Экзамен зачет учебный год 2023 / Busch, Indirect Representation and the Lando Principles. An Analysis of Some Problem Areas From the Perspective of English Law

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At first sight, the Principles may therefore seem unacceptable from the point of view of English law. Nevertheless, the exceptions which they allow to their starting point may be such that an application of the Principles and English law will not ultimately produce very different results.

3.2 Comparison between Articles 3:302-304 PECL and the English undisclosed principal doctrine

3.2.1 When are direct actions available?

Under English law, a third party can generally sue an undisclosed principal (and vice versa). But in practice these rights are more likely to be exercised by the principal or the third party in two situations. They are: where the agent goes bankrupt,27 or where he fails to perform his obligations to his principal or to the third party.

It is hardly surprising that, in just these circumstances, the Principles recognise exceptions to the general rule28 and permit direct actions between principal and third party. Article 3:302(b) PECL gives the principal the right to exercise against the third party the rights acquired on the principal s behalf by the intermediary (the so-called actio directa). The actio directa is available where the intermediary becomes insolvent, or if it commits a fundamental non-performance to the principal, or if prior to the time for performance it is clear that there will be a fundamental non-performance (anticipatory fundamental non-performance). Similarly, the actio contraria is available to a third party if the intermediary becomes insolvent, or if the intermediary is guilty of fundamental nonperformance or anticipatory fundamental non-performance of his obligations to the third party (Art. 3:303(b) PECL). In order to enable the principal and the third party to exercise their direct actions, the intermediary must communicate on demand the name of the third party or the principal (Arts. 3:302(a) and 3:303(a) PECL).

The term fundamental non-performance requires some explanation. By Article 8:103 PECL non-performance of an obligation is fundamental to the contract in three different types of case.29 They are: first, where strict compliance with the obligation is of the essence of the contract (sub (a)); secondly, where nonperformance substantially deprives the aggrieved party of what he was entitled to expect under the contract, unless the other party did not foresee and could not reasonably have foreseen that result (sub (b)); and thirdly, where non-performance is intentional and gives the aggrieved party reason to believe that he cannot rely on the other party s future performance (sub (c)).

27The origin of the undisclosed principal doctrine is even said to lie in the right of the principal of a factor to intervene in the factor s bankruptcy. See S.J. STOLJAR, The Law of Agency: Its History and Present Principles (London: Sweet & Maxwell, 1961), pp. 204-11.

28On Article 3:302-3:304 PECL see Text & Comments (1996) pp. 86-90. 29LANDO AND BEALE, pp. 125-29.

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So defined, the concept of fundamental non-performance in the Principles is not likely to cause difficulties for English lawyers. English law uses similar concepts. In particular there is, as the drafters state,30 a direct correspondence to tests laid down in two English cases and to a provision in the Sale of Goods Act 1979. Subsection (a) of Article 8:103 PECL expresses a test which resembles a test laid down in Bunge Corp. v. Tradax S.A.31 The test was there used to determine when a term of a contract should be classified as a condition , with the effect that any breach would give the other party a right to terminate the contract. Subsection

(b) of the Article resembles a test stated by Diplock L.J. in Hong Kong Fir Shipping Co. Ltd. v. Kawasaki Kaisha Ltd.32 to determine when breach of an

innominate term in a contract would give the other party a right to terminate. Finally, subsection (c) is similar to s. 31(2) of the Sale of Goods Act 1979 on deliveries by instalment.33 The only substantial difference seems to be that Article 8:103 (c) PECL is confined to intentional breaches whereas under English law it is established that even an unintentional fundamental breach may give rise to anticipatory repudiation of the contract.34 Nevertheless, this difference is, it is submitted, immaterial in relation to undisclosed agency and commission agents, because Articles 3:302 and 3:303 PECL refer to the situation where it is clear prior to the time of performance that there will be a fundamental non-performance, and do not draw a distinction between intentional and unintentional anticipatory fundamental breaches.

