Chapter IV Agency

Chapter IV: AGENCY

3.1 Introduction

3.1.1 Agency in international contract law

Today our everyday life is difficult to imagine, and would probably be much more difficult to live,

without the device of agency, or representation. Imagine what it would be like if shop owners would

have to sell their goods to us not through shop assistants employed by them, but by themselves. Or,

if each citizen him- or herself would have to defend his or her interests in court without having the

possibility to entrust his or her attorney with this task. Being unwilling or, in most cases, unable to

carry out these tasks themselves, people resort to the assistance of others who represent them in

dealings with third parties.

The importance of the law of agency, which has been described as ‘a subject of never-

ending fascination’1 and even as ‘a legal miracle’,2 becomes even higher if one gets involved in

cross-border activities. Today one may find numerous examples of agency in international contract

law. The wholesaler with the headquarters in Paris may sell his goods through a commission agent

in Berlin, the manufacturer of jewellery from Amsterdam may delegate the purchase of diamonds to

his agent in Moscow, and the investor resident in Beijing may trade in securities through an

investment broker based in London. In all these examples, one party based in one country uses the

assistance of another person based in another country with a view to buying or selling the goods

abroad. The function of these intermediaries is to enable others to participate in commercial

transactions by acting ‘for them’, ‘on their account’, ‘as agents’, or ‘in their interest’. It would be not

an exaggeration to say that international commerce would hardly be possible without the use of

agent for handling the goods and payments in another jurisdiction. The device of agency is thus ‘an

unavoidable necessity in any developed system which depends on the division of labour for the

production and distribution of goods and services’3 and ‘a key element in making international sales

possible on any kind of scale’.4

One may distinguish three basic characteristics of agency which are common for all

jurisdictions. Broadly speaking, we are dealing with agency when:1 R. Goode, Commercial Law, London, 1995, p. 166. 2 E. Rabel, ‘Die Stellvertretung in den hellenistischen Rechten und in Rom’, in: W.Wolff (ed.), Gesammelte Aufsätze IV, (Tübingen, 1971), p. 491 ff., at p. 492.3 H. Beale et al, Cases, Materials, and Text on Contract Law, (Oxford and Portland, Oregon, 2002), p. 913. 4 Dalhuisen on International Commercial, Financial and Trade Law, (Oxford and Portland, 2004), p. 391.

1) a party (principal) delegates the authority to initiate or complete a legal act with or obtain

discharge from another party (third party) for his account to an intermediary (agent) or by

his statements or conduct induces the third party to reasonably believe that the agent has

been granted authority for such acts;

2) the agent initiates or completes a legal act with or obtains a discharge from the third party

for the account of the principal;

3) the agent acts for the account and at the risk of the principal and normally does not incur

liabilities or acquire rights of his own; an important indicator of whether a person is acting

‘for the account and at the risk’ of another is if the principal receives the benefits from the

contract with the third party and bears the burdens arising therefrom, such as the risks of

non-performance by the third party and force majeure.5

Thus, for example, the manufacturer of shoes (principal) may delegate the search for leather

suppliers and/or purchase of leather to the manager employed by him (agent). The position of agent

is determined by the contractual arrangement under which he operates, in casu the employment

contract. As a result, the latter may introduce leather suppliers (third parties) to the manufacturer,

negotiate contracts with them or even conclude such contracts for the account of the manufacturer.

At the same time, the economic risk of losses as a result of a particular kind of leather proving to be

unsuitable for the manufacturing of shoes is normally borne by the principal.

3.1.2 Terminology

In the focus of this Chapter lie the concepts of ‘agency’ and ‘representation’. Whereas the former is

a Common Law notion, the latter pertains to the Civil Law tradition. Although these concepts

essentially deal with the same phenomenon, their meaning within the legal systems is not entirely

the same.

As will be discussed in more detail below, the common law notion of ‘agency’ is a uniform

concept which covers all cases where one person, the ‘agent’, acts on behalf of another, the

‘principal’ so as to effect the principal’s relations with a third party, and it is normally the principal

which acquires rights and liabilities. In the American Restatement (Third) of Agency, for example,

the agency is defined as follows:

5 Compare D. Busch, Indirect Representation in European Contract Law, (The Hague, 2005), p. 11.

Agency is the fiduciary relationship that arises when one person (a “principal”) manifests assent to

another person (an “agent”) that the agent shall act on the principal’s behalf and subject to the

principal’s control, and the agent manifests assent or otherwise consents so to act.

By contrast, in the Civil Law countries, a more or less explicit distinction is made between direct

and indirect representation, and it is in principle only in the case of direct representation, when the

agent acts ‘in the name of the principal’, that the principal acquires rights and liabilities under the

contract concluded by the agent with the third party. If, however, the agent acts ‘on behalf of the

principal but ‘in his own name’, which is the case in indirect representation, it is the agent who

becomes party to the contract.

For the purposes of this Chapter, the term ‘agency’ will occasionally be used as a general

concept which encompasses both the Common Law and the Civil Law concepts. In this broad sense,

the term is in particular used in the Introduction. Where the discussion, however, touches upon the

peculiarities of the law of agency in the Common Law tradition, the term ‘agency’ will be used in a

sense in which it is understood in the Common Law legal systems. The term ‘representation’, in

contrast, is reserved for the discussion of the law of agency in Civil Law legal systems. When

dealing with the international instruments in the field of the law of agency, I will stick to the

terminology used in these instruments.

3.1.3 Internal/external relationship distinguished

In light of the key features of agency discussed above, one may distinguish two legal

relationships involved which require our attention (see illustration 1 below):

1) the relationship between principal and agent which lies at the origin of the

agent’s dealings with a third party (i.e. the internal relationship );

2) the relationship between the principal or agent on the one hand, and the third

party on the other, which results from the transaction or other legal act

completed by the agent (i.e. the external relationship ).

Illustration 1. Internal/external relationship

P A

internal relationship

external relationship external relationship

T

The following may serve as an example of the internal and external relationship: the contract of

carriage between the seller and the carrier is purely limited to the relationship between both of them

and is therefore internal. Yet it may have external effect in that the carrier operating for the seller

may effect a legal act with the buyer for the seller, like the act of delivery achieving the title transfer

under laws which require delivery as a condition. That is the external aspect leading in the end to a

direct delivery between the seller (principal) and the buyer (third party).

3.1.4 Sources of international contract law rules on agency

At present, the main sources of contract law rules on agency are, in the first place, the contracts

between the parties involved, i.e. the one between the principal and the agent and the one between

the agent and the third party and, secondly, provisions of the national private law which in the Civil

Law systems are mainly found in the civil codes, and in the Common Law systems in the common

law. Thus, for example, the main rights and duties of the principal and the self-employed

commercial agent in their internal relationship depend on the agency agreement between them, and

the mandatory rules for the protection of self-employed commercial agents applicable in the legal

system where the agent operates. In the Member States of the European Union (hereinafter: the

‘EU’) the rules on commercial agency were largely harmonized.

Yet, there are several (yet) non-binding instruments containing uniform substantive rules on

agency aimed at the unification of certain aspects of the law of agency. Among such instruments the

following must be mentioned:

- UNIDROIT Principles of International Commercial Contracts (hereinafter the ‘PICC’).6 This

instrument aims at the unification of general contract law at international level and in Section

2 contains provisions on the ‘Authority of Agents’. Section 2 of the PICC is confined to the

external relationship between the principal or agent on the one hand, and the third party on

the other;

- Principles of European Contract Law (hereinafter the ‘PECL’).7 The PECL aims at the

unification of general contract law within the EU and contains a specific chapter, Chapter 3,

on the ‘Authority of Agents’. In the same way as the PICC, the PECL are also confined to

the external relationship.

- The Draft Principles of European Law on Mandate Contracts (hereinafter the ‘Draft

PELMC’).8 Whereas the PICC and PECL are confined to the external relationship, these

Principles deal exclusively with the internal relationship between principal and agent. In this

way, the PELMC are designed to fill in the lacuna left in the PECL, which would enable to

achieve unification not only of external but also of internal aspects of agency. The Draft

PELMC deals with contracts of mandate in general. Commercial agency is excluded from its

scope).

- The UNIDROIT Convention on Agency in the International Sale of Goods, concluded in

Geneva on 17 February 1983 (hereinafter the ‘Geneva Convention on Agency’).9 This

Convention contains uniform rules on agency in a more specific context of the conclusion of

international sales contracts and is confined to external relationship. The Convention has not

yet entered into force, lacking the required number of ratifications. Until now it has been

signed and ratified only by three EU Member States (France, Italy and the Netherlands).

- Principles of European Law on Commercial Agency, Franchise and Distribution Contracts

(hereinafter the ‘PEL CAFDC’).10 Whereas the PECL contain general contract law rules on

the authority of agents, the PEL CAFDC include specific sets of rules relating, in particular,

to commercial agency and aim to achieve harmonization in this area in the EU.

6 UNIDROIT Principles of International Commercial Contracts, (Rome, 1994); UNIDROIT Principles of International Commercial Contracts (Rome, 2004). The integral version of the principles (‘black latter’ rules and comments) can be found at: http://www.unidroit.org/english/principles/contracts/principles2004.integralversionprinciples2004-e.pdf.7 O. Lando, H.Beale (eds), Principles of European Contract Law, (The Hague [etc.], 2000).8 M.B.M. Loos, O. Bueno Díaz, Principles of European Law on Mandate Contracts, (Munich, forthcoming 2008/2009). 9 See Diplomatic Conference for the Adoption of the Draft Convention on Agency in the International Sale of Goods, Geneva, 31 January-17 February: Acts and Proceedings of the Conference, (Rome, 1993).10 M.W. Hesselink et al. (eds), Principles of European Law on Commercial Agency, Franchise and Distribution Contracts, (Munich, 2006).

3.2 Authority of agents

3.2.1 The principle of independence

Before discussing the issue of how the authority can be conferred upon the agent, it is important to

understand the meaning of the principle of independence or abstraction. As will be shown below, it

is usually the contract between the principal and his agent which grants the authority to the agent to

perform certain acts for the account of the principal. However, as a result of the operation of the

principle of independence, in most legal systems the distinction is drawn between the unilateral act

of the principal granting the authority to an agent, and the underlying contract that may or may not

exist between the agent and the principal. In other words, the principle of independence implies that

the authorization constitutes an abstract juridical act and is independent from the underlying contract

between the principal and the agent. As a result, the effects of the agency on third parties (therefore

in the external relationship) are mainly determined by the objective law, and thus not by the

underlying contract between the principal and the agent which sets the agency in motion. Thus, for

example, the rules on the grant, scope and duration of the authority are clearly separated from the

terms of the contract between the parties. As a consequence, there can be a grant of authority even if

there is no valid contract between the principal and the agent, which is the case when the apparent

authority comes into being. Furthermore, the third party effect may be different from what the

contract between the principal and the agent prescribed.

3.2.2 The use of the concept of authority

Before considering the methods of granting authority, it is important to be aware of the fact that the

use of the concept of authority in the Civil Law and in the Common Law systems, as well as in the

PICC, the PECL and the Geneva Convention on Agency, is not entirely the same. As will be

discussed in detail in section 3.4 below, the Common Law countries, the PICC and the Geneva

Convention on Agency start from a uniform concept of agency and do not draw a distinction

between the agent acting in the name of the principal and the agent acting in his own name. The

concept of authority in these legal systems and international instruments applies therefore to all

manifestations of agency, irrespective of whether the agent acted in the name of the principal or in

his own name. By contrast, the Civil Law systems and the PECL do make a distinction between the

agent acting in the name of the principal (‘direct representation’) and the agent acting in his own

name (‘indirect representation’). In these legal systems and under the PECL the concept of authority

is traditionally used only in relation to direct representation.11 As a result, the issue of authority is

linked to the question of whether or not the agent acted in the name of the principal or not. As a

consequence, in the Civil Law systems and under the PECL, before considering whether there was

sufficient authority on the part of the agent to represent the principal, one should first establish

whether the agent acted in the name of the principal. ‘In the name of the principal’ requirement thus

serves as a precondition for dealing with the issue of authority. This difference in the use of the

concept of authority should be kept in mind when studying the methods of granting authority which

are discussed in section 3.2.3 below.

3.2.3 Methods of granting authority

One can generally distinguish between the following methods of granting authority to the agent to

act for the account of the principal: express, implied and apparent (or ostensible) grant of authority.

In addition, the authority may essentially also be granted post factum as a result of the ratification by

the principal of the agent’s unauthorized acts. All four methods will be considered in more detail

below.

3.2.3.1 Express authority

The most obvious method of granting authority to another person to perform certain acts for the

account of the principal is by doing so expressly.

Express authority may be arranged unilaterally, so that there may not be an underlying

contract between the principal and the agent which would oblige the agent to act. In such a case one

can speak about isolated authority, which gives the agent only the right to act for the account of the

principal but does not impose on him the duty to act for the account of the principal. A power of

attorney is the most common case of express authority which may also be granted unilaterally.

Express authority may, however, also result from the contractual agreement between the

parties. In the first place, granting of authority may figure as the main objective of a contractual

relationship. The most evident contract giving rise to express authority is the (commercial) agency

contract in the Common Law or mandate contract in the Civil Law. Brokerage arrangements, under

11 For criticism of this approach and on the issue of the authority in case if indirect representation in Civil Law legal systems and under the PECL, see D. Busch, Indirect Representation in European Contract Law, (The Hague, 2005), Chapter 2, § II C (the Netherlands), Chapter 3, § II C (Germany) and, in particular, p. 229 ff.

which a broker is required to buy or sell assets, especially commodities or investment securities, on

behalf of his client, should also be mentioned in this context. Although explicit grant of authority is

only the result of the brokerage contract, which may also give rise to other rights and duties, it

constitutes the core of such a contract.12 Secondly, the grant of authority may also be coupled to the

other contract under which the agent operates. Thus, for example, it may result from a warehousing

or transportation agreement in the handling of goods by third parties or a letter of credit in the

handling of payments by the bank.

These contracts might imply special powers and that may become the area of agency: the

warehousing or transportation agreement may give the warehouse or the carrier the right to hand

over the goods to a buyer. It may complete the delivery duty of the seller at the same time, which in

systems requiring delivery for the transfer of title passes full ownership. Here the warehouse may

become an agent for the seller in that it accomplished legal acts for him. Alternatively, the

warehouse or carrier may be the agent of the buyer so that the delivery and title transfer are

completed when the goods are handed over by the seller to them. […]

Under a letter of credit, the bank has an independent payment obligation but the payment

by the bank will discharge the buyer’s payment obligations under the sales agreement at the same

time and the seller will have no further claim for payment on the buyer. Here again, there is an

intermediary who completes performance for somebody else, in this case the buyer who will have

arranged this facility as part of his performance under the original sales agreement requiring the

letter of credit. Again the paying bank may be seen as the agent for the buyer in fulfilling and

extinguishing his payment obligation to the seller.

Similarly, explicit grant of authority may also result, for example, from an employment contract. In

all these cases, although the contract itself does not have the grant of authority as its main subject

matter, it may explicitly impose on the warehouse, carrier or employee obligations which may

become the area of agency and which in essence constitute an explicit grant of authority.

Legal systems do not take a uniform approach concerning formal requirements for the

granting of authority. In some countries the granting of authority is subject to the fulfillment of the

formal requirements prescribed for the authorised act. By contrast, in other legal systems, no form

is required for the granting of authority. The latter approach is also followed in the international

instruments in question. The commentary to Article 2.2.2 of the PICC, however, explicitly states

12 Compare Dalhuisen on International Commercial, Financial and Trade Law, (Oxford and Portland, 2004), p. 392.

that the granting of express authority in writing has the obvious advantage of providing clear

evidence of the existence and precise scope of the agent’s authority to all parties concerned.

The question of whether or not an authority to perform a certain act for the account of the

principal has been given to the agent is a matter of construction of the contract between the principal

and the agent.

3.2.3.2 Implied Authority

Most legal systems recognize that the authority can be granted not only expressly, but also implicitly

An implied authority arises where it may be implied from the circumstances of the case (e.g. the

agent being assigned a particular task) that the principal has given consent to the agent’s actions or

to a particular transaction which the agent effected, despite the fact that there is no express

agreement between the principal and the agent. The commentary to Article 2 of the PICC contains

the following examples of the implied authority:

1. B appoints A as Manager of B’s apartment building. A has implied authority to conclude short

term lease contracts relating to the individual apartments.

2. Owner B consigns to shipmaster A a cargo to be carried to country X within 10 days. With only

three days of navigation left, the ship is damaged and must stop in the nearest port for repairs. A has

implied authority to unload the cargo and consign it to another shipmaster to be carried to

destination on another ship.

In both examples, an implied authority actually supplements and expands an express authority in its

scope.

A particular case of implied authority, for which explicit provision is made both in the

PECL (Article 3:206) and the PICC (Article 2.2.8), is the agent’s right to appoint subagents, with

the only limitation that the agent may not entrust its subagents with tasks which the agent is

reasonably expected to perform himself.

An implied authority may well be subject to express limitations by the principal. Such

limitations may be contained in the contractual agreement between the principal and the agent.

Furthermore, the implied granting of authority may be limited by formal requirements which apply

in some countries. In the Romanist countries, the limitations on the implied granting of authority

may also result from the distinction between ‘acts of administration’ and ‘acts of disposition’: a

general authority empowers only to make the former but not the latter acts.

3.2.3.3 Apparent authority

In so far we were dealing with two kinds of actual authority. We saw that such authority could be

granted expressly or could be implied from the circumstances. In both cases it is the will of the

principal to grant authority to the agent which is at stake. Actual authority accordingly exists when

the principal has consented in advance to the agent’s actions.

Yet, the authority to act for the account of the principal may not necessarily come into

being as a result of the principal’s express or implied consent. Even without such consent, and thus

an actual authorisation on the part of the principal, an agent’s authority may arise if the principal,

through his acts or omissions, has induced in a third party a reasonable belief that the ‘agent’ has

been granted authority to represent the principal, and hence the third party may assume apparent (or

ostensible) authority. This may be the case if, for example, the negotiations between the ‘agent’ and

the third party took place at the principal’s premises, the principal himself was present at the first

meeting with the third party and at the end of this meeting showed to the third party his interest in

the conduct of further negotiations by his representative by making remarks such as ‘I leave you in

the reliable hands of my deputy.’ Another example of a situation in which the apparent authority

may be established is when a chief financial officer of a company, though lacking authority to do so,

has, with the acquiescence of the company’s director, repeatedly entered into financial transactions

with a bank on behalf of the company. If a new transaction entered by him proves to be

disadvantageous for the company and the company’s director invokes the financial officer’s lack of

authorisation to set it aside, the bank may defeat this objection by claiming that the financial officer

had apparent authority to enter into this transaction on behalf of the company.

Apparent authority is one of the two main exceptions to the rule that an authorised agent is

unable to bind his principal in a contract with the third party (the other exception being the

principal’s ability to ratify a contract which the unauthorised agent purported to conclude (see

section 3.2.3.4 below). The idea of apparent authority is known in most legal systems, but is almost

nowhere laid down in legislation, except in few instances. Thus, for example, explicit provisions on

apparent agency can be found in Dutch and Chinese law.

Dutch Civil Code (BW)

Article 3:61 (2):

Where a juridical act has been performed in the name of another person, the other person who, on

the basis of a declaration or conduct of that other person has presumed and in the given

circumstances could reasonably presume the existence of a sufficient authority, may not have

invoked against him the inaccuracy of this presumption.

Contract Law of the People’s Republic of China

Article 49 Contract by Person with Apparent Agency Authority:

Where the person lacking agency authority, acting beyond his agency authority, or whose agency

authority was extinguished concluded a contract in the name of the principal, if it was reasonable for

the other party to believe that the person performing the act had agency authority, such act of agency

is valid.

In several countries specific situations are prescribed by statutes in which an authority is considered

to be present regardless of the principal’s intentions.13 Thus, for example, under the German

Commercial Code (§ 56), the clerk in a shop or an open warehouse may be treated as being

authorised to make ordinary sales and receive payments. The Nordic Contracts Act contains even a

much more general provision (§ 10(2), according to which everyone in the typical position of agent

is supposed to be authorised.

