ICC Articles

Introduction

I regard the new UNIDROIT Principles of International Commercial Contracts (UNIDROIT Principles) as technically a great improvement on the Geneva Convention, about which I have always had serious reservations. I specifically approve of their minimalist approach, in seeking to distil very basic principles of agency indeed, on which it is difficult to envisage serious international disagreement. I think this fits well the purposes for which the UNIDROIT Principles are, in their Preamble, stated as having been devised.

I shall deal first with three main matters that I regard as controversial, or potentially controversial. They are the elimination of the basic distinction between direct and indirect representation; the curious Article 2.2.4(2) on undisclosed principal; and ratification. After dealing with these, I shall proceed to some lesser matters.

I. The distinction between direct and indirect representation (Article 2.2.3(2)) and the common law doctrine of the undisclosed principal (Article 2.2.4(1))

It is probably fairly well known to those working in the area that the distinction between direct and indirect representation, as a matter of the exposition of agency law, is not known to the common law. There are some well-known descriptions of the commissionaire in nineteenth-century decisions,¹ but after that the matter dropped out of prominence. There can be no theoretical objection to an intermediary operating commercially on the basis that externally it² deals as a principal, but internally owes obligations to its principal that are the same, or more or less the same, as those owed by an agent who has power to affect the legal relations of his principal, i.e is a direct representative. But there are few cases about such a situation, and virtually none attributing a special status to persons who act in this way professionally. Common law decisions tend to assume in the sale context, for example, that either the agent is a true agent (with an undisclosed, unidentified or identified principal) and makes contracts for its principal; or it buys from third parties and resells to its principal; or it buys from its principal and resells to third parties.³

The Principles of European Contract Law (hereinafter 'PECL') base themselves on the distinction between direct and indirect representation. I think that if international comprehensibility is sought, the position adopted by the UNIDROIT Principles is better as making them easier to understand for common lawyers, for instance common law trained arbitrators, not all of whom have heard of indirect representation at all (though they have no difficulty in understanding it when it is explained to them). As I understand it, in the UNIDROIT Principles the indirect representation situation is covered almost incidentally in Article 2.2.3(2), on the [Page10:] simple basis that this is a situation where 'the agent with the consent of the principal undertakes to become the party to the contract'. (I wonder however whether it is appropriate, as the comment does, to describe such situations as 'exceptional'.)

It seems that it is not infrequently believed by comparative lawyers whose first training is in civil law that the common law doctrine of the undisclosed principal corresponds to the civil law notion of indirect representation, and thus provides a more direct way to liability of the principal on the indirect representative's contracts, and the right of the principal to intervene on them. As I understand the common law, and the notion of indirect representation, this is not a true parallel. The undisclosed principal doctrine requires that the principal authorise the agent to contract on his or her behalf, and expect a right and accept a liability on the contract which is not (at any rate initially) known to the third party. An example would be that of a purchaser of land who wishes to accumulate a lot of different but contiguous sites, but wishes it not to be known that one person is seeking to buy them, because this could affect the price at which vendors might sell, so buys through an agent or agents whom he directs not to disclose that he is interested. The converse occurs where the principal assumes the agent will disclose that he is acting for another, but the agent for his own reasons does not do so. The first is rather a doubtful function for justifying a juridical institution, and neither is, as I understand it, the central example of indirect representation.

I therefore approve of the policy of the UNIDROIT Principles in not making use of the distinction between direct and indirect representation, and in disallowing the doctrine of the undisclosed principal as a separate exercise. But when the opening provision on agency, Article 2.2.1, states almost immediately that it applies 'whether the agent acts in its own name or in that of the principal', I do have to express regret that the phrase 'acts in the name of' survives even for the limited purpose of saying that it is not relevant.⁴ It has always puzzled me that this phrase in the English language emerges from other, non-English-speaking countries, when it is little used by common lawyers (most of whom are English-speaking) and would have no agreed meaning for them.⁵ I have always thought that it would be better to use the language of one of the countries where the phrase is used, and to treat 'in the name of' as a technical term which needs definition when employed in the English language. If the UNIDROIT Principles are to be readily understood by common lawyers, I would have thought it might have been sensible to say something like 'whether under any particular legal system (or 'legal system in which this distinction is taken') the agent would be regarded as acting in its own name or as acting in the name of the principal'.