It therefore appears that the circumstances in which direct actions are permitted between principal and third party and the language which is used in the Principles to describe these situations, may well be acceptable to English lawyers. Bankruptcy and (anticipatory) fundamental non-performance to the principal or the third party are, it is submitted, also the key situations in England in which the principal will wish to sue the third party and vice versa. Furthermore, the concept of fundamental non-performance (as defined in Art. 8:103 PECL) and the references in Articles 3:302 and 3:303 PECL to anticipatory breaches will sound familiar to English lawyers.

3.2.2 Legal basis

The Principles allow the principal, in the circumstances described in 3.2.1, to exercise against the third party the rights acquired on the principal s behalf by the intermediary (Art. 3:302(b) PECL). Conversely, they allow the third party - in similar circumstances - to exercise against the principal the rights which the third party has against the intermediary (Art. 3:303(b) PECL). These rights may be exercised only if notice of intention to exercise them is given to the intermediary and to the principal or the third party, respectively (Art. 3:304 PECL).

30Ibid., pp. 128.

31[1981] 1 W.L.R. 711.

32[1962] 2 Q.B. 26, 72.

33See the Appendix for the text of this section.

34E.g. Universal Cargo Carriers Corp. v. Citati [1957] 2 Q.B. 401, 438.

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In England, no notice of any kind is required for triggering off the undisclosed principal doctrine: the undisclosed principal may (as a rule) sue and is liable to be sued as a matter of law. The exact legal basis of the English doctrine is, however, unclear and is hard to reconcile with the doctrine of privity of contract.35 It is probably best explained simply as an exception to the doctrine, which is justified on grounds of commercial convenience.36

Nevertheless, the fact that the Principles require notice of intention to exercise direct rights before they may be exercised, whereas English law does not, does not constitute so significant a difference between the two bodies of law that the agency provisions in the Principles would be unacceptable in England. The notice requirement is surely an advantageous requirement which tends to promote certainty.

3.2.3 Effect of performance by principal or third party

Under the Principles, where the third party has performed his obligations under the contract between him and the intermediary, it logically follows that the rights against the third party which are acquired on the principal s behalf and which may be exercised by the principal are extinguished. It is different where the third party received the principal s notice of intention to exercise his rights under Article 3:302 PECL before performance to the intermediary. In that case, the third party is no longer entitled to perform to the intermediary and if he nevertheless performs, he is not discharged as against the principal (Art. 3:304 PECL).

It is not possible to apply the same reasoning to the converse position. In the case of performance by the principal to his intermediary, it does not follow that the third party s rights against the intermediary are extinguished. Nevertheless, Article 3:304 PECL provides that, upon receipt of notice of the third party s intention to exercise his rights under Article 3:303 PECL, the principal is no longer entitled to make performance to the intermediary. If he nevertheless performs he is not discharged as against the third party. Conversely, it follows, it is submitted, that the principal is entitled to make performance before receipt of such notice with the effect that he is also discharged in relation to the third party.

In English law, the old case of Coates v. Lewes37 is often cited for the proposition that the third party is discharged by payment to the agent prior to discovery of the principal. In Ramazotti v. Bowring,38 however, estoppel reasoning was applied: it was held that the third party is only discharged where the principal was in some way at fault in misleading the third party. But this case should not be followed, because it is difficult to see how the third party can ever rely on the representation of someone of whom he has not heard.39

35On the legal basis of the undisclosed principal doctrine see REYNOLDS, pp. 409-11.

36Siu Yin Kwan v. Eastern Insurance Co. Ltd. [1994] 2 A.C. 199, 207 per Lord Lloyd of Berwick. 37(1808) 1 CAMP. 444.

38(1859) 7 C.B. (N.S.) 851; also Cooke & Sons v. Eshelby (1887) 12 App. Cas. 271. 39REYNOLDS, p. 441.

