The Relationship of Principal and Agent with Third Party

The primary purpose of many agency agreements is to create a contractual relationship

between the principal and third party. However, whether such a relationship actually comes
into existence depends on a number of factors. Problems may arise in the agency
relationship,or the agent may act in an unauthorized manner.
Contracts made by the agent: the rule is that the agent withdraws from the transaction soon
after he must have concluded a contract between his principal and third party. Where there is
a valid principal/agent relationship, it will be pertinent to the third party to know how to sue.
The contractual position varies in accordance with whether the existence of the principal is
disclosed or undisclosed.
Disclosed principal: generally, an agent makes it clear from the start, or it is obvious from
the circumstances that he is acting on behalf of another person. If at the time of the
transaction, the existence though not necessarily the identity of the principal is known to the
person dealing with the agent, there is said to be a disclosed principal.
Undisclosed principal: if the person dealing with the agent does not know, and ought not to
know from the circumstances, of the existence of a principal, but assumes that the agent is
acting on his own behalf, although in fact he is an agent,then the principal is undisclosed.
The rule relating to liability to third parties will be discussed under three headings.
I. Where the Agent contracts for a Disclosed principal: The general rule is that a
contract made by an agent for a disclosed principal, as long as the agent acts within the
scope of his authority, passes the rights and liabilities under the contract to the principal.
This common law rule was emphasized by Wright J. in the case of Montgomery v UK
Steamship Association1.
Exceptions to the general rule that the principal is the only one that can sue and be
sued: in other words, when an agent can be sued by a third party. It is hardly necessary to
point out that the third party's right to sue the agent on the contract is generally coexistence
with the agent's right to sue him.
1. If the agent executes a deed in his own name, even if he expressly contracts as an agent, he
is personally liable.
2. If the agent signs a bill of exchange,or a written contract, without disclosing that he is
contracting as an agent.
3. If there is annexed to the main contract, a subsidiary or collateral contract between the agent
and the third party which imposes obligations on the agent.
4. Where the agent acts for a foreign principal.
5. Where the agent acts for an undisclosed principal.
6. Where the agent purports to act in circumstances where the principal lacks capacity to
execute the contract e.g infant or company not yet incorporated.
7. If the agent is acting for himself.
8. If a person purports to contract as an authorized agent but in fact he lacks authority.
9. If the principal and the agent contract and provide that both parties will be concurrently
liable.
10. If it is customary for an agent to be bound by such contract.

1
(1891) Q.B 370.
11. If, though the third party knew that he was an agent, he contracted in his own name and the
terms of the contract clearly show that it was the parties' intention that the agent should be
bound personally.
12. Where the third party has notice of lack of authority on the part of the agent, the principal
will not be liable.
13. If the principal is a disclosed principal, the third party cannot 'set-off' against such principal
a debt owed to himself by the agent. A set-off is the right of someone who owes money to
subtract from the debt any money owed in the other direction.
Payment of Money to Agent
A common feature of the law of agency is that often the principal may entrust money to the
agent for onward transmission to the third party, and also the third party may settle with the
agent with a view to the money being transmitted to the principal. The question arises as to
what will be the legal effect in either circumstance, if the agent absconds with the money
entrusted to his care?
Payment of Agent by Principal
The general rule is that the principal who settles with the agent remains liable to the third
party. But, if the conduct of the third party positively, indicates to the principal that the agent
has fully executed his (i.e., the principal's) obligations to the third party where the agent
absconds with the money paid to him by the principal. This rule was approved in an earlier
case of Irvine v. Watson2, and later confirmed in Heald v. Kenworthy3. Any fraud by a third
party in reliance of this general rule which is prejudicial to the principal will defeat the
operation of the rule. Thus, in Wyatt v. Marquis of Mertford4, a third party issued a receipt to
the agent for payment when in fact the third party did not receive any money from the agent.
In an action by the third party against the principal to recover the money, it was held, that he
could not recover as the principal relied on the receipt issued by the third party that he had
been settled by the agent.
Payment of Agent by Third Party
Generally, payment to an agent by a third party will not discharge the third party. But there
are exceptions to this general rule, namely:
1. If the agent had authority to receive payment on behalf of the principal. The authority can
be express, implied or apparent.
2. If the agent was not authorized to receive money but he, however, received money and
paid same over to the principal, the third party is discharged.
3. If the agent has a lien on the principal's goods, then if payment is settled by the third party
for the principal with the agent who fails to pay over to the principal, the third party will be
discharged to the limit of the value of the lien over the goods.
II. Where the Agent Contracts as an Agent on Behalf of an Unnamed Principal:
Generally, there is no distinction between the position of the disclosed or undisclosed
principal where the agent acts as an agent of another: an undisclosed principal can sue
and be sued in respect of contracts entered into on his own behalf, but not the agent who
ordinarily drops out of the contract. The rights and liabilities on the contract still subsist

