Third Parties Beware of the Agent Who Does Not Disclose the Identity of the Principal

• Posted on: Jul 29 2016

An agency relationship occurs when a principal gives legal authority to an agent to act on the principal’s behalf when dealing with a third party, and obtains the agent’s consent to be subject to the principal’s control.  See Restatement (Third) of Agency §1.01.

An agency relationship is a fiduciary one, meaning the agent, acting within the scope of his/her authority, has to act in the best interests of the principal. Under such circumstances, the acts and deeds of the agent will bind the principal, making the principal liable for the consequences of the acts that the agent has been authorized to perform.

There is a significant body of law governing the principal-agent relationship, including liability for wrongs committed against third parties.

As a general matter, the liability of an agent for wrongs committed against a third party depends upon a number of factors, including whether the agent discloses the existence of the principal.  The inquiry is often focused on the type of principal that is present in the deal or transaction: (1) a “disclosed” principal; (2) a “partially disclosed” principal; or (3) an “undisclosed” principal.

Disclosed Principal

A disclosed principal is a person whose existence and identity is made known to the third party through words or the performance of an authorized act.  As explained in the Restatement (Third) of Agency, the “third party has notice that the agent is acting for a principal and has notice of the principal’s identity.” Restatement (Third) of Agency § 104(2)(a). Under these circumstances, any contract or agreement executed between the agent and a third party is deemed to be a contract or agreement between the principal and the third party. The agent is not a party to the contract or agreement. Therefore, in the event the contract or agreement is breached in any way by the principal, the agent cannot be held personally liable for any damages incurred by reason of the breach.

Partially Disclosed Principal

A partially disclosed principal or “unidentified principal” is a person whose existence but not identity is made known to the third party through words or the performance of an authorized act. As explained in the Restatement (Third) of Agency, the “third party has notice that the agent is acting for a principal but does not have notice of the principal’s identity.” Restatement (Third) of Agency § 104(2)(c). Under these circumstances, any contract or agreement executed between the agent and a third party is deemed to be a contract or agreement between the agent and the third party unless the parties agree otherwise (i.e., the principal is responsible for performing under the contract or agreement). Without the third party’s consent and agreement that the principal is the contracting party, the agent may be held personally liable for any breach of the contract or agreement.

Undisclosed Principal

An disclosed principal is a person whose existence and identity are not made known to the third party through words or the performance of an authorized act. As explained in the Restatement (Third) of Agency, the “third party has no notice that the agent is acting for a principal.” Restatement (Third) of Agency § 104(2)(b). Under these circumstances, any contract or agreement executed between the agent and a third party is deemed to be a contract or agreement between the agent and the third party.  Thus, the agent may be held personally liable for any breach of the contract or agreement.

Holding the Agent Liable

It goes without saying that an agent does not want to be held liable for the transactions he/she enters on behalf of another person. With this truism in mind, let’s consider the following scenario:

Jane buys a condo that needs renovation.  After two months of research, Jane meets with John, a contractor and home designer.  John tells Jane that he is the owner of XYZ Design and Renovation, maintains an affiliation with ABC Home Designs (a high-end home design company), and can handle the work required to renovate the apartment. Jane tells John that she will think it over and get back to him if she decides to go forward.

A few weeks later, Jane emails John to express her interest in hiring him. Over the next few months, Jane and John exchange emails about designs and construction plans. Thereafter, John sends Jane a contract, which lists all of the improvements to be done and the corresponding cost for supplies and labor.  Jane finds the terms and conditions acceptable and hires John.

Not long after John begins the work, Jane becomes concerned with John’s workmanship and the quality of the supplies that John is using for the renovation.  After paying over $25,000 in parts and labor, Jane fires John and files suit against him for breach of contract.

John denies any liability, arguing that he is not a party to the contract with Jane. John claims that the actual contracting party is Bella Inc. d/b/a XYZ Design and Renovation and that XYZ Design and Renovation is a trade name for Bella Inc.

Can Jane sue John personally for breach of contract?

In Tecchia v. Bellati, 2016 NY Slip Op. 31311(U), the case upon which the foregoing fact pattern is based, Justice Scarpulla of the Supreme Court, New York County, Commercial Division, answered the question with an unequivocal yes.

The Facts

Sara Tecchia (“Tecchia”) purchased an apartment in lower Manhattan that needed substantial home improvements.  Tecchia met with Bartolomeo Bellati (“Bellati”) in his New York showroom, “where he represented that he was the owner of Minimal USA, that he was affiliated with Minimal Cucine, an Italian bespoke kitchen designer, and that he could perform the construction improvements that Tecchia sought.”

During the following year, Tecchia and Bellati met and exchanged multiple emails concerning the construction plans. Bellati sent a contract (the “Contract”) to Tecchia, which Tecchia countersigned several months later.  Among other things, the Contract listed the work to be performed and the corresponding price for parts and labor.

Tecchia was not satisfied with the work that Bellati performed and the quality of the supplies that he installed.  Consequently, Tecchia terminated the Contract, after paying Bellati $593,808.29 under the Contract, and sued for, among other things, breach of contract.

Bellati moved to dismiss the complaint on the grounds that he was the agent for another company, Canova Inc. (“Canova”), and that Canova was responsible for any damages Tecchia claimed she incurred.

The Holding

Justice Scarpulla denied the motion, finding that Bellati failed to disclose Canova as the principal:

Here, the Contract was signed by individual defendant Bellati over a line that bore the name “Minimal USA” and there is no indication that it was disclosed to Tecchia that Bellati was acting on behalf of corporate entity Canova instead of individually or on behalf of non-corporate entity Minimal USA.

None of the documents submitted by Defendants “conclusively” establish a defense to the claims asserted against Bellati.

(Internal quotations and citations omitted.)

In rejecting Bellati’s argument, Justice Scarpulla made it clear that the third party must have actual knowledge of the principal.  Mere suspicion is insufficient “to relieve the agent from liability”:

Defendants argue that an invoice bearing the name “Canova Inc.” gave [the plaintiff] reason to suspect that Bellati was acting on Canova’s behalf. However, the fact that a plaintiff has reason to suspect that an individual is acting as an agent in and of itself is insufficient to relieve the agent from liability. Knowledge of the real principal is the test, and this means actual knowledge, not suspicion. Indeed, nothing short of full disclosure of the principal’s status will relieve an agent from personal liability.

(Internal quotations and citations omitted.)

TAKEAWAY:

Tecchia teaches that disputes between principals/agents and third parties can be avoided through the use of a well-written contract.  Such agreements can be drafted to make it clear who the transacting parties are (e.g., a third party and the principal) and who will be responsible for any breaches of the agreement. A business lawyer and/or a commercial litigator can help draft such an agreement and/or represent the principal or agent in a dispute with a third party.

Tagged with: Business Law, Commercial Litigation