When Dr Jekyll Turns out to be Mr Hyde – The Undisclosed Principal to a Land Contract and Section 52?

Amanda Stickley

The action for misleading or deceptive conduct is increasing in its application with the development that silence may amount to a breach of s 52 Trade Practices Act 1974 (Cth). The use of an agent is common practice in commercial transactions, and in some situations a party will be an undisclosed principal to avoid having their true identity revealed. This is accepted under the common law as a recognised category of agency. However, under the provisions of the legislation, it would appear possible that a corporation as an undisclosed principal to a contract, may be engaged in misleading or deceptive conduct. This paper intends to focus on the use of the undisclosed agency in land transactions.

The scope for the future development of the action for misleading or deceptive conduct is as wide as the language of s 52 in its primary and extended operation...

Justice French, ‘The Action for Misleading or Deceptive Conduct: Future Directions’in Misleading or Deceptive Conduct: Issues and Trends.[1]

Introduction

There can be no doubt as to the widening impact of the Trade Practices Act 1974 (Cth) on commercial dealings in setting standards for the conduct of trade and commerce. This has led to much debate concerning how the common law and the legislation interrelates. Of particular note is the effect of s 52 on the traditional general law. Such areas as tort, contract, passing off and defamation have all experienced the far reaching effect of the provision prohibiting misleading or deceptive conduct.

As French J wrote in 1989, “[s 52's] limits are yet to be reached”.[2] This appears to be true as the Federal Court continues to expand the concept of what amounts to misleading or deceptive conduct. Of note is the relevance of s 52 to land contracts.[3] It is now well established that a vendor who makes misrepresentations as to the use of land can be found guilty of misleading and deceptive conduct.[4] A further development in the last decade is the concept that silence can be misleading or deceptive conduct in breach of s 52 of the Trade Practices Act 1974 (Cth).[5] Actions for non-disclosure in respect of land contracts have so far only been brought by purchasers against vendors. However, the words of s 52 do not prohibit an action for misleading or deceptive conduct being brought against a purchaser.

What are the rights of a vendor against a purchaser whose silence has induced the vendor to enter into a land contract that otherwise the vendor would not have done so? This situation could arise where the vendor has objections to selling the property to a certain person or corporation. The purchaser could employ an agent to overcome this obstacle without revealing the existence of the agency relationship. The utilisation of an agent for such objectives is a common and accepted commercial practice.

The Law of Agency

An agent creates legal relations between a principal and a third party. The agency exists when one party is authorised by the other to act on their behalf in respect of acts that affect their rights and duties in relation to third parties. The existence of the agency may be openly acknowledged, or the agent may enter into the contract without revealing that they are contracting on behalf of another. At common law, the latter situation falls within the doctrine of the undisclosed principal.

The doctrine of the undisclosed principal

In ordinary agency, where the principal and the existence of the agency relationship are disclosed, the agent is merely the instrument through which the principal becomes a party to the contract. Therefore, the principal acquires rights and liabilities under the contract.[6] Where the principal is undisclosed, to all intents and purposes, the agent is the party to the contract who will assume the rights and liabilities.

The doctrine of the undisclosed principal is at variance with one of the fundamental rules of the law of contract.[7] The rule of privity of contract allows only the parties to the contract to acquire rights and liabilities under that contract. Under the doctrine of undisclosed principal, the principal may be sued or may sue on the contract that is made by its agent, despite the fact that upon strict interpretation, the agent is the contracting party and the undisclosed principal is a third party to that contract.[8]

Commentators have suggested that the basis of the doctrine is similar to assignment, without the evidence of a transfer, the undisclosed principal being the implied assignee of the agent.[9] Bowstead suggests that the doctrine developed simply for commercial convenience,[10] and is now firmly established despite being criticised as “unsound”, “unjust” and “inconsistent with elementary principles”.[11] In Armstrong v Stokes, Blackburn J stated in respect of the legality of the doctrine:

It has often been doubted whether it was originally right to hold so: but doubts of this kind come now too late.[12]

As in any agency relationship, for the undisclosed principal to sue or be sued on the contract, the agent must have acted within its authority in entering into the contract. The authority can be either express or implied.[13]

The agent of an undisclosed principal will be personally liable under the contract to the vendor, as the agent has contracted personally.[14] The agent loses the right to sue if the principal intervenes on the contract. Therefore, both the agent and the undisclosed principal may sue and be sued on the contract.[15] Upon the vendor discovering the existence of the undisclosed principal, the vendor has the option to choose between the agent or the principal to enforce the rights under the contract.[16] If the vendor seeks to enforce the contractual rights or liabilities against the agent, the agent will be personally liable.[17]

Application of the Principles to Land Contracts

From the case law, a vendor who is wishing to avoid a contract on the grounds that the undisclosed principal was not the party the vendor intended to enter into contractual relationship with, they will have to establish that the identity of the agent or the undisclosed principal is material to the transaction.[18] The fact that the vendor did not wish to enter into a contract with the undisclosed principal, will not be a material element of the contract, unless the vendor contracted with the agent due to some personal attribute of that agent.

