Legal Definitions - undisclosed principal

An undisclosed principal refers to a situation in agency law where a person or entity (the principal) authorizes another person (the agent) to act on their behalf, but the third party with whom the agent interacts is completely unaware that the agent is representing anyone else. The third party believes they are dealing directly and solely with the agent.

Despite the principal's identity being hidden, the law generally holds the undisclosed principal responsible for contracts and agreements made by their agent, as long as the agent acted within the scope of the authority granted to them. In certain circumstances, an undisclosed principal might even be held liable for an agent's unauthorized actions if the third party suffered harm and the principal was aware of the agent's conduct but did not intervene.

• Example 1: Real Estate Development

  A property developer, Apex Holdings, wants to acquire several adjacent plots of land to build a new shopping center. To prevent landowners from inflating prices once they realize a large developer is interested, Apex Holdings hires a real estate agent, Sarah Chen, to purchase the properties. Sarah approaches each landowner, presenting herself as an individual investor looking to buy the land for personal use, never mentioning Apex Holdings.

  In this scenario, Apex Holdings is the undisclosed principal. Sarah Chen is the agent, and the landowners are the third parties. The landowners believe they are selling to Sarah directly, unaware that she is acting on behalf of Apex Holdings. If Sarah signs purchase agreements within the authority given by Apex, Apex Holdings will be legally bound to buy the properties, even though its identity was initially hidden.

• Example 2: Art Acquisition

  A wealthy art collector, Ms. Evelyn Reed, wishes to acquire a rare antique sculpture that is coming up for sale. To avoid a bidding war and potentially higher prices that might result if her identity as a prominent collector were known, she instructs her art dealer, Mr. David Lee, to bid on the sculpture at auction. Mr. Lee participates in the auction in his own name, without disclosing that he is bidding for Ms. Reed.

  Here, Ms. Evelyn Reed is the undisclosed principal. Mr. David Lee is her agent, and the auction house and seller are the third parties. The auction house believes Mr. Lee is purchasing the sculpture for himself or for his own gallery. If Mr. Lee successfully bids on the sculpture within the limits authorized by Ms. Reed, she will be legally obligated to complete the purchase, even though her involvement was not revealed during the auction.