In other legal systems, the idea of apparent authority is accepted by courts and in academic

literature (e.g. Belgium: Cass. 20 June 1988, R.W. 1989/90 p. 1425, 1426; Italy: Cass. 19 January

1987, no. 423, Nuova Giurisprudenza Civile Commentata 1987 I 486, 487 with note Ceccherini;

France: theory of mandate apparent, (Terré, Simler, Lequette, Droit Civil, Les Obligations, 6 th ed.,

1996, no. 196); Germany: distinction between two types of apparent authority: authority by

knowingly tolerating the agent’s conduct (Duldungsvolmacht), (BGH 22 October 1996, NJW 1997,

312, 314) and authority by causing misconception about the agent’s authorisation

(Anscheinsvollmacht), (Palandt, Bürgerliches Gesetzbuch und Nebengesetze, 56th ed., 1997).14 The

13 O. Lando, H.Beale (eds), Principles of European Contract Law, (The Hague [etc.], 2000), p. 204.14 O. Lando, H.Beale (eds), Principles of European Contract Law, (The Hague [etc.], 2000), p. 204.

possibility of the principal being bound to the third party as a result of the ‘agent’s’ apparent

authority is not only acknowledged in the case law of the courts on the Continent, but also in the

Common Law, where this possibility is even very well known. Lord Diplock explains the essence of

apparent authority as follows:

Court of Appeal

Freeman & Lockyer v. Buckhurst Park Properties (Mangal) Ltd.15

Diplock LJ: It is necessary at the outset to distinguish between an ‘actual’ authority of an

agent on the one hand, and an ‘apparent’ or ‘ostensible’ authority on the other. Actual authority and

apparent authority are quite independent of one another. Generally they co-exist and coincide, but

either may exist without the other and their respective scopes may be different. As I shall endeavour

to show, it is upon the apparent authority of the agent that the contractor normally relies in the

ordinary course of business when entering into contracts.

An ‘actual’ authority is a legal relationship between principal and agent created by a

consensual agreement to which they alone are parties. Its scope is to be ascertained by applying

ordinary principles of construction of contracts, including any proper implications from the express

words used, the usages of the trade, or the course of business between the parties. To this agreement

the contractor is a stranger; he may be totally ignorant of the existence of any authority on the part

of the agent. Nevertheless, if the agent does enter into a contract pursuant to the ‘actual’ authority, it

does create contractual rights and liabilities between the principal and the contactor.

An ‘apparent’ or ‘ostensible’ authority, on the other hand, is a legal relationship between

the principal and the contractor created by a representation, made by the principal to the contractor,

intended to be and in fact acted upon by the contractor, that the agent has authority to enter on

behalf of the principal into a contract of a kind within the scope of the ‘apparent’ authority, so as to

render the principal liable to perform any obligations imposed upon him by such contract. To the

relationship so created the agent is a stranger, he need not be (although he generally is) aware of the

existence of the representation but he must not purport to make the agreement as principal himself.

The representation, when acted upon by the contractor by entering into a contract with the agent,

operates as an estoppel, preventing the principal from asserting that he is not bound by the contract.

It is irrelevant whether the agent had actual authority to enter into the contract […].

15 [1964] 2 GB 480.

The representation which creates ‘apparent’ authority may take a variety of forms of which

the commonest is representation by conduct, that is, by permitting the agent to act in some way in

the conduct of the principal’s business with other persons. By so doing the principal represents to

anyone who becomes aware that the agent is so acting that the agent has authority to enter on behalf

of the principal into contracts with other persons of the kind which an agent so acting in the conduct

of his principal’s business has usually ‘actual’ authority to enter into.

Similar idea is also expressed in the American Restatement (Third) of Agency:

Restatement (Third) of Agency

§ 2.03 Apparent Authority: Apparent authority is the power held by an agent or other actor to affect

a principal’s legal relations with third parties when a third party reasonably believes the actor has

authority to act on behalf of the principal and that belief is traceable to the principal’s

manifestations.

§ 2.05 Estoppel To Deny Existence of Agency Relationship: A person who has not made a

manifestation that an actor has authority as an agent and who is not otherwise liable as a party to a

transaction purportedly done by the actor on that person’s account is subject to liability to a third

party who justifiably is induced to make a detrimental change in position because the transaction is

believed to be on the person’s account, if

(1) the person intentionally or carelessly caused such belief, or

(2) having notice of such belief and that it might induce others to change their

positions, the person did not take reasonable steps to notify them of the facts.

§ 3.03 Creation of Apparent Authority: Apparent authority, as defined in § 2.03, is created by a

person’s manifestation that another has authority to act with legal consequences for the person who

makes the manifestation, when a third party reasonably believes the actor to be authorized and the

belief is traceable to the manifestation.

The idea of apparent authority is also elaborated in all the relevant international instruments

in question which contain explicit provision to this effect:

PICC

Article 2.2.5 Agent acting without or exceeding its authority:

(1) Where an agent acts without authority or exceeds its authority, its acts do not affect the legal

relations between the principal and the third party.

(2) However, where the principal causes the third party reasonably to believe that the agent has

authority to act on behalf of the principal and that the agent is acting within the scope of that

authority, the principal may not invoke against the third party the lack of authority of the

agent.

PECL

Article 3:201 Express, Implied and Apparent Authority:

(3) A person is to be treated as having granted authority to an apparent agent if the person’s

statements or conduct induce the third party reasonably and in good faith to believe that the apparent

agent has been granted authority for the act performed by it.

Geneva Convention on Agency

Article 14:

(1) Where an agent acts without authority or acts outside the scope of his authority, his acts do

not bind the principal and the third party to each other.

(2) Nevertheless, where the conduct of the principal causes the third party reasonably and in

good faith to believe that the agent has authority to act on behalf of the principal and that the

agent is acting within the scope of that authority, the principal may not invoke against the

third party the lack of authority of the agent.

All three international instruments reflect the essential elements of apparent authority which can be

found in most legal systems and virtually lay down the same three conditions for the apparent

authority to be established:

1) there must be statements or conduct by the principal;

2) these statements or conduct must have induced the third party to act in reliance that the agent

had been authorised;

3) the third party must be reasonable and in good faith when relying on the appearance of

authority.16

The difference between the international instruments exists, however, as far as the effects of

apparent authority are concerned.17 The PECL put apparent authority with respect to its effects on

the same footing as actual authority. As a consequence, while the principal may not invoke against

the third party the agent’s lack of actual authority, the principal may sue the third party on the

contract concluded by the apparent agent. By contrast, the PICC and the Geneva Convention on

Agency express the concept of apparent authority in terms of estoppel by conduct or prohibition of

venire contra factum proprium. This approach finds its expression in the fact that the principal not

only may not invoke against the third party the ‘agent’s’ lack of actual authority, but in addition may

not sue the third party on the contract concluded by the apparent agent. As will be discussed in more

detail in section 3.2.2.4 below, however, on closer examination, this difference is a more theoretical

than practical one, as under the PICC and the Geneva Convention on Agency any action by the

principal against the third party could be considered to be an implied ratification of the contract

concluded by the apparent agent and as such be admitted.

An important issue which must be considered in the present context is whether for an

apparent authority to be established it is always required that the principal actually caused the third

party to believe that the ‘agent’ was duly authorised (condition 1)), as the formulation of Article

3:61 (2) of the Dutch Civil Code, Article 2.2.5 of the PICC, Article 3:201 of the PECL and Article

14 of the Geneva Convention on Agency seem to suggest. In fact, this is not the case. The case law

of several European jurisdictions contains examples in which the third party’s reliance that the

‘agent’ has authority to perform a certain act is protected not only when this reliance was caused by

the principal himself, but also when the third party’s reliance results from factors which are within

the principal’s sphere. Thus, for example, in the decision of the Dutch Supreme Court in the Felix v.

Aruba case,18 the relevant factors to be taken into account when determining whether the apparent

16 Compare O. Lando, H.Beale (eds), Principles of European Contract Law, (The Hague [etc.], 2000), p. 203. 17 Compare M.J. Bonell, Chapter 21 ‘Agency’, in: A. Hartkamp et al. (eds), Towards a European Civil Code, (Nijmegen, 2004), p. 381, at p. 386 f. 18 HR 27 November 1992 MJ 1993, 287. See also the conclusion by Advocate-General Bakels in HR 23 October 1998, NJ 1999, 582 (Nacap Nederland BV v. Mestindustrie Kurstjens BV). For the discussion of the issue of apparent authority in the recent Dutch case law, see, in particular, D. Busch and L. Macgregor, ‘Apparent Authority in Scots Law: Some

authority should be established, include not only the conduct of (the competent ‘organ’ of) the

government (the principal), but also the agent’s position in the government organisation, the agent’s

conduct, the fact that the government’s organisation and/or the distribution of competences between

the various governmental bodies was not transparent for third parties and the government’s potential

failure to inform the third party of the agent’s lack of authority. Although Felix v. Aruba concerned

a complex untransparent government’s organisation (The Aruban Aviation Authority), the majority

of Dutch legal opinion appears to endorse the view that the shift of emphasis from the conduct of the

principal towards a justified reliance of the third party is not limited to untransparent government

bodies but must equally be true for all those cases where the organisation of the principal is not

transparent for the third party.19 The rule that is favoured by this majority opinion is that the third

party’s reliance on the agent being duly authorised must be protected not only when this reliance has

been caused by the principal himself, but also when it is created by factors which are within the

principal’s sphere. This idea seems also to be accepted, at least in certain cases, in the Common

Law. Thus, in English law, the appointment of a person to a particular position normally gives rise

to apparent authority to do what a person in that position would normally be empowered to do (e.g.

Waugh v. HB Clifford & Sons Ltd [1982] Ch. 374, C.A.), unless the third party knows that the

person does not have the usual authority.20 The above cited Article 49 of the Chinese Contract Law

is, however, the most remarkable in this context in that it does not mention the principal’s conduct at

all. According to the wording of this provision, for the apparent authority to be established it is

sufficient that the other party reasonably believed that the ‘agent’ was duly authorised.

In fact, similar results may also be reached under the international instruments by means of

a broad interpretation of the ‘principal’s conduct’ requirement. This may be the case particularly

when the agent is employed by the principal. In such a situation it can be argued that there is

conduct by the principal, namely placing the agent in a certain position within his organisation.21

This conclusion is in particular supported by the commentary to Article 2.2.5 of the PICC.

According to it:

International Perspectives’, 11 The Edinburgh Law Review (2007), p. 349, at p. 372 ff. 19 J. Hijma, C.C. van Dam, W.A.M. van Schendel, W.L. Valk, Rechtshandeling en overeenkomst, (Deventer 2004), p. 126. See also D. Busch et al. (eds), The Principles of European Contract Law and Dutch law: a Commentary , (The Hague [etc.], 2002), p. 146 f. 20 See also First Energy UK Ltd v. Hungarian International Bank Ltd [1993] 2 Lloyd’s Rep 194 and American Restatement (Third) of Agency, Comment c and e to 3.03. 21 Compare D. Busch et al. (eds), The Principles of European Contract Law and Dutch law: a Commentary, (The Hague [etc.], 2002), p. 147.

Apparent authority […] is especially important if the principal is not an individual but organisation.

In dealing with a corporation, partnership or other business association a third party may find it

difficult to determine whether the persons acting for the organisation have actual authority to do so

and may therefore prefer, whenever possible, to rely on their apparent authority. For this purpose the

third party only has to demonstrate that it was reasonable for it to believe that the person purporting

to represent the organisation was authorised to do so, and that this belief was caused by the conduct

of those actually authorised to represent the organisation (Board of Directors, executive officers,

partners, etc.). Whether or not the third party’s belief was reasonable will depend on the

circumstances of the case (position occupied by the apparent agent in the organisation’s hierarchy,

type of transaction involved, acquiescence of the organisation’s representatives in the past, etc.)

The commentary to Article 2.2.5 of the PICC provides the following example of apparent authority:

A, a manager of one of company B’s branch offices, though lacking actual authority to do so,

engages construction company C to redecorate the branch’s premises. In view of the fact that a

branch manager normally would have authority to enter into such a contract, B is bound by the

contract with C since it was reasonable for C to believe that A had actual authority to enter into the

contract.

Although the commentary to the PICC refers to the ‘conduct of those actually duly authorised’, the

appointment of a person to a particular position, which in the example provided gives rise to

apparent authority, rather appears to be a factor within the principal’s sphere than the actual

‘conduct’ of the principal causing a justified reliance on the part of the third party that the agent was

duly authorised.

The rationale behind the apparent authority is the protection of the interests of the third

party which has reasonably relied upon the impression that the principal had in fact granted

authority. Apparent authority focuses on placing liability on the principal, either in the form of a

damage action raised by a third party, or an action for the performance of the contract purportedly

concluded by the agent. The principal, however, is not the only party which may be held liable in

this situation. The third party may raise an action against the agent as the falsus procurator. This

type of action, however, is generally less common because of it being impossible (the agent has

absconded) or because the agent’s financial standing is weaker than that of the principal.22

22 See also section 3.4.4.1 below.

Accordingly, both in the Common Law and in many Civil Law legal systems as well as

under the international instruments in question, the principal to a greater or lesser degree bears the

risk that the third party may reasonably assume apparent agency. As Dalhuisen observes, ‘[u]se of a

company’s signals like titles, letterheads, visiting cards and premises may all lead to a situation in

which a third party may assume the agency and not make further inquiries, although this may still

remain exceptional’.23 The possibility of the principal being bound by agent’s apparent authority is

an important manifestation of the principle of abstraction, under which the effects of agency on third

parties are mainly determined by the objective law, and thus not by the underlying contract between

the principal and the agent which sets the agency in motion (see section 3.2.1 above). Yet, it is

possible for the principal to protect himself against such a risk in the internal relationship between

the principal and the agent by means of contractual arrangements (on this see section 3.3 below).

3.2.3.4 Ratification by principal

There is general agreement that, by ratification, a principal may cure any defect in the agent’s

authority, including the absence of such authority. The principal’s ability to ratify a contract which

the unauthorised agent purported to conclude, is one of the two main exceptions to the rule that an

authorised agent is unable to bind his principal in a contract with the third party (the other exception

being apparent authority discussed above in section 3.2.3.3). If the principal ratifies, i.e. adopts, the

contract made by an unauthorised agent with a third party, such contract becomes binding on the

principal from the beginning. Ratification accordingly produces the same effects as authorisation.

Rules to this effect are laid down in most civil codes or other legislative acts although they differ in

detail (e.g. Germany: BGB § 177; the Netherlands: BW art. 3:69 (1); France, Belgium and

Luxembourg: CCs art. 1998 (2); Italy: CC art. 1399 (1); Denmark, Sweden, Finland: Nordic

Contracts Act § 25 (1)). The principle of ratification is also recognised in the Common Law

(England: Bird v. Brown (1850) 4 Exch. 786, 798; US: Restatement (Third) of Agency, Chapter 4).

The rules on ratification are also contained in the international instruments in question (PICC: art.

2.2.9; PECL: arts 3:207 and 3:208; Geneva Convention on Agency: art. 15).

Ratification may be made by express declaration addressed to the agent, to the third party,

or to both, or implied from acts of the principal which unambiguously demonstrate his intention to

adopt the contract made by the agent (e.g. Germany: BGH 2.11.1989, BGHZ 109, 177; France,

23 Dalhuisen on International Commercial, Financial and Trade Law, (Oxford and Portland, 2004), p. 397.

Belgium and Luxembourg: CC art. 1998 (2); PICC: comment 1 to art. 2.2.9; PECL: comment A to

art. 3:207; Geneva Convention on Agency: art. 15 (8)). If the principal accepts the benefits arising

from the contract concluded by an unauthorised agent or voluntarily performs the obligations

towards the third party, this can be regarded as an implied ratification. Explicit provisions to this

effect are contained in the Austrian Civil Code (ABGB § 1016) and in the Civil Codes of France,

Belgium and Luxembourg (CCs art. 1338 par (2)). Classic examples of the conduct amounting to the

implied ratification by the principal are provided in the comments to Article 2.2.9 of the PICC and

Article 3:207 of the PECL, respectively:

Agent A purchases on behalf of principal B goods from third party C at a price higher than

that which A is authorised to pay. Upon receipt of C’s bill, B makes no objection and pays it by

bank transfer. The payment amounts to ratification of A’s act even if B does not expressly declare

its intention to ratify, fails to inform A and C of the payment and C is only subsequently informed of

the payment by its bank.

In the name of her principal P, a merchant, agent A has contracted with T, also a merchant,

for the purchase of the most recent model of a computer for 22,500 Euro although her authority was

limited to 20,000, which T did not know. After learning what A has done, P sends instructions about

delivery of the machine. This implies ratification of A’s act.

An implied ratification is, however, excluded where the observation of a form is prescribed for the

ratification, either the same formality as is required for the contract to be ratified (e.g. Italy: CC art.

1399 (1)) or that for the grant of authority (e.g. the Netherlands: BW art. 3:69 (2)).

The possibility of ratification of the agent’s unauthorised acts by the principal raises a

number of interesting questions connected with the position of third parties. May the principal ratify

the contract concluded by an unauthorised agent if a third party neither knew nor ought to have

known that the agent intended to act on behalf of the principal? Or may the principal ratify the

contract if the third party either knew or ought to have known that he was dealing with the agent but

neither knew nor ought to have known of the agent’s lack of authority to enter into contracts for the

account of the principal? Because these issues touch upon a more general problem of the third party

protection in dealing with agents, it will be discussed in section 3.4.4.2 below devoted to the

external relationship between the principal and the agent on the one hand, and the third party on the

other.

3.2.4 Duration of authority

As a rule, the duration of the agent’s actual authority depends upon the duration of the underlying

internal relationship between the principal and the agent. In general, revocation by the principal, 24

renunciation by the agent or contractual termination agreed between the principal and the agent are

considered to be grounds for the termination of authority. The actual authority may also be limited

in time or made dependent upon certain conditions by stipulation.

In addition, national laws may contain the following grounds for termination: death or

cessation of the existence of the agent and/or the principal; loss of capacity by the agent and/or the

principal; the agent’s and/or the principal’s insolvency. The laws on termination vary considerably

from country to country. Under the law of almost every legal system, death or incapacity of the

agent terminate his authority. Legal systems, however, do not agree upon the consequences of the

principal’s death or incapacity. While some legal systems provide that the agent’s authority

terminates if the principal dies or becomes incapacitated (e.g. France, Belgium and Luxembourg: the

Netherlands, England: Drew v. Nunn (1879) 5 QBD 661; Yonge v. Toynbee [1910] K.B. 215; US:

Restatement (Third) of Agency, § 3.06 (2), (3)), others do not provide for termination in such a case

(e.g. Germany: BGB § 675, 672, 168; Denmark, Sweden and Finland: Nordic Contract Acts § 21

(1). In Austria, for example, the agent’s authority is extinguished by the principal’s death (ABGB §

1022), but it continues if the principal loses capacity (OGH 20 May 1953, SZ 26 no. 132)).25

Although the duration of the agent’s actual authority normally depends upon the duration of the

internal relationship between the principal and the agent, most legal systems grant some protection

to the third party who is unaware of the termination of the agent’s authority and to the principal who

may suffer damages as a result of the termination of the agent’s authority. Provisions to this effect

are also included in the PICC, the PECL and the Geneva Convention on Agency which focus

exclusively on the external aspects of the duration of authority. For the issue of third party and

principal’s protection see later in this chapter.

3.2.5 Consequences of agent acting without or outside his authority

24 There is a general agreement that the agent’s authority is revocable. Exceptionally, an authority may be granted as irrevocable. In most countries, however, the granting of an effective irrevocable authority is subject to certain conditions, a typical condition being that an authority is granted in the agent’s interest (e.g. the Netherlands: BW art. 3:74 (1); Germany: BGH 13 December 1990, NJW-RR 1991, 439); England: Bowstead & Reynolds on Agency, (London, 2006, p. 604 ff.)).25 O. Lando, H.Beale (eds), Principles of European Contract Law, (The Hague [etc.], 2000), p. 218.

There is general agreement that where the agent has acted without any or without sufficient

authority, be it actual (express or implied) or apparent, and his unauthorized acts have not been

ratified by the principal, these acts are not binding upon the principal and the third party. The

commentary to Article 2.2.5 (1) of the PICC provides the following illustration to this rule:

E.g. principal B authorizes agent A to buy on its behalf a specific quantity of grain but without

exceeding a certain price. A enters into a contract with seller C for the purchase of a greater quantity

of grain and at a higher price than that authorized by B. On account of A’s lack of authority, the

contract between A and C does not bind B, nor does it become effective between A and C.

