If the principal is undisclosed at the time of the transaction, but subsequently discovered, the third person may elect to hold such principal because he is the real party in interest.
We have heretofore noticed that an agent may keep his principal undisclosed, and bind himself upon the contract. He may do this because he acts under instructions to that effect, or because he is careless in the manner in which he performs his agency, or because for some reason he chooses to bind himself. In such a case, he becomes, as we have seen, personally liable to the third person. But the third person, upon discovering the identity of the principal, may, subject to the exceptions hereafter stated choose to hold the principal. This arises out of the consideration that the principal is the real party in interest and identified in the transaction with his agent, and that as he is the real party, it ought to be the third person's right to hold him as such.77
Thus we may suppose that A is about to buy goods of C for P. He chooses however, to act in his own name and either to keep the fact concealed that there is another person who is principal, or if he discloses the fact that there is a principal, then to keep that principal's identity concealed. He therefore makes a contract with C, whereby for certain goods which C delivers him, he promises to pay C a certain amount of money. This is, say a written contract executed in A's name as though he were the real principal. C can hold A on this contract, whether he knows that A is only an agent or not.78 And if at the time, he does know that A is only an agent and knows the identity of A's principal, he cannot afterwards hold P, because in that case he may be said to have deliberately chosen to make his contract with A and not with P. If, however, at the time he does not know that A is merely an agent, or if he does know he is an agent but does not know the principal's identity, then he may upon discovering the identity of the principal, either continue to hold A or elect to hold P.
77. Violett v. Powell's Adm'rs, 10 B. Monr. 347.
This rule, however, is subject to some exceptions which we will notice.
Third person cannot hold principal on election to hold agent. If the third person after discovering the principal's identity elects to hold the agent, he cannot afterwards hold the principal. The third person must elect to hold the principal within a reasonable time, but his election need not be verbal. It may be inferred from his conduct.
The third person has contracted with the agent as a principal. He may hold the agent as the contracting party, because the agent has seen fit to keep the principal concealed, and to bind himself. Upon discovery of the identity of the principal the third person may hold him as such. But he must make his election, and having made it must stand by it.79 A failure within a reasonable time to indicate by word or act that he chooses to hold the principal will be taken as an election to hold the agent and he cannot afterwards say he will hold the principal. A third person, however, cannot be said to have made his election so long as he is unadvised as to the facts. Thus, billing the agent as the real debtor, taking notes from him, etc., would be immaterial to show an election before the facts has become known to the third person. If, however, he continues in these or other ways to treat the agent as the real debtor after discovery of the facts, that will constitute an election.
78. Kayton v. Barnett, 16 N. Y. 625.
79. Kingsley v. Davis, 104 Mass. 178.
Third person's right to hold principal subject to state of account between principal and agent. If the state of accounts between the principal and agent, as where the principal has paid money over to the agent to pay to the third party, renders it inequitable to allow the third person to hold the principal, he cannot hold such principal and must be satisfied with his recourse against the agent.
Giving the third person the right to hold the undisclosed principal when discovered, is giving him a right to rely upon a source which he did not rely upon when the contract was made. It would be really no hardship upon him to deny him the right altogether for it would not be depriving him of anything which he had relied upon. Therefore the rule is not extended where it would operate as a hardship upon the principal. Thus if the principal believing that the agent has settled with the third person, or in order that he may settle with the third person, pays the agent money, so that if he had to pay the third party it would amount to paying the account again if the agent were not responsible, then the third person cannot hold the principal, but must look to the person to whom he looked when the contract was made. It is consequently declared that the rule is subject to the state of accounts between the principal and agent.80 The payment or settlement must, however, have been made in good faith, and it must have been made before the third person elected to hold the principal.
Rule does not apply to sealed instruments. Only those in whose name a sealed instrument is executed can be held liable thereon.
We have already seen that one cannot be held on a sealed instrument if he is not named therein, or indeed unless it may be said to be executed by him in person or by agent. Consequently the rule we are now considering does not apply if the contract is under seal.81
In some jurisdictions the seal has lost some of its ancient force and in some has been altogether abolished. In such states the rule would apply as well to a sealed instrument as to any other.
Rule does not apply to negotiable instruments. Only those in whose name a negotiable instrument is executed can be held liable thereon.
We have noted, also, that one cannot be held liable on a negotiable instrument unless it is made in his name. Consequently the rule we are now considering has no application to negotiable instruments.
Third person cannot hold undisclosed principal except in cases of actual authority previously conferred. An undisclosed principal cannot ratify. He can be held by the third person only in case he gave actual authority to the agent prior to the time the agent acted, to do the very act that the agent did.
80. The law on this subject is not so well settled as is desirable. See Mechem, Agency, 2nd Ed. SEC. 1749.
81. Huntington v. Knox, 7 Cush. (Mass.) 374.
It is discussed in another connection, that a third person may hold a disclosed principal where the agent lacked real authority, but had apparent authority to do the act by reason of the situation in which the principal placed him. We have also noticed that where there is no authority, either actual or apparent, a disclosed principal may cure the defect and become bound by ratification. None of this reasoning applies to the case of an undisclosed principal. The third person can hold him only in cases where the agent pursued the actual authority given him. There is no room for the doctrine of apparent authority, for there can be no apparent authority where there was not known to be any authority, or any particular authority. And it is also settled that the third person cannot claim that the undisclosed principal ratified the act. An undisclosed principal cannot ratify.
If the principal is undisclosed, the principal may at his election hold the third person on the contract, except, (1) where the state of accounts between third person and agent would make it unjust, or (2) where the contract is under seal, or (3) is expressed in the form of negotiable paper, or (4) also where the rights sought to be asserted by the principal are rights to personal service, or the performance of personal obligations.
We have seen how an undisclosed principal can be sued when discovered by the other party. There is the corresponding right of the principal to step into his agent's shoes, disclose himself and assert his rights under the contract. This rule is subject to exceptions.
First. If the third person has already paid the agent he will not be compelled to repay the principal, but the principal must look for settlement from the agent.
Second. The reasoning concerning instruments under seal set forth in section 64 is applicable here. Third. The same may be said where the contract is in the form of a negotiable instrument.
Fourth. The third person can only assert rights which do not involve the performance of services personal in nature, or involving the personal skill or credit of the undisclosed principal. Thus if C deals with A, as a principal, whereas A is in fact an agent, P, the principal can only step in where that would not affect C's rights any more than if A had made an assignment to P of rights under his contract. But A cannot assign nor can an undisclosed principal assert rights to personal services, nor obligations personal in nature. If C had dealt with A he has a right not to have another party to the contract thrust upon him. One may choose with whom he will contract.82 Yet as to rights growing out of such contract which are not personal in nature, as a right to receive money, just as they may be assigned, so they may be asserted by an undisclosed principal.
82. Cowan v. Curran, 216 111. 598.