THE EQUITY OF THE UNDISCLOSED PRINCIPAL

Transcription

1 THE EQUITY OF THE UNDISCLOSED PRINCIPAL THE doctrine of the undisclosed principal has been classified as an anomaly and in so far as it enables a person, who is not apparently a party to a contract and who is not even expressed to take a benefit under it, to acquire rights and. obligations vis-ci-vis another person who is unaware of his existence, the doctrine is clearly anomalous in the context of the strict common law rules of contract. However, in all contracts where an agent is involved, because of the fiduciary duty owed by an agent to his principal, it is not only the common law rules of contract that have to be considered but also the rules of equity. It is submitted that da- culties that have arisen with regard to the doctrine are attributable either to a failure to recognise the equity involved or to a lack of appreciation of the full extent of the equitable rules that may be applicable. It is the object of this article to demonstrate that the doctrine is in complete accordance with the rules of equity in their present state of development and that cases such as Watteau v. Fenwick and Edmunds v. Bushell,= which have been criticised as unwarrantable extensions of the doctrine, can be justified by an application of the modem rules of equity. Conversely, it is hoped to show that where, as in Armstrong v. stoke^,^ the equitable implications of the fiduciary duty, owed by an agent to his principal, are not fully considered, error inevitably results. Sir Frederick Pollock was of opinion that the whole English law as to the position of undisclosed principals is an anomaly. Whether it be a beneficial anomaly is a question to be decided with reference rather to mercantile than to legal principles. This view, in contrasting legal principles and mercantile principles, raises the problem as to what are mercantile principles and how they can be identified. The truth is that mercantile priqciples and practices can have no impact upon legal doctrines, be those doctrines orthodox 1 The writer adopts the view, advanced by Goodhart and Hamson, that the contract as such is between the agent and the third party and that, when it is said that there is priaity in contract between an undisclosed principal and the third arty, it ia,merely an elli tical phrase to indicate their mutual rights and ohigations. Undisclosed hncipals in Contract (1932) 4 Cmmb.L.J Cf. Chesdire and Fifoot, Lam o contract, 6th ed., p. 403; Holmes, Select E!says in Anglo-American Lega f Hiatory, Vol. 6, p. 404;,, James Barr Ames, Undisclosed Principal-His Rights and Liabilities (1909) 18 Yale L.J Q.B [1865) L.R. 1 Q.B poilock (1893) 9 L.Q.R (1872) L.R. 7 Q.B (1898) 14 L.Q.R

2 168 THE MODERN LAW REVIEW VOL. 28 or anomalous, until they come before a court of law for examination. In such cases the court is free to accept or to reject a mercantile practice, however well established. Furthermore, although mercantile custom or usage is an important source of commercial law, it is well established that a usage cannot operate if it is inconsistent with the express terms of a contract. It follows that, where a contract is expressed to be made between A and T, a usage! cannot be invoked to convert it into one between P and T. If a practice is accepted, it is either because it accords with an existing rule of law or equity or because it presents a factual situation that requires to be regulated by a rule of law.* One of the earliest reported cases, involving the rights of an undisclosed principal, entailed a conflict between legal and mercantile thinking. In Scrimshire v. Alde~ton,~ the plaintiff, a farmer, consigned oats to a factor for sale. The oats were sold to the defendant and before he paid the factor, as was customary, the latter became insolvent. The defendant refused to comply with a request by the plaintiff to pay him direct. The Chief Justice directed the jury to find for the plaintiff and although the jurymen were sent out a second and a third time to reconsider their verdict, they insisted on finding for the defendant. The Chief Justice then interrogated each member of the jury with no better result. On a retrial a special jury, having received the same direction, nevertheless concurred with the jury of the first trial.10 Clearly, if mercantile principles are ascertainable at all, the best evidence with regard to them should be the view taken by a jury drawn exclusively from merchants. There is, however, one mercantile principle that requires no elaboration and no authority to support it, namely that a business transaction should produce a profit. It follows that where such a transaction results in a loss, it frequently falls to the lot of a court of law to allocate or to apportion that loss amongst the parties to the transaction. The court s problem is not always simple, even where only two parties are involved but where an agent has been employed by one of the parties complications arise, not only because three persons are involved but also because only one of the three is owed a direct fiduciary duty and only one of the three is under that duty. 7 Les Affrdteurs Rdunis Socidtd Anonyme v. LeopoM Walford (London), Ltd. [1919] A.C. 801, especially the observations of Lord Birkenherrd at p Yet practical necessity cannot be accepted an a juristic basis. Legal technique consists in creatin!, particular to for the handling of the complex circumstances of life : Montrose, Tge Basis of the Power of an Agent in Cases of Actual and Apparent Authority (1938) 16 Can. Bar Rev. 757 at p (1743) 2 Stra. 1182; 93 E.R This, ewever, was an outrage to legal theory : Lord Chorley, Del Credere (1929) 45 L.Q.R. 221 at p

