Representation
1. Purpose and historical development
Modern business life requires its participants to be able to entrust others with the negotiation and conclusion of contracts in order to benefit from their skill and expertise, or from their presence at another place. This mechanism constitutes at one and the same time a delegation and an exercise of a person’s private autonomy (freedom of contract). The need to enter into legal transactions (juridical act) with the help of another person—an intermediary or ‘agent’—also arises if somebody is not able to act personally, be it on account of a lack of full capacity, be it—as is the case with legal persons—on account of the inability to form and express a will of its own (for details: authority of agents). The agent is supposed to act in the interest and for the account of the principal. He is not a mere messenger who transmits someone else’s declaration of will, but instead forms and declares a will of his own. By being directly involved in the conclusion of the contract himself, the agent can be distinguished from a broker (eg insurance intermediaries, retailers of package-travel) whose task is confined to acts that lead to the conclusion of a contract.
No difficulties in conceptualizing such a mechanism arise if the intermediary himself becomes the contract partner of the third party, and then—only in a second step and against reimbursement of expenses incurred—forwards the benefits derived from the contract to his principal. Compared to this indirect construction, Ernst Rabel has described it as a ‘juridical miracle’ that an intermediary may in fact act as his principal’s ‘substitute’ by binding the latter directly to the consequences of the intermediary’s acts. As a matter of fact, for a long time this miracle seemed unimaginable. Roman law, with its requirements to use prescribed legal formulae and its principle of alteri stipulari nemo potest, did not favour the direct creation of rights and obligations in another person. To be sure, in certain cases the Roman jurists acknowledged that an intermediary’s acts could confer rights or impose obligations on the person of the principal; and there were substitute devices compensating, to some extent, for the lack of general rules on representation; suffice it to mention that a paterfamilias could acquire ownership or other rights through his dependants, ie children in power and slaves. But it was only the natural lawyers (natural law) who—aided by their discovery of private autonomy and driven by the need to react to the expansion of trade and commerce—were finally able to detach themselves from the Roman concept: a mandatary who is acting in the name of the principal, and within his mandate, can directly create contractual rights and obligations in the person of the principal. The mandatary himself, in turn, is not liable under the contract.
The common law witnessed a different and, as is often said, more pragmatic development. It has adopted a broad concept of ‘agency’ that does not solely embrace cases of direct representation. Rather, agency can be defined as ‘a relationship which arises when one person, called the principal, authorises another, called the agent, to act on his behalf and the other agrees to do so’ (Guenter Treitel).
2. Two basic types of representation distinguished
Although the distinction may sometimes be hidden behind the terminology used, in substance all national legal systems and all sets of European or international model rules distinguish two types of representation, depending on their effects on agent and principal. In the case of what will here be called ‘direct representation’, the acts of the agent directly affect the principal’s position. It is the principal who immediately acquires rights against the third party and who is obliged to the third party under the contract. The agent does not become a contracting party; unless he and the third party agree otherwise, he may only be liable for a breach of duties in the course of negotiating the contract. ‘Indirect representation’, by contrast, corresponds to the historically earlier form of acting on behalf and in the interest of a principal. Here, the agent himself is bound to the third party by his acts. Other expressions for these two categories include: unmittelbare/mittelbare Stellvertretung, offene/verdeckte Stellvertretung, représentation parfaite/imparfaite, rappresentanza diretta/indiretta, directe/ middellijke vertegenwoordiging. Even the all-embracing common law understanding of agency can be fitted into this scheme, having regard to the effects of disclosed and undisclosed agency.
Two fundamental questions flow from this seemingly clear distinction. First, no consensus exists in European private law as to where to draw the dividing line between both categories. Continental legal systems and the common law differ in this respect, and the Principles of European Contract Law (PECL), the UNIDROIT Principles of International Commercial Contracts (PICC) and the Draft Common Frame of Reference (DCFR) have also adopted different approaches. Secondly, there is no agreement about the relationship between the principal and the third party in the second type: do they have direct claims against each other?