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Conversely, it was held in Armstrong v. Stokes40 that where an undisclosed principal settles with his agent at a time when the third party still does not know that the agent acted for a principal, the principal is discharged. This was because it would produce intolerable hardship 41 if the principal were to pay twice. In the cases of Irvine & Co. v. Watson & Sons42 and Davison v. Donaldson,43 however, estoppel reasoning was again applied, this time to the effect that the principal would only be discharged where the third party was in some way at fault in misleading the principal. But these cases appear to have involved unnamed principals, and it is therefore doubtful whether they are good authority for undisclosed principal situations.44 It has been suggested that in this situation it is equally hard for the third party not to be paid at all.45 However, it is submitted that the law should have no sympathy for the third party, since he did not rely on the credit of a principal of whose existence he was unaware at the time of contracting. Of course, whenever the undisclosed principal is sued the third party gets a windfall of this kind, but that does not mean that the law should not deprive the third party of this windfall where the legitimate interests of the undisclosed principal so require, e.g. where he settled with the agent prior to discovery of the undisclosed principal.

Thus, as to the effect of performance by the third party or the undisclosed principal, it is submitted that there is probably no difference between (the preferable view of) English law and the Principles. The Principles may well be acceptable therefore from the English point of view.

3.2.4 Defences and rights of set-off

Where the principal (whether undisclosed or the principal of a commission agent) exercises his actio directa, he is subject to any defences which the third party may set up against the intermediary (Art. 3:302(b) PECL). It would prejudice the third party if this were to be otherwise: the third party contracted with the intermediary personally, so he would expect to be allowed to plead against the intervening undisclosed principal (or principal of a commission agent) his defences against the intermediary. Where the third party exercises his actio contraria, he is subject to any defences which the intermediary may set up against the third party and those which the principal may set up against the intermediary (Art. 3:303(b) PECL).

In English law the position appears to be different. Where a principal (disclosed or undisclosed) sues the third party, the latter is said to have all the defences which he would have had against the principal if the principal had himself made the contract in the same circumstances.46 It is submitted that if it

40(1872) L.R. 7 Q.B.D. 598.

41At p. 610.

42(1880) 5 Q.B.D. 414.

43(1882) 9 Q.B.D. 623.

44REYNOLDS, p. 437.

45G.H. TREITEL, The Law of Contract, 9th edn. (London: Sweet & Maxwell, 1995), p. 648. 46REYNOLDS, pp. 432-33, with references to cases.

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exists, this sweeping rule (presumably based on the idea that the contract is made between principal and third party) is unnecessary for the protection of the third party. The third party always thought he was contracting with the agent and never expected to have the benefit of these defences.

It is also said in English law that, because the contract in the case of undisclosed agency is initially made between the third party and the agent, the third party should not be prejudiced by the intervention of the undisclosed principal. As a result, the third party should, in addition, be able to plead against the principal all defences against the agent (including set-offs47) which had accrued before he had reasonable notice of the principal s existence.48 However, as in the case of settlement with the agent, there is case law which indicates that set-off may only be pleaded against the principal where he was in some way at fault in misleading the third party.49 As already stated, this must be doubtful: it is difficult to see how the third party can ever rely on the representation of a person of whom he has not heard.50

Alternatively, under English law, if the undisclosed principal (when discovered) is sued on the contract by the third party, he cannot set off a claim that he has against the agent,51 nor, it is submitted, can he plead any other defence that he has against the agent. However, the principal should be able to plead defences arising out of the transaction between agent and third party.52 Furthermore, he may plead defences personal to himself (such as set-off in his favour against the third party53), but not defences personal to the agent (such as set-off in favour of the agent54).55 If these rules are correct, their effect could be extremely beneficial for the third party, whose position may even be better than it would have been had he sued the agent. It is submitted that they go beyond what is necessary for his protection.

Here there are therefore differences between the Principles and English law. First, under the Principles the third party may set up any defences against the principal which he may set up against the intermediary. This is also the case in English law. In addition, however, it appears that, by English law, he may set up all defences he would have had against the principal if the principal had himself made the contract in the same circumstances; this seems to go too far. Secondly, where the Principles state that the principal may plead against the third party any defences which the intermediary may set up against the third party, this includes rights of set-off which the intermediary may invoke against the third party, other

47Rabone v. Williams (1785) 7 T.R. 360.