3 MARCH 1966 THE EQUITY OF TEE UNDISCLOSED PRINCIPAL 169 That an agent owes a fiduciary duty to his principal is beyond dispute l1 and the reports show that, in the eighteenth century at any rate, the courts of common law recognised this duty l2 and, furthermore, were prepared, with the laudable desire of preventing circuity of action, to apply the equitable rules arising out of that duty.'s That their application of these rules appears to the modern lawyer to have been defective is attributable to three factors. In the first place, the equitable rules may not have been fully developed at that time; secondly, the common law judges may not have been fully conversant with the rules l4 and, finally, the accounting facilities, often necessary for the application of those rules, were not available to them.15 It was because of this imperfect application of equitable rules by the common law courts that the error arose of supposing that there was some distinction between the equitable remedies available to a cestui que trust and those available to a person who, although he was owed a fiduciary duty, was not a beneficiary under an orthodox trust. In Ex p. Dale 4 Co.,16 this erroneous conception was reluctantly accepted by an eminent equity judge, Sir Edward Fry. His lordship expressed himself as being unable to understand why there should be such a distinction but nevertheless considered that the distinction was implicit in a series of common law decisions that were binding on him. The fallacy was exposed by Sir George Jessel M.R. in Re Hallett's Estate 17 after a careful examination of the judgment in EX p. Dale 4 Co,, the common law cases referred to therein and the authorities in equity. Sir George said: '( I think that after those authorities it must now be considered settled that there is no distinction, and never was a distinction, 11 That a principal does not usually owe any fiduciary duty to his agent probably originated from the fact that the earliest examples of agency were also master and servant relationships and from what would now be considered a reactionary view of that relationship. 12 Because of the third party's right of election the problem of an undisclosed principal'e liability to the third party will usually arise when the agent is insolvent, and, therefore, the matter will usually be settled in Chancery, e.g., Whitecomb v. Jacob (1709) 1 Salk. 160; 91 E.R. ' " As to the reason of the caee, I rely here again upon the rule concerning circuity of action. For I think it would be very absurd to say that anything shall vest in the assignees for no other purpose but in order that there may be a bill in equity brought against them....", per Willes J., in Scott v. Surman (1742) Willes 400 at p. 402; 125 E.R at p See the observations of Sir George Jessel M.R., in Re Hallett's Estate (infra). 1s Under the Supreme Court of Judicature (Consolidation) Act, 1925, (1)(b), account actions ere still assigned to the Chancery Division. For the exceptional ca8es in which an account action between partners was maintainable at law see Lindley on Partnership, 11th ed., pp (not in 12th ed.). 16 (1879) 11 Ch.D. 772 at p (1880) 13 Ch.D. 696 at p It will be recalled that, with regard to the bonds in the RUBEian Bond and Waggon Company, which the deceased Hallett had taken in his own name and subsequently deposited with his bankers, he was held to be not a trustee for Mrs. Cotterill but her agent. Therefore, ais-d-cis the company and Hallett's bankers, she was an undisclosed principal. VOL. 28 7

4 170 THE MODERN LAW REVIEW VOL. 28 between a person occupying one fiduciary position or another fiduciary position as to the right of the beneficial owner to follow the trust fund and that those cases which have been cited at law, so far from establishing a distinction, establish the contrary; and that the mere error of supposing that equity could not follow or distinguish money in the cases supposed, if error it was, and perhaps it was not so originally (I am not sure that the doctrine of equity had got so far at the first start, but it was certainly an error at a later period), is attributable really to the fact that the judges who followed the earlier cases were not aware of what I may call the gradual refinement of the doctrine of equity. In view of this high authority, it is not necessary to equate every fiduciary relationship with a trust in order to make available equitable remedies.i8 Thus, in the case of an undisclosed principal, the agent, apart from any contractual rights that are vested in him, can take action against a third party to recover a benefit due to his principal in equity in the same way that a trustee can sue to recover benefits due to his