Given the differences in terminology used not only in comparative literature but also in the various European and international model rules, it should be remarked at this point that the term ‘agent’ will be used in this entry to denote the intermediary or middle person in both categories of representation. This is not only in accordance with common as well as legal parlance in English, but it also stresses the proximity of both categories and can, moreover, be seen as a kind of neutral position between the PECL, which speaks of ‘agent’ only in the case of direct representation, and the DCFR, which reserves the term ‘agent’ for the internal relationship between intermediary and principal.
3. The dividing line between the two basic types
a) National legal systems
Continental legal systems are built on the natural lawyers’ concept of representation and therefore require that, for the effects of direct representation to ensue, the agent must act in the name of his principal (contemplatio domini). However, acting in the name of another person does not call for the agent expressly to state that he is acting in the name of the principal or expressly to state the principal’s name.
(i) It is in the third party’s interest to know who will be his contracting partner. To satisfy this interest, it is sufficient if he can deduce from the circumstances, usages or party interests that the agent does not want to bind himself but his principal (eg shop assistants). Where, however, a will not to become a contract partner is not apparent from the circumstances, the rules of indirect representation apply. An economically important example is the contract of commission. In most cases, all persons involved in the transaction know that the commission agent (Kommissionär, commissionaire) is acting on behalf of his principal (Kommittent, commettant). Still, they want contractual relations to arise only between the agent and the third party in order to benefit from the commission agent’s business contacts, experience, reputation or solvency. This is reflected in mercantile practice and in many continental codifications.
(ii) Even if the third party may have an interest in knowing who his contract partner is, this interest may not always be worthy of legal protection. This holds true if it should not matter to the third party with whom he is dealing, as is for instance the case in everyday transactions, immediately performed on both sides (Germany, Switzerland). More importantly, the third party appears less worthy of protection if he agrees that the identity of the principal will only be revealed at a later stage by the agent (déclaration de command, contratto per persona da nominare and offenes Geschäft für den, den es angeht). In such a case, the rules on direct representation can still apply if the agent nominates a principal (in a timely fashion: France, Italy, Netherlands) and if this principal consents to being bound by the contract—this consent generally being implied in the principal’s instructing the agent. However, national legal systems differ as to the point in time from which they apply the rules on direct representation (ab initio: France, Italy; from the moment of identification by the agent: Germany). Differences also exist if the agent fails to identify a principal. Some legal systems then regard the agent as an unauthorized agent (Austria, Germany; authority of agents); others bind the agent himself to the contract (France, Italy, Netherlands). The latter approach is based on two reasons: the agent has voluntarily incurred the risk of being personally liable, and he can generally seek reimbursement under his contract with the principal who had instructed him.
English law, by contrast, regards it as irrelevant whether the agent acts in the name of the principal or in his own name. The rules on direct representation apply if the agent discloses to the third party the existence of an agency relationship between him and the principal on whose behalf he is dealing (disclosed agency). Otherwise, the agent himself is bound (undisclosed agency). Disclosure of an agency relationship can be deduced from the circumstances, and also under English law the agent may identify the principal at a later point.
The differences in approach and terminology outlined above sometimes complicate the comparative discussion about representation. It can, however, be doubted that they lead to significant differences in outcome. As continental legal systems allow that acting in the name of the principal can be deduced from the circumstances and that the principal’s identity may be revealed subsequently, the approaches do not seem too far apart from each other. The decisive question is whether the third party is able to recognize whether the person with whom he is dealing is to become his contract partner. From an economic perspective, too, whether a person deals in his own name or in the name of a principal are rather similar situations; mixed legal systems (Louisiana, Quebec) have in fact achieved a combination of both traditions. Problems in comparative discussions are still caused by the commission agent who generally deals in his own name but usually discloses that he is acting for the account of another person, named or unnamed. He is regarded as a continental phenomenon and is difficult to subsume under the categories of English law because he lacks the authority to act in the principal’s place (which is characteristic of an agency relationship). Under the continental model, on the other hand, the agent can choose to bind himself alone, although he is openly acting for the account of another.
