(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.
1. “Disclosed” agency
With respect to the effects of the acts of the agent, this Section distinguishes between two basic situations: one in which the agent acts on behalf of a principal and within the scope of its authority and the third party knows or ought to know that the agent is acting as an agent, and the other in which the agent acts on behalf of a principal within the scope of its authority but the third party neither knows nor ought to know that the agent is acting as an agent. The first situation, which is the normal one, may be referred to as “disclosed” agency and is dealt with in this Article.
2. Agent’s acts directly affect legal relations between principal and third party
In the case of a “disclosed” agency, the rule is that the agent’s acts directly affect the principal’s legal position vis-à-vis the third party (paragraph (1)). Thus, a contract made by the agent directly binds the principal and the third party to each other. Likewise, any communication of intention that the agent makes to, or receives from, the third party affects the principal’s legal position as if the principal itself had made or received it.
1. 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 entitled to payment by C.
2. The facts are the same as in Illustration 1, except that one of the computers delivered is defective. The notice of such defects given by C to A directly affects B.
3. Acting in the principal’s name not necessary
For the establishment of a direct relationship between the principal and the third party it is sufficient that the agent acts within the scope of its authority and that the third party knows or ought to know that the latter acts on behalf of another person. By contrast, it is as a rule not necessary for the agent to act in the principal’s name (see also Article 2.2.1(1)).
In practice, however, there might be cases in which it is in the agent’s own interest to indicate expressly the identity of the person on whose behalf it is acting. Thus, whenever the contract requires the signature of the parties, the agent is well advised not simply to sign in its own name, but to add language such as “for and on behalf of” followed by the principal’s name, so as to avoid any risk of being held personally liable under the contract.
3. The facts are the same as in Illustration 1. For the sales contract to directly bind B vis-à-vis C it is irrelevant whether A, when accepting C’s order over the telephone, acts in its own name or expressly states that it is accepting in the name of B.
4. Computer specialist A is contacted by research centre C with a view to creating a computer programme for a special database on international case law. A, when signing the contract in its capacity as employee of software company B, should expressly state that it is acting on behalf of B. If A merely signs the contract without indicating B, C may hold A personally liable under the contract
4. Agent undertakes to become party to the contract
An agent, though openly acting on behalf of a principal, may exceptionally itself become party to the contract with the third party (paragraph (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 its rights under the contract with the third party, it will transfer them to the principal.
Entirely different is the case where the agent steps in and, in violation of its agreement with the principal, decides to become party to the contract with the third party. In so doing the agent no longer acts as an agent, and this case therefore falls outside the scope of this Section.
5. 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.
6. 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.
7. Dealer B instructs agent A to purchase a certain quantity of oil on its behalf. When A is about to conclude the contract with supplier C, the news arrives that the oil producing countries intend to reduce production substantially. A, expecting a rise in oil prices, decides to purchase the oil on its own behalf and enters into the contract with C as the only other party. In so doing A has ceased to act as agent for the principal and the consequences of its acts are no longer governed by this Section.