cestui que trust. The third party can sue the agent quite apart from the contractual relationship between them, in the same way that a trustee can be sued on transactions entered into by him on behalf of the trust. An undisclosed principal can sue the third party in the same way that a cestui que trust, who is sui juris and absolutely entitled to the trust property, can bring the trust to an end l8 and then take action in his own name to recover any benefits that were owing to the trust. The right of the third party to sue the undisclosed principal when he discovers him presents greater difficulty and it has been doubted whether it can be justified even by equating an agency with a trust.20 It is true that a person, who has contracted with a trustee, may not be able to sue the cestui que trust upon the contract even if the cestui que trust is absolutely entitled and sui jurk. However, it may be possible to saddle the cestui que trust with the ultimate liability on the contract by making available to the other party to the contract the rights of the trustee against the cestui que trust. 18 Seavey, in I The Rationale of Agency (1920) 29 Yale LJ. 869 at p. 863, suggested that 8n agency is 8n8lOgOUs to 8 trust rather h 8 WIltr8Ct but, 88 Powell points out, it is not necessary to identify an 8genCy with 8 trust in order to have recourse to equitable remedies, The Law of Agency.!hd ed., p. 25. In attempting to identify the two concepts. Am-, op. cit. at pp , employs the example of undisclosed purchasers of land. That spprosch involves considerations peculiar to conveyancing, such as constructive notice, which usually have no appli~atio?~ to mercantile dealings wifh chattel interests. Curiously, Charles Sweet, in Trusteeship and Agency (l892) 8 L.Q.R. 220 at p. 228, considered it n?cesssry to invoke the doctrine of the undiscloeed principal to rationahse Cedein aspects of the 18w of trustn. 19 Re Marshall Ch. 19 2, C.A. 20 Dr. Stoljar, L! he aw of Agency, p. 9, doubts whether the trust an810 y Can cover C88eS where the contract 1s stlll executory. If, however, t%e undisclosed principal s liability stems from his duty. to indemnify his agent, the objection is disposed of, because the agent has mcurred liability whether the contract is executed or executory.

5 MARCH 1965 THE EQUITY OF TEE UNDISCLOSED PRINCIPAL 171 The authorities with regard to the liability of a cestui que trust to indemnify his trustee were comprehensively reviewed by Lord Lindley in Hardoon v. Belilios 21 and he summed up their effects in these words : But where the only cestui que trust is a person sui juris the right of the trustee to indemnity by him against liabilities incurred by the trustee by his retention of the trust property has never been limited to the trust property; it extends further and imposes upon the cestui que trust a personal obligation enforceable in equity to indemnify his trustee. This is no new principle but as old as trusts themselves.... Where, as in Balsh v. HyhamYz2 a trustee seeks indemnity in respect of transactions in which he need not have engaged and which were not within the scope of his trust, he must prove that his cestui que trust either authorised or ratified such transaction. But if he has incurred liability within the scope of his trust and for the benefit of his cestui que trust, Ex parte Chippendale * shews that nothing more is required. Once the liability of the cestui que trust to indemnify his trustee is established the only objection to suing him directly is purely procedural. Then, applying the principles laid down by Sir George Jesse1 in Re Hallett s Estate, the same right of action must be available against an undisclosed principal because of the fiduciary duty owed to him by his agent. Before leaving this aspect it is pertinent to observe that, on this analysis, the liability of the undisclosed principal to be sued by the third party is not based upon some supposed proposition of law to the effect that a person taking the benefits of a transaction must inevitably assume its burdens. If there ever was a belief that such a proposition was of general application, that belief should have been dispelled by the decision of the House of Lords in Cox v. Hickman,= where it was held that if a person is to be held liable to the creditors of a business, something more must be proved than the mere fact that he had a legal or an equitable right to participate in the profits of that business. It is submitted that what must be proved to render a person liable, either as a partner or as a principal, is that the person, who allegedly acted on his behalf, owed him a fiduciary duty. It is the fiduciary duty that acts as a catalyst, bringing into play the equitable rules that enable an undisclosed principal to be sued in accordance with well established equitable principles. It remains to be considered whether or not those principles extend to cases where an agent acts within the scope of the business entrusted to him and for the benefit of his principal but in defiance of some express prohibition of his principal. 21 [1901] A.C. 118 at pp (1728) 2 P. Wms. 453; 24 E.R s (1853) 4 De G.M. & (3.19; 43 E.R L4 (1860) 8 H.L.C. 268; 11 E.R. 431.