48Sims v. Bond (1833) 5 B. & Ad. 389, 393; Browning v. Provincial Insurance Co. of Canada (1873) L.R. 5 P.C. 263, 272-73; REYNOLDS, pp. 432-33.

49Cooke & Sons v. Eshelby (1887) 12 App. Cas. 271, 278-79. 50Also REYNOLDS, p. 441.

51Waring v. Favenck (1807) 1 CAMP. 85; Kymer v. Suwercropp (1807) 1 CAMP. 109; DERHAM, p. 390. 52REYNOLDS, p. 433.

53E.g. Spurr v. Cass (1870) L.R. 5 Q.B. 656; REYNOLDS, pp. 433-34; R. DERHAM, Set-off, 2nd edn. (Oxford: Clarendon Press, 1996), p. 390.

54Ibid.

55REYNOLDS, pp. 433-34.

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that where the agent is described as being the owner 58 or proprietor 59 the implied exclusion exception may probably be raised, whereas e.g. the words tenant 60 orcharterer 61 are less likely to do so. Exclusion of the undisclosed principal by implication of the contract therefore seems to be exceptional. An explanation for this may be that in an ordinary commercial context it may be assumed that a person is willing to treat as a party to the contract anyone on whose behalf the agent may have been authorised to contract, unless either the other party manifests his unwillingness or there are other circumstances which would lead the agent to realise that the other party was not so willing .62

The above exception is not explicitly mentioned in the Principles. Nevertheless, it is submitted that the position is the same where the Principles apply. It follows from the fundamental notion of freedom of contract (which is acknowledged in Art. 1:102 PECL) that the parties should be able to exclude the possibility of direct actions.

It has been suggested that the exclusion by the express or implied terms of the contract constitutes the sole exception to the undisclosed principal s right to sue and his liability to be sued.63 Such a rule would not, it is submitted, offer much certainty, because it is very vague. It would be preferable in addition to have clear rules in particular instances. In my view, such rules can at least to some extent be found in English cases. They are examined in the following sections.

3.2.5.2 Personal rights

Under English law, is an undisclosed principal unable to intervene where the agent s rights are not assignable? This must be the case where the rights of the agent against the third party are essentially personal.64 It is submitted, however, that this exception is irrelevant in the converse situation: that is, as regards the rights of the third party against the principal. It is true that where the third party s rights against the agent are essentially personal, he cannot assign them. But it does not follow that it is impossible for him to exercise these rights against the principal. This point is not always made in the English legal textbooks.

It has also been held in England that a contract which provides that it shall not be assignable does not preclude intervention by an undisclosed principal.65 This is a rather inaccurate way of putting things. The rule should be that where the contract stipulates that one or more obligations under the contract are, solely by virtue of the stipulation, not assignable, this cannot exclude the principal from

58Humble v. Hunter (1848) 12 Q.B. 310.

59Formby Brothers v. Formby (1910) 102 L.T. 116

60Danziger v. Thompson [1944] K.B. 654.

61F. Drughorn Ltd. v. Rederiaktiebolaget Trans Atlantic [1919] A.C. 203.

62Teheran-Europe Co. Ltd. v. S.T. Belton (Tractors) Ltd. [1968] 2 Q.B. 545, 555 per Diplock L.J., approved by Lord Lloyd of Berwick in Siu Yin Kwan v. Eastern Insurance Co. Ltd. [1994] 2 A.C. 199, 208- 9.

63REYNOLDS, pp. 420-23.

64R. POWELL, The Law of Agency, 2nd edn. (London: Sir Isaac Pitman & Sons, 1961), p. 165.

65Siu Yin Kwan v. Eastern Insurance Co. Ltd. [1994] 2 A.C. 199, 210 per Lord Lloyd of Berwick; POWELL, p. 166.

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exercising his agent s rights against the third party. One should distinguish the contractual exclusion of assignment of rights from cases where rights are essentially personal and are for that reason not assignable. Again, all this is (for the same reason as in the case of rights which are essentially personal) irrelevant in the converse situation: that is, as regards the rights of the third party against the agent.