With respect to the consequences of unauthorized acts for the agent himself, it is a generally

recognized principle that the false agent is liable for damages to the third party if the third party

neither knew nor ought to have known of the agent’s lack of authority. What this means in more

practical terms is discussed in more detail in section 3.4.4.1 below.

3.3 Internal principal-agent relationship

3.3.1 Agency contracts: general issues

3.3.1.1 Definition

The most obvious contract giving rise to agency is the agency contract in the Common Law or

mandate contract in the Civil Law. The rights and duties as between the principal and the agent (the

internal relationship) are governed by such agreements and the applicable law which, with respect to

specific types of agency relationships, may provide mandatory rules for the protection of the agent.

The Draft PELMC, which aims at the harmonization of the internal relationship (the mandate

relationship) between the principal and the agent, provides the following definition of mandate

contracts:

Draft PELMC

Article 1:101 Scope:

Mandate contracts [are contracts] by which a person (the representative) is authorized and instructed

(mandated) by another person (the principal) to conclude a contract between the principal and a third

party or otherwise affect the legal position of the principal in relation to a third party by acting on

behalf of the principal.

When studying the internal principal-agent relationship, one should keep in mind the fact that the

agency contract or mandate contract between the principal and the agent as well as the law

applicable to it is not always decisive in the external relationship with the third party. As a result of

the operation of the principle of independence, the principal may acquire rights or incur liabilities

which were not stipulated by the agency or mandate contract (see section 3.2 above). The principle

of independence also explains why the rules on the duration of authority, for example, and the

duration of the mandate contracts are separate sets of rules. To distinguish between the notion of

authority and that of mandate, the Draft PELMC even provides the following definitions of the two

notions:

Draft PELMC

Article 1:102 Definitions:

a. the ‘authority’ of a representative is the power to affect the principal’s legal position;

b. the ‘mandate’ of the representative is the authorization and instruction given by the

mandate contract or by a subsequent direction by the principal.

At the same time, the agency contract and especially the mandatory rules remain important in the

internal relationship between the principal and the agent, in particular, for determining the purpose

for which the authority is granted and the obligations of the agent towards the principal. The

mandatory rules which generally apply to non-commercial agency agreements include first and

foremost the duties of principals and agents, in particular in the case of a conflict of interests, the

principal’s duties towards the agent and the rules on termination of such agreements. These rules

will be discussed in more detail below.

3.3.3.2 Duties of agents and principals

If an agency or mandate contract exists as between principal and agent, that contract may expressly

impose duties upon the parties (see section 3.3.3 below). In the principal-agent relationship,

however, duties are placed upon the parties by the general law. These obligations can exist in

addition to any duties imposed upon the agent by the agency contract. Some of these obligations

may be modified by the contract. Other, however, such as fiduciary duties aimed to protect the

principal in the case of a conflict of interests, arise independently of any contract and their breach

may even entail strict liability.

Especially the Common Law imposes upon the agent extensive duties of care, loyalty and

confidentiality while providing for relatively few rights for the agent. In general, the agent owes the

principal the following duties:26

- A duty to use reasonable care and diligence in light of the circumstances . This duty may be

modified, limited or even excluded from the contract, subject to the statutory rules on unfair

contract terms. The American Restatement (Third) of Agency formulates this duty as follows:


§ 8.08 Duties of Care, Competence, And Diligence:

Subject to any agreement with the principal, an agent has a duty to the principal to act with the

care, competence, and diligence normally exercised by agents in similar circumstances. Special

skills or knowledge possessed by an agent are circumstances to be taken into account in

determining whether the agent acted with due care and diligence. If an agent claims to possess

special skills or knowledge, the agent has a duty to the principal to act with the care, competence

and diligence normally exercised by agents with such skills or knowledge.

§ 8.10 Duty of Good Conduct:

26 Compare S. Kenyon-Slade & M. Thornton, Schmitthoff’s Agency and Distribution Agreements, (London, 1992, p. 7 f.

An agent has a duty, within the scope of the agency relationship, to act reasonably and to refrain

from conduct that is likely to damage the principal’s enterprise.

- A duty to disclose all material facts i.e. information to the principal:


§ 8.11 Duty To Provide Information:

An agent has a duty to use reasonable effort to provide the principal with facts that the agent knows,

has reason to know, or should know when

(1) subject to any manifestation by the principal, the agent knows or has reason to know that the

principal would wish to have the facts or the facts are material to the agent’s duties to the principal;

and

(2) the facts can be provided to the principal without violating a superior duty owed by the agent to

another person.

- A duty to obey all legitimate instructions issued by the principal, including a duty not to act

outside the scope of his authority:


§ 8.09 Duty To Act Within Scope of Actual Authority and To Comply With Principal’s

Instructions:

(1) An agent has a duty to take action only within the scope of the agent’s actual authority.

(2) An agent has a duty to comply with all lawful instructions received from the principal and

persons designated by the principal concerning the agent’s actions on behalf of the principal.

- Broad fiduciary duties which arise independently of any agency contract . The American

Restatement (Third) of Agency contains a general fiduciary principle:


§ 8.01 General Fiduciary Principle:

An agent has a fiduciary duty to act loyally for the principal’s benefit in all matters connected

with the agency relationship.

The content of this general fiduciary duty is further specified by several duties of loyalty of the

agent which prohibit a certain conduct on the part of the agent unless the principal has consented to

it in accordance with the requirements of § 8.06. Among these duties are the following: a duty not to

acquire a material benefit from a third party in connection with transactions arising out of the

agent’s position (§ 8.02); a duty not to deal with the principal as or on behalf of an adverse party in a

transaction connected with the agency relationship (§ 8.03); a duty to refrain from competing with

the principal throughout the duration of an agency relationship (§ 8.04); a duty not to use property of

the principal for the agent’s own purposes or those of a third party and not to use or communicate

confidential information of the principal for the agent’s own purposes or those of a third party (§

8.05).

A breach of the general and fiduciary duties established under the common law and equity

by the agent will amount to a breach of contract or a breach of fiduciary duty for which the agent

will be liable to the principal. Moreover, the agent’s liability for breach of fiduciary duties is strict,

that is, the agent will be liable despite the presence of good faith.

In Civil Law systems, by contrast, the agent’s duties towards the principal, in particular the

agent’s duties of loyalty in the area of potential conflicts of interests, are notably less developed.

These legal systems often allow the agent, when he acts in his own name while the agency remains

undisclosed, to possibly benefit from the transaction to the detriment of the principal. Duties of

loyalty, however, have gradually been introduced in Civil Law systems. The new Dutch Civil Code,

for example, contains an explicit provision on conflicts of interests, which in principle prohibits the

agent to act on behalf of the principal, whether in the name of the principal or in his own name, if

there is a conflict of interests between the two (art. 7:416 in conjunction with art. 7:414 BW). Duties

of loyalty are also introduced in Civil Law systems as a result of the adoption of the EU legislation

in the field of financial services which must be implemented in the national legal orders of the EU

Member States. Thus, for example, Article 19 (1) of the Markets in Financial Instruments

Directive27 imposes on the providers of investment services (agents) the duty to act honestly, fairly

and professionally in accordance with the best interests of their clients (principals). It is notable that

the Draft PELMC also contains an extensive list of the agent’s duties towards the principal,

including the duties of loyalty. Among these duties are the following:

- a duty to act in accordance with the mandate (art. 3:101);

- a duty to act in the interests of the principal (art. 3:102);

- a duty to a duty to use care and skill in light of the circumstances (art. 3:103);

- a duty to inform the principal (arts. 3:401-3:403);

- duties of loyalty in the case of a conflict of interests (arts. 5:101 and 5:102). The Draft PELMC

contains extensive provisions to this effect distinguishing between a situation where the

principal is a consumer and the one whether he is not:

Draft PELMC

Conflicts of Interests

Article 5:101 Self-contracting:

(1) The representative may not become the principal’s counterparty to the prospective contract.

(2) The representative may nevertheless become the counterparty if

(a) this is agreed by the parties in the mandate contract;

(b) the representative has disclosed an intention to become the counterparty and

(i) the principal subsequently expresses consent; or

(ii) the principal does not object to the representative becoming the counterparty after having been

requested to indicate consent or a refusal of consent;

(c) the principal otherwise knew, or could reasonably be expected to have known, of the

representative becoming the counterparty and the principal did not object within a reasonable time;

or

27 Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments amending Council Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC of the European Parliament and of the Council and repealing Council Directive 93/22/EEC. See also Council Directive 93/22/EEC of 10 May 1993 on investment services in the securities field, OJEC L 141/27, art. 11.

(d) the content of the prospective contract is so precisely determined in the mandate contract that

there is no risk that the interests of the principal may be disregarded.

(3) If the principal is a consumer, the representative may only become the counterparty if

(a) the representative has disclosed that information and the principal has given express consent to

the representative becoming the counterparty to the particular prospective contract; or

(b) the content of the prospective contract is so precisely determined in the mandate contract that


(4) The parties may not, to the detriment of the principal, exclude the application of paragraph (3) or

derogate from or vary its effects.

(5) If the representative has become the counterparty, the representative is not entitled to a price for

services rendered as a representative.

Article 5:102 Double mandate:

(1) The representative may not act as the representative of both the principal and the principal’s

counterparty to the prospective contract.

(2) The representative may nevertheless act as the representative of both the principal and the

counterparty if

(a) this is agreed by the parties in the mandate contract;

(b) the representative has disclosed an intention to act as the representative of the counterparty and

the principal

(i) subsequently expresses consent; or

(ii) does not object to the representative acting as the representative of the counterparty after having

been requested to indicate consent or a refusal of consent;

(c) the principal otherwise knew, or could reasonably be expected to have known, of the

representative acting as the representative of the counterparty and the principal did not object within

a reasonable time; or

(d) the content of the prospective contract is so precisely determined in the mandate contract that


(3) If the principal is a consumer, the representative may only act as the representative of both the

principal and of the counterparty if

(a) the representative has disclosed that information and the principal has given express consent to

the representative acting also as the representative of the counterparty to the particular prospective

contract; or

(b) the content of the prospective contract is so precisely determined in the mandate contract that


(4) The parties may not, to the detriment of the principal, exclude the application of paragraph (3) or

derogate from or vary its effects.

(5) If and in so far as the representative has acted in accordance with the previous paragraphs, the

representative is entitled to the price.

The law generally imposes duties not only on the agent but also on the principal. The principal may

have the following duties:

- a duty to pay the agent remuneration. This duty normally exists if the agency agreement

provides for such remuneration. In the Common Law, where there is no express agreement

governing the agent’s remuneration, the court may imply that remuneration equal to a reasonable

sum for the agent’s services, is to be paid; no such implied term, however, will be found where

that would conflict with an express provision of the agreement excluding the agent’s right to

remuneration.28 By contrast, the Draft PELMC does not make an explicit reference to the terms

of the contract, but instead uses the following formulation:

Draft PELMC

Article 2:102 Price:

(1) The principal must pay a price if the representative performs the obligations under the

mandate contract in the course of a business, unless the principal expected and could

reasonably have expected the representative to perform the obligations without

remuneration.

28 S. Kenyon-Slade & M. Thornton, Schmitthoff’s Agency and Distribution Agreements, (London, 1992), p. 8.

(2) The price is payable as of the moment the representative has affected the legal relations of

the principal in accordance with the mandate contract and given account of that.

(3) When the principal has concluded the prospective contract directly or another person

appointed by the principal has concluded the prospective contract on the principal’s behalf,

the representative is entitled to the price or a proportionate part thereof if the conclusion of

the prospective contract can be attributed in full or in part to the representative’s

performance of the mandate contract.

(4) When the prospective contract is concluded after the mandate relationship has terminated,

the principal must pay the price if payment of a price based solely on the conclusion of the

prospective contract was agreed and

(a) the conclusion of the prospective contract is mainly the result of the

representative’s efforts; and

(b) the prospective contract is concluded within a reasonable period after the

mandate relationship has terminated.

- a duty to pay the agent’s expenses and to provide the agent with an indemnity against certain

losses. Such a duty is explicitly laid down in the American Restatement (Third) of Agency and

the Draft PELMC, although the wording of the respective provisions differs:


§ 8.14 Duty To Indemnify:

A principal has a duty to indemnify an agent

(1) in accordance with the terms of any contract between them; and

(2) unless otherwise agreed,

(a) when the agent makes a payment

(i) within the scope of the agent’s actual authority, or

(ii) that is beneficial to the principal, unless the agent acts officiously in making

the payment; or

(b) when the agent suffers a loss that fairly should be borne by the principal in light of

their relationship.

Draft PELMC

Article 2:103 Expenses incurred by representative:

(1) When the representative is entitled to a price, the price is presumed to include the reimbursement

of the expenses the representative has incurred in the performance of the obligations under the

mandate contract.

(2) When the representative is not entitled to a price or when the parties have agreed that the expenses

will be paid separately, the principal must reimburse the representative for the expenses the

representative has incurred in the performance of the obligations under the mandate contract, when

and in so far as the representative acted reasonably when incurring the expenses.

(3) The representative is entitled to reimbursement of expenses under paragraph (2) as from the time

when the expenses are incurred and the representative has given account of the expenses.

- a duty to provide the agent with information about risks of physical harm or pecuniary loss that

the principal knows or ought to know are present in the agent’s work but that are unknown to the

agent. An explicit duty to this effect is included in the American Restatement (Third) of Agency

(§ 8.15), where it is regarded as a manifestation of the principal’s duty to deal with the agent

fairly and in good faith.

- a duty to co-operate with the agent, in particular by answering requests by the agent for

information the agent needs to be able to perform his obligations under the agency or mandate

contract and giving direction regarding such performance. An explicit duty to this effect is

included in the Draft PELMC (art. 2:101).

3.3.3.3 Termination of agency contracts

There is general agreement that if under the contract an agent is appointed for a fixed time period, or

to execute a specific task, the agency or mandate contract terminates on expiry of that time period or

on completion of the particular task. The legal systems also generally agree that the agency or

mandate contract can be terminated in the case of non-performance by one of the parties of his main

obligations. Yet, considerable differences exist between legal systems concerning other grounds for

unilateral termination of such contracts and their termination by the operation of law.

As far as the unilateral termination is concerned, under Dutch law, for example, the

principal may always terminate the contract, be it a contract for a definite or indefinite period or for

execution of a specific task (art. 7:422 in conjunction with art. 7:408 (1) BW). This is a mandatory

provision, from which the parties may only deviate if the purpose of the mandate contract is to

perform a legal act in the interests of the agent or that of the third party (art. 7:422 (2)). By contrast,

the agent who acts in a professional capacity may only terminate the contract for a serious reason if

the contract was concluded for an indefinite period of time and does not end upon the completion of

the task for which the mandate was granted. The parties may, however, agree otherwise. Under the

Common Law,29 where an agent is appointed for a fixed period, the principal may dismiss the agent

and terminate the agency agreement before the expiry of the time period, if the agent has breached

his duties to the principal. In the absence of such a breach, the early termination of the agency

contract by the principal may be a breach of contract. Where the agent is appointed for an indefinite

period of time, the liability for termination of the agency relationship will normally depend on the

provisions of the contract. Agency contracts often provide for termination upon giving notice in

advance. Under the Draft PELMC, the principal may terminate the mandate relationship at any time

by giving notice of reasonable length if the mandate contract has been concluded for an indefinite

period or for a particular task (art. 6:102). In addition, the principal may terminate the mandate

relationship by giving notice for extraordinary and serious reason, i.e. death or incapacitation of the

principal, and the death or incapacitation of the person with consideration to whom the mandate

contract was concluded, in which case no reasonable period of notice is required (art. 6:103). The

mandate contract may under the Draft PELMC be also terminated by the representative by giving

notice of reasonable length in two situations: a) if the mandate contract has been concluded for an

indefinite period (art. 6:104 (1); if the mandate contract is non-remunerated (art. 6:104 (2). In

addition, the representative may also terminate the mandate relationship by giving notice for

extraordinary and serious reason, i.e. a significant change of the mandate contract by the principal,

the death or incapacitation of the principal, and the death or incapacitation of the person with

consideration to whom the mandate contract was concluded; in these cases no period of reasonable

notice is required (art. 6:105). All these provisions of the Draft PELMC are mandatory, with the

29 See S. Kenyon-Slade & M. Thornton, Schmitthoff’s Agency and Distribution Agreements, (London, 1992), p. 8.

exception of Article 6:104 (2) providing the possibility for the agent to terminate the mandate

contract by notice if it is non-remunerated.

Differences also exist concerning some grounds for automatic termination of agency or

mandate contracts by the operation of law. Under the Common Law, for example, the agency

contract may automatically be terminated in the case of death or insanity of either party and

bankruptcy of the principal or agent which impedes effecting the transactions which are the subject

matter of the agency contract.30 Similar grounds for automatic termination are also provided by the

Dutch Civil Code under which the death, incapacitation or bankruptcy of either party end the agency

relationship (art. 7:422 (1) BW). Moreover, the death, incapacitation or bankruptcy of the principal

is a mandatory ground for automatic termination from which the parties may not derogate by

agreement (art. 7:422 (2) BW). The Draft PELSC, however, does not allow automatic termination in

these cases, except in the case of the representative’s death (art. 7:104). Art. 7:103 of the Draft

PELMC even explicitly mentions that the death of the principal does not end the mandate

relationship.

It should also be borne in mind that although the agency or mandate contract may have

been terminated and thus the agent’s actual authority withdrawn, the principal may nevertheless be

bound by the agent’s apparent authority if this continues to exist (see section 3.2.3.3 above).

3.3.2 Commercial agency

In commercial practice, the agent, that can either be a natural person or a legal entity, frequently acts

as an independent intermediary to negotiate or to conclude contracts for the account of the principal

for remuneration. In such a case we are dealing with commercial agency. The agent is independent

from the principal in the sense that he is not the principal’s employee. The commercial agent’s main

tasks generally consist of prospecting the market, attracting customers, promoting the sale or

purchase of products and negotiating the terms of contracts. In addition, the commercial agent may

also be entrusted with concluding contracts for the principal.

Many countries in Europe have adopted specific legislation regulating the terms upon

which commercial agents dealing in goods and/or in services act for their principals, setting out the

rights and duties of both sides, particularly in the area of remuneration and compensation for

termination. Moreover, the rules governing commercial agency contracts for the purchase and sale

of tangible assets in EU Member States have been harmonised at a minimum level as a result of the

30 S. Kenyon-Slade & M. Thornton, Schmitthoff’s Agency and Distribution Agreements, (London, 1992), p. 8 f.

adoption of the EC Directive on Self-Employed Commercial Agents. The Directive has been

transposed into all the legal systems of the EU Member States which now contain specific rules on

commercial agency. The scope of their application, however, differs. Whereas under the law of most

legal systems, the scope of application includes not only the sale of goods but also service contracts

(e.g. France: art. L.134-1 C. Com.; Germany: § 84 I HGB; the Netherlands: art. 7:428 BW), in the

directive itself, English, Finnish and Swedish law, the scope of the commercial agency rules is

restricted to contracts for the sale of goods (Art. 1 (2) of the Directive; UK: Commercial Agents

(Council Directive) Regulation s 2993 (S.I. 1993/3053), as amended by the Commercial Agents

(Council Directive) (Amendment) Regulations 1993 (S.I. 1993 No. 3173) and 1998 (S.I. 1998 No.

2868; Finland: art. 2 Act on Commercial Agents; Sweden § 1 HaL).