6 172 THE MODERN LAW REVIEW VOL. 28 We have already observed that in the case of a trust Lord Lindley considered that, provided that the trustee had acted within the scope and for the benefit of his trust, he is entitled to be indemnified by his cestui que trust who is sui juris and absolutely entitled to the trust property, even though he acted without authority. It will be noted that his lordship makes a significant distinction between acting without authority and acting outside the scope of the trust. In coming to this conclusion his lordship relied upon the authority of Balsh v. Hyham. In Balsh v. Iyham,2s the plaintiff was trustee for the defendant of 21,000 stock in the South-Sea Company. At the defendant s request the plaintiff had borrowed 24,000 from the company for the benefit of the defendant on the security of the stock. It was subsequently provided by statute 26 that, if any debtor of the company, whose stock was held as security by the company, repaid 10 per cent. of his debt, he would be discharged from all further obligations to the company in respect of that debt. The defendant, apparently under the impression that if the 10 per cent. were not paid the company would forfeit the stock and thereby relieve him from his liabilities as a stockholder, forbade the plaintiff to make the payment. Nevertheless the plaintiff paid the 10 per cent. and he was held to be entitled to recover the amount so paid from the defendant. Sir Frederick Pollock, whilst conceding the correctness of the basic doctrine of the undisclosed principal, appears to have considered that its extension to cases, such as Edmunds v. Bushell and Watteau v. Fenwick, where the agent has acted contrary to the express instructions of his principal, was an undesirable extension of an anomalous doctrine.* In Edmunds v. Bushell 4 JoRes,28 A employed B to manage A s business which was carried on under the name of B & Co. expressly forbade B to accept bills of exchange. It was held that A was liable to an indorsee of a bill of exchange, accepted by B in the name of B & Co. although the indorsee had no knowledge of A s existence at the time when the bill was indorsed over to him. The basis of the decision appears to have been that By in accepting the bill, was performing an act within the scope of the duties usually entrusted to the manager of the kind of business carried on by B & Co. and, therefore, a secret limitation of those duties could 2s (1728) 2 P.Wms. 453; 24 E.R Geo. 1, stat. 2, c (1898) 14 L.Q.R. 6. As draftsman of the Partnership Act, 1890, he incorporated the basic doctrine in E. 5, but, by the proviso to that section, he attempted to relieve undisclosed partners from liability where the acting partner has acted without authority, although within the scope of the partnership business. Professor Mcmtrose has demanstrated that the attempt was not wholly successful; Liability of Principal for Acts exceeding Actual and Apparent Authority (1939) 17 Can. Bar Rev. 693 at p. 699 et seq. 28 (1865) L.R. 1 Q.B. 97, especially the observations of Cockburn C.J. at p. 99. A

7 MARCH 1966 THE EQUITY OF THE UNDISCLOSED PRINCIPAL 173 not operate to the prejudice of persons dealing with the firm, who had no knowledge of such a limitation. In Watteau v. Fenwick 28 the defendants, a firm of brewers, were the owners of a beerhouse and had appointed one Humble to manage it. The licence was taken out in Humble s namea0 and his name appeared over the door. By the agreement between Humble and the defendants he was forbidden to purchase certain articles, which were to be supplied by the defendants for the purpose of the business. Humble in contravention of his instructions ordered certain of the prohibited articles from the plaintiff for use in the business. The plaintiff supplied these goods and gave credit for them to Humble only. On these facts a Divisional Court gave judgment for the plaintiff against the defendants for the price of the goods supplied. The decision has been criticised and distinguished but has never been overruled. It has been followed on one occasion in England and there are several American decisions to similar effect.31 It is submitted that following the principles enunciated by Sir George Jesse1 in Re Hallett s Estate the decision in Balsh v. Hyham is applicable. Although Humble was acting in defiance of the express prohibition of his principals, he nevertheless acted within the scope of the business entrusted to him and there was no evidence that the business did not receive the benefit of the transaction. If, then, the decisions in Watteau v. Fenwick and Edmunds v. Bushell 4 Co. are C O R to ~ cases ~ where the agent acts within the scope of the business