Finally, where rights of the third party against the agent relate to duties of the agent to the third party which cannot be vicariously performed, it should not, as a matter of logic, be possible for a third party to sue the principal.66 For example, it would make no sense if the third party was permitted to sue the principal where the agent bound himself to paint the third party s portrait. It does not follow, however, that the undisclosed principal should not be able to sue for the price of the portrait. Thus, this exception should be irrelevant as regards direct actions by the principal.

These exceptions are not mentioned in the Principles, but it would be contrary to common sense if they were not also recognised. However, it might not be wise to adopt the English rule that where a contract provides that it shall not be assignable, intervention by an undisclosed principal is not precluded: this seems to be contrary to the notion of freedom of contract (see Art. 1:102 PECL).

3.2.5.3 Personality of the parties and knowledge of the principal

Thirdly, it seems fair that the undisclosed principal is not allowed to intervene where the third party shows that the undisclosed principal knew or should have known at the time of the contract that the third party would not have dealt with him.67 It is submitted that it is equally fair to refuse to allow the principal to intervene where he knows or should have known that the third party only wanted to contract with his counterparty, the agent.

In Said v. Butt68 the plaintiff twice applied for a theatre ticket for a first-night performance, but his application was refused by the proprietors of the theatre as in the past he had strongly criticised their conduct. He therefore sent a friend to the box-office to buy a ticket for him without disclosing his name, but he was later refused admission by the manager of the theatre. In an action against the manager for inducing breach of contract, McCardie J.69 held that there was no contract between the plaintiff and the proprietors. This was apparently on the ground of mistake as to the person: they reserved the right to sell first-night tickets to specially selected persons, so that the personality of the other contracting party was a material element in the contract. But that ground is a doubtful one. Mistake reasoning is valid only if one assumes that the undisclosed principal is a party to

66The same rule seems to have been stated (rather inaccurately) in Siu Yin Kwan v. Eastern Insurence Co. Ltd. [1994] 2 A.C. 199, 210 per Lord Lloyd of Berwick. Also H.L. GOODHART and C.J. HAMSON,Undisclosed Principals in Contract , Cambridge Law Journal, 4, (1932), pp. 338-45; POWELL, p. 165. Contra: REYNOLDS, p. 421.

67TREITEL, p. 648. Contra: REYNOLDS, p. 422, where it is said that such a rule may be a fair one, but that it can only be justified on grounds of being an exception to an admitted anomaly, designed to prevent that anomaly from going too far and interfering with commercial convenience for which it arose. In my opinion, to accept this rule would not interfere with commercial convenience at all.

68[1920] 3 K.B. 497.

69p. 498 et seq.

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the contract. This does not seem to be the case: he is rather a third party that the law allows to intervene. If this is true, there cannot be any mistake as to the person, because the agent is the person with whom the third party contracts and the person with whom he intended to contract.70

Another case, Dyster v. Randall & Sons,71 appears to take a different approach. In that case, an undisclosed principal had bought land through an agent which he knew the owner would not sell to him. The undisclosed principal was nevertheless held entitled to specific performance on the ground that the contract was assignable.

It is therefore unclear whether this third type of exception is accepted in English law. But it is submitted that it should be accepted on the basis that it is unfair that a person should be able, by means of an undisclosed agent, indirectly to force himself upon a party who is unwilling to deal with him (or who only wants to deal with the undisclosed agent).

The Principles should, it is submitted, also accept this exception. The undisclosed principal should not be allowed to exercise his actio directa where he knows or should know at the time of the contract that the third party would not have dealt with him (or where he knows or should know that the third party only wants to deal with the agent). The basis for this exception would be that such intervention would be contrary to good faith and fair dealing (Art. 1:201 PECL).72

For similar reasons, it is submitted that an exception should also be recognised both by English law and under the Principles in the converse situation. That is, the third party should also not be entitled to sue the undisclosed principal where the principal knows or should have known at the time of the contract that the third party would not deal with him (or where he knows that the third party is unwilling to deal with anyone else than the agent). There are no English cases on this situation but it is submitted that such an action should not be possible. Where a third party is truly unwilling to deal with the principal or only willing to deal with the agent, he should take the full consequences of this unwillingness and he should therefore not be allowed to sue the principal. The same should be true where the Principles apply, because (for the same reasons) exercise of the actio contraria by the third party in such situations seems to be contrary to good faith and fair dealing in the sense of Article 1:201 PECL.

