If a third person has no knowledge about the fact that the agent is acting for a principal, then both the agency and the principal is known as undisclosed ones[i]. The agent of an undisclosed principal can be held liable on the contract as the real obligor as s/he contracted in that capacity. Similarly, an undisclosed principal can also be held liable as s/he must also assume its burdens.
The liability of an undisclosed principal and the agent is an alternative liability. It means that the third party can only make either the principal or the agent liable and not both of them together.
A third party can decide whether to make the principal or the agent responsible only after discovery of the principal and opportunity to make an intelligent choice. However, once an election is made by a third party, it is generally irrevocable[ii].
However, the commencement of a suit against the agent or a judgment against the agent will not amount to an election to hold the agent, rather than the principal liable, if the third party was unaware of the existence or the identity of the principal.
In some jurisdictions, if the third party brings suit and recovers judgment against the agent after knowing the identity of the principal, then the election against the agent will bar a subsequent action against the principal[iii].
An undisclosed principal becomes a party to a transaction only if it is proved that the agent intended to act upon his/her account[iv]. If an agent acts in his/her own name without disclosing the principal will not preclude liability of the principal.
However, if there is no proof of an actual agency relationship, there can be no reliance on the doctrine of undisclosed principals. Whereas, the principal is not liable where the contract provides that an undisclosed principal is not a party to it.
Similarly, an agent will be held liable if s/he fails to disclose the agency and the identity of the principal while making the contract. In such case, the agent will be subject to all the liabilities created by the contract, in the same way as if the agent were the principal in interest.
Likewise, in order to avoid personal liability, disclosure of the principal must be made at the time of contract. The agent or the principal will be held liable otherwise[v]. However, after the principal is disclosed, the agent will not be liable for subsequent authorized acts between the third person and the principal[vi].
When an agent makes a contract for the principal concealing the fact that s/he is an agent, the principal can claim all the benefits of the contract from the other contracting party, so far as the principal does not cause any injury to the other party[vii]. However, a third person will not be liable to an undisclosed principal, if the specific terms of the contract exclude liability to any undisclosed principal or to the particular principal[viii].
An agent, who pays money to a third party that actually belongs to the undisclosed principal by mistake, can maintain in his/her own name an action for money to recover it back[ix].
[i] Bems, Inc. v. Shelter Commercial Properties, Div. of US Shelter Corp., 1991 Tenn. App. LEXIS 19 (Tenn. Ct. App. Jan. 9, 1991)
[ii] Bell v. Borders, 205 Ky. 181 (Ky. 1924)
[iii] Pittsburgh Terminal Coal Corp. v. Bennett, 73 F.2d 387 (3d Cir. Pa. 1934)
[iv] Lee v. YES of Russellville, Inc., 784 So. 2d 1022 (Ala. 2000)
[v] Mawer-Gulden-Annis, Inc. v. Brazilian & Colombian Coffee Co., 49 Ill. App. 2d 400 (Ill. App. Ct. 1st Dist. 1964)
[vi] Young v. Vista Homes, Inc., 243 S.W.3d 352 (Ky. Ct. App. 2007)
[vii] Ford v. Williams, 62 U.S. 287 (U.S. 1858)
[viii] Hawkins v. Windhorst, 87 Kan. 176 (Kan. 1912)
[ix] Kelly v. Kremer Motor Co., 177 Minn. 515 (Minn. 1929)