b) European and international model rules
The different approaches are reflected in the Principles of European Contract Law (PECL) and the UNIDROIT Principles of International Commercial Contracts (PICC). At the head of the PECL rules on representation (in a chapter titled ‘Authority of Agents’), Art 3:102 contains a bifurcation of direct and indirect representation that appears to subscribe to the continental concept. Direct representation requires that the agent acts ‘in the name of a principal’ and that the third party knows or has reason to know this. The principal’s identity may remain open at the time of conclusion of the contract, but it has to be revealed by the agent within a reasonable time after a request by the third party (Art 3:203). The UNIDROIT PICC, on the other hand, appear to adopt the common law concept. Direct representation (called ‘disclosed agency’ to avoid confusion with the continental concept) requires that the third party knows or ought to have known that the intermediary is acting as an agent, ie with the aim of affecting the legal relations of a principal (Arts 2.2.3(1), 2.2.4(1)). It is irrelevant whether he acts in his own name or in the name of his principal. The problematic case of the commission agent is tempered by a special rule: with the consent of the principal, the agent and the third party can agree that only the agent and not also the principal (by way of direct representation) will be bound (Art 2.2.3(2)). For the PECL, the commission agent does not pose a problem and can easily be conceptualized as an example for its rules on indirect representation. The approach of the Draft [[Common Frame of Reference (DCFR) does not correspond to any of the two concepts. It steers a middle course in that it applies the rules on direct representation if the agent acts ‘in the name of a principal or otherwise in such a way as to indicate to the third party the intention to affect the legal position of a principal’ (Arts II.-6:105, II.-6:106).
4. Direct claims in the case of indirect representation
In both types of representation, the economic interest in the transaction is with the principal and the third party. They bear the risk and derive the benefits, whereas the agent usually receives a commission or an honorarium. What if, in the case of indirect representation, difficulties arise in the course of the transaction in the person of the agent, particularly because he becomes insolvent or fails to perform? Do the principal and the third party have direct claims against each other? As a side-effect, the extent to which such claims are admitted can dilute the dividing line between the two types of representation.
a) National legal systems
Direct claims can readily be granted where the agent has transferred his position by way of assignment. Very often the internal relationship between principal and agent will provide for such an assignment—possibly even in advance. The third party, by contrast, can effect an assignment in a somewhat more cumbersome way by means of execution against the agent. Apart from this situation, however, differences become apparent between the national legal systems.
(i) At one end of the spectrum are several legal systems that do not grant a direct claim to the principal without prior assignment. This is most rigidly the case in German and—despite criticism in legal literature—also in French law (where, however, the principal may exercise the agent’s rights against the third party by bringing an action oblique). Swiss law supplants the need for an assignment by a cessio legis as soon as the principal has fulfilled his obligations arising from the internal relationship with the agent. Italian law, by contrast, accepts a direct claim. The principal may elect to assume the position of the agent, thus effecting a transfer of rights by unilateral act. In the Netherlands, a direct claim may exist, provided that the agent does not perform his obligations against the principal or becomes insolvent, and that the principal gives notice of his intention to assume the position of creditor (from a functional perspective this notice serves as a notice of assignment). At the other end of the spectrum one finds English law, where the concept of undisclosed agency plays out its particularity—not free from criticism even in English legal literature. It is not only the agent who is entitled to claim under the contract, but also the principal who has a right to claim by virtue of the agent’s acts; once the agency relationship is disclosed to the third party, the agent ceases to have a claim. A widespread doctrinal explanation for this construction that seems to fly in the face of privity of contracts is seen in a desire to avoid a circuitry of actions (its historical origins are to be found in protective devices in the case of insolvency of the agent). Not only in English law, but in all legal systems that accept a direct claim by the principal, the third party may find himself obliged to a creditor of whose existence he was unaware at the time of conclusion of the contract and whom he did not select as his contracting partner. However, this unpleasant surprise is alleviated by the fact that all defences and rights of set-off are preserved. Moreover, the undisclosed principal has no claim if the third party wanted to deal exclusively with the agent. All these restrictions fulfil the same function as the different devices to protect the debtor of an assigned claim.