entrusted to him but contrary to the express instructions of his principal and provided that the agent acted for the benefit of the business, those decisions are in conformity with well established equitable principles. On that basis these cases can be reconciled with the House of Lords decision in Keighley, Maxsted 4 Co. v. Durant. In Keighley, Maxsted 4 Co. v. Durant the appellants had authorised Roberts, a corn merchant, to buy wheat for them at a specified price. Roberts failed to obtain wheat at that price and later contracted in his own name to buy wheat at a higher price. The appellants subsequently purported to ratify the contract but later refused to take delivery of the wheat. The respondents sold it at a loss and sued the appellants for damages for breach of contract. 29 [1893] 1 Q.B Inquiries at the Public Record Office and to the Registrar of the Durham County Court confirm the accuracy of the facts as set out in the report and the county court judge s note adds nothing of significance. 1: am grateful to the Registrar for his courtesy in answering my inquiries. 80 The fact that the licence was in Humble s name is consistent with either managership or ownership. Under the Beerhouse Act, 1840 (3 & 4 Vict. c. 61), 8. 1, 8 licence could only be issued to a person resident upon the premises. Hubbard v. Tenbrook, 124 Pa. 291 (1889); Rowan v. Buttman, 1 Daly (N.Y.) 413 (1865). The American Restatement, 5 195, subjects an undisclosed principal to liability in the circumstances of Watteau v. Fenwick. and Edmunds v. Bushell. 52 [1901] A.C. 240.

8 174 THE MODERN LAW REVIEW VOL. 28 It was held that a contract made by a person intending to contract on behalf of a third party but without his authority, cannot be ratsed so as to render him able to sue or liable to be sued on the contract, unless the person who made the contract professed at the time of making it to be acting on behalf of a principal. At first sight this decision appears to be in direct conflict with Edmunds v. Bushell and Watteau v. Fenwick but the words of Lord Lindley are significant. He said, '' The reasons upon which a real principal not disclosed can sue or be sued on a contract made on his behalf by an agent acting with his authority have no appli$ation to contracts made by one person for another, but without any authority from him. Some other reason must be found to permit a person to sue or be sued upon a contract not entered into by him through an agent or otherwise." 33 It is submitted that these words suggest the distinction between the cases. In Watteau v. Fenwick and Edmunds V. Bushell there was a subsisting agency at all material times and although in each case the agent acted without authority in the particular transaction, it cannot be said that he acted without any authority because he acted within the scope of the business in which he had authority to act. There was in each case an existing fiduciary duty which is, as we have seen, the nexus between the common law contractual rules and the rules of equity enabling the latter rules to be invoked and to prevail. On the other hand, in Keighley, Maxsted v. Durant, Roberts was appointed to effect one specific transaction and, that transaction having proved abortive, his agency and with it his fiduciary duty to the appellants ceased.84 Without the existence of a fiduciary duty at the time of the contract there was nothing to bring the equitable rules into operation either for the benefit or to the detriment of the appellants. The decision of the Divisional Court in Kinahan 8 Co. v. Parry 85 followed Watteau v. Fenwick but it is submitted that, on the basis of the foregoing analysis, the reversal of the former decision by the Court of Appealae is of greater significance. The Court of Appeal gave two grounds for its decision: " that there was no evidence that the manager was the agent of the defendant in the particular transaction or that the whisky was supplied for the use of the hotel and not to the manager personally." The first of these grounds, because of the absence of a fiduciary duty, excludes 8s Ibid. at p Bowstead, The Law of Agency, 12th ed., Art. 2, De Villiers and &facintosh. Law of Agency in South Africa, %d ed., Art. 19 and the American Restatement, $5 3 and 194, draw a dietinction between general agencies involving continuity and sgenciee that do not. Powell, op. cit. at p. 31 appars to reject the distinction. Cf. ~oodhart and Hameon, op. cd. at p. 396, The distinction between Watteau v. Penwick and Durant's caee is that in one case there was, in the other there wae not, an external notorious act from which general suthority of 8 defined clasa could be implied.'' 8s 1910 a K.B So [l9ll] 1 E.B. 469.

