Harbor Bay Development hires Guthrie to act as its agent to buy a 100-acre waterfront tract of land from Frankie for $1,000 per acre. Harbor Bay does not want Frankie to know that it is the principal or that Guthrie is its agent. Harbor Bay wants the land for a new marina, and believes that Frankie may not sell the land for that purpose or may demand a premium price. Guthrie makes the purchase, signing only his name on the contract as the buyer and not disclosing to Frankie the agency relationship. Harbor Bay gives Guthrie the amount to pay for the land, but Guthrie absconds with the funds. Frankie soon learns of Harbor Bay's identity. Can Frankie enforce the contract against Harbor Bay? against Guthrie?

Question

What will be an ideal response?

Answer 1

As a general rule, an undisclosed principal is liable for an agent's dishonesty after an authorized contract has been made. In this problem, the principal's payment to its agent was not a payment to the third-party seller, and thus under the general rule, the principal must bear the loss of the funds with which the agent absconded. Because the contract was within the scope of the agent's authority, the third-party seller can hold the principal to the contract.

In addition, when a third person contracts with an agent for a fully undisclosed principal, the agent becomes personally liable on the contract. Therefore, in this problem, once the principal's identity is revealed, the third-party seller can elect to hold either the agent or the principal liable. Generally, an election to hold one party liable releases the other party from liability. Filing a suit against both parties is not an election, but when the suit is at the point of being reduced to a judgment, however, the successful; third-party seller may have to choose the party from whom to recover.