The EC Directive on Self-Employed Commercial Agents defines a commercial agent as a

self-employed intermediary who has continuing authority to negotiate the sale or the purchase of

goods on behalf of another person (the ‘principal’), or to negotiate and conclude such transactions

on behalf of and in the name of that principal, and whose activities are remunerated by the principal

(art. 1). The directive aims at the protection of the commercial agent against the principal and

contains detailed rules on the rights and obligations of the parties (Chapter II), remuneration

(Chapter III) and the conclusion and termination of agency contracts (Chapter IV). The provisions

governing the rights and obligations of the principal (arts. 3-4) and the agent as well as the agent’s

indemnification and compensation after termination of the agency contract (arts. 17-18) are

mandatory (arts. 5 and 19, respectively). Articles 3 and 4 of the directive impose an overall

obligation on both parties to act in good faith towards each other, and to provide each other the

information needed to fulfil the other’s obligations under the contract. In particular, the agent must

communicate to the principal all the necessary information available to him, and the principal must

notify the agent if he anticipates that volume of business will be less than the agent would normally

expect (arts. 3 and 4). Article 17 (1) of the directive requires that Member States take the necessary

measures to ensure that after termination of the agency contract, the commercial agent is

indemnified or compensated for damage in accordance with Articles 17 (2) and (3) and 18. The

parties may not derogate from these rules to the detriment of the commercial agent before the

agency contract expires. In addition, the directive also specifies that non-competition clauses

(‘restraint of trade clauses’) after termination may be imposed for a maximum period of two years,

provided they are in writing and restricted to the geographical area, or to the group of customers and

geographical area, entrusted to the agent, and to the type of goods covered by his agency contract

(art. 20). This provision of the directive is, however, subject to more stringent requirements

restricting non-competition clauses contained in the local legislation of any Member State. The

mandatory nature of the minimum harmonisation rules of the directive implies that these rules

cannot easily be set aside by the law considered applicable to the agency if not respecting these

rules, even if the agency contract is concluded between a non-EU based principal and agent, as long

as the agent is operating or the agency has an effect in the EU.

The EC Directive on Self-Employed Commercial Agents is not the only legislative action

which the European Community has taken with regard to commercial agency contracts. Article 81

(1) (ex Article 85 (1)) of the EC Treaty declares invalid all agreements and concerted practices

which may affect trade between Member States and which have as their object or effect the

prevention, restriction or distortion of competition within the common market. The Commission

Regulation 2790/99 on the Application of Vertical Agreements and Concerted Practices, together

with the Guidelines on Vertical Restraints (99/C 270/42), define the application of Article 81 (3) of

the EC Treaty to inter alia agency contracts, whether for the supply of goods or services, and

exempt certain types of such agreements from the operation of Article 81 (1). The regulation and the

guidelines use the criterion of the acceptance of entrepreneurial risk to distinguish between two

types of agency contracts. They classify such agreements as either ‘genuine agency agreements’

(where the agent does not assume any important financial and commercial risks in relation to the

activities for which he has been appointed by the principal) and ‘non-genuine agency agreements’

(where the agent bears some financial and commercial risks in relation to such activities, though not

necessarily by taking title to the relevant goods or becoming a party to the contract). While genuine

agency contracts are not caught by Article 81 (1), non-genuine agency contracts, such as those

providing for the del credere service (i.e. a separate guarantee of a customer’s creditworthiness by

the agent) may potentially be caught by this article but are capable of exemption directly under

Article 81 (3) or pursuant to the Commission Regulation 2790/99.31 The Commission Regulation

states that the question of risk must be assessed on a case-by-case basis with regard to the economic

reality of the situation rather than the legal form (nos. 12-17). If non-genuine agency contract is

caught by Article 81 (1), it will be invalid. The general consequences of invalidity of an agency

contract are left by the EC Treaty to national laws.

In addition, specific sets of rules relating, in particular, to the internal relationship between

principal and commercial agent can be found in the Principles of European Law on Commercial

Agency, Franchise and Distribution Contracts (PEL CAFDC).32 In the same way as the PECL, the

31 On this issue in more detail, see R. Christou, Drafting Commercial Agreements, (London, 2004), p. 275 ff. 32 M.W. Hesselink et al. (eds), Principles of European Law on Commercial Agency, Franchise and Distribution Contracts, (Munich, 2006).

PICC and the Draft PELMC, the PEL CAFDC are a non-legislative instrument aimed at the

harmonisation of contract law in Europe. The provisions on commercial agency contained in the

PEL CAFDC build upon the provisions of the EC Directive on Self-Employed Commercial Agents.

It is not surprising therefore that the definition of commercial agency used in the PEL CAFDC is

similar to the definition in the directive. The rules on commercial agency can be found in Chapter 1

in which the general provisions applicable to all commercial agency, franchise and distribution

contracts are set out, and Chapter 2 containing specific rules on commercial agency. The general

part includes the following obligations from which the parties may not derogate: a pre-contractual

duty of each party to provide the other party with adequate information (art. 1:201); a duty to co-

operate (art. 1:202); a contractual duty to inform (art. 1:203). The general part also contains a duty

of confidentiality which a party who receives confidential information owes to the party from whom

he receives such information (art. 1:204). This duty is however not mandatory. Besides, the general

part contains the rules on termination of commercial agency contracts (arts. 1:301-1:206). In

particular, it specifies that a party may terminate the contract for non-performance only if the other

party’s non-performance is fundamental within the meaning of Article 8:103 (b) and Article 8103

(c) of the PECL, and the parties may not derogate from this provision (on the notion of fundamental

non-performance, see Chapter 6). Other general provisions of default character are the agent’s right

of retention over the movables of the principal until the principal fulfils his obligations under the

contract (art. 1:401) and the right of each party to receive from the other, on request, a signed

written document setting out the terms of the contract (art. 1:402). Specific provisions on

commercial agency lay out obligations of commercial agents and their principals. The rules with

regard to the commercial agent’s obligations are not mandatory and specify the following

obligations: a duty to make reasonable efforts to negotiate contracts on behalf of the principal and to

conclude the contracts if so instructed (art. 2:201); a duty to follow the principal’s ‘reasonable’

instructions, ‘provided they do not substantially affect the commercial agent’s independence’ (art.

2:202); a duty to inform the principal during the contract’s performance about the contracts

negotiated or concluded, the relevant market conditions, the solvency of and other characteristics

relating to customers (art. 2:203); a duty to maintain proper accounts relating to the contracts

negotiated or concluded on behalf of the principal (art. 2:204). The rules concerning the obligations

of the principal constitute a mixture of mandatory and default provisions and impose the following

obligations on the principal: a duty to pay the commercial agency commission on contracts

concluded with customers during and after the period of the agency contract (arts. 2:301-2:306); a

duty to inform the commercial agent during the performance of the contract about the characteristics

of the goods or services and the prices and conditions of sale or purchase (art. 2:308); a duty to

inform the commercial agent of the principal’s acceptance, rejection or non-performance of a

contract which the commercial agent has negotiated on the principal’s behalf (art. 2:309); a duty to

warn the commercial agent if he foresees or ought to foresee that the volume of business will be less

than the agent had reason to expect (art. 2:309); a duty to supply the commercial agent with a

statement of the commission to which the agent is entitles (art. 2:310); a duty to maintain proper

accounts relating to the contracts negotiated or concluded by the commercial agent (art. 2:311); a

duty to indemnify the agent in accordance with certain requirements (art. 2:313). Finally, the PEL

CAFDC impose restrictions on the validity of del credere clauses which enable the principal to shift

the risk of the customer’s insolvency on the agent by requiring that the agent guarantees the

customer’s payment to the principal. According to Article 2:313, a del credere clause is only valid if

the clause is in writing, it does not extend to a general group of (or to all) customers, and it is

‘reasonable with regard to the interests of the parties’, i.e. the clause does not unreasonably burden

the commercial agent (art. 2:313 (1)). The commercial agent is entitled to be paid a commission of a

reasonable amount on contracts to which the del credere guarantee applies (del credere commission)

(art. 2:313 (2)).

3.3.3 Key issues in drafting agency contracts

Any draftsmen dealing with agency contracts has to be concerned with three main issues: 1) the

arrangements under which the agent will deal with third parties, in particular whether the agent has

authority to only negotiate or also conclude contracts with the third parties and, if so, on which

terms; 2) the arrangements between the principal and the agent, in particular with regard to

remuneration, commission, and/or indemnification; 3) the impact of competition or mandatory

contract law of the relevant legal systems, particularly their mandatory rules aimed at the protection

of third parties and commercial agents, on the first two issues.

In light of that, a cross-border agency or mandate contract usually includes the following

key elements:

- definitions of the key concepts used throughout the agreement;

- the grant and terms of agency;

- the duties of the agent;

- the duties of the principal;

- clauses dealing with the agent’s remuneration, commission and/or indemnification;

- non-competition or restraint of trade clause;

- an assignment clause providing that benefits and obligations of the agreement may not be

assigned or transferred other than by the common consent of the parties to the agreement;

- clauses concerning termination of the agency contract, in particular for breach, insolvency,

change of control of the agent, or in the case of force majeure or hardship;

- force majeure and/or hardship clauses defining the relevant supervening effects and their effect

on the contract;

- clauses establishing the rules on the interpretation of the contract;

- arbitration clauses stating that disputes arising from the contract shall be submitted to an

arbitrator or a clause specifying the governing courts to which jurisdiction the parties shall

submit their disputes;

- a provision specifying the law governing the contract.

These provisions should be drafted in such a way that they not violate the applicable mandatory

rules. In particular, it makes no sense for the principal to exclude the possibility of him being bound

by the agent’s apparent or ostensible authority in the contract between the principal and the agent.

Such exclusion will have no effect in relation to the third party. As we have seen in section 3.2.3.3,

both in the Common Law and in many Civil Law legal systems as well as under the international

instruments in question, the principal takes the risk that the third party may reasonably assume

apparent agency. At the same time, in response to the problem of apparent authority the principal

may draft the agency contract in such a way as to substantially reducing the risk of being bound by

the agent’s unauthorised acts. This can be done by including in the agency agreement a special

clause prohibiting the agent from holding himself out in a capacity other than as agent in relations

with third parties. Such clauses are intended to alert third parties of the agent’s true status and to

induce them to make inquiries with the principal, in particular if the conclusion of a contract for a

huge amount of money is at stake. Thus, for example, an agency contract may impose on the agent

the following duty:

The Agent will cause to be printed an express statement that it acts only as sales agent for the

Principal on all letterheads, invoices, leaflets, brochures or other documents issued by it on or in

which it refers to the Products or the Principal. The Agent shall also affix a clearly visible plaque

containing such statements at the Agent’s registered office and at any place of business of the Agent.

Such statement shall likewise appear in all advertisements published by the Agent in which the

Products or the Principal are mentioned. The Agent shall not expressly or by implication in any

negotiations relating to the Products or otherwise describe itself as acting in any capacity for or on

behalf of or in relation to the affairs of the Principal other than in accordance with such statement.33

Furthermore, if it is the commercial agency which is involved and the agency contract between the

commercial agent and the principal is concluded between the parties based in the EU or between a

non-EU based principal and a commercial agent who is operating in the EU or the agency has an

effect in the EU, the mandatory rules transposing the EC Directive on Self-Employed Commercial

Agents, which were discussed in section 3.3.2 above, should be complied with. In addition, both

mandatory and default rules contained in the domestic legislation, the EC Directive on Self-

Employed Commercial Agents and international instruments such as the PECLMC and PEL

CAFDC may provide an important source of mutual rights and obligations when drafting provisions

concerning, in particular, the duties of the agent and the principal, the agent’s remuneration,

commission and/or indemnification, non-competition and del-credere clauses, or termination.

Consider, for example, the following clauses in the long form agency agreement:34

During the period of this Agreement the Agent shall serve the Principal as agent on the terms of this

Agreement with all due and proper diligence (acting dutifully and in good faith), observe all

reasonable instructions given by the Principal as to its activities under this Agreement, act in the

Principal’s interests and use its best endeavours to increase the sale of the Products in the

Territory.35

The Agent shall keep strictly confidential, not disclose to any third party and use only for the

purposes of this Agreement all information relating to the Products (whether technical or

commercial) and to the affairs and business of the Principal, whether such information is disclosed

to the Agent by the Principal or otherwise obtained by the Agent as a result of its association with

the Principal.36

33 R. Christou, Drafting Commercial Agreements, (London, 2004), p. 319.34 For the whole long form agency agreement, see R. Christou, Drafting Commercial Agreements, (London, 2004), p. 318. On common clauses in agency agreements, see also S. Kenyon-Slade & M. Thornton, Schmitthoff’s Agency and Distribution Agreements, (London, 1992), p. 43 ff. 35 R. Christou, Drafting Commercial Agreements, (London, 2004), p. 318.36 R. Christou, Drafting Commercial Agreements, (London, 2004), p. 319.

In discharging his obligations to the Agent the Principal shall act dutifully and in good faith.37

The Principal shall notify the Agent within a reasonable period of time once he anticipates that the

volume of sales of the Products in the Territory will be significantly lower than that which the Agent

could normally have expected.38

More informal, short form agency agreements, which are suitable for situations where the principal

intends to appoint a considerable number of commercial agents for selling low value standardised

consumer or commercial items without defining the territory in which a particular agent should

operate or granting exclusivity to him, may not necessarily reproduce in contractual form all of the

provisions of the relevant national rules or the EC Directive on Self-Employed Commercial Agents.

Instead, the parties concerned may draft a basic document setting out the grant of the agency and the

main issues upon which they need to agree expressly, while leaving the balance of their rights and

obligations to be determined by the applicable law and the provisions of the directive.39

3.4 External principal/agent-third party relationship

In the previous section we were dealing with the internal relationship between the principal and the

agent. This relationship lies at the origin of the agent’s dealings with a third party. Yet, the

consequences of the agent’s acts do not entirely depend upon the arrangements between the

principal and the agent and the rules applicable to their internal relationship. Once the agent enters

into a contract with a third party, the rules governing the external relationship, i.e. the relationship

between the principal or agent on the one hand, and the third party on the other, apply. It is this

aspect of the law of agency which will be the focus of this section. As we shall see, particularly the

approach to the external relationship reveals, at least in theory, significant differences between the

Civil Law and the Common Law.40

3.4.1 Civil Law approach

37 R. Christou, Drafting Commercial Agreements, (London, 2004), p. 321.38 R. Christou, Drafting Commercial Agreements, (London, 2004), p. 321.39 For an example of such a contract, see R. Christou, Drafting Commercial Agreements, (London, 2004), p. 315 ff. 40 For a comparison of the Civil Law and Common Law approach to the external relationship, see, for example, K. Zweigert and H. Kötz, Introduction to Comparative Law, (Oxford, 1998), p. 436 ff.; H. Beale et al, Cases, Materials, and Text on Contract Law, (Oxford and Portland, Oregon, 2002), p. 912 ff.; D. Busch, Indirect Representation in European Contract Law, (The Hague, 2005).

The Civil Law approach to the external relationship is reflected in the PECL which provide a good

illustration of the distinctive characteristics of this approach.41 Following a more or less explicit

division recognised by the Civil Law systems, Article 3:102 distinguishes between direct and

indirect representation.42

PECL

Article 3:102: Categories of Representation

(1) Where an agent acts in the name of a principal, the rules on direct

representation apply (Section 2). It is irrelevant where the principal’s

identity is revealed at the time the agent acts or is to be revealed later.

(2) Where an intermediary acts on instructions and on behalf of, but not in the

name of, a principal, or where the third party neither knows nor has reason

to know that the intermediary acts as an agent, the rules on indirect

representation apply (Section 3).

Direct representation accordingly exists where an agent acts ‘in the name of’ a principal and the

third party knows or ought to know this (art. 3:102 (1) PECL). It also covers the case where an agent

acts ‘in the name of’ a principal but does not, at first, disclose the principal’s name.43 By contrast,

indirect representation covers two types of cases (art. 3:102 (2) PECL). In the first place, there is

indirect representation if the intermediary acts ‘in his own name’ but on behalf of the principal. The

third party may or may not know that the party with whom he is dealing is acting for the account

and at the risk of another. The most typical commercial example is a so-called commission agency

in the Civil Law countries. Under the contract concluded between the commission agent and the

41 On the approach to the external relationship under the PECL, see, in particular, A. Hartkamp, ‘Indirect Representation According to the Principles of European Contract Law, the Unidroit Agency Convention and the Dutch Civil Code’, in: J. Basedow et al. (eds), Festschrift für Ulrich Drobnig zum siebzigsten Geburtstag, (Tübingen, 1998), p. 25; D. Busch, ‘Indirect Representation and the Lando Principles: an Analysis of Some Problem Area from the Perspective of English Law’, European Review of Private Law 7 (1999), p. 319 (also published on Internet: Electronic Journal of Comparative Law, vol. 2.3, December 1998); M.J. Bonell, Chapter 21 ‘Agency’, in: A. Hartkamp et al. (eds), Towards a European Civil Code, (Nijmegen, 2004), p. 381.42 The Continental Civil Codes generally only regulate direct representation (e.g. France, Belgium and Luxembourg: CC art. 1984 (1); Austria: ABGB § 1002; Germany: BGB § 164; the Netherlands: BW art. 3:60 (1)). Therefore, in some countries the term ‘representation’ is confined to what the PECL call direct representation. In substance, however, the distinction between direct and indirect representation can be found in most Civil Law systems. In several countries there are special rules governing indirect representation in general (e.g. Italy: CC art. 1705); Spain: CC art. 1717; Portugal: CC arts. 1180-1184) and/or commission agency as an important type of indirect representation in particular (e.g. Germany: HGB § 383; Italy: CC arts. 1731-1736; the Netherlands: BW art. 7:425-7:427). 43 The agent is however bound to reveal the principal’s name on request of the third party (art. 3:203 PECL).

principal, the commission agent normally does not have authority to act in the name of the principal

and conclude a contract between the principal and third parties with which he (the agent) deals and

can only act in personal capacity. The second type of indirect representation is where the agent is

granted authority to act in dealings with the third party ‘in the name’ of the principal but the agent

does not disclose that he is acting as an agent and acts in his own name instead. This type of agency

can be termed ‘undisclosed agency’. (See illustration 2 below). In the same way as in the case of

direct representation, in both cases of indirect representation the agent still acts on behalf of the

principal in the sense that the transaction is ultimately at the risk and for the benefit of the principal.

Illustration 2. Civil law approach to external relationship

Agency (Representation)

direct indirect

undisclosed commission

The practical importance of whether the agent acts in the name of the principal or in his own name

and the knowledge of the third party in this respect lies in the legal consequences of the agent’s acts

in the external relationship. In the case of direct representation, i.e. where the agent acts in the name

of the principal and the third party knows or ought to know this, the agent’s acts bind the principal

and the third party directly and the agent drops out (art. 3:202 PECL)44 (see illustration 3 below).

Hence, the basic effect of the direct representation where the agent has acted within the scope of his

express, implied or apparent authority is that the agent creates, modifies or terminates a legal

relationship between his principal and the third party and the agent does not acquire any rights or

liabilities under the contract himself. There are two exceptions from this rule. The agent and the

third party or the principal and the agent may by contract deviate from this rule and impose personal

liability upon the agent who in this way may become a co-obligor or a guarantor of the principal’s

obligations. Another exception is established by Article 3:203 of the PECL: where an agent enters

into a contract in the name of a principal whose identity is to be revealed later (i.e. an unnamed

principal), but fails to reveal that identity within a reasonable time after a request by the third party,

the agent himself is bound by the contact.

Illustration 3. Direct representation in the Civil Law

By contrast, in both cases of indirect representation, i.e. commission agency and undisclosed

agency, the contract concluded by the intermediary binds him personally to the third party (art.

3:301 PECL) (see illustration 4 below). Hence, the basic effect of indirect representation is that the

agent creates, modifies or terminates a legal relationship between the third party and himself and the

principal and the third party do not become bound to each other. The principal may not therefore sue

the third party or be sued by the third party on the contract concluded by the agent, even though the

agent was in fact acting for the account and at the risk of a principal who alone had any economic

interest in the contract concluded by the intermediary with the third party. Moreover, a contract

44 This general principle is to be found in many Continental codifications (e.g. Germany: BGB § 164 (1); France, Belgium and Luxembourg: CCs art. 1998; Italy: CC art. 1388); the Netherlands: BW art. 3:66 (1)).

made by a commission agent will normally be held binding only on the agent even if the third party

may know not only that the agent, as commission agent, acts on behalf of a principal, but may even

know the principal’s identity (e.g. France: CCom art. 94; Italy: CC arts. 1731). The commentary to

Article 3:301 of the PECL provides the following example of the legal consequences of indirect

representation:

Customer C instructs her bank B (or a dealer in securities D) to buy 1,000 shares. B (or D), acting in

their own name, purchase the shares from seller S. In the eyes of the Civil Law countries, B (or D) is

a commission agent. No direct relationship between C and S arises.