9 MARCH 1968 THE EQUITY OF THE UNDISCLOSED PRINCIPAL 175 a recourse to equitable remedies against the owner of the hotel. The second ground, even if there had been an agency relationship, excludes the application of the rule in Balsh v. Hyham, because the transaction was not entered into for the benefit of the principal. It has been suggested that U atteau v. Fenwick is a case of pure e~toppel.~ That is a valid enough solution but carries the inevitable implication that on similar facts no action would lie against the third party at the suit of the undisclosed principal where the third party was in breach of his obligations under the contract, as for example, if the goods were not of merchantable quality. Clearly the justice of the case demands that the undisclosed principal should not be without a remedy in such circumstances. On the principles outlined above he would have such a remedy whereas on the estoppel solution he has none. Having dealt with the basis of the undisclosed principal s liability, we can now consider the circumstances in which he is discharged from that liability. Whether the view is taken that liability is based on a contractual duty or upon his equitable obligation to indemnify his agent, he will be discharged from it when the third party s claims are in fact satisfied. It is hardly necessary to add that if those claims are satisfied by the agent, his principal remains liable to reimburse him. However, a more difficult situation arises where an undisclosed principal, in the belief that the agent has settled or will settle with the third party, pays the agent before the third party is aware that the agent was acting for a principal and the agent then fails to settle with the third party. In Heald v. Kenworthy 38 it was laid down that the payment of the agent by his principal, even though such payment is made at a time when the third party is as yet unaware that the agent was acting for a principal, does not discharge the principal, unless he was induced to make the payment by some conduct or representa- tion of the third party. In that case Parke B. said, If the conduct of the seller would make it unjust for him to call upon the buyer for the money, as for example, where the principal is induced by the conduct of the seller to pay his.money on the faith that the agent and seller have come to a settlement on the matter, or if any representation to that effect is made by the seller, either by words or conduct, the seller cannot afterwards throw off the mask and sue the principal. The clear implication of Heald v. Kenworthy is that the mere fact that an undisclosed principal has paid his agent before the third party becomes aware that the agent was acting for a principal is not, of itself, sufficient to discharge the principal from his 1iabiIity to the third party. Nevertheless, in Armstrong v. Stokes,ag 87 Goodhart and Hamson, op. cit. at p. 336, there is, in Watteau v. Penwick an excellent example of pure estoppel by conduct (18.55) 10 Ex. 739; 156 E.R (1872) L.R. 7 Q.B. 598.

10 176 THE MODERN LAW REVIEW VOL. 28 Blackburn J. appears to have rejected that implication in holding that the principal wa? discharged in such circumstance, even though no conduct or representation of the third party had induced the principal's payment to his agent. It was not until after Lord Blackburn had ascended to the House of Lords that the conflict between the two cases was considered by the Court of Appeal in Irvine v. Watson.40 Although it was not directly relevant to the case before them, which related to a disclosed but unnamed principal, the court was unanimous in preferring Heald v. Kenworthy to Amnstrong v. Stokes. It is true that Bramwell L.J. made the tentative suggestion that the decision in Armstrong v. Stokes may have turned upon the peculiar characteristics of Manchester commission merchants 41 but there is nothing in the judgment of Blackburn J. to indicate that any reliance was placed on that aspect and, indeed, there is much to show that it was based on normal agency. The fact is that either Parke B. or Blackburn J. applied the wrong principle and it is submitted that it was the latter because he, like other eminent common lawyers before him, had failed to appreciate the full equitable consequences flowing from an agent's fiduciary duty.'z In Armstrong v. Stokes4a the defendant had been in the habit of ordering supplies of white shirting material from J. & 0. R. The usual procedure had been for J. & 0. R. to order grey shirting from the plaintiff and to have it bleached before delivering it to the defendant. It was customary for J. & 0. R. to charge the defendant a price made up of the price paid to the plaintiff, the cost of bleaching and 1 per cent. on the total of those two items expressed to be by way of omm mission.^' In the past J. & 0. R. had invariably settled with the plaintiff and the defendant had usually paid J. PE 0. R. on the pay-day next succeeding the presentation of their invoice. In pursuance of an order for white shirting ordered from him by the defendant, J. & 0. R. placed an order for grey shirting with the plaintiff and this was delivered to them on July 24, payment to be made within thirty days of delivery. J. & 0. R. had the shirting bleached and delivered it to the defendant together with an invoice in which the price had been calculated in the usual manner. On August 11 the defendant paid J. & 0. R. It was not until August 30, after J. & 0. R. had become insolvent without having paid him, that the plaintiff realised that A had purchased the goods to enable him to carry out the defendant's 40 (1679) 6 Q.B.D Ibid. at p See, for example, the observations of Jesse1 M.R., in Re Hallstt's Estate (1879) 13 Ch.D. 696 at p. 717, with regard to Lord Ellenborough's judgment in Taylor v. Plumer (1616) 3 M. & S. 662: 106 E.R. 7' (1872) L.R. 7 Q.B Blackburn J. appears to b~ve attached great weight to this "commission." He said, ibid. at p. 604, The charge of commission is conclusive to shew, that to some extent, there was a relationship of principal end agent...."

