Under our law of agency, an agent may represent its principal when concluding agreements with third parties, provided that the agent has authority to represent its principal. 1
An anomaly arises where an agent agrees with a third party, where the agreement is ostensibly between the third party and the agent, but the agent concluded that agreement with the third party on the instruction of its principal.
In this scenario, despite the agent concluding the agreement in its name, the agreement was, unbeknownst to the third party, concluded for the benefit of its principal.
Accordingly, the agent was acting as the agent of the principal, but because the principal's existence was not disclosed to the third party, the third party was left unaware of the true nature of the agreement. This situation is recognised in our law, and the principles that have developed around it are commonly referred to, as the doctrine of the undisclosed principal.
Under the doctrine, the third party (without knowing) can have a claim against, or be liable to, an unknown person (the undisclosed principal). In the 1972 Appellate Division case of Cullinan v Noord-Kaaplandse Aartappelkernmoerkwekers Koöperasie Bpk, it was confirmed that the doctrine of the undisclosed principal is part of the common law of South Africa. The basis for the existence of this doctrine in South African law was articulated in the case of Karstein v Moribe (1982), where the court said that the doctrine is, "at complete variance with the basic principles of the law of contract and justifiable only on grounds of commercial convenience".
The exceptions and limitations of the undisclosed principal
Due to the complications that could arise from the application of the doctrine, our courts (as well as courts in foreign territories) have established various exceptions and limitations to the doctrine. For instance:
- An undisclosed principal may not intervene if the agreement with the third party is personal.
- An undisclosed principal may also not intervene if, because of a negative 'skill' of the undisclosed principal, the agreement would not have been concluded by the third party.
- The doctrine has no application in a case of direct representation in an agreement.
- If the doctrine could result in prejudice to the third party, where the prejudice was unforeseen by the third party at the time of agreeing, then the doctrine ought to be excluded.
These examples of limitations and exceptions to the doctrine are not exhaustive, and we suggest that due to the murkiness clouding the doctrine and its inherent potential for unwarranted prejudice to an innocent third party, there will always be an element of risk involved in concluding transactions to which the doctrine applies.
It is likely that because of the potential risks that may arise from the application of this doctrine, our courts will further develop the limitations and exceptions of this doctrine, especially where prejudice could be caused to an unknowing and innocent third party.
The doctrine of the undisclosed principal should be considered when drafting agreements to ensure that the doctrine does not apply where it is not intended to apply, particularly when assessing whether a third party may have a claim against another party that's unknown to the third party.
Footnote
1 Makate v Vodacom [2016] ZACC 13 5.
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