The term undisclosed principal is used in the business realm when an individual or organization enters into a contractual agreement without revealing the true identity of the principal behind the agreement. It is typically important for parties to contractual agreements to have full knowledge of the party with whom they are dealing. An undisclosed principal means the buyer is actually a third-party, who is the actual beneficiary of the agreement, and hence the true person with whom the contract is to be enforced.
The existence of an undisclosed principal to a contract, while sometimes beneficial for both the contract parties, can also put the parties at risk. For example, if one party to a contract fails to honor their duties under the agreement and the other party attempts to pursue legal action against the undisclosed principal a potential problem arises: the actual identity and details of the principal may not have been discussed and agreed upon by either of the contractual parties. Therefore, it’s important that contract parties understand the implications of a potential undisclosed principal.
Benefits of an Unanounced Principal Agreement
At times, the presence of an undisclosed principal can be beneficial for both parties. In the situation of large corporate contracts, the face of the principal may be an agent of the company. The agent possesses the necessary authority to sign contractual documents on the companies’ behalf and still thus maintain anonymity.
Additionally, there are times when a contract should be enforced against an undisclosed principal. For example, if a company’s business operations involve confidential information, such as private medical records or credit card information, it may be beneficial for the other party to be protected from details of the company’s identity or further to the true name of the principal. This in turn helps protect other companies and clients.
Risks of an Unanounced Principal Agreement
There are certain risks associated with entering into an undisclosed principal agreement. When a third-party is not disclosed in a contract, it’s difficult for the other parties to know what liability exposure they may be entering into. For example, if a contract is breached, then the other party may not have the ability to pursue legal allegations against the true party in charge of the business.
Moreover, it’s difficult to ensure that both parties are aware of the other’s name, contact information, and other related information needed to fulfill contractual obligations. Without knowledge of the true identity of the principal, the other party may have difficulty negotiating or simply not be aware of the different terms or conditions that may be part of the agreement.
For these reasons, it is important that parties to contract agreements understand the implications of the presence of an undisclosed principal. When possible, it is wise to always attempt to establish full disclosure of all parties to the agreement.