11 ~IARCH 1965 THE EQUITY OF THE UNDISCLOSED PRINCIPAL 177 order and until then the plaintiff had dealt with J. & 0. R. as principals. It was on these facts that Blackburn J. held that the defendant was under no liability to the plaintiff. In arriving at this decision his lordship held as a question of fact that there had been a normal agency relationship between J. & 0. R. and the defendant, in the sense that they had been empowered to establish privity of contract between the defendant and the plaintiff. Then, after a consideration of the rule laid down by Parke B. in Heald v. Kenworth?), he said, We think that we could not, without straining the evidence, hold in this case that the plaintiff had induced the defendant to believe that the plaintiff had settled with J. & 0. Ryder at the time when the defendant paid him. This makes it necessary to determine whether we agree in what we think was the opinion of Parke B., acquiesced in by Pollock C.B. and Alderson B. We think that, if the rigid rule thus laid down were to be applied to those who were only discovered to be principals after they had fairly paid the price to those whom the vendor believed to be the principals and to whom alone the vendor gave credit, it would produce intolerable hardship In contracts where there is an undisclosed principal there can be little doubt that, as a matter of strict common law, the contract is between the agent and the third party and that the rights and liabilities of the principal are consequences flowing from his fiduciary rights against the agent. It follows that, because the duties of the principal to the third party are based on equitable rules, he has notice of the equitable right of the third party to look to him for payment. Having such notice he cannot discharge his obligation by making payment to his agent unless he knows that the agent has settled with the third party. Conversely, the third party s right to look to the principal for payment being merely equitable, he cannot enforce that right if he himself has behaved inequitably, as for example, where the payment to the agent was induced by his conduct. Arguments to the contrary appear to be based upon the third party s lack of knowledge, whereas what is relevant in equity is the knowledge attributable to the party wishing to be discharged from the obligation. However, it is submitted that, although it was decided upon incorrect principles, Armstrong v. Stokes produced the correct result, because it is hardly possible that the dealings between J. & 0. Ryder and the defendant created an agency relationship between them, in the sense that J. & 0. Ryder were empowered to establish either legal or equitable relationships between the plaintiff and the defendant. Indeed, Blackburn J. appears to have had strong doubts as to whether there was an agency but decided not to send that question back for a retrial because he considered that, even 45 Ibid. at p. 610.