2
(1880) 5 Q.B.D.414
3
(1855) 10 Ex. 739
4
(1882) 3 East 147
 in the principal and the third party. Thus, in Irvine v. Watson5, Irvine and Co. sold casks
of oil to X., a broker, who said that he was acting for an unnamed principal. The oil was
delivered without payment of the purchase price and Watson and Sons, who were X's
principals, paid the purchase price to X who became insolvent and was unable to pay
over the money to Irvine and Co. It was held that, the fact that Watson and Sons had paid
the purchase price to X could not prevent Irvine and Co, from recovering the price from
them.
However, everything will depend largely on the construction to be given to the
[Link], where a person holds himself out as acting for an unnamed principal,
he will be liable personally to the same extent that the purported unnamed principal would
have been.
III. Where Neither the Name Nor the Existence of the Principal is Disclosed: In law, there is
no duty on a third party to inquire whether or not there exists an undisclosed principal.
Once it is established that there exists an undisclosed principal, such a principal, subject
to some limitations, can sue and be sued as a disclosed [Link] the doctrine of
undisclosed principal has been criticized as inconsistent with the elementary principles of
contract, it is best to regard the doctrine as an anomalous doctrine accepted by the
common law for commercial convenience.
Position of the Unnamed and Undisclosed Principal and the Agent
Where an agent, when entering into a contract with a third party, fails to disclose to the third
party the fact that he is acting for, and on behalf of a principal, the agent alone can sue or be
sued on the contract. However, since an undisclosed principal through his agent acquires the
benefits of the contract, the law renders the undisclosed principal liable for the contract at the
option of the third party, if and when he discovers the identity of the principal, unless the
terms of the contract do not lend themselves to such implication. It means, therefore, that the
third party may make an election whereby he should either continue to deal with the agent as
the only party to the contract or he may (on such discovery) treat the agent as one acting on
behalf of another at all material time, ie, he has an option to sue either the undisclosed
principal or the agent.
However, the right of the third party to sue the principal, if discovered, is co-extensive with
the right of the principal to sue the third party. Thus, in Crompton-Richmond Co. Inc. v
Salami Alhadji Atanda6, the plaintiffs, the assignee of a contractual right, sued the defendant
for damages for nonacceptance of goods ordered, through the agent, from the assignor, an
undisclosed principal. The success of the plaintiff's case depended on the answer to the
question whether an undisclosed principal could enforce a contract against a party with whom
his agent had contracted without disclosing his existence.
Following an English case of Collins v. Associated Greyhound Race Courses7, in which it was
held that, when a party contracts with an agent whom he does not know to be an agent, the
undisclosed principal is generally bound by the contract and entitled to enforce it, unless the
agent of the undisclosed principal contracts in terms that would import he is the real and only
principal, the court held that, the plaintiffs to whom the undisclosed principal had assigned
his rights under the contract were entitled to sue the defendant for the breach of the contract.