Such a solution in the case of indirect representation is the effect of the continental ‘publicity

principle’ which manifests itself in the idea that each party should be able to freely decide with

whom to contract.45 Such freedom would not exist if the third party were bound to the principal

while being induced by the agent acting in his own name to believe that he (the agent) intended to

contract personally.

Illustration 4. Indirect representation in the Civil Law

The differences between the direct and indirect representation in the Civil Law countries can thus be

summarised as follows. In the case of direct representation, the agent acts in the name of the

principal, the third party knows or ought to know this and the principal becomes entitled and bound

under the contract with the third party. By contrast, in the case of indirect representation, the agent

45 On the publicity principle, see, for example, R. Zimmerman, The Law of Obligations: Roman Foundations of the Civilian Tradition, (Oxford: Clarendon Press, 1996), p. 46 f.

contracts with a third party in personal capacity and it is the agent who in principle becomes entitled

and bound by the contract with the third party. Indirect representation covers two situations. First, it

arises where the intermediary, in accordance with his authority, acts on behalf of the principal but in

his own name (e.g. commission agency). Second, indirect representation is also at stake where the

principal confers authority on the agent to act in his (the principal’s) name, but the agent acts in his

own name instead and does not disclose to the third party that he is actually acting as an agent for

someone else (undisclosed agency).

It is important to realize, however, that the traditional Civil Law distinction between

the direct and indirect representation may be somewhat misleading. As we shall see in sections

3.4.4.3 and 3.4.5.1, in a number of specific situations the Civil Law legal systems and the PECL

permit direct actions between principal and third party even where the agent acted in his own name.

In particular, the principal and the third party may have a possibility to sue each other in the case of

the intermediary’s bankruptcy or non-performance. Such exceptions from the basic rule make the

differences between the Common Law and Civil Law approach to the external relationship much

more relative in practice.

3.4.2 Common Law approach

The distinction between the direct and indirect representation is not known in the Common Law

where the notion of ‘agency’ has a very broad meaning. In the Common Law, this notion is not

limited to cases of ‘direct representation’ in the Civil Law but instead covers all cases where a

person (the agent) acts ‘on behalf of’ another (the principal) so as to affect the principal’s relations

with a third party. Within this uniform concept of agency a distinction is made between disclosed

and undisclosed agency, a distinction that is as such unknown to civil lawyers.46 (See illustration 5

below).

Illustration 5. Common law approach to external relationship

Agency

46 On this in more detail, see D. Busch, Indirect Representation in European Contract Law, (The Hague, 2005), p. 127 ff.

disclosed undisclosed

In the case of disclosed agency, i.e. when it is clear to the third party at the time of the conclusion of

the contract that he is dealing with the agent, the principal is directly bound by contracts concluded

by the agent acting within the scope of his actual authority with third parties; the agent himself is not

bound to the third party and, in a legal sense, ‘drops out’ of the transaction.47 If an agent makes a

contract on behalf of his disclosed principal within the scope of his authority, it is therefore the

principal who acquires the rights and liabilities under the contract. (See illustration 6 below).

Illustration 6. Disclosed agency in the Common Law

By contrast, in the case of undisclosed agency, the third party is unaware at the time of the

conclusion of the contract that he is dealing with the agent acting on behalf of the principal. Even

though the agency is undisclosed, the principal may under the Common Law nonetheless sue the

third party directly. This is so even if the agent concealed his very existence at the time the contract

with the third party was made and gave the impression that he himself was to be the other party.

Conversely, when the third party discovers the existence of an undisclosed principal, he may sue the

undisclosed principal directly. Thus, even in the case of undisclosed agency, the undisclosed

principal and the third party may in principle enforce against each other the rights under the contract

concluded with the agent acting within the scope of his actual authority.48 Such an approach is based

47 F.B.M. Reynolds, Bowstead & Reynolds on Agency, (London, 2006), p. 331 ff.48 There is some controversy in the literature, however, as to agent’s authority in this case. One view is that for the doctrine of undisclosed principal to operate the principal must have authorized the agent to bring him into contractual privity with the third party. The other view is that whatever the principal’s intentions, he is affected by this doctrine whenever he uses the services of an intermediary. The majority of dicta directly or by implication favour the first view. See, F.B.M. Reynolds, Bowstead & Reynolds on Agency, (London, 2006), p. 375 ff.

on the common law doctrine of the ‘undisclosed principal’ which was summarised by Lord Lloyd of

Berwick as follows:

Siu Yin Kwan v. Eastern Insurance Co. Ltd.49

(1) An undisclosed principal may sue and be sued on a contract made by an agent on his behalf,

acting within the scope of his actual authority. (2) In entering into the contract, the agent must intend

to act on the principal’s behalf. (3) The agent of an undisclosed principal may also sue and be sued

on the contract. (4) Any defence which the third party may have against the agent is available

against his principal. (5) The terms of the contract may, expressly or by implication, exclude the

principal’s right to sue, and his liability to be sued. The contract itself, or the circumstances

surrounding the contract, may show that the agent is the true and only principal.

A similar approach is also taken by the American Restatement (Third) of Agency:


§ 6.03 Agent For Undisclosed Principal:

When an agent acting with actual authority makes a contract on behalf of an undisclosed principal,

(1) unless excluded by the contract, the principal is a party to the contract;

(2) the agent and the third party are parties to the contract; and

(3) the principal, if a party to the contract, and the third party have the same rights, liabilities,

and defences against each other as if the principal made the contract personally, subject to §§

6.05-6.09.

In practical terms, this implies that in the absence of any such agreement, the third party may find

himself being sued by the party of whose existence and identity he has not known at the time of the

contract conclusion with the agent (an undisclosed principal). Such an outcome is difficult to

reconcile with the common law doctrine of privity which says that a contract cannot confer rights or

impose obligations arising under it on any person except the parties to it. The case law of the

49 [1994] 2 A.C. 199, 207.

English courts recognises this inconsistency, but provides a pragmatic explanation to it, namely that

it is necessitated by the requirements of commercial practice and the need to avoid circuity of

action.50 Yet, even though the common law recognises the right of an undisclosed principal to sue

the third party, as will be shown in section 3.4.4.5 below, apart from the express or implied

contractual exclusion of such a possibility in the contract between the agent and the third party, there

are also other constraints thereto. In particular, it is not possible for the principal to sue the third

party if the principal knows that the third party would not have contracted with him directly.

Similarly, unless agreed otherwise, the third party who learns of the identity of the

principal may also sue the principal. It is no defence for the latter to show that he has already paid

the price under the contract effected by the agent to the agent, unless the third party has led the

principal to believe that he had already settled with the agent.51 If the agent fails to transmit the

payment to the third party, the principal is obliged to pay again, this time directly to the third party.

The rationale for such an approach in the eyes of the Common Law lawyers is that because the

principal sets the agent in motion by authorising him to enter into contracts with third parties on his

behalf, he should also bear the risks that third parties may be harmed in the case of the agent’s non-

performance or bankruptcy.52

In addition, it is important to note that in the Common Law, in the absence of any

agreement between the agent and the third party excluding the possibility to sue the principal, the

third party who learns of the identity of the undisclosed principal may exercise his right of

‘election’. The doctrine of ‘election’ implies that the third party may choose whether to sue the

principal or the agent under the contract concluded by the latter, but once the third party has

‘elected’ to hold one of them liable, he may lose his right to sue the other. The choice between the

principal and the agent continues until the agent obtains judgment against one of them or otherwise

definitely chooses which to hold liable. Once the right of election is exercised, the third party may

not sue the other, even if his claim is not satisfied.53

50 See, for example, Keighly, Maxsted & Co. v. Durant [1901] AC 240, 261-262 per Lord Lindley; Freeman and Lockyer v. Eastern Insurance Co. Ltd [1964] 2 Q.B. 480, 503 per Diplock L.J.; Siu Kwan v. Eastern Insurance Co. Ltd [1994] 2 A.C. 199, 207 per Lord of Berwick. See also G.H.L. Fridman, Law of Agency, (London, 1990), p. 230. In the view of Fridman, all theories endeavouring to provide a legal basis for the doctrine of undisclosed principal do not completely explain this peculiarity of English law and the idea of the undisclosed principal has been introduced into and accepted by the common law purely ‘for reasons of mercantile convenience’. For an overview of the theories of those seeking to find a legal basis for the doctrine for undisclosed principal, see D. Busch, Indirect Representation in European Contract Law, (The Hague, 2005), p. 141 ff. 51 Irvine v. Watson (1880) 5 QBD 414.52 Compare K. Zweigert and H. Kötz, Introduction to Comparative Law, (Oxford, 1998), p. 440. 53 The English doctrine of election has been criticised in legal literature, in particular on the ground that there is no reasonable justification for releasing the principal or the agent merely because the third party has chosen to hold the other liable while the third party’s claim is not satisfied. See, for example, F.B.M. Reynolds, Bowstead & Reynolds on

From the point of view of its legal consequences, the undisclosed agency can accordingly

be illustrated as follows. (See illustration 7 below).

Illustration 7. Undisclosed agency in the Common Law

In the light of all the above mentioned, the Common Law approach to the external relationship

between the principal and the agent on the one hand, and the third party on the other, can be

summarised as follows. The Common Law proceeds from a uniform concept of agency drawing no

distinction between the situation where the agent acts in the name of the principal and where he acts

in his own name (direct and indirect representation, respectively, in the Civil Law). Instead, within

Agency, (London, 2006), p. 407 ff. The PECL do not provide an answer to the question of whether a third party is barred from suing agent or principal where the third party has already exercised his rights against one of them, but has not been able to satisfy his claim. For criticism of this approach, see D. Busch, ‘Indirect Representation and the Lando Principles: an Analysis of Some Problem Area from the Perspective of English Law’, European Review of Private Law 7 (1999), p. 319 (also published on Internet: Electronic Journal of Comparative Law, vol. 2.3, December 1998), section 3.2.6.

this uniform concept the Common Law distinguishes between the disclosed and undisclosed agency.

This distinction, however, does not have entirely the same effect as the one between the direct and

indirect representation in the Civil Law. In the Common Law the principal and the third party may

sue each other and be sued by each other under the contract concluded by the agent not only in the

case of disclosed agency, but, as a rule, also in the case of undisclosed agency. Whereas the legal

consequences of the disclosed agency in the Common Law are therefore comparable to those of the

direct representation in the Civil Law, the legal effects of undisclosed agency differ from those of

indirect representation. Another peculiar feature of the Common Law is that in the case of

undisclosed agency the third party has the right of election which enables the third party to choose

whether to sue the principal or the agent. The third party may thus enforce his rights under the

contract with the agent against either undisclosed principal or the agent. Once, however, the choice

in favour of one of these is made, the third party cannot sue the other, even if his claim is not

satisfied.

3.4.3 A compromise between the Civil Law and Common Law in the Geneva Convention on

Agency and the PICC

While the PECL reflect the Civil Law approach to the external relationship between the principal

and the agent, the Geneva Convention on Agency and the PICC adopted a solution which can be

regarded as a compromise between the opposite views of the Civil Law and Common Law on this

issue. This compromise is embodied in Articles 12 and 13 (1) of the Geneva Convention on Agency

and Articles 2.2.1, 2.2.3 and 2.2.4 of the PICC. Articles 2.2.3 and 2.2.4 (1) of the PICC, which are

considered below, almost literally correspond to Articles 12 and 13 (1) of the Geneva Convention.

PICC

Section 2: Authority of Agents

Article 2.2.1 (Scope of the Section):

(1) This section governs the authority of a person (‘the agent’) to affect the legal relations of another

person (the ‘principal) by or with respect to a contract with a third party, whether the agent acts in

its own name or in that of the principal.

[…]

Article 2.2.3 (Agency disclosed):

(1) Where an agent acts within the scope of its authority and the third party knew or ought to

have known that the agent was acting as an agent, the acts of the agent shall directly affect

the legal relations between the principal and the third party and no legal relation is created

between the agent and the third party.

(2) However, the acts of the agent shall affect only the relations between the agent and the third

party, where the agent with the consent of the principal undertakes to become the party to the

contract.

Article 2.2.4 (Agency undisclosed):

(1) Where an agent acts within the scope of its authority and the third party neither knew nor

ought to have known that the agent was acting as an agent, the acts of the agent shall affect

only the relations between the agent and the third party.

[…]

Following the Common Law approach, the PICC and the Geneva Convention on Agency do not

differentiate between the situation where the agent has acted in the name of the principal and the one

whether he has acted in his own name. Thus, in contrast to the PECL, the PICC and the Geneva

Convention on Agency dispose the dichotomy of direct/indirect representation. Instead, in the same

way as in the Common Law, the distinction is made between the disclosed and undisclosed agency.

However, in contrast to the Common Law where a principal and a third party may, as a rule, sue

each other even if the agent has not disclosed his true capacity, the PICC and the Geneva

Convention on Agency provide for the establishment of a direct relationship between the principal

and the third party only in those cases where the agency is disclosed, i.e. the third party knew or

ought to have known that the agent was acting on behalf of a principal, whether identified or not.

(See illustration 8 below).

Illustration 8. Approach to external relationship under the PICC and the Geneva Convention on

Agency

The Commentary to Articles 2.2.3 and 2.2.4 of the PICC provides the following examples of the

legal effects of the disclosed and undisclosed agency:

A, a sales representative for computer manufacturer B, accepts the order placed by university C for

the purchase of a certain number of computers. The sales contract directly binds B vis-à-vis C with

the result that it is B, and not A, who is under an obligation to deliver the goods to C and who is

entitles to payment by C.

Art dealer A purchases a painting from artist C. When entering into the contract A does not

disclosed the fact that it is acting on behalf of client B, nor has C any reason to believe that A is not

acting on its own behalf. The contract is binding on A and C only, and does not give rise to a direct

relationship between client B and artist C.

In addition, following the Civil Law approach to commission agency which in the Continental legal

systems falls under the category of indirect representation, the PICC and the Geneva Convention on

Agency make an exception from the basic rule in certain cases where the agent, in the Civil Law

terminology, acts in his own name. In these cases neither the PICC nor the Geneva Convention on

Agency establish a direct relationship between a principal and a third party even if the agent openly

acts on behalf of the principal and the agency is thus disclosed. This is in particular the case where

the intermediary acts as a commission agent. The Commentary to Article 2.2.3 (2) of the PICC

provides the following explanation to this exception:

An agent, though openly acting on behalf of a principal, may exceptionally itself become party to

the contract with the third party (para. (2)). This is the case, in particular, where a principal, who

wants to remain anonymous, instructs the agent to act as a so-called ‘commission agent’, i.e. to deal

with the third party in its own name without establishing any direct relation between the principal

and the third party. This is also the case where the third party makes it clear that it does not intend to

contract with anyone other than the agent and the agent, with the consent of the principal, agrees that

it alone and not the principal will be bound by the contract. In both cases it will follow from the

terms of the agreement between the principal and the agent that, once the agent has acquired his

rights under the contract with the third party, it will transfer them to the principal.

The Commentary to Article 2.2.3 (2) of the PICC also contains the following illustrations:

Dealer B, expecting a substantial increase in the price of wheat, decides to purchase a large quantity

of wheat. B, wishing to remain anonymous, entrusts commission agent A with this task. Even

though supplier C knows that A is purchasing on behalf of a principal, the purchase contract is

binding on A and C and does not directly affect B’s legal position.

Confirming house A, acting on behalf of overseas buyer B, places an order with supplier C for the

purchase of certain goods, Since C, who does not know B, insists on A’s confirmation of B’s order,

A accepts to be held liable itself vis-à-vis C. Even though C knows that A is purchasing on behalf of

B, the purchase contract is binding on A and C and does not directly affect B’s legal position.

In so far, the legal consequences of the disclosed agency under both the PICC and the Geneva

Convention on Agency largely correspond to that of the direct representation in the Civil Law and

under the PECL, while the legal consequences of the undisclosed agency to that of the indirect

representation. Yet, while both the PICC and the Geneva Convention on Agency agree on the

starting point, there is an important difference between the two concerning the protection of the

interests of the principal and the third party in the case of undisclosed agency.54 As will be discussed

in sections 3.4.4 and 3.4.5 in more detail, even in cases of undisclosed agency, Article 13 (1) (a) in

conjunction with Article 13 (2) of the Geneva Convention on Agency grants the principal and the

third party the right of direct action against each other whenever the agent fails to fulfil or is not in a

54 Compare M.J. Bonell, Chapter 21 ‘Agency’, in: A. Hartkamp et al. (eds), Towards a European Civil Code, (Nijmegen, 2004), p. 381, at p. 388 ff.

position to fulfil his obligations towards one or the other. By contrast, under the PICC in cases of

undisclosed agency the principal’s right of direct action against the third party is excluded

altogether, while the third party only exceptionally may sue the principal, namely where in

contracting with the agent the third party was led to believe that it was dealing with the owner of a

business but later discovers that it had in fact being dealing with the owner’s agent (art. 2.2.3 (2)).

By totally excluding the undisclosed principal’s right of direct action against the third party in the

case of the agent’s default, the PICC have adopted a rather specific solution which is rejected not

only by the Common Law and the Geneva Convention on Agency, but also by the PECL. This

solution has been justified on the ground that in international commerce it would often contravene a

party’s reasonable expectations if, after entering into a contract with a person he believed to be a

principal, the party was subsequently confronted with another person claiming to be the principal

but whose existence had until then been completely unknown to him.55 By contrast, in granting also

the undisclosed principal a right of direct action against the third party in the case of the agent’s

default, the Geneva Convention on Agency comes closer to the Common Law approach and the

PECL which reach similar results in such a case by means of the doctrine of undisclosed principal

and a specific exception from the general rule on indirect representation (art. 3:302), respectively.

3.4.4 Third party protection

In the previous sections 3.2 and 3.4.1-3.4.3 we discussed a number of rules which govern the

external relationship between the principal or agent on the one hand, and the third party, on the

other, and aim to strike a balance between often competing interests of the principal and the third

party. In particular, it became clear that there are considerable differences in theory between the

Civil Law and the Common Law approach to the external relationship. No consensus on many

important issues of such relationship was also found to exist in the international instruments in

question. Against this background, an important practical problem which arises is how the interests

of the principal and the third party are protected under different regimes. This issue is particularly

important if one acts as a lawyer for one of the two parties whom the agent may bring together, i.e.

for a principal or for a third party. In this and next section therefore we shall look at the protection of

the interests of the third party and the principal in a number of cases in which, in the absence of such

protection, the party concerned would find himself in a pretty unfavourable situation. We shall start

55 Compare Unidroit 1999, Study – Misc. 21, paras. 266-274; Unidroit 2000, Study – Misc. 22, paras. 866-883.

this discussion by looking at how the third party is protected in those cases where it turns out that

the agent with whom he entered into the contract was not authorised to do so by the principal.

3.4.4.1 Third party protection in the case of unauthorised agency

As has been discussed in section 3.2.3.3, an important means for the protection of the interests of the

third party in the case of unauthorised agency is provided by the possibility that a third party

assumes the agent’s apparent, or ostensible authority. Such an authority may be assumed if the

principal has induced in a third party a reasonable belief that the ‘agent’ has been granted authority

to represent the principal. In such a case, a reasonable reliance by the third party upon the

impression that the principal has granted actual authority to the agent is protected by law.

Furthermore, the interest of the third party in the transaction concluded by the false agent is

also protected even if neither actual nor apparent authority of the agent can be established. It is a

generally recognised principle that the unauthorised agent is liable for damages to the third party if

the third party neither knew nor ought to have known of the agent’s lack of authority. The details of

this liability, however, vary to some degree.

On the one hand, there are legal systems where the fact that the agent himself was unaware

of his lack of authority is wholly irrelevant for the extent of his liability to the third party. This is the

case, for example, in Dutch law (art. 3:70 BW; HR 28 March 1997, NJ 1997, no. 454 (Wisman v.