That apart, I regard the formulation of Article 2.2.3(2) as most ingenious in accommodating indirect representation in a different garb. I have one-highly technical-reservation about it. It seems to postulate a person with authority to bind the principal (which is the nearest one gets to a definition of an agent in Article 2.2.1) who acts exceptionally (by becoming the party to the contract) in certain circumstances. This is appropriate to the second situation given in the comment as triggering off paragraph (2)-that where the third party says it will only deal with (the person who was willing to act as) the agent. But the so-called agent may be a person who never (or very rarely) acts (at any rate professionally) except in the capacity of indirect representative and is known not to do so. This sort of person does not seem to me to qualify as 'agent' within the meaning of, and so far as defined by, these UNIDROIT Principles at all: hence Article 2.2.3(2) could be argued not to apply to such a person. The PECL seek to get round this problem [Page11:] by calling the indirect agent an intermediary, and I think the introduction of this word purely as a matter of drafting at the beginning of Article 2.2.3 might have helped.⁶

I note that there is no reference to direct, contrary or oblique actions by and against the principal in the indirect representation situation of Article 2.2.3(2), and I think this is sensible for international principles of such generality. The exceptions become too involved, and are not ones even remotely accepted in common law. The complexity that can arise can be seen from the complex provisions of the PECL.⁷

A small but related point is that I wonder whether it is right to say, as the comment does, that it will follow in such a case from the terms of the agreement between the principal and the agent that once the 'agent' who deals as principal under Article 2.2.3(2) has acquired its rights under the contract with the third party, it will transfer them to the principal. This seems to me an internal matter for the law governing the relationship between principal and intermediary: the consequence is likely to follow, but I see no reason why it must.

Going on to the situation of the undisclosed principal as understood at common law, Article 2.2.4(1) deals with the situation where the agent acts with authority but the third party neither knew nor ought to have known that the agent was acting as an agent. Here the contract only binds and entitles the agent. This amounts to a specific rejection of the common law undisclosed principal doctrine, and I appear in the travaux préparatoires as going on record, together with Professor Deborah DeMott, the Reporter forRestatement (Third) of Agency of the American Law Institute, to the effect that nothing vital is lost in dispensing with this curious doctrine.⁸ I adhere to that view. The undisclosed principal doctrine, at any rate in the English common law, is one the full potential of which has never been worked out, and in its present form it is obscure, intermingles with other doctrines such as that of vicarious liability, gives to some the impression of covering the situation of indirect representation when it does not, and altogether provides opportunities for confusion. Many common lawyers are surprised to discover that it exists. As with actions by and against the principal in indirect representation situations, it is simplest in a set of principles with objectives such as those of the UNIDROIT Principles to steer clear of the doctrine of the undisclosed principal altogether.

II. The exception of Article 2.2.4(2)

Article 2.2.4(2), however, provides a surprise in going on to lay down an exception where something like undisclosed principal reasoning does apply. When an agent (that it to say, an agent not known to be acting as such) contracting on behalf of a business represents itself to be the owner of the business, the third party may, upon discovery of the real owner, exercise also against that owner the rights it has against the agent.

I can see that this is a situation where it might be thought that (something like) the undisclosed principal rule gives a fair result. It seems to be aimed at owners of businesses who act as such and then, unknown to the third party, transfer the business away while continuing to act as before. They then continue contracting in apparently the same capacity-that is to say, as principal-whereas in fact they are now agents. There is a famous English case, Watteau v. Fenwick,⁹ on this situation, which has an additional feature: the person concerned in that case entered into contracts which were specifically forbidden by the new business for which he was [Page12:] now acting as agent, and the new business was nevertheless held liable. The problem of theory is that there was no actual authority, and the agent was not thought to be such, so could not have no apparent authority. American lawyers working in this field are apt to cite a case called Grinder v. Bryans Road Building and Supply Co.,¹⁰ though, as was pointed out in the travaux préparatoires of the Principles, this was actually a case where the agent could pay and the principal not, and the issue was whether an action against the principal barred one against the agent. (It was held not.)

I do think this sole exception looks odd amid such general rules. As I say, it is certainly a situation where an undisclosed principal might reasonably be held liable: the person with whom I thought I was dealing has put his or her assets elsewhere. But this is true of many situations where someone with more money than the actor is discovered behind a transaction, and/or where a corporate form is adopted. It may involve unfair conduct by the person concerned, but this would be equally so in other cases where he or she simply transferred assets elsewhere, for example to his or her spouse. The problem may be well known, but there are various juridical ways of dealing with such situations, not all involving agency reasoning, as the travaux préparatoires make clear.¹¹ It looks odd to me to introduce this way of solving the problem raised by this situation into what is put forward as a set of very general principles on agency. I suggest also that as a matter of drafting the phrase 'owner of a business' is imprecise, not least in not making clear how it relates to the idea of incorporation. Of course, the contrary argument is that it would be a pity to withdraw what might be a useful protection for third parties simply in the interests of consistency.

III. Ratification (Article 2.2.9)

The doctrine of ratification is a strange one. Everyone agrees that it is something convenient to retain. As the Comment to Restatement (Second) of Agency said: 'It operates normally to cure minor defects in an agent's authority, minimizing technical defenses and preventing unnecessary lawsuits.'¹² It obviously raises considerable theoretical problems, not least because it can overlap with other doctrines. In common law it overlaps with notions of election (binding choice between alternative rights), affirmation and estoppel (a notion probably apprehended in a general way by all Western lawyers, but for which I offer a Latin phrase for good measure, venire contra factum proprium).

