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
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, 6th 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
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
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
36
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
38
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).
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.
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
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
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
54
2004), p. 381, at p. 388 ff.
55
Compare Unidroit 1999, Study – Misc. 21, paras. 266-274; Unidroit 2000, Study – Misc. 22, paras. 866-883.
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
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:
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.
§ 6.10 Agent’s Implied Warranty of Authority:
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
57
[1910] KB 215.
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
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
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.
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
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
60
[1901] AC 240.
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
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
61
Compare H. Kötz, European Contract Law, (Oxford, 1997), p. 234.
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.
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:
62
O. Lando & H. Beale (eds), Principles of European Contract Law, (The Hague [etc.], 2000), p. 225.
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
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
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.
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
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
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.
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
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
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.
above). However, in some cases this protection may by way of exception from the general rule be
denied.
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
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 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
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:
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.
D. Busch, Indirect Representation and the Lando Principles: an Analysis of Some Problem Area
from the Perspective of English Law73
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.
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.
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.
- 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
76
[1920] 3 KB 497.
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
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
77
[1927] 2 KB 28.
78
[1926] Ch. 932.
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
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
79
[1898] 78 L.T. 34.
80
(The Hague, 2005), p. 164 f.
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
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
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:
81
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.
(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;
(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).
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
87
[1994] 2 A.C. 199, 207.
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
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,
88
D. Busch et al. (eds), The Principles of European Contract Law and Dutch law: a Commentary, (The Hague [etc.],
2002), p. 158.
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
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.
89
F.B.M. Reynolds, Bowstead and Reynolds on Agency, (London, 2006), p. 190 ff., in particular, pp. 194-195.
90
(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.
(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.
91
2004), p. 381, at p. 392.
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.
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
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.
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,
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
96
D. Busch, Indirect Representation in European Contract Law, (The Hague, 2005), p. 137, in particular, at p. 139.
97
98
Article 2.2.10 Termination of authority:
[…]
(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.

Chapter IV Agency

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Chapter IV Agency

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Chapter IV: AGENCY

3.1.1 Agency in international contract law

3.1.3 Internal/external relationship distinguished

Illustration 1. Internal/external relationship

external relationship external relationship

3.1.4 Sources of international contract law rules on agency

3.2.1 The principle of independence

3.2.2 The use of the concept of authority

3.2.3 Methods of granting authority

3.2.3.1 Express authority

3.2.3.2 Implied Authority

3.2.3.3 Apparent authority

Dutch Civil Code (BW)

Contract Law of the People’s Republic of China

Article 49 Contract by Person with Apparent Agency Authority:

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

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

Restatement (Third) of Agency

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

Article 2.2.5 Agent acting without or exceeding its authority:

Article 3:201 Express, Implied and Apparent Authority:

3.2.3.4 Ratification by principal

3.2.5 Consequences of agent acting without or outside his authority

3.3 Internal principal-agent relationship

3.3.1 Agency contracts: general issues

Article 1:101 Scope:

Article 1:102 Definitions:

3.3.3.2 Duties of agents and principals

Restatement (Third) of Agency

§ 8.08 Duties of Care, Competence, And Diligence:

§ 8.10 Duty of Good Conduct:

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

Restatement (Third) of Agency

§ 8.11 Duty To Provide Information:

Restatement (Third) of Agency

Restatement (Third) of Agency

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

Article 5:101 Self-contracting:

Article 5:102 Double mandate:

Article 2:102 Price:

Restatement (Third) of Agency

§ 8.14 Duty To Indemnify:

A principal has a duty to indemnify an agent

Article 2:103 Expenses incurred by representative:

3.3.3.3 Termination of agency contracts

3.3.2 Commercial agency

3.3.3 Key issues in drafting agency contracts

3.4 External principal/agent-third party relationship

3.4.1 Civil Law approach

Article 3:102: Categories of Representation

Illustration 2. Civil law approach to external relationship

Illustration 3. Direct representation in the Civil Law

Illustration 4. Indirect representation in the Civil Law

3.4.2 Common Law approach

Illustration 5. Common law approach to external relationship

Illustration 6. Disclosed agency in the Common Law

Siu Yin Kwan v. Eastern Insurance Co. Ltd.49

A similar approach is also taken by the American Restatement (Third) of Agency:

Restatement (Third) of Agency

§ 6.03 Agent For Undisclosed Principal:

Section 2: Authority of Agents

Article 2.2.3 (Agency disclosed):

Article 2.2.4 (Agency undisclosed):