Trijber)56 and in the Common Law (Yonge v. Toynbee [1910] KB 215; Bowstead & Reynolds on

Agency, (London, 2006), p. 538; Restatement (Third) of Agency § 6.10), where the liability of the

false agent is viewed as a consequence of the non-performance on his part of the obligation to

warrant, vis-à-vis the third party, the existence of authority. Hence, in these legal systems the third

party is entitled to require performance of the contract by the unauthorised agent himself or payment

of full damage suffered by the third party as a result of the agent’s failure to perform (including the

so-called expectation or positive interest). The American Restatement (Third) of Agency, example,

contains the following explicit provision to this effect:


§ 6.10 Agent’s Implied Warranty of Authority:

56 On the Dutch approach to the agent’s liability in case of the lack of authorisation in more detail, see D. Busch et al. (eds), The Principles of European Contract Law and Dutch law: a Commentary, (The Hague [etc.], 2002), p. 154 f.

A person who purports to make a contract, representation, or conveyance to or with a third party on

behalf of another person, lacking power to bind that person, gives an implied warranty of authority

to the third party and is subject to liability to the third party for damages for loss caused by breach of

that warranty, including loss of the benefit expected from performance by the principal, unless

(1) the principal or purported principal ratifies the act as stated in § 4.01; or

(2) the person who purports to make the contract, representation, or conveyance gives notice to

the third party that no warranty of authority is given; or

(3) the third party knows that the person who purports to make the contract, representation, or

conveyance acts without actual authority.

A clear illustration of such an approach is provided by the decision of the English Court of Appeal

in Yonge v. Toynbee. In this case, a solicitor (the agent) has been conducting litigation against the

third party on behalf of his client (the principal) who became insane. After this had happened but

before the agent had heard of it he took further steps in the action. The question before the Court of

Appeal was whether the third party could recover from the agent the costs incurred by him as a

result of the agent having continued the litigation after his authority to do so had come to an end

because of his client’s incapacity. Buckley LJ answered this question in the affirmative providing

the following reasoning:

Court of Appeal

Yonge v. Toynbee57

Buckley LJ: […] I can see no distinction in principle between the case where the agent never had

authority and the case where the agent originally had authority, but that authority has ceased without

his knowledge or means of knowledge. In the latter case as much as in the former the proposition, I

think, is true that without any mala fides he has at the moment of acting represented that he had an

authority, whether there was fraud or not. In Collen v. Wright (1857) 8 E. & B. 647 Willes J. in

giving judgment of the Court uses the following language: “I am of opinion that a person who

induces another to contract with him, as the agent of a third party, is answerable to the person who

so contracts for any damages which he may sustain by reason of the assertion of authority being

untrue … The fact that the professed agent honestly thinks that he has authority affects the moral

57 [1910] KB 215.

character of his act; but his moral innocence, so far as the person whom he has induced to contract is

concerned, in no way aids such person or alleviates the inconvenience and damage which he

sustains. The obligation arising in such a case is well expressed by saying that a person professing to

contract as agent for another, impliedly, if not expressly, undertakes to or promises the person who

enters into such a contract, upon the faith of the professed agent being duly authorised, that the

authority which he professes to have does in point of fact exist.” This language is equally applicable

to each of the two classes of cases to which I have referred […]. The question is not as to his

honesty or bona fides. His liability arises from an implied undertaking or promise made by him that

the authority which he professes to have does in point of fact exist. I can see no difference of

principle between the case in which the authority never existed at all and the case in which the

authority once existed and has ceased to exist […]

The same strict rule has been adopted in the PICC (art. 2.2.6), the PECL (art. 3:204 (2) and the

Geneva Convention on Agency (art. 16) the wording of which is almost identical. Article 2.2.6 of

the PICC, for example, reads as follows:

PICC

Article 2.2.6 Liability of agent acting without or exceeding its authority:

(1) An agent that acts without authority or exceeds its authority is, failing ratification by the

principal, liable for damages that will place the third party in the same position as if the

agent had acted with authority and not exceeded its authority.

(2) However, the agent is not liable if the third party knew or ought to have known that the agent

had no authority or was exceeding its authority.

Article 2.2.6 (1) of the PICC, by stating that the unauthorised agent is liable for such compensation

that will place the third party in the same position as it would have been in if the agent had acted

with authority, makes it clear that the liability of the unauthorised agent is not limited to the so-

called reliance or negative interest, but extends to the expectation or positive interest; the third party

may therefore recover the profit that would have resulted if the contract concluded with the

unauthorised agent had been a valid one.58 The commentary to the article in question provides the

following example of the practical implications of this provision:

Agent A, without being authorised by principal B, enters into a contract with third party C for the

sale of a cargo of oil belonging to B. Failing B’s ratification of the contract, C may recover from A

the difference between the contract price and the current market price.

On the other hand, there are legal systems where the liability of the unauthorised agent is considered

to be a kind of precontractual liability (culpa in contrahendo) on account of the agent’s failure to

reveal to the third party his lack of authority. Thus, for example, according to § 179 (2) of the

German Civil Code, the agent is liable only for the third party’s reliance interest if he honestly

believed that he was duly authorised. In some other Civil Law countries, the damages the third party

may recover from the unauthorised agent are limited to reliance interest even if the agent did not act

in good faith honestly believing in his authority. In Austria, for example, in civil law matters the

damages are limited to the reliance interest (OGH 19 November 1875, JBl. 1978, 32, 35), and in

Italy, in case the agent is held liable for violation of his precontractual obligations, the third party

may only recover his reliance interest (art. 1398 CC; Cass. 20 February 1987, no. 1817).59 This

implies that the third party may only seek from the agent reimbursement of the expenses incurred

during the negotiations or damages for lost opportunities in concluding the same type of transaction

under the same or more advantageous conditions. Such an approach, however, gives little protection

to third parties, in particular, in international trade where the contracts involved often refer to goods

or services of considerable value and third parties may often be unaware of the agent’s lack of

authority. In addition, it would not be easy for the third party to prove that it has suffered damages

for lost opportunities. The former approach, therefore, adopted inter alia in the Common Law and

under the international instruments, better reflects the needs of international trade practice in that it

does not limit the agent’s liability to the third party’s reliance interest.

3.4.4.2 Third party protection in the case of ratification by principal

Ratification produces the same effects as authorisation, i.e. the principal and the third party are

bound to each other as from the moment the agent had acted (see section 3.2.3.4 above). The

58 Article 2.2.6 PICC, Comment 1.59 O. Lando, H. Beale (eds), Principles of European Contract Law, (The Hague [etc.], 2000), p. 208.

possibility of subsequent ratification of the agent’s unauthorised acts by the principal may, however,

come as a surprise to the third party. In the first place, the third party may not necessarily know that

the unauthorised agent in reality intended to act on behalf of the principal. This fact, however, may

be of importance to the third party because, in the case of ratification, the third party will be bound

not to the agent, but to the principal. May a principal ratify the contract concluded by the

unauthorised agent if the third party neither knew nor ought to have known that the agent in fact

intended to act on behalf of the principal? In the Civil Law systems, which start from the distinction

between the direct and indirect representation, it follows from the wording of the code provisions

that ratification by a principal is possible only where the agent’s (unauthorised) statements were

reasonably understood by the third party as being made in the name of a principal. In the Common

Law, however, the distinction between the agent acting in the name of a principal and in one’s own

name is not drawn. Hence, as has been shown in section 3.4.3 above, in the Common Law systems

the third party, which concluded the contract with the agent having no reason to assume that he was

in fact dealing with the principal, may in principle find himself being sued by the undisclosed

principal. Is the same also true in case the agent was not only undisclosed but also unauthorised? In

Keighley, Maxstead & Co. v. Durant, the House of Lords answered this question in the negative. In

this case, a certain Roberts, a corn merchant in Wakefield (the agent) bought corn from Durant, a

corn merchant in London (the third party) at a price above that at which he had been authorised to

buy by Keighley, Maxstead & Co. (the principal). The agent intended to buy for the principal, but

did not disclose this fact to the third party. The principal later purported to ratify the contract, but

then refused to accept delivery. The third party sued the principal for damages. The Court of Appeal

held for the third party on the ground that the principal’s ratification was valid. This judgment,

however, was overruled by the House of Lords. Lord Lindley provided the following explanation to

his decision:

House of Lords

Keighley, Maxstead & Co. v. Durant60

Lord Lindley: […] It is not necessary to write a treatise on the doctrine of ratification in order to

dispose of this case. Historically that doctrine is no doubt derived from Roman law; but it has been

extended and developed in this country conformably to our own legal principles and to meet our

own commercial necessities; and it is to our decisions rather than to the Digest and commentaries

60 [1901] AC 240.

upon it that English Courts must look for guidance. It is well known that in matters of contract we

pay far less attention judicially to unexpressed intentions than is paid to them in other countries

which have followed the Roman law more closely than we have: see Byrne v. Van Tienhoven (1880)

5 C.P.D. 344 […].

It was strongly contended that there was no reason why the doctrine of ratification should

not apply to undisclosed principals in general, and that no one could be injured by it if it were so

applied. I am not convinced of this. But in this case there is no evidence in existence that, at the time

when Roberts made his contract, he was in fact acting, as distinguished from intending to act, for the

defendants as possible principals, and the decision appealed from, if affirmed, would introduce a

very dangerous doctrine. It would enable one person to make a contract between two others by

creating a principal and saying what his own undisclosed intentions were, and these could not be

tested.

Judgments to the same effect were also delivered by other Law Lords. It follows from the foregoing

that both the Civil Law and Common Law systems share the view that the principal may not acquire

rights and liabilities resulting from the contract concluded by the unauthorised agent by way of a

ratification if the third party neither knew nor ought to have known that the agent in reality intended

to act for the account of the principal.

Another question which arises in the present context is whether the third party may refuse

to ratify the contract concluded by the unauthorised agent. In particular, what if the third party either

knew or ought to have known that he was dealing with the agent but neither knew nor ought to have

known of the agent’s lack of authority to enter into contracts for the account of the principal? The

answers to these questions differ in national laws and international instruments. Compare, for

example, the following provisions:


Article 3:69:

[…]

(3) Ratification has no effect, if at the time it is done, the third party has already let it be known

that he considers the act to be invalid for want of authority, unless the third party understood

or under the circumstances ought to have understood at the time of his acting, that no

sufficient authority has been granted.

(4) A directly interested person can determine a reasonable period for ratification by the person

in whose name the act has been performed. He does not have to accept a partial or

conditional ratification.


§ 4.05 Timing of Ratification:

A ratification of a transaction is not effective unless it precedes the occurrence of circumstances that

would cause the ratification to have adverse and inequitable effects on the rights of third parties.

These circumstances include:

(1) any manifestation of intention to withdraw from the transaction made by the third party;

(2) any material change in circumstances that would make it inequitable to bind the third party,

unless the third party chooses to be bound; and

(3) a specific time that determines whether a third party is deprived or subjected to a liability.

PICC

Article 2.2.9 Ratification:

[…]

(2) The third party may by notice to the principal specify a reasonable period of time for

ratification. If the principal does not ratify within that period of time it can no longer do so.

(3) If, at the time of the agent’s act, the third party neither knew nor ought to have known of the

lack of authority, it may, at any time before ratification, by notice to the principal indicate its

refusal to become bound by a ratification.


Article 15:

[…]

(2) Where, at the time of the agent’s act, the third party neither knew nor ought to have known

of

the lack of authority, he shall not be liable to the principal if, at any time before ratification,

he

gives notice of his refusal to become bound by a ratification. Where the principal ratifies but

does not do so within a reasonable time, the third party may refuse to be bound by the

ratification if he promptly notifies the principal.

(3) Where, however, the third party knew or ought to have known the lack of authority of the

agent, the third party may not refuse to become bound by a ratification before the expiration

of any time agreed for ratification or, failing agreement, such reasonable time as the third

party may specify.

(4) The third party may refuse to accept a partial ratification.

All these provisions allow the third party, at least in certain circumstances, to avoid being bound by

a ratification and thus to withdraw from the transaction concluded by the unauthorised agent. The

circumstances in which this is possible, however, differ. The broadest protection to the third party is

granted by the American Restatement (Third) on Agency which enables the third party to withdraw

from the transaction made by the unauthorised agent at any time before ratification. The Dutch Civil

Code also grants such a possibility except in a situation when the third party knew or ought to have

known that the agent had no authority. In fact, the solution allowing the third party who neither

knew nor ought to have known of the agent’s lack of authority, prior to ratification is also the

solution prevailing among other Civil Law systems.61 The Geneva Convention on Agency provides a

comparable solution, but in much more elaborated terms. Under the Convention express distinction

is made between the case where the third party, when contracting with an unauthorised agent, was

aware of the agent’s lack of authority and the case where the third party was unaware of the agent’s

lack of authority. If aware, the third party may object to ratification by the principal only after the

expiration of the time period agreed upon for ratification or, failing such an agreement, after a

reasonable period of time unilaterally specified by it. If unaware, the third party may not only

withdraw from the transaction made by the unauthorised agent at any time prior to ratification, but

may also refuse to be bound by ratification which has not been made within a reasonable time.

61 Compare H. Kötz, European Contract Law, (Oxford, 1997), p. 234.

Finally, the PICC contain the rule, which, in a way, can be considered to be a middle solution

between the approach adopted by the American Restatement (Third) on Agency, on the one hand,

and the approach followed in Dutch Law and under the Geneva Convention on Agency, on the

other, in cases where the third party knew that he was dealing with an unauthorised agent.

According to the PICC, the third party, irrespective of whether or not he knew that he was dealing

with a false agent, may set a reasonable time for ratification by the principal. According to the

commentary to Article 2.2.9 of the PICC, this rule is intended to balance the principal’s interest in

ratifying at any time and the third party’s interest in not being left in doubt indefinitely as to the

ultimate fate of the contract concluded by the unauthorised agent. In addition, similar to the Dutch

Civil Code and the Geneva Convention on Agency, the PICC also give the third party who was

unaware that he was dealing with a false agent a right to withdraw from the contract prior to

ratification.

By contrast, the PECL do not grant the third party a right to withdraw from the transaction

concluded by the unauthorised agent at all. The third party may therefore not withdraw from the

contract concluded by the false agent prior to ratification even if the third party neither knew nor

ought to have known of the agent’s lack of authorisation. The only provision on third party rights

with respect to ratification is Article 3:308 which reads as follows:

PECL

Article 3:208 Third Party’s Right with Respect to Confirmation of Authority:

Where statements or conduct by the principal gave the third party reason to believe that an act

performed by the agent was authorised but the third party is in doubt about the authorisation, it may

send a written confirmation to the principal or request ratification from it. If the principal does not

object or answer the request without delay, the agent’s act is treated as having been authorised.

In this way, the PECL grant the most limited protection to the third party in dealings with the

unauthorised agent.

3.4.4.3 Third party protection in the case of the agent’s non-performance or bankruptcy

The issue of the third party protection in the case of the agent’s non-performance or bankruptcy

hardly arises in the Common Law where, as has been discussed in section 3.4.2, the third party has

an action of his own against the principal regardless of whether the agent has not performed or

became bankrupt, unless exceptionally it was agreed between the third party and the agent that only

the agent should be liable. In the Common law legal systems the third party may therefore proceed

even against the undisclosed principal. This is justified on the ground that since the principal chose

the agent to represent him he must bear the risk of the agent’s default. Similarly, the issue of the

third party protection in the case of the agent’s non-performance or bankruptcy does not arise in the

Civil Law countries and the PECL in the case of direct representation, and under the Geneva

Convention and the PICC in the case of disclosed agency, where, as has been shown in sections

3.4.1 and 3.4.3, a direct contractual relationship arises between the third party and the principal and

the agent falls out. May a third party, however, directly sue the principal if the agent has not

performed or became bankrupt in the case of indirect representation or undisclosed agency where a

direct contractual relationship between the third party and the principal simply does not arise?

The answer to this question differs from country to country as for the Civil Law it is much

harder to accept the view that the third party should be able to sue a principal of whom he was

unaware when the contract was concluded and/or where the agent has acted in his own name. In

Denmark and Sweden, for example, the third party may generally not proceed against the

principal.62 These legal systems clearly take the view that if a person is wrong about the credit-

worthiness of the person he deals with he must bear this risk himself. By contrast, the third party

may exercise the agent’s rights against the principal (‘actio contraria’) in the case of the agent’s

non-performance or bankruptcy under Dutch law:


Article 7:421:

1. If a mandatary who has entered into a contract with a third person in his own name,

does not perform his obligations with respect to the third party or becomes bankrupt,

the third party is entitled, after a written notification to the mandatary and the

62 O. Lando & H. Beale (eds), Principles of European Contract Law, (The Hague [etc.], 2000), p. 225.

mandator, to exercise against the mandator those rights resulting from the contract, to

the extent that the mandator is correspondingly obliged towards the mandatary at the

time of notification.

2. In the cases mentioned in paragraph (1) of this provision, the mandatary is on request

obliged to communicate the name of the mandator to the third party.

In other legal systems, no general provisions granting the third party the right to sue the principal in

the case of the agent’s non-performance or bankruptcy can be found. In some countries, however, at

least in certain cases the same result may be reached through a different path. For example, in

French law if the third party acquired knowledge of the fact that the agent with whom he has

concluded the contract was acting on behalf of a principal, he may bring a declaratory action for a

judicial statement of simulation (action en declaration de simulation); on the strength of such a

judicial decision, the third party has the choice either to rely on the hidden contract and sue the

principal or, alternatively, to sue the agent on the basis of the ‘simulated’ contract.63 The need to sue

the principal will generally arise if the agent does not perform his obligations or becomes bankrupt.

Under Spanish commercial law, the third party may be entitled to sue the principal if a factor, who

under Article 284 of the Commercial Code should act in the name of the principal, did in fact act in

his own name (CCom art. 287).64 In this specific situation, the third party will naturally be entitled to

sue the principal in the case of the agent’s non-performance or bankruptcy. In German law, the third

party may stipulate a Vorausabtretung (a form of the assignment of claims when a claim is

transferred before it arises).65 If the contract between the agent and the third party contains such a

clause, the claim arises directly in the person of the assignee (in casu the third party). If the assignor

(the agent) becomes bankrupt, for example, the assignee (the third party) will not be affected

because the claim is insolvency-proof and does not fall into the bankrupt’s estate. Owing to the

device of Vorausabtretung, the third party may exercise his right of direct action even in cases that

do not involve non-performance or insolvency, though in practice the need to exercise such a right

will generally arise in these very cases. However, an important drawback of this device for the

protection of the third party in cases of undisclosed agency is that Vorausabtretung must be

stipulated in the contract which the third party concluded with the agent. An explanation is simple: if

63 O. Lando & H. Beale (eds), Principles of European Contract Law, (The Hague [etc.], 2000), p. 224 f.64 O. Lando & H. Beale (eds), Principles of European Contract Law, (The Hague [etc.], 2000), p. 224.65 On this in more detail, see D. Busch, Indirect Representation in European Contract Law, (The Hague, 2005), p. 97 ff., in particular, at p. 108.

the third party does not know that he in fact is dealing with the agent he is highly unlikely to be

extra alert so as to include such a clause in the contract.

No consensus on the issue of the third party rights against the principal in those cases

where no direct contractual relationship arises between the third party and the principal can be found

in the international instruments either. The most limited protection is granted to the third party by

the PICC, where in case of undisclosed agency the third party may sue the principal only where in

contracting with the agent the third party was led to believe that he was dealing with the owner of a

business but later discovers that he had in fact being dealing with the owner’s agent (art. 2.2.3 (2)).

According to the Commentary to Article 2.2.3 (2), this may be the case, for example, in the

following situation:

Manufacturer A, after having transferred its assets to a newly formed company X, continues to

contract in its own name without disclosing to supplier B that it is in fact acting only as the

Managing Director of X. Upon discovery of the existence of X, B has a right also against that

company.

By contrast, the Geneva Convention on Agency goes much further and allows the third party to sue

the undisclosed principal in all cases of the agent’s failure to perform unless the parties have agreed

otherwise:


Article 13:

(1) Where the agent acts on behalf of a principal within the scope of his authority, his acts shall bind

only the agent and the third party if:

(a) the third party neither knew nor ought to have known that the agent was acting as an agent, or

(b) it follows from the circumstances of the case, for example by a reference to a contract of

commission, that the agent undertakes to bind himself only.

(2) Nevertheless:

(a) […]

(b) where the agent fails to fulfil or is not in a position to fulfil his obligations to the third party, the

third party may exercise against the principal the rights which the third party has against the agent,

subject to any defences which the agent may set up against the third party and which the principal

may set up against the agent.