I start by saying that ratification is a notion of which some sort of definition might have been appropriate. I sympathise with the overall desire to simplify, but I am not sure that this English word standing alone carries enough univocal meaning, particularly in view of the other nearby concepts to which I have referred. There are serious points about ratification, the answer to which is not obvious. Thus, in comment 1, it is stated that '[ratification] need not be communicated to anyone, provided that it is manifested in some way and can therefore be ascertained by probative material'. However, in comment 3 we have the statement: 'It goes without saying that in such a case ratification must be notified to the third party.' Of course, the black-letter text here specifically requires notification, but maybe some initial attention to establishing the juristic nature of ratification would have helped.

Paragraph (1) simply states the retrospective effect of ratification (using the passive infinitive 'ratified' and the noun 'ratification' without explanation). I shall come back to this shortly.[Page13:]

Paragraph (2) entitles the third party to specify a reasonable time for ratification. It must therefore be directed to a party who always knew (or ought to have known), or has discovered later, that the contract was unauthorised.

Paragraph (3) deals with a third party who did not know (nor ought to have known) that the act was unauthorised, and permits him or her at any time before ratification to (in effect) repudiate the act that might be ratified. Obviously, this requires discovery that the act was unauthorised.

One of the situations with which paragraph (2) deals must therefore be that where a person enters into a contract knowing (or being taken to know) that the agent has no authority. In such a case I would say that either the transaction is a complete nullity; or that it is an offer to the principal by the third party, made through the agent, which is binding and open to acceptance for some period; or that it is some form of conditional contract between third party and agent under which the parties are bound and cannot withdraw, the agent must use reasonable efforts to procure ratification, and if there is ratification the ratified contract with the principal supersedes the initial contract with the agent. The result of Article 2.2.9(2) is apparently to give the third party an overriding right in such a case to set a time limit in any such situation in which he might otherwise be bound, whatever other contractual arrangements there may be. I wonder whether this is appropriate. Of course, the rule can be excluded: but few would think to do so. Presumably, if the arrangement is already one for ratification within a specified period, to set a different period would be unreasonable.

Paragraph (3) covers the case where the third party enters into a contract not knowing (nor being taken to know) that the agent has no authority. One presumes that the belief that the agent has authority will normally be reasonable: so in most cases the third party will be able to hold the principal liable under the doctrine of apparent authority. For this situation the result of paragraph (3) seems to be to provide a locus poenitentiae for a third party who can already sue the principal, should he not wish to do so. One can see the general idea: that a person who discovers that the agent had no authority need not wait to see whether the principal will ratify, but can escape from the transaction. The main purpose of rules like this is usually stated as being to prevent the principal 'playing the market'. But the third party is almost certainly entitled to the benefit of the doctrine of apparent authority in the terms of Article 2.2.5(2), which will give it the enforceable contract that it intended to make. The result of the present rule is that the third party can sue the principal on this basis if it wants, but alternatively has, by virtue of paragraph (3), a possibility of indicating its refusal to be bound-even though the principal wishes to affirm a contract which is what the third party expected and on which it should be liable. The person who can play the market is therefore not the principal but the third party. I am not certain of the fairness of this.

It would appear also that when such a party discovers that the contract is unauthorised and as yet unratified, it may set a time limit for ratification as well, which improves its position further.

I return finally to the statement of the retrospective effect of ratification in paragraph (1). English law at least retains an overall power in the court to refuse the retrospective effect of ratification where it would be unduly prejudicial to the third party: for example, where an act that is required to be done within a specified period is ratified outside the period. Restatement (Third) of Agency in fact refuses effect to ratification in the latter circumstances.¹³ A famous English case¹⁴ involved a situation where parties were in negotiation, one of whom was [Page14:] not authorised. The other party knew nothing of the lack of authority, but was of the view that the negotiations had not matured into a contract: he purported to withdraw from the negotiations. The court, however, was later to find that the contract was already binding at the time of withdrawal. The principal ratified the contract and it was held that the ratification related back to before the purported withdrawal. The decision is regularly criticised (though more often misunderstood),¹⁵ but may have been fair. However, it does show the need for some sort of exception. Perhaps this could be achieved through good faith reasoning, but I would think a rule specifically addressed to possible unfair effects of ratification might be better. English courts have toyed with isolating problems where property rights are concerned, or where there are specific time limits,¹⁶ but have ended up with a specific rule for ratification alone, formulated in terms of prejudice.¹⁷

Altogether, I fear that ratification may raise more tiresome, largely technical problems than the present provisions allow for. I have read the travaux préparatoires and understand the reason for the omission of a definition and certain matters of detail, but I remain doubtful as to whether the UNIDROIT Principles might not have gone a little bit further.

IV. Lesser matters

I note first that Article 2.2.2(2), on what common lawyers call implied authority, confines itself to giving authority for acts that are 'necessary in the circumstances'. The illustration reinforces this.¹⁸ 'Necessity' implies to me a rather strict criterion. I would think that a wider formulation might have helped.