Protective mechanisms in favour of the principal exist particularly in case of the agent’s insolvency. Where the principal has a direct claim, this claim survives the insolvency (eg England). Also, the legal assignment in Swiss law is not affected by the insolvency. French law at least grants the principal a right of preferential satisfaction. The solution in German law is confined to cases of commission agency (§ 392(2) HGB): as between the principal and the agent, all rights of the agent against the third party are regarded as belonging to the principal. Thus, the principal is protected against the agent’s creditors and, if the agent becomes insolvent, the principal may segregate such rights from the insolvent’s estate.
(ii) A direct claim by the third party meets greater reservations in many national legal systems. In practice, such a claim is only conceivable after the principal’s existence has been revealed. German law and Swiss law generally do not grant such a claim. The same holds true for French law. To be sure, the action oblique is available, but it does not really help the third party if the principal has already fulfilled all his obligations to the agent. In the special case of a so-called straw man (prête-nom), the rules on simulation apply and enable the third party to claim directly against the principal (but not the principal to claim directly against the third party). In this direction, Italian law declines a direct claim as well. Dutch law, on the other hand, finds a solution that is parallel to its approach to direct claims by the principal. Again, it requires non-performance or insolvency of the agent and—after a notice by the third party—holds the principal in these cases jointly and severally liable in addition to the agent, with the important restriction that this direct claim only exists if the principal has not yet fulfilled his obligations vis-à-vis the agent. This last restriction is unknown to English law which grants a direct claim in any event, even if the principal has already done everything he was obliged to do under the internal relationship with the agent and, in particular, if he has already reimbursed the agent for his expenses. One can discern the substantive issue behind these different approaches: who is to bear the risk of a non-performance or of the insolvency of the agent? While the common law places this risk on the principal, who, after all, seeks to derive a benefit from mandating the agent and has better means of controlling the agent’s actions than the third party, continental legal systems leave it with the third party, who has freely chosen to deal with the agent. In addition, continental lawyers may argue from an economic perspective that the risk of insolvency is included in the contract price, and the third party, had he doubted his contract partner’s solvency or reliability, could have asked for security, for instance by a retention of title. From this perspective, an additional debtor could be regarded as an undeserved windfall.
b) European and international model rules
The approach of the Principles of European Contract Law (PECL) to this question is very much in line with the symmetrical solution provided by Dutch law. Despite the agent’s acting in his own name (ie commission agency or failure to disclose the existence of a principal), direct claims may come into existence under limited and clearly defined circumstances (Arts 3:301 ff). Both the principal and the third party have a right that the agent communicates the name and address of their counter-party (called ‘economic opposite’ by the PECL Comments) to them. Then, the principal may exercise against the third party all the rights the agent has acquired on the principal’s behalf. The third party, in turn, may exercise against the principal all its rights against the agent. In both cases, the defences arising from the relationship between the agent and the third party are preserved. Moreover, the principal retains the defences he may set up against the agent, which means, in effect, that he does not have to pay a second time after having already paid once to the agent. All these claims presuppose that the agent becomes insolvent or commits a fundamental non-performance (including anticipatory breach) towards the principal or the third party respectively, and the exercise of these rights requires prior notice of the intention to do so to the other parties involved. The draftsmen of the PECL emphasize that direct claims are exceptional and arise only under narrow conditions. On the other hand, it may be argued that it is exactly the cases of non-performance and insolvency where a practical need for direct claims emerges. In reality, the exception may very well be regarded as the rule.
The UNIDROIT Principles of International Commercial Contracts (PICC), by contrast, dispense with direct claims almost completely. Neither in the case of commission agency (where the existence of a principal is well known to the parties), nor in the case of an undisclosed principal that only appears some time after conclusion of the contract, do the acts of the agent give rise to a direct relationship between principal and third party. This solution is intended to respond to parties’ expectations in international commerce. A direct claim is granted exclusively in one exceptional case and only to the third party. If the agent holds himself out to be the owner of the business on whose behalf he acts and the third party subsequently discovers the real owner, he may exercise the rights he has against the agent also against the real owner (Art 2.2.4(2)). Thus, although the PECL take the continental principle of contemplatio domini as their starting point, in the end they are closer to the common law than the UNIDROIT PICC. Some comparatists attribute greater elegance and intellectual coherence to the clear-cut solution of the UNIDROIT PICC.
