Undisclosed principal
A legal conundrum most relevant in the context of agency orders for securities and derivatives placed with a broker-dealer by an asset manager in bulk on behalf of several clients. Typically the agent will place the order first, and advise the executing broker of the identity of the principals to whom the securities should be allocated later in the day.
The question arises: who is liable for those executed transactions in the mean time? The broker doesn't know who the principal is, so can hardly take up matters with it directly. On the other hand, asset managers will hotly deny any kind of personal liability, appealing to their regulatory status, meagre capitalisation, or sheer importance as a valued client in intimating that this risk ought to be the broker's problem.
So much bunk — all of these reasons.
An undisclosed principal is a principal whose identity the agent has not revealed. A principal you don’t know is a principal you can’t sue.
It is not — or ought not — apply where an agent has neglected to mention the agency relationship altogether. An agent who has failed to reveal he is an agent at all (regardless for whom) — call that fellow an “undisclosed agent” — is, in this commentator’s contrarian opinion, better known as a “principal”. Or a liar. but the law takesa kinder view, about which you can read a lot more here.
Back to a disclosed agency with an undisclosed principal. Where an agent strikes a bargain without revealing its principal’s identity, it puts its counterparty at a disadvantage, since the counterparty does not, and cannot, know against whom it should seek to enforce the bargain. Here the agent cannot escape responsibility if the principal fails.
The common law’s rather practical response is to make the agent de facto personally responsible for performance of the contract on behalf of its undisclosed principal. It is the agent’s problem to sort it out with its own client.
It is unquestionably the general rule of our law that an undisclosed principal, when subsequently discovered, may, at the election of the other party, if exercised within a reasonable time, be held upon all simple non-negotiable contracts made in his behalf by his duly authorized agent, although the contract was originally made with the agent in entire ignorance of the principal.
- Mechem on Agency, 2nd Ed., § 1731
This is correctly described as still being an agency obligation, but an unconditional one: The agent must, unconditionally, perform the contract on behalf of its undisclosed principal and then make its own arrangements with the principal for reimbursement of moneys paid out (or received) on its behalf. The agent’s other remedy is to disclose the principal and invite the agent to take matters up with it directly — but even in this case the counterparty may elect to require the agent to perform the bargain.