5
Supra
6
(1967) N.M.L.R. 383
7
(1930) 1 Ch. 1
It follows, therefore, that an undisclosed principal cannot enforce the contract against the
third party if he could not have been a party to the contract at the time it was made; neither
could he do so if the identity of the agent or of the principal is so important to the third party
that he could not have entered into the contract had he known the principal's identity.
However, where the principal can properly sue the third party, he can be met with any
defence which the third party might have had against the agent before he knew him to be
acting for a principal. Thus, in Montagu v. Forwood8, B and Co. were employed by M as
agents to collect a debt from X. B and Co. rightly employed Z, an insurance broker, to collect
the debt. Z, being unaware, at the time he was employed, that B and Co. were acting as
agents for M, decided, after collecting the debt, to set off the amount of a debt due to him
from B and Co. against the debt he had collected. It was held, that, he was entitled to do so.
Settlement with Agent
If the principal settles payment in respect of the agency contract with the agent before the
third party discovers the existence of the principal, then the third party cannot later sue the
principal when the undisclosed principal's existence is discovered. However, the right of the
third party to sue the agent or the principal is not cumulative but alternative. Therefore, where
a third party has sued and obtained judgment against either the principal or the agent, he
cannot afterwards proceed against the other; even if the judgment which he has obtained
remains unsatisfied.
Circumstances under which the Undisclosed Principal Cannot Sue or Be Sued by the
Third Party:
1. Where the contract expressly provides that the agent is solely bound.
2. Where the terms of the contract are inconsistent with agency.
3. Where there is a personal element in the contract and the identity of the undisclosed
principal would have made a material difference in the decision of the third party to enter into
the contract, for example, a contract of service.
Unlike the case of a disclosed principal, the third party can set-off against the principal's
claim any amount or amounts due from the agent to the third party.
Where the Agent Acts for a Foreign Principal
There is a general rule that a foreign principal cannot sue or be sued upon a contract made by
his agent in Nigeria, unless it is expressly agreed between the agent and the third party that
the contract would establish privity of contract between the principal and the third party or
that such intention could be inferred.
Dispositions of Property by Agent
The rules as regards dispositions of property by an agent follow the general principles already
discussed. If the agent disposes of the property with full authority, the principal is bound, and
the third party will acquire a good title. But if the property is disposed by the agent without
the principal's authority or in disregard of restrictions placed upon his authority by the
principal, the principal is not bound, and the third party gets no good title, even if he took the
property in good faith and without notice of the defect, unless the principal is estopped by his
(the principal's) conduct from denying that the agent has his authority to dispose of the
property.
8
(1893) 2 Q.B.350
Relationship Between the Agent and Third Party
If the agent acts within his authority in relation to his duties as agent, he will be free from any
liability arising from the contract. The third party can neither enforce the rights nor impose
liabilities under the transaction on the agent nor can the agent exercise either of those powers
against the third party. Thus, in G.B. Ollivant Ltd. v. Adetutu9, the defendant agent sold goods
to a third party under the approved and written consent of the plaintiff to sell the goods on
credit. The third party failed to settle the bill and the plaintiff sued in respect of the price of
the goods. It was held that, the defendant was not liable as the goods were sold in accordance
with the plaintiffs consent prior to subsequent revocation of the consent. And where a party
asserts that another has no authority to act as an agent, the burden rests on him to prove it.
Breach of Warranty of Authority
An agent who acts for a principal is deemed to warrant that he has his principal's authority.
But, where an agent acts either without an authority, express or implied, of exceeds the scope
of his authority, the agent, and not the principal, will be personally liable. it is no defence for
the agent to plead that he acted in good faith and that he did not know his authority to be at an
end. In any case, his acts may usually be ratified by his principal.
However, where the agent holds himself out that he possesses authority when in fact he has
none, the third party who deals with him on the basis of the assumed authority, may sue him
for an implied breach of authority if the third party suffers any damage acting in reliance
upon the purported authority.
Torts Committed by an Agent
The principal is liable for any tort committed by his agent when acting in the course of his
employment, if the tort was authorized or ratified by the principal. Generally, it is no defence
to an action against a tortfeasor for him to prove that he acted under the authority, instructions
or orders of another. Therefore, the agent is also personally [Link], if both principal
and agent are liable, their liability will be joint and several.

Termination of Agency
The agency relationship can be terminated in three ways:
1. By the act of the parties.
2. By custom
3. By operation of law

1. By the Act of the Parties.

a. Mutual Agreement: the most obvious way in which the agency relationship may
be terminated is by agreement between the parties. This may happen in various
ways; by time stipulation, termination on the achievement of the purpose for
which it was set up.
b. Unilateral Termination by Notice: where the principal terminates, he is said to
revoke it; and when the agent does, he is said to renounce it. Either party can
unilaterally terminate the agency at any time before execution. This will not affect
9
(1940) 15 N.L.R. 99
 the rights and liabilities created between the principal and third parties prior to
such notice. If the contract does not specify the notice period, then a reasonable
notice must be given. Termination by notice requires no special form but whether
or not a unilateral termination by either of the parties will result in a breach will
depend on the nature of and terms of the contract and the surrounding
circumstances. This was the case in Luther v Mandilas and Karaberis10, where the
court held that the plaintiff who was employed on a commission basis on debts
actually collected, was not entitled to any commission on the revocation of the
agency by the principal. The revocation of the agent’s authority must be brought
to the notice of third parties, otherwise the principal remains bound by the contract
entered into by the agent. Thus in Raccah v Standard Co. Of Nigeria11, the
plaintiff entered into a contract with W, whose authority had been revoked but not
communicated to the plaintiff. The defendant company was held liable.
c. Unilateral Termination without Notice: Agency can be terminated without
notice by conduct inconsistent with it’s continuation for e.g, if the principal sells
the subject matter of the agency, such conduct may be considered a breach of
contract but nevertheless it puts an end to the contract.
Irrevocable Agency
There are some circumstances in which an agency is considered Irrevocable.
Where the agent has ‘authority coupled with an interest’,this is where the agency
is created for the purpose of securing the interest of the agent. In Smart v
Danders12,a principal consigned goods to a factor for sale and the factor lent
money to the principal in consideration of a promise by the principal not to revoke
the factor’s authority to sell the goods. It was held that the authority was
Irrevocable. It should be noted that where authority is genuinely coupled with an
interest, it will be secure from termination as a result of the death, insanity or
bankruptcy of the principal.