(3) The rights under paragraph 2 may be exercised only if notice of intention to exercise them is

given to the agent and the third party or principal, as the case may be. As soon as the third party or

principal has received such notice, he may no longer free himself from his obligations by dealing

with the agent.

(4) Where the agent fails to fulfil or is not in a position to fulfil his obligations to the third party

because of the principal's failure of performance, the agent shall communicate the name of the

principal to the third party.

(5) […]

(6) […]

(7) An agent may, in accordance with the express or implied instructions of the principal, agree with

the third party to derogate from or vary the effect of paragraph 2.

Similarly, in the case of indirect representation the PECL grant the third party protection if the agent

does not perform his obligations to the third party or becomes bankrupt:

PECL

Article 3:303 Intermediary’s Insolvency or Fundamental Non-performance to Third Party:

If the intermediary becomes insolvent, or if it commits a fundamental non-performance towards the

third party, or if prior to the time for performance it is clear that there will be a fundamental non-

performance:

(a) on the third party’s demand, the intermediary shall communicate the name and address of the

principal to the third party; and

(b) the third party may exercise against the principal the rights which the third party has against

the intermediary, 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.

It should be borne in mind, however, that even in those legal systems and international instruments

which allow actio contraria in the case of the agent’s non-performance and/or bankruptcy, the

provisions to this effect are not mandatory. The third party and the agent may therefore exclude their

application by contract. The possibility of contractual exclusion of actio contraria is explicitly

mentioned only in Article 13 (7) of the Geneva Convention. In Dutch law and the PECL, for

example, it follows from the general principles of contract law that, since it is the rights of the third

party which are at stake, these may be excluded in the contract between the agent and the third

party.66 The possibility of contractual exclusion of direct actions by the third party was also

explicitly acknowledged in English law in the Siu Yin Kwan v. Eastern Insurance Co. Ltd.67 (see

section 3.4.2 above). In contrast to Dutch and English law, as well as the PECL, under the Geneva

Convention on Agency, exclusion of the actio contraria in the contract between the third party and

the intermediary is possible only if the principal instructed the agent to this effect (art. 13 (2)(b) in

conjunction with art. 13 (7)). In practice, however, it is hard to imagine that the principal would

object to the exclusion of the third party right to direct action. Moreover, even if this occurs, it is up

to the third party to waive this right in the contract if he so wishes, for this right exists solely in the

interests of the third party.68

3.4.4.4 Third party protection in the case of termination of the agent’s authority by principal

Most legal systems grant some protection to the third party who is unaware of the termination of the

agent’s actual authority. The authority is normally deemed to subsist until the third party knows or

ought to know that the authority has been terminated (e.g. Germany: BGB § 170-173; the

66 See. for example, A. Hartkamp, ‘Indirect Representation According to the Principles of European Contract Law, the Unidroit Agency Convention and the Dutch Civil Code’, in: J. Basedow et al. (eds), Festschrift für Ulrich Drobnig zum siebzigsten Geburtstag, (Tübingen, 1998), p. 25, at p. 54; D. Busch, Indirect Representation in European Contract Law, (The Hague, 2005), p. 273.67 [1994] 2 A.C. 199, 207.68 Compare, D. Busch, Indirect Representation in European Contract Law, (The Hague, 2005), p. 274. For other issues concerning contractual exclusion of actio contraria, see ibid., p. 273 ff.

Netherlands: BW art. 3:76 (1); France, Belgium and Luxembourg: CC arts. 2005-2006, 2008-2009;

Denmark, Sweden, Finland: Nordic Contract Acts § 12 ss.; England: Drew v. Nunn (1879) 4 Q.B.D.

661). The agent’s actual authority, whether express or implied authority, although terminated for

one reason or other, remains extant vis-à-vis the third party as an apparent authority. An explicit

provision to this effect is included in the American Restatement (Third) of Agency:


§ 3.11 Termination of Apparent Authority

(1) The termination of actual authority does not by itself end any apparent authority held by an

agent.

(2) Apparent authority ends when it is no longer reasonable for the third party with whom an

agent deals to believe that the agent continues to act with actual authority.

Provisions aimed to protect the third party in the case of termination of the agent’s actual

authority are also contained in the PICC, the PECL and the Geneva Convention on Agency:

PICC

Article 2.2.10 Termination of authority:

(1) Termination of authority is not effective in relation to the third party unless the third party knew

or ought to have known of it.

PECL

Article 3:209 Duration of Authority:

(1) An agent’s authority continues until the third party knows or ought to have known that:

(a) the agent’s authority has been brought to an end by the principal, the agent, or both; or

(b) the acts for which the authority had been granted have been completed, or the time for which

it had been granted has expired; or

(c) the agent has become insolvent or, where a natural person, has died or become incapacitated;

or

(d) the principal has become insolvent.

(2) The third party is considered to know that the agent’s authority has been brought to an end

under paragraph (1)(a) above if this has been communicated or publicised in the same

manner in which the authority was originally communicated or publicised.


Article 19:

The termination of the authority shall not affect the third party unless he knew or ought to have

known of the termination or the facts which caused it.

Although the approaches taken by the PICC, the PECL and the Geneva Convention on Agency with

respect to termination are not entirely the same, the three instruments agree on the basic principle

according to which, whatever the grounds for termination of the agent’s authority, in relation to the

third party termination is not effective unless the third party knew or ought to have known of it.69

3.4.4.5 Third party protection against the undisclosed principal

The third party enjoys the highest degree of protection against the actions by the undisclosed

principal under the PICC where, as has already been discussed in section 3.4.3 above, the possibility

of such actions is excluded altogether (art. 2.2.4). Protection of the third party is also the starting

point under the Geneva Convention on Agency, the PECL and in the Civil Law systems, which

allow the principal to sue the third party only if the agency is disclosed (see sections 3.4.1 and 3.4.3

above). However, in some cases this protection may by way of exception from the general rule be

denied.

69 For the comparison of the provisions of the PICC and PECL on termination, see M.J. Bonell, Chapter 21 ‘Agency’, in: A. Hartkamp et al. (eds), Towards a European Civil Code, (Nijmegen, 2004), p. 381, at p. 395 ff.

Under the Geneva Convention on Agency, the right of direct action against the third party

is granted to the undisclosed principal in the case of the agent’s failure or being not in a position to

fulfil his obligations (art. 13 (2)). This right is subject to two exceptions which are explicitly

mentioned in the Convention. Firstly, it may not be exercised if the third party, had he known the

principal’s identity, would not have entered into the contract (art. 13 (6)). Secondly, an agent may,

in accordance with the express or implied instructions of the principal, agree with the third party to

exclude the principal’s right of direct actions in the case of the agent’s failure or inability to perform

(art. 13 (7)).

Under the PECL and in some Civil Law legal systems the principal, whether disclosed or

not, may sue the third party not only in the case of the agent’s non-performance but also in the case

of the agent’s bankruptcy (see section 3.4.5.1 below). Although the exceptions from this rule are not

mentioned in the PECL, for example, it is arguable that they can be derived from its more general

provisions.70 In the first place, it follows from the principle of freedom of contract, which is

embodied in Article 1:102 of the PECL, that the third party and the agent should be able to exclude

the possibility of direct actions by the undisclosed principal. Secondly, the good faith and fair

dealing in the sense of Article 1:201 of the PECL may provide a basis for denying the undisclosed

principal the right to sue the third party where the principal knows or ought to know at the time of

the contract conclusion that the third party would not have dealt with him. Similarly, the good faith

and fair dealing may preclude the undisclosed principal to sue the third party where the rights of the

agent against the third party are essentially personal. Thirdly, the undisclosed principal may also be

denied the right to sue the third party where the principal knows or ought to have known at the time

of the contract conclusion that the third party wished to contract only with the agent. In this case the

third party may invoke Article 4:103 which enables him to avoid the contract or use it as a defence

against intervention by the undisclosed principal where he has made a mistake of fact or law. Where

the third party thinks that he is dealing with one party, while in fact this party turns out to be the

agent for somebody else, the third party can be said to be in error as to a ‘fact’ in the sense of Article

4:103) (1) of the PECL. Moreover, where the agent 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, the third party may avoid a contract for mistake on the basis of Article 4:103 (1)(a)(ii) of

the PECL, for it is contrary to reasonable standards of fair dealing to leave the mistaken party in

error. In addition, the undisclosed principal may also be deprived of his right of direct action against

70 Compare D. Busch, ‘Indirect Representation and the Lando Principles: an Analysis of Some Problem Area from the Perspective of English Law’, European Review of Private Law 7 (1999), p. 319 (also published on Internet: Electronic Journal of Comparative Law, vol. 2.3, December 1998), section 3.2.5.

the third party in the case of the agent’s non-performance or bankruptcy if the third party has been

fraudulently led to conclude the contract by the intermediary’s or any other person’s fraudulent

misrepresentation or fraudulent non-disclosure of any circumstances which in accordance with good

faith and fair dealing should have been disclosed. This provision may in particular be invoked by the

third party if he asked the agent about his true capacity and the latter lied about it concealing the fact

of acting for the undisclosed principal. It can be argued that similar defences may also be invoked

by the third party in those Civil Law systems which by way of exception from the general rule on

indirect representation do allow the undisclosed principal to sue the third party in the case of the

agent’s non-performance and/or bankruptcy.

Whereas the general rule in the Civil Law countries as well as under the Geneva

Convention on Agency, the PICC and the PECL is that a direct contractual relationship between the

principal and the third party arises only if the agency is disclosed, the starting point under the

Common Law is entirely different. The undisclosed principal doctrine enables the principal to sue

the third party without any conditions. As a consequence, the third party may find himself being

sued by the principal even if at the time of concluding the contact with the agent he neither knew nor

ought to have known that he was in fact dealing with the principal. The Common Law, however,

recognises that unconditional grant of the right of direct action against the third party to the

undisclosed principal may in practice lead to unfair results and limits this right in several respects.

Among these restrictions aimed to protect the third party in the case of undisclosed agency one

should mention the following:71

- the express or implied terms of the contract.72 This restriction on the principal’s right of direct

action against the third party is the one which is also accepted under all the international instruments

in questions as well as in the Civil Law legal systems. Where the terms of the contract expressly

exclude the principal’s right to sue, there can be no intervention by the undisclosed principal. The

contract may also exclude the principal’s right to direct action by implication. As Busch explains:

D. Busch, Indirect Representation and the Lando Principles: an Analysis of Some Problem Area

from the Perspective of English Law73

71 For a detailed overview of the exceptions from the undisclosed principal doctrine, see D. Busch, Indirect Representation in European Contract Law, (The Hague, 2005), p. 158 ff. 72 Siu Yin Kwan v. Eastern Insurance Co. Ltd. [1994] 2 A.C. 199, 207; United Kingdom Mutual Steamship Assurance Assn. v. Nevill (1887) 19 Q.B.D. 110; Rayner (Mincing Lane) Ltd. v. Department of Trade and Industry [1990] 2 A.C. 418, 516.

This implication is sometimes derived from the interpretation of words descriptive of the agent

himself, and of the contract as a whole, that he alone answers the description in question. It appears

from the cases that where the agent is described as being the ‘owner’ or ‘proprietor’ the implied

exclusion exception may probably be raised, whereas e.g. the words ‘tenant’ or ‘charterer’ 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’.

- personal rights and duties. Under English law, an undisclosed principal may not intervene ‘upon a

contract of a personal character’.74 According to Busch:

D. Busch, Indirect Representation in European Contract Law75

From a civil-law perspective, this proposition is formulated rather imprecisely. A civil lawyer

(unlike a common lawyer) would perhaps be more inclined to divide contract into obligations and

then to make a further distinction between the active and the passive side of obligations. A civil

lawyer would therefore be much more likely to approach the present problem as follows. The

undisclosed principal cannot sue the third party directly if the rights of the agent against the third

party are of a strictly personal character. Such an exception does not exist in the converse situation.

Naturally, if the rights of the third party against the agent are strictly personal, assignment is

excluded. However, it does not necessarily follow from this that it would be impossible to exercise

these strictly personal rights against the principal, since a strictly personal right of the third party

need not necessarily correspond to a strictly personal duty of the agent.

The undisclosed principal may accordingly not sue the third party directly if the rights of the agent

against the third party are of a strictly personal character.

73 European Review of Private Law 7 (1999), p. 319 (also published on Internet: Electronic Journal of Comparative Law, vol. 2.3, December 1998), section 3.2.5.1.74 R. Powell, The Law of Agency, (London, 1961), p. 165.75 (The Hague, 2005), p. 159.

- personality of the principal or agent. An undisclosed principal may not be entitled to sue the third

party directly if the principal knows or should have known at the time of the conclusion of the

contract by the agent that the third party would not have contracted with him directly. Support for

the acceptance of this exception in English law is provided by the judgment in Said v. Butt. In this

case, the plaintiff (the principal) was minded to attend the first night of a play. Knowing that the

management of the theatre (the third party) were ill-disposed towards him because of his previous

criticisms of the conduct of the theatre and would refuse to sell a ticket to him, the plaintiff arranged

for an acquaintance (the agent), Mr Pollock, to buy a ticket for him, without disclosing that he was

acting for the plaintiff. This did the plaintiff no good, since when the plaintiff arrived at the theatre

to attend the first night of the play, the manager of the theatre refused to allow him to his seat. The

plaintiff sued the manager on the ground that he was entitled as undisclosed principal to demand

admission on the basis of the contract concluded by Mr Pollock as his agent. The action was,

however, dismissed. Justice McCardie provided the following reasoning for his judgment:

King’s Bench Division

Said v. Butt76

McCardie J: […] A first night at the Palace Theatre is, as with other theatres, an event of great

importance. The result of a first night may make or mar a play. If the play be good, then word of its

success may be spread, not only by the critics, but by the members of the audience. The nature and

social position and influence of the audience are of obvious importance. First nights have become to

a large extent a species of private entertainment given by the theatrical proprietors and management

to their friends and acquaintances, and to influential persons, whether critics or otherwise. The

boxes, stalls and dress circle are regarded as parts of the theatre which are subject to special

allocation by the management. Many tickets for those parts may be given away. The remaining

tickets are usually sold by favour only. A first night, therefore, is a special event, with special

characteristics. As the plaintiff himself stated in evidence, the management only disposes of first

night tickets for the stalls and dress circle to those whom it selects. I may add that it is scarcely

likely to choose those who are antagonistic to the management; or who have attacked the character

of the theatre officials.

In my opinion the defendant can rightly say, upon the special circumstances of this case,

that no contract existed on 23 December 1919, upon which the plaintiff could have sued the Palace

76 [1920] 3 KB 497.

Theatre. The personal element was here strikingly present. The plaintiff knew that the Palace

Theatre would not contract with him for the sale of a seat for 23 December. They had expressly

refused to do so. He was well aware of their reasons. I hold that by the mere device of utilising the

name and services of Mr Pollock, the plaintiff could not constitute himself a contractor with the

Palace Theatre against their knowledge, and contrary to their express refusal. He is disabled from

asserting that he was the undisclosed principal of Mr Pollock.

Similarly, the undisclosed principal may also be denied the right to sue the third party where the

principal knows or ought to have known at the time of the contract conclusion that the third party

wished to contract only with the agent. Thus, in Greer v. Downs Supply Co.77 the defendant made a

purchase from an agent only because he had a time-barred claim against the agent which he hoped to

be able to set off against the price. In this case, the undisclosed principal, on whose behalf the agent

had contracted, was not allowed to sue.

At the same time, in Dyster v. Randall and Sons,78 a person who had bought land as an

undisclosed principal from an owner who, to his knowledge, would not have dealt with him was

held entitled to claim specific performance from the third party. Such an outcome was justified on

the ground that the agent could in any case have assigned the benefit of the contract to him. It is not

entirely clear therefore how firmly the party who does not wish to do business with a particular party

is protected under English law. It appears, however, that the greater the interests of the third party

will be prejudiced in the case of allowing the undisclosed principal to sue, the more prepared the

English courts will be to dismiss the undisclosed principal’s action.

- misrepresentation. The third party acquires a powerful defence against direct actions by the

undisclosed principal if the agent makes untrue statements about his true capacity. As a rule, under

English law the mere fact that the agent does not indicate that he is acting on behalf of an

undisclosed principal will not constitute misrepresentation. Therefore if the third party wishes to

know whether the agent acts on behalf of the principal, he should explicitly ask the agent whether

this is the case. If the agent denies the fact that he is actually acting for the principal’s account at the

time of concluding the contract with the third party and the third party later find himself sued by the

undisclosed principal, the third party may be able to rescind the contract with the agent on the

ground of misrepresentation. Such a situation occurred, for example, in the case of Archer v. Stone79

77 [1927] 2 KB 28.78 [1926] Ch. 932.79 [1898] 78 L.T. 34.

where Stone (the third party) asked the undisclosed agent (Archer) whether he was acting for Smith.

Although Smith was indeed his undisclosed principal, the agent denied this. In this case, it was held

that the false agent was not entitled to claim specific performance from the third party. In the

literature it is assumed that the outcome of the case would be no different if it was the undisclosed

principal himself who had intervened and demanded specific performance from the third party. As

in the case of rescission on the ground of misrepresentation the contract is considered to have never

existed, the third party may not be sued by the principal thereon.

- deeds and negotiable instruments:

D. Busch, Indirect Representation in European Contract Law80

A contract can be contained in a deed, in other words in a written document the validity of which

depends on the fulfilment of a number of formal requirements. The interpretation of deeds depends

completely on the manner in which they are formulated: ’Deeds depend strictly on their wording.’ It

is therefore hardly surprising that an undisclosed principal (who is not mentioned in the deed)

cannot derive rights from the relevant deed and cannot therefore sue the third party directly.

Conversely, the third party cannot derive rights against the undisclosed principal from the deed.

In addition, the undisclosed principal doctrine does not apply to negotiable instruments

such as bills of exchange, promissory notes and cheques. This is because negotiable instruments

pass from hand to hand, and it is therefore important that the rights and liabilities following from

them should relate only to the persons identified on the document. This precludes intervention by an

undisclosed principal.

It follows from the foregoing that the Common Law, on the one hand, and the Civil Law as well as

the international instruments, on the other, are not far apart concerning the issue of the third party

protection against the undisclosed principal. While the Common Law starting point in accordance

with which the third party may be sued by the undisclosed principal is considerably mitigated as a

consequence of a number of exceptions from this general rule, the Civil Law point of departure

under which the third party may not be sued by the undisclosed principal may substantially be

weakened if a certain legal system or an international instrument grants the principal such a right in

the case of the agent’s non-performance and/or bankruptcy. Granting such a right, however, will

80 (The Hague, 2005), p. 164 f.

normally also be subject to exceptions in the case of undisclosed agency which largely correspond to

those accepted under the Common Law. Accordingly, the end result, i.e. the protection of the

interests of the third party against the actions by the undisclosed principal where the effect is to

severely prejudice the third party, is generally likely to be the same in most legal systems.

3.4.5 Protection of principal

3.4.5.1 Protection of principal in the case of the agent’s non-performance or bankruptcy

In section 3.4.4.3 above, we have already discussed the issue of the third party protection in the case

of the agent’s non-performance and/or bankruptcy. It was mentioned that this issue hardly arises in

the Common Law, where the principal and the third party are in principle directly bound to each

other, regardless of whether or not the agency is disclosed. The same is true in the case of direct

representation in the Civil Law and under the PECL and disclosed agency in the PICC and the

Geneva Convention on Agency, since in both cases a direct contractual relationship arises between

the principal and the third party. It was demonstrated that the most problematic the issue of the third

party protection becomes in those cases where the principal and the third party are not bound to each

other, i.e. indirect representation in the Civil Law countries and the PECL or undisclosed agency

under the PICC and the Geneva Convention on Agency.

The same considerations are equally applicable in the present context where the issue of the

protection of the principal in the case of the agent’s non-performance or bankruptcy is at stake. The

principal enjoys most protection in the Common Law where he has a direct action (‘actio directa’)

against the third party unless the parties have agreed otherwise and subject to the exceptions in the

case of undisclosed agency (see section 3.4.4.5 above). In the Civil Law systems and under the

PECL, the principal is automatically protected in those cases where the agent acts in the name of the

principal and the rules on direct representation accordingly apply. Similarly, under the PICC and the

Geneva Convention on Agency the principal is protected in those cases where the third party knows

or ought to have known that he was dealing with the agent and the rules on disclosed agency

therefore apply. The most interesting, however, is the issue of whether the principal is also protected

against the agent’s non-performance and/or bankruptcy in the case of indirect representation and that

of undisclosed agency.