12 178 THE MODERN LAW SEVIEW VOL. 28 if there were an agency, the principal had discharged his obligati01-1.'~ In evading that question, his lordship was underestimating the equitable consequences of an agency relationship. If the facts in that case constituted an agency, then it is arguable that whenever a person places an order for the manufacture of goods, with the knowledge that the manufacturer will have to acquire his raw materials from a third party, he appoints the manufacturer to be his agent. In such circumstances, if the person placing the order paid the manufacturer without ensuring that the supplier of raw materials had been paid for them, he would be liable to the supplier for their price. On the authority of Irvine v. Watson, this would certaidy be the case if the supplier was aware that the'materials were to be manufactured for resale and the purchaser from the manufacturer were unable to prove a usage to the contrary. Again, if, on facts similar to Armstrong v. Stokes, the shirting had been ruined in the bleaching process and the person who placed the order refused to take delivery and to pay the price, would he be liable to pay the price to the supplier of the grey shirting? To hold that he would involves the wide proposition that every contract for the purchase of future.goods, as defined by the Sale of Goods involves an agency relationship between the buyer and the seller. For the reasons stated it is considered that the doctrine of the undisclosed principal and its extension to cases such as Watteau v. Fenwick and Edrnunds v. Bushel1 is in complete accord with the modern rules of equity and furthermore that, since the Judicature Act, it can scarcely be considered to be an anomaly in the common law. The question as to whether the doctrine is socially or commercially beneficial has been well answered by an American court : '' A man conducting an appcrrently profitable and prosperous business obtains credit thereby, and his creditors have a right to suppose that his profits go into his assets for their protection in the case of a pinch or an unfavourable turn in the business. To allow an undisclosed principal to absorb the profits and then when the pinch comes, to escape responsibility on the ground of orders to his agent not to buy on credit, would be a plain fraud on the public. No exact precedent has been cited. None is needed." 48 It may be argued that, as a matter of law, the House of Lords, in Cox v. Hickman, permitted undisclosed persons, who participate in the profits of a business, to escape liability to the creditors of that business whilst at the same time depleting the assets available to the business creditors. Be that as it may, within five years of 46 Ibid. at pp & 57 Vict. c. 71, 8. 6'2 (1): ' I ' Future Goods ' means goods to be manufactured or acquired by the seller after the making of the contrsct of sale." 48 [1910] 2 K.B. 389 (Divl. Ct.), reversed on other grounds [1911] 1 K.B. 459 (C.A.) infra. Hubbard v. Tenbrook, 124 Pa. 291 (1889). I am indebted to Dr. Stoljar for thie passage, quoted in his Law of Agency at pp , and also for many other valuable referencee.

13 3l.mc THE EQUITY OF THE UNDISCLOSED PRINCIPAL 170 that decision the legislature recognised the anti-social nature of such activities by enacting that, in the event of the insolvency of the persons running the business, the claims of persons, other than employees and annuitants, who had participated in the profits are to be postponed to those of the business creditors.49 Another objection to the doctrine was that the right of one person to sue another on a contract not really made with the person suing was unknown to every legal system except that of England and America.50 Since that view was advanced in 1877, several of the civil law jurisdictions have partially accepted the doctrine.51 It has been suggested that the reason for the development of the doctrine in common law jurisdictions and for its former rejection in civil law jurisdictions lies in the differing attitudes of the two systems with regard to the consensual aspect of contractual obligati0ns.5~ Indeed, Sir Frederick Pollock s apparent hostiiity may very well be attributable to the influence of Pothier and, through him, of Kant s theories of a consensual agreement. We have observed, however, that the origins of the doctrine were rooted in equitable rather than common law concepts and that the imperfections of the doctrine as administered in the courts of common law were a result of an imperfect application of the rules of equity. It may be that the delay in the acceptance of the doctrine by civil law jurisdictions is due rather to the much wider divergence between the growth of equitable rules in those jurisdictions and common law jurisdictions, than to subtle differences between their respective theories of contract. P. F. P. HIGGINS.* 49 [Mercantile Law (Amendment) Act], Law of Partnership Act, 1865, (Bovill s Act), s. 5. Now the Partnership Act, 1890, s Pollock (1887) 3 L.Q.R In Comparative Aspects of Undisclosed Agency (1955) 18 M.L.R. 33, E rofessor Miiller-Freienfels has described the extents to which the doctrine has been adopted in France, Germany, Switzerland and the Scandinavian countries. 52 Miiller-Freienfels, The Undisclosed Principal (1953) 16 M.L.R At p. 303, he appears to have placed great reliance on the observations of Denning L.J. in Smith (e Snipes Hall Farm V. River Douglas Catchment Board [1949] 2 K.B. 500 at pp Since the publication of that article, those observatione have been rejected by the House of Lords (Lord Denning dissenting), in Scruttom, Ltd. v. Midland Silicones, Ltd. [1962] A.C * LL.M. ; Senior Lecturer in Law at the University of Tasmania,