It is therefore suggested that the Principles will probably produce the same results as English law does or should do so that the Principles should be acceptable for English lawyers in this respect also.

3.2.5.4 Personality of the parties and knowledge of the agent

70REYNOLDS, p. 422.

71[1926] Ch. 932.

72On good faith and fair dealing in the Principles: LANDO AND BEALE, pp. 53-58. The exception here discussed is not very likely to arise in cases involving commission agents. Where a third party deals with a commission agent he normally knows that there is a principal behind him. He may even know who the principal is. But even where he does not, this exception should not apply, because the third party, by dealing with a commission agent, simply runs the risk that there is somebody behind him with whom he would not be willing to deal.

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A further exception was recognised in Siu Yin Kwan v. Eastern Insurance Co. Ltd:73 where the agent knows or should know that the third party is unwilling to contract with anyone other than himself, the undisclosed principal cannot intervene. Lord Lloyd of Berwick said:74 ... Axelson were entitled to sue as undisclosed principals unless Richstone [the agent, DB] should have realised that the insurers [the third party, DB] were unwilling to contract with anyone other than themselves. There seems to be no good reason why this exception should not be extended to cases where the agent knows or should know that the third party is unwilling to contract with his principal.75 There will, of course, be considerable overlap between cases falling within the category discussed in 3.2.5.3 and this category, because they are by no means mutually exclusive: it is perfectly possible that both the undisclosed principal and the agent know or should know that the third party is only willing to deal with the agent or that he is not willing to deal with the principal.

What is the position under the Principles? An exception similar to that accepted in English law is not explicitly mentioned. Nevertheless, the same result may be reached by virtue of Article 4:103 PECL which enables the third party to avoid the contract or use it as a defence against intervention of the undisclosed principal where he has made a mistake of fact or law.76 Where the third party thinks that his counterparty acts as principal, whereas he is in fact an intermediary who acts on behalf of an undisclosed principal, the third party may be said to be in error as to afact in the sense of Article 4:103(1) PECL. Where the intermediary knew or ought to have known that the third party was only willing to contract with him (the agent) or was not willing to contract with the principal, it should be contrary to good faith and fair dealing for the intermediary to allow the third party to proceed in error (Art. 4:103(1)(a)(ii) PECL). In such a case the agent knows or should know that the third party, had he known the truth, would not have entered into the contract (Art. 4:103(1)(b) PECL). As a result, the third party should be entitled to avoid the contract or to use the mistake as a defence against agent or undisclosed principal.

In English law, an undisclosed principal should be able to invoke this exception where he is sued. Again, it is submitted that where a third party is truly unwilling to deal with the principal or only willing to deal with the agent, he should take the full consequences of this unwillingness: he should not be allowed to sue the principal.

In the Principles, the position seems to be as follows. By virtue of Article 4:103 PECL the contract is voidable. This means, that the third party will not be able to exercise the actio contraria once the contract is avoided.

73[1994] 2 A.C. 199.

74At p. 208.

75Some support for this assumption may be found in the judgment of Diplock J. in Teheran-Europe Co. Ltd. v. S.T. Belton (Tractors) Ltd. [1968] 2 Q.B. 545 at p. 555, which was approved by Lord Lloyd of Berwick in Siu Yin Kwan v. Eastern Insurance Co. Ltd. [1994] 2 A.C. 199, 208-9. As to commission agents, the remarks made in note 72 apply here mutatis mutandis.

76On mistake as to facts or law: Text & Comments (1996) pp. 93-99.