There is considerable confusion of authority in regard to the question whether settlement by the principal with his agent before the person with whom the agent dealt makes a claim upon the principal is a defence to the latter. The decision of the controversy depends upon whether the liability of an undisclosed principal is to be regarded as an absolute right of one who deals with the agent although confessedly the credit of the agent has been exclusively relied upon, or whether, on the other hand, a person who thus deals with an agent is to be given only such limited right against the undisclosed principal as is consistent with equity. If the first of these theories is sound, the person dealing with the agent cannot be deprived of his right against the principal unless in some way he has subjected himself to an estoppel by misleading the principal. If, however, the second theory is sound, the mere fact that the principal has innocently put himself in a situation where hardship will be caused by holding him liable on the agent's contract should be a defence. The English court has wavered somewhat uncertainly between these two views. The earliest decision on the subject52 adopted the second theory and held that recovery from the principal was "subject, however, to this qualification, that the state of the account between the principal and the agent is not altered to the prejudice of the principal." This rule is supported perhaps by the weight of authority in the United States,53 but has now been much modified in England, the first of the two theories suggested above having been adopted by a later decision in the middle of the last century, and the principal held liable unless the plaintiff in some way had misled the principal.54
52 Thomson v. Davenport, 9 B. ft C. 78.
53Fradley v. Hyland, 37 Fed. 49, 2 L.R.A. 749; Clealaad v. Walker, 11 Ala, 1058, 46 Am. Dec. 238; Ketchum v. Verdell, 42 Ga, 634; Price-Evans Foundry Co. v. Southern Bell T. & T. Co., 19 Ga. App. 264, 91 8. E. 283; Thomas v. Atkinson, 38 Ind. 248; Emerson v. Patch, 123 Mass. 541;
Cheever v. Smith, 15 Johns. 276; Fish v. Wood, 4 E. D. Smith, 327; Laing v Butler, 37 Hun, 144; Knapp v. Simon, 96 N. Y. 284; Rowan v. Buttman, 1 Daly, 412; Muldon v. Whitlock, 1 Cow. 290,13 Am. Dec. 533; Rathbone v. Tucker, 15 Wend. 498; English v. Rauchfuas, 21 N. Y. Misc. 494, 47 N. Y. 8. 639.
54Heald v. Kenworthy, 10 Exch.
It is still the law of England that if the plaintiff was aware when the contract was made that the agent was acting for some principal, though unnamed, a settlement by the principal with his agent will not preclude a suit against the principal by the third party; 55 but if the settlement by the undisclosed principal was made when the third party was still unaware that the agent was not himself the principal, it has been held that the plaintiff cannot hold the principal.56 The later English cases find support in a few decisions in the United States.57 There seems little ground for the fine distinctions taken by the later English cases. It would be better to adopt squarely either the rule that the undisclosed principal is liable in every case unless the plaintiff has discharged him by electing so to do, or by misleading him to his injury; or, on the other hand, to hold that the principal is not liable whenever his action honestly taken makes it undue hardship to hold him. The latter view seems more conformable to justice.