The DCFR follows yet another approach that seems to favour the principal over the third party. In cases of indirect representation, the agent’s act can only affect the legal position of the principal if specifically provided for by a rule of law (Art II.-6:106). Such a rule is to be found in the chapter on ‘Change of parties’. According to Art III.-5:104, the principal may—in the case of the intermediary becoming insolvent (and only in that case)—by notice to the third party and to the agent take over the rights of the agent under the contract in relation to the third party. As a consequence, the third party is in a position similar to that of the debtor of an assigned right. In addition, but only if the principal exercises his option, the third party has—by notice to the agent and the principal—a counter-option to exercise against the principal the rights which he has against the agent. The principal may invoke any defences which the agent could set up against the third party, but—unlike under the PECL—he may not invoke the defences he has against the agent, thereby countering the favourable position of the principal who may, in the end, be required to pay twice. Account must also be taken of Art VIII.-2:302 DCFR that grants principal and agent the possibility to specify in their contract whether ownership in goods acquired by the agent passes directly from the third party to the principal.
5. Uniform law
The Geneva Convention on Agency in the International Sale of Goods of 1983 aims at the unification of the rules on representation in an area of considerable practical importance for international commerce. However, the Convention was not able to share in the success of the Convention on Contracts for the International Sale of Goods—it has not even entered into force. It aims to apply ‘irrespective of whether the agent acts in his own name or in that of the principal’ (Art 1(4)). At the outset, the Convention’s approach to the division between direct and indirect representation as well as to the question of direct claims in case of indirect representation seems similar to English law, but then it specifically deals with commission agency as a case of undisclosed agency and restricts direct claims to non-performance and insolvency of the agent. Other acts of uniform law do not concern the substantive rules on representation but rather private international law (representation (PIL)).
EU private law does not contain a specific regime on representation and its consequences in regard to third parties. It does, however, acknowledge in principle that a principal may be bound by an act of his agent in Annex (1)(n) to the Unfair Terms Directive (Dir 93/13), in Art 1(2)(g) of the Rome I Regulation (Reg 593/ 2008), and in the definition of a commercial agent in Art 1(2) of the Commercial Agents Directive (Dir 86/653; although this latter directive is only aimed at the internal relationship between principal and commercial agent). Moreover, EU private law is concerned with the effects of representation in the different instruments on consumer protection. As a general rule, a person does not lose his status as consumer or trader if an intermediary is acting on his behalf (Art 7 of the Commission proposal for a directive on consumer rights even imposed an information requirement to this effect on any trader acting on behalf of a consumer, COM(2008) 614 final). To determine whether a contract is concluded away from business premises, regard is only to be had to the immediate actors, ie the intermediary and his counter-party. A consumer may even enjoy the protection under Directive 85/577 if the trader is unaware that his intermediary approaches the consumer in an off-premises context.
Literature
Wolfram Müller-Freienfels, Stellvertretungsregelungen in Einheit und Vielfalt: Rechtsvergleichende Studien zur Stellvertretung (1982); Michael Joachim Bonell, ‘The 1983 Geneva Convention on Agency in the International Sale of Goods’ (1984) 32 Am J Comp L 717; Reinhard Zimmermann, The Law of Obligations (1996) 45 ff; Tony Weir (tr), Hein Kötz, European Contract Law, vol I (1997) 217 ff, 238 ff; Jens Kleinschmidt, ‘Stellvertretungsrecht in Deutschland und Frankreich: Perspektiven für eine Rechtsvereinheitlichung’ (2001) 9 ZEuP 697; Danny Busch, Indirect Representation in European Contract Law (2005); Francis Reynolds, ‘Authority of Agents’ [2005] ICC International Court of Arbitration Bulletin (Special Supplement) 9; Howard Bennett, ‘Agency in the Principles of European Contract Law and the UNIDROIT Principles of International Commercial Contracts (2004)’ [2006] Uniform Law Review 771; Dominik Moser, Die Offenkundigkeit der Stellvertretung im deutschen und englischen Recht sowie in den internationalen Regelungsmodellen (2010); Michael Joachim Bonell, ‘Agency’ in Arthur S Hartkamp and others (eds), Towards a European Civil Code (4th edn, 2011) 515.
