If a third person has no knowledge about the fact that the agent is acting for a principal, then both the agency and the principal is “undisclosed.” The agent of an undisclosed principal can be held liable on the contract as the real obligor as s/he contracted in that capacity. Similarly, an undisclosed principal can also be held liable as s/he must also assume its burdens.

The liability of an undisclosed principal and the agent is normally an alternative liability. It means that the third party can only make either the principal or the agent liable and not both of them together. A third party can decide whether to make the principal or the agent responsible only after the discovery of the principal and the opportunity to make an intelligent choice. However, once an election is made by a third party, it is generally irrevocable.

If an agent acts in his/her own name without disclosing the principal this will not preclude the liability of the principal. Note that if there is no proof of an actual agency relationship, there can be no reliance on the doctrine of undisclosed principles. Also, the principal is not liable where the contract provides that an undisclosed principal is not a party to it.

Similarly, an agent will be held liable if s/he fails to disclose the agency and the identity of the principal while making the contract. In such a case, the agent will be subject to all the liabilities created by the contract, in the same way as if the agent were the principal in interest.

Likewise, in order to avoid the personal liability of the agent, disclosure of the principal must normally be made at the time of contract. After the principal is disclosed, the agent will not be liable for subsequently authorized acts between the third person and the principal.

When an agent makes a contract for the principal concealing the fact that s/he is an agent, the principal can claim all the benefits of the contract from the other contracting party, so far as the principal does not cause any injury to the other party. However, a third person will not be liable to an undisclosed principal, if the specific terms of the contract exclude liability to any undisclosed principal or to the particular principal. There is nothing “illegal” or “unethical” about an undisclosed agency…it is done often…so long as fraud and injury to the third party are not caused by the undisclosed agency and the agreement does not prohibit it.

Undisclosed agents are often used to avoid negotiations that would otherwise be biased or tainted. Thus, if I am selling a building to a very rich buyer, I may negotiate a much higher price assuming I can do so. That buyer may use an undisclosed agent until the deal is signed to avoid that type of bias on my part. The way to avoid that danger if you are a third party is to simply put into the agreement the fact that no undisclosed principals are involved.