2. By custom: as long as the termination is not repugnant to natural justice or inconsistent

with the express agreement by the parties, an agency agreement can be brought to an end
by any usage or custom.

3. By operation of law: A contract of agency is automatically terminated by the occurrence

of any of the following events :
A. By Death of Either Party: If the principal dies, the agent will be personally liable
under the contract if he continues it, whether he knew of the principal's death or not. The
death of the agent are brings the agency agreement to an end, and it is not open to the
agent's personal representatives to carry on the agency.
It follows that except in the case of an irrevocable agency, the death, or in the case of a
corporation, the dissolution of the principal automatically puts an end to the agency
contract, and the estate of the principal will not be liable upon any contract made by the
agent after the principal's death, even though the agent is unaware of and had no means of
10
(1967) L.L.R. 43
11
(1922) 4 N.L.R. 48
12
(1848) 5 C.B.895
 knowing that fact. Thus, in Smouth v Ilbery13, a butcher, who sued for the price of meat
supplied to a woman whose husband had died at the material time, was held unable to
recover such price from the deceased husband's estate, because the authority of the wife
to buy on her husband's behalf had been revoked by the death of the husband.
In such a situation, however, the agent will be liable to the third party in damages for
breach of an implied warranty of authority. The death of an agent also determines the
agency. However, the death of the principal or agent does not terminate an agency
'coupled with an interest’.
B. Insanity of the Principal or Agent: Except in those cases where the authority of the
agent is irrevocable, the insanity of the principal puts an end to the contract of agency as
between the principal and the agent, but the principal may still be liable to third parties
who dealt with the agent in ignorance of the principal's condition. His liability to third
parties is on the ground of estoppel. In Drew v Nunn14 a husband who gave his wife
authority to buy goods from a third party was held liable to the third party for the goods
supplied by the latter to the wife after the husband's insanity, which was unknown to the
third party at the time he supplied the goods.
The insanity of an agent also determines the agency as he would thereby lack the
capacity to contract either for himself or for another.
C. Bankruptcy of the Principal: The bankruptcy of the principal or its liquidation (in the
case of companies) terminates the agency, but the bankruptcy of the agent does not
necessarily produce the same result, unless the bankruptcy renders him unfit to act.
D. Supervening Impossibility or Frustration: An agency will be terminated If it’s
continuation becomes impossible, for example, because the principal’s business has come
to an end; or the agent is conscripted(forcefully made to join the armed forces); or the
furtherance of the relationship becomes illegal due to a subsequent legislation. Thus, in
Stevenson and Sons Ltd. v Aktfur Cartonnagen - Industries15, it was held that, the
outbreak of war between England and Germany automatically puts an end to the agency
between an English company and its German principal.
E. Termination of Agency of Necessity: It is of the general nature of an agency of
necessity that it will generally only terminate with the cessation of the necessity that gave
rise to it.
F. Miscellaneous Cases of Termination: In addition to the above instances, an agency
may be terminated -
 By the destruction of the subject matter of the agency.
 By the expiration of the time agreed upon by the parties for its duration.
 By the completion of the agent's assignment. On completion of the work for which the
agency was created, the agency automatically comes to an end. For example, where an
auctioneer was engaged to sell goods by auction, the agency determines as soon as the
sale by auction materializes.

Effect of Termination
13
(1842) 12 M and W 1
14
1879 4 Q.B.D. 661
15
(1918) A.C. 239
The rights and obligations that have already arisen between the principal and the agent are
not affected by the termination of the agency relationship, from whatever [Link],
the agent will still be able to sue for such things as commission earned or an indemnity in
respect of a matter arising before the terminating event. Conversely, the principal will still be
able to sue in relation to negligence or breaches of duty committed by the agent before the
terminating event.