(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.
(2) However, where such an agent, when contracting with the third party on behalf of a business, represents itself to be the owner of that business, the third party, upon discovery of the real owner of the business, may exercise also against the latter the rights it has against the agent.
1. “Undisclosed” agency
This Article deals with what may be referred to as “undisclosed” agency, i.e. the situation where an agent acts within the scope of its authority on behalf of a principal but the third party neither knows nor ought to know that the agent is acting as an agent.
2. Agent’s acts directly affect only the relations between agent and third party
Paragraph (1) provides that in the case of an “undisclosed” agency the agent’s acts affect only the relations between the agent and the third party and do not directly bind the principal vis-à-vis the third party.
1. Art dealer A purchases a painting from artist C. When entering into the contract A does not disclose 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 B and C.
3. Third party’s right of action against principal
Notwithstanding the rule laid down in paragraph (1), the third party may exceptionally have a right of direct action also against the principal. More precisely, according to paragraph (2), if the third party believes that it is dealing with the owner of a business while in fact it is dealing with the owner’s agent, it may, upon discovery of the real owner, exercise also against the owner the rights it has against the agent.
2. Manufacturer A, after having transferred its assets to a newly formed company C, continues to contract in its own name without disclosing to supplier B that it is in fact acting only as the Managing Director of C. Upon discovery of the existence of C, B has a right of action also against that company.