The answer to this question is not entirely the same everywhere. It is nevertheless clear that

notwithstanding the general rule on indirect representation, many Civil Law countries found ways of

allowing the person indirectly represented to intervene in a contract concluded for his account by the

intermediary, in particular if the latter becomes bankrupt. In this way, these legal systems secure that

debts due from the third party vest not in the creditors of the agent but in the person for whose

account he was acting. An explicit provision granting the principal the right of direct action against

the third party where the agent does not perform or becomes bankrupt is contained, for example, in

the Dutch Civil Code (art. 7:420 (1) BW). In addition, the Dutch Civil Code grants the principal the

right of direct action against the third party where the third party does not perform his obligations to

the agent (7:420 (2) BW).


Article 7:420:

1. If a mandatary who has entered into a contract with a third person in his own name

does not perform his obligations with respect to the mandator or becomes bankrupt,

the mandator is entitled to have those rights of the mandatary with respect to the third

person, which are susceptible of transfer, transferred to him by means of a written

declaration to the third party and the mandator, except to the extent that these rights

belong to the mandatary in his mutual relationship with the mandator.

2. The mandator is similarly entitled in case the third party does not perform his

obligations with respect to the mandatary, unless the latter satisfies the mandator as if

the third party had performed his obligations.

3. In the cases mentioned in paragraph (1) and (2) of this provision, the mandatary is on

request obliged to communicate the name of the third party to the mandator.

Under Belgian and Luxembourg law, the principal may proceed directly against the third party only

in the case of the intermediary’s bankruptcy. Furthermore, he may claim only any outstanding part

of the purchase price of the goods which the agent had sold on the principal’s behalf (Belgium:

Bankruptcy Code of 1997 art. 103 (2); Luxembourg: CCom art. 567 (2)).81 In German law, in the

same way as the third party, the principal may make use of Vorausabtretung (a form of the

assignment of claims when a claim is transferred before it arises) (see section 3.4.4.3 above) in order

81 O. Lando, H. Beale (eds), Principles of European Contract Law, (The Hague [etc.], 2000), p. 222.

to obtain the right of direct action against the third party.82 If the principal and the third party have

arranged for assignment in advance of the claims which the agent will obtain against the third party,

the principal can acquire such a right. Resorting to the device of Vorausabtretung is, however,

unnecessary in so far as this is done to circumvent the risk of the commission agent’s insolvency:

according to § 392 II of the German Commercial Code, even if the claim has not been assigned, it

serves in the relationship between the principal and the commission agent or his creditor(s) as a

claim of the principal.83 This implies, inter alia, that if the commission agent becomes insolvent, the

principal is treated as a secured creditor.

The possibilities for the intervention by the principal in those cases where he cannot obtain

what he is owed by the agent are also provided under the Geneva Convention on Agency (art. 13

(2)) and the PECL (art. 3:302) in cases of undisclosed agency and indirect representation. Both

instruments enable the principal to sue the third party directly if the agent does not perform his

obligations or becomes bankrupt:


Article 13:

(1) Where the agent acts on behalf of a principal within the scope of his authority, his acts shall bind

only the agent and the third party if:

(a) the third party neither knew nor ought to have known that the agent was acting as an agent, or

(b) it follows from the circumstances of the case, for example by a reference to a contract of

commission, that the agent undertakes to bind himself only.

(2) Nevertheless:

(a) where the agent, whether by reason of the third party's failure of performance or for any other

reason, fails to fulfil or is not in a position to fulfil his obligations to the principal, the principal may

exercise against the third party the rights acquired on the principal's behalf by the agent, subject to

any defences which the third party may set up against the agent;

82 On this in more detail, see D. Busch, Indirect Representation in European Contract Law, (The Hague, 2005), p. 97 ff., in particular, at p. 108. 83 On this in more detail, see D. Busch, Indirect Representation in European Contract Law, (The Hague, 2005), p. 100 ff.

(b) […]

(3) The rights under paragraph 2 may be exercised only if notice of intention to exercise them is

given to the agent and the third party or principal, as the case may be. As soon as the third party or

principal has received such notice, he may no longer free himself from his obligations by dealing

with the agent.

(4) […]

(5) Where the third party fails to fulfil his obligations under the contract to the agent, the agent

shall communicate the name of the third party to the principal.

(6) The principal may not exercise against the third party the rights acquired on his behalf by the

agent if it appears from the circumstances of the case that the third party, had he known the

principal's identity, would not have entered into the contract.

(7) An agent may, in accordance with the express or implied instructions of the principal, agree with

the third party to derogate from or vary the effect of paragraph 2.

PECL

Article 3:302 Intermediary’s Insolvency or Fundamental Non-performance to Principal:

If the intermediary becomes insolvent, or if it commits a fundamental non-performance towards the

principal, or if prior to the time for performance it is clear that there will be a fundamental non-

performance:

(a) on the principal’s demand, the intermediary shall communicate the name and address of the

third party to the principal; and

(b) the principal may exercise against the third party the rights acquired on the principal’s behalf

by the intermediary, subject to any defences which the third party may set up against the

intermediary.

By contrast, as has already been mentioned in section 3.4.3 above, under the PICC in cases of

undisclosed agency the principal’s right of direct action against the third party is excluded

altogether. This solution has been justified on the ground that in international commerce it would

often contravene a party’s reasonable expectations if, after entering into a contract with a person it

believed to be a principal, the party was subsequently confronted with another person claiming to be

the principal but whose existence had until then been completely unknown to him.84

In addition, it should be borne in mind that in those legal systems and international

instruments which do grant the principal the right of actio directa, this right is subject to the

limitations. As has been discussed in section 3.4.4.5 above, in particular in the case of undisclosed

agency there are a number of restrictions on the exercise of the right of actio directa aimed to

protect the third party who neither knew nor to have known that he was in fact dealing with the

agent. Some limitations, however, are applicable regardless of whether or not the agency is

disclosed. Thus, for example, it is assumed in Dutch, German and English law that the exercise of

the right of actio directa can be precluded if the nature of the right concerned is such that it should

not be exercised by another person, for example in the case of highly personal rights.85 The same

result can be achieved in the PECL on the basis of good faith and fair dealing (art. 1:201).86

Furthermore, it is generally possible to exclude the actio directa in the contract between the agent

and the third party. The possibility of contractual exclusion of actio directa is explicitly mentioned

only in Article 13 (7) of the Geneva Convention on Agency, where it is made dependent however

upon the instructions of the principal to this effect. In those Civil Law countries which in certain

circumstances grant the principal the right of actio directa and under the PECL, such a possibility

follows from the fundamental principle of freedom of contract (art. 1:102 PECL) and is not subject

to a similar limitation. The possibility of contractual exclusion of direct actions by the third party

without further conditions was also explicitly acknowledged in English law in the Siu Yin Kwan v.

Eastern Insurance Co. Ltd.87 (see section 3.4.2 above).

3.4.5.2 Protection of principal in the case of a conflict of interests

In the triangular situation in which an agent finds himself between principal and third party, the

agent is exposed to often conflicting interests of three persons, i.e. the principal, the third party and

84 Compare Unidroit 1999, Study – Misc. 21, paras. 266-274; Unidroit 2000, Study – Misc. 22, paras. 866-883.85 D. Busch, Indirect Representation in European Contract Law, (The Hague, 2005), p. 265. 86 Compare D. Busch, Indirect Representation in European Contract Law, (The Hague, 2005), p. 265.87 [1994] 2 A.C. 199, 207.

himself. Potential conflict of interests often arises where the agent acts for two principals and where

the agent concludes the contract with himself or with a firm in which he has an interest. In such

situations, the agent may be tempted to pursue his own interests at the expense of that of his

principal. In these circumstances, the principal clearly needs protection. The issue of the conflict of

interests between the principal and the agent in the context of internal relationship has already been

considered in section 3.3.3.4 above. It was shown that the duties of the agent aimed at avoiding the

conflict of interests with the principal are particularly developed in the Common Law where many

of such duties are even of a fiduciary nature. The duties of loyalty have, however, also gradually

been imposed on the agent in the Civil Law countries. It is notable that the Draft PELMC also

contains extensive provisions concerning the conflict of interests. Whereas the content of the agent’s

duties in this respect is determined by the law governing the internal relationship between the

principal and the agent and the agency or mandate contract between the parties, a conflict of interest

may have consequences not only for the internal relationship between the principal and the agent,

but also for the external relationship between the principal and the agent on the one hand, and the

third party on the other. In this section therefore the external aspects of conflicts of interests between

the principal and the agent will be examined from the point of view of the protection of the

principal.

On the one hand, there are legal systems which adopt a rather rigid solution, according to

which, albeit only in specific conflict of interests situation where the agent concludes the contract

with himself, the agent’s acts do not bind the principal at all. Thus, for example, Article 3:68 of the

Dutch Civil Code provides that the agent may only personally act as the principal’s counterparty

where the content of the contract to be entered into on the principal’s behalf is so precisely

determined that conflict between their interests is excluded. Although the legal consequences of

acting in violation of this article are not indicated in this provision, it appears that these are that the

agent has no authority to bind the principal and for this reason the contract does not come into

existence.88 A similar solution is provided in § 181 of the German Civil Code. On the other hand, the

Common Law systems adopt a very flexible approach under which the remedies available, if any,

depend on the circumstances of the case.89 A compromise between these two extremes can be found

in Italy and Portugal, for example, where in the case of a conflict of interests when the agent

88 D. Busch et al. (eds), The Principles of European Contract Law and Dutch law: a Commentary, (The Hague [etc.], 2002), p. 158.89 F.B.M. Reynolds, Bowstead and Reynolds on Agency, (London, 2006), p. 190 ff., in particular, pp. 194-195.

concludes the contract with himself, the principal may avoid the contract (e.g. Italy: CC art. 1394

and art. 1395); Portugal: CC art. 261).90

Contrary to the Geneva Convention on Agency which is silent on the issue of the conflict of

interests, both the PICC and the PECL deal with the case where the agent, when concluding the

contract, acts in a situation of conflict of interests with the principal. Both instruments contain

extensive provisions aimed to strike a balance between the interest of the principal in being

protected against the acts of the agent in a conflict of interests and the interest of the third party in

preserving the contract.

PICC

Article 2.2.7 (Conflict of Interests):

(1) If a contract concluded by an agent involves the agent in a conflict of interests with the

principal of which the third party knew or ought to have known, the principal may avoid the

contract. The right to avoid is subject to Articles 3.12 and 3.14 to 3.17.

(2) However, the principal may not avoid the contract

(a) if the principal had consented to, or knew or ought to have known of, the agent’s

involvement in the conflict of interests; or

(b) if the agent had disclosed the conflict of interests to the principal and the latter had

not objected within a reasonable time.

PECL

Article 3:205 Conflict of Interest:

(1) If a contract concluded by an agent involves the agent in a conflict f interests of which the

third party knew or could not have been unaware, the principal may avoid the contract

according to the provisions of Articles 4:112 to 4:116.

(2) There is presumed to be a conflict of interests where:

(a) the agent also acted as agent for the third party; or

(b) the contract was with itself in its personal capacity.

90 O. Lando, H. Beale (eds), Principles of European Contract Law, (The Hague [etc.], 2000), p. 211.

(3) However, the principal may not avoid the contract:

(a) if it had consented to, or could not have been unaware of, the agent’s so acting; or

(b) If the agent had disclosed the conflict of interests to it and it had not objected within a

reasonable time.

The solution adopted by the PICC and the PECL constitutes a compromise between the two

extremes found in some Civil Law systems on the one hand, and in the Common Law on the other. 91

Both instruments concur in granting the principal the right to avoid the contract concluded by an

agent in a conflict of interests except when the principal has consented to or could not have been

unaware of the agent’s involvement in the conflict of interests, or the agent has disclosed to the

principal the conflict of interests and the latter had not objected within a reasonable time. The only

difference between the PICC and the PECL is that while the former indicate two situations in which

a conflict of interests between the principal and the agent is presumed, i.e. where the agent also acts

as agent for the third party, or where the contract is with himself in his personal capacity, the PICC

do not make mention of any such presumptions.

The Commentary to Article 2.2.7 of the PICC contains the following examples of conflicts

of interests where the principal may avoid the contract:

Solicitor A is requested by foreign client B to purchase on its behalf an apartment in A’s city. A

buys the apartment client C has requested A to sell on its behalf. B may avoid the contract if it can

prove that C knew or ought to have known of A’s conflict of interests. Likewise, C may avoid the

contract if it can prove that B knew or ought to have known of A’s conflict of interests.

Sales agent A, requested by retailer B to purchase certain goods on its behalf, purchases the goods

from company C in which A is a majority shareholder. B may avoid the contract if it can prove that

C knew or ought to have known of A’s conflict of interests.

A, Chief Executive Officer of company B, has authority to appoint the company’s counsel in the

event of a law suit being brought by or against B. A appoints itself as B’s counsel. B may avoid the

contract.

91 Compare M.J. Bonell, Chapter 21 ‘Agency’, in: A. Hartkamp et al. (eds), Towards a European Civil Code, (Nijmegen, 2004), p. 381, at p. 392.

By contrast, a conflict of interests does not arise in the following situation:

Client B instructs bank A to buy on its behalf one thousand shares of company X at the closing price

of day M on the stock exchange of city Y. Even if A sells B the requested shares from out of those it

has in its own portfolio, there can be no conflict of interests because B’s mandate leaves A no

margin for manoeuvre.

3.4.5.3 Protection of principal in the case of Drittschaden

The problem of Drittschaden is a particularly well-known issue in the Civil Law countries in the

case of indirect representation. The problem arises if the third party fails to perform his obligations

and this failure results in damage to the assets of the principal. The principal however cannot sue for

non-performance because in the case of indirect representation he is not a party to the contract, and

the agent cannot sue the third party for compensation as it is no the agent but the principal who

suffers damage.

The issue is exemplified by the following case which reached the Dutch Supreme Court.

Mr Stolte (the third party) sold a 9-year-old Brandenburger gelding for a sum of NLG 7,600

(approximately 3,700 Euros) to Mr Schiphoff who was acting as commission agent for the German

horse dealer Mr Lörsch (the principal). The third party knew that his counterparty was acting as

agent for the principal. He also knew that the horse would be trained by the principal to take part in

competitions and sold the horse to the agent as being suitable for this purpose. The horse was

warranted to be ‘good, honest and well-behaved and free of any vices’. In two weeks, however, the

principal informed his commission agent that the horse was totally unsuitable as a saddle horse: it

was a so-called crib-biter (or, in German, a Krippensetzer), had an incurable subcutaneous back

disease, broken-down haunches and its back was sensitive, as a result of which it was weak on the

rear hand and often lame. The agent claimed that the third party had committed a breach of contract

against him because he had warranted that the horse did not have any hidden defects and therefore

should compensate the agent for the damage that he had suffered. The damage included the purchase

price, commission, costs of veterinary services in the Netherlands, transportation, veterinary

certificates in the Netherlands and Germany, importation in Germany, to name but a few. The third

party refused to compensate them and put forward as a defence, inter alia, that the buyer was not the

agent but the principal, and that the agent could not therefore institute a claim for non-performance.

In addition, the third party also argued that even if it were nonetheless assumed that the agent was

the buyer, he had in any even not suffered any damage.

In its judgment, the Dutch Supreme Court rejected these defences by the third party.92 The

solution chosen by it in this case was later adopted by the Dutch legislator in Article 7:419 of the

new Civil Code:


Article 7:419:

If a mandatary in his own name has concluded a contract with a third party who does not perform

his obligations, the third party is obliged also, within the limits of what otherwise results from the

law relating to the obligation to pay damages, to pay the mandatary damages for loss suffered by the

mandator.

It is evident from this provision that a third party who fails to perform his obligations is bound to

compensate not only the agent for his own damage but also the damage suffered by the principal as

a result of the third party’s failure. Similar results can also be reached in other Civil Law systems.

The German law, for example, also protects the principal in the case of Drittschaden by making an

exception from the basic principal that the creditor can claim from his debtor only damage that he

has suffered himself: in a limited number of cases, among which is indirect representation, a creditor

may claim damages suffered by a third party.93 This is known as Drittschadensersatz (third party

compensation). It is established case law that an intermediary who acts as indirect representative can

claim from his counterparty (the third party) the damage suffered by the principal.94 The principal

himself can claim the damage suffered by him if the principal arranges for the relevant actionable

claim of the agent to be assigned to him.95

The problem of Drittschaden may arise not only in the case of indirect representation in the

Civil Law countries, but also in the case of undisclosed agency in the Common Law. At present,

92 HR 11 March 1977, NJ 1877, 521 (Kribbebijter).93 For more details, see D. Busch, Indirect Representation in European Contract Law, (The Hague, 2005), p. 88 ff.94 See, for example, BGH 26 September 1957, BGHZ 25, 250, in particular at 258; BGH 10 July 1963, BGHZ 40, 91; BGH 4 December 1997, ZIP (1998), 511.95 OLG Celle 4 October 1974, VersR (1975), 838.

however, it is not clear under the English law whether an agent can recover from the third party the

loss suffered by his undisclosed principal.96

The international instruments do not provide a solution to the problem of Drittschaden.

Although under Article 13 of the Geneva Convention on Agency and Article 3:302 of the PECL the

principal can in certain cases exercise the rights of the agent against the third party in the case of

indirect representation and undisclosed agency (see section 3.4.5.1), this does not mean that the

principal becomes a party to the contract and can sue for non-performance in order to obtain

compensation of the damage suffered by him.97

3.4.5.4 Protection of principal in the case of termination of the agent’s authority

Termination of the agent’s authority may adversely affect not only the interests of the third party,

but also that of the principal (or, in the case of the principal’s death or other extinction, the interests

of his successor). Many legal systems contain specific provisions which under certain circumstances

oblige the agent to continue to act in the principal’s interests after the termination of his authority.

Thus, for example, under the Dutch Civil Code, after the principal’s death or incapacitation, the

agent is still authorised to perform those acts that are necessary for the management of a business or

that cannot be postponed without causing prejudice (BW art. 3:73 (1) and (2)). Under the Nordic

Contract Acts, after the principal has become bankrupt or incapacitated, the agent may on strength

of his authority perform such acts that are necessary to protect the principal or his bankrupt estate

against losses, until necessary measures can be taken by the person who has the right to act on the

principal’s behalf under the law. Provisions to a similar effect can also be found in other legal

systems (e.g. France, Belgium and Luxembourg: CCs art. 1991 (2); Italy (CC art. 1728 (1); Portugal

(CC art. 1175)).98

The PICC even go a step further and contain a general provision authorising the agent to act

in the principal’s interests after the termination of his authority should it be necessary to prevent

harm to the principal’s interests:

PICC

Article 2.2.10 Termination of authority:

96 D. Busch, Indirect Representation in European Contract Law, (The Hague, 2005), p. 137, in particular, at p. 139.97 Compare D. Busch, Indirect Representation in European Contract Law, (The Hague, 2005), p. 244. 98 O. Lando, H. Beale (eds), Principles of European Contract Law, (The Hague [etc.], 2000), p. 219.

[…]

(2) Notwithstanding the termination of its authority, an agent remains authorised to perform the acts

that are necessary to prevent harm to the principal’s interests.

Very similar provisions of a general character are also contained in the PECL (art. 3:209 (3)) and the

Geneva Convention on Agency (art. 20).

3.5 Case study

P, an importer in Beijing, instructs his agent A, in Amsterdam, to purchase diamonds from

manufacturer T in Amsterdam. A concludes a contract with T, but does not disclose the fact that he

is acting on behalf of another (P).

a) To whom is T legally bound – to A or to P?

b) Suppose, that A refuses to pay for the diamonds duly delivered by T. T learns about the fact

that A acts on behalf of P. Can T demand the payment for the diamonds from P?

c) If the answer to the question under c) is in the affirmative, can T nevertheless choose to

demand the payment for the diamonds from A?

Please, answer the questions according to the PICC, PECL, English law and your own national law.

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Chapter IV Agency

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