It is difficult to see how the identity of an agent would be a material element in the contract for the sale of land. As argued by Stoljar, a land contract does not involve an ongoing personal relationship between the vendor and the purchaser.[19] This appears to be the approach taken by the court in Williams v Bulat.[20]

If then, in land contracts, the identity of the purchaser is unlikely to be a personal consideration, does an agent, as a purchaser, owe any obligation of disclosure to the vendor?

Obligations Between Vendor and Purchaser

In land contracts, the obligations of the vendor are well established.[21] The obligations of the purchaser of land are far less onerous. In Coaks v Boswell, the Earl of Selbourne LC stated:

Every...purchaser is bound to observe good faith in all that he says and does, with a view to the contract, and (of course) to abstain from all deceit, whether by suppression of truth, or by suggestion of falsehood. But inasmuch as a purchaser is (generally speaking) under no antecedent obligation to communicate to his vendor facts which may influence his own conduct or judgment when bargaining for his own interest, no deceit can be implied from his mere silence as to such facts, unless he undertakes or professes to communicate them.[22]

His Lordship went on further to say that a purchaser who intentionally misleads the vendor on any material point, will be guilty of fraud and the contract could be set aside.[23] Therefore, if an agent misrepresents to the vendor who they are acting for, the contract could be avoided by the vendor. In Archer v Stone,[24] the defendant asked the plaintiff if he was acting for a particular third party. The plaintiff replied untruthfully that he was not. North J held that the misrepresentation had induced the defendant to enter into the contract and therefore specific performance could not be granted.

If [the agent] tells a lie relating to any part of the contract or its subject matter, which induces another person to contract to deal with his property in a way he would not do if he knew the truth, the man who tells the lie cannot enforce his contract.[25]

None of the cases involving the doctrine of the undisclosed principal to a land contract discuss the obligations of the purchaser to a vendor. An agent and principal are in a recognised fiduciary relationship. For an agent to reveal the existence or identity of its undisclosed principal would be a breach of the agent’s fiduciary duty. An agent, therefore, does not have the obligation to disclose the existence of the agency to the vendor, even if the agent were aware of the vendor’s objection to contracting with the undisclosed principal. But is this duty of confidence on the part of the agent applicable when the agent is, upon strict interpretation, the actual purchaser? Duncan and Jones suggest that an agent does not have a legal obligation to disclose the agency, unless it is a material element in the vendor’s acceptance.[26]

As to whether the agency is a material element in the vendor’s acceptance, presumably it would need to be a personal consideration, that is, an attribute of the agent that induces the vendor to enter into the contract.[27] As discussed above, this would be difficult to prove in relation to land contracts. The fact that the vendor has objections to contracting with the undisclosed principal does not make the identity of the purchaser material. It is argued that it is only in respect of personal contracts, that the identity of the purchaser would be a material element.[28]

Position of the Agent of the Undisclosed Principal at Common Law

At common law, the agent of an undisclosed principal is not guilty of any sharp practice or misleading conduct. In Williams v Bulat,[29] Ambrose J made reference to the fact that it was not unusual in business for a purchaser to keep their identity hidden by engaging an agent for the purpose of negotiating a lower price. In that case, the reason for using an agent was solely to avoid paying an inflated price for the property, the defendants being willing to sell to anyone else at a lower price.[30] The doctrine of the undisclosed principal, despite being harshly criticised, is accepted as part of the law of agency, justified on the grounds of commercial convenience or even economic grounds to overcome strategic bargaining practices.

The Real Estate Agent

It is usual in land contracts for the vendor to appoint a real estate agent to locate a purchaser for the property. The real estate agent is subject to many duties, owed to the vendor as principal, arising from the fiduciary relationship between the parties. As Cardozo stated in Meinhard v Salmon:

The rule of undivided loyalty is relentless and supreme.[31]

The duty of the real estate agent, stated broadly, is to act in good faith in the best interests of the vendor. Under the laws of agency, an agent is bound to keep the principal informed about matters which would be of concern to the principal.[32] To fulfill this duty, the real estate agent must disclose to the vendor all matters that may affect the vendor’s judgment in relation to the land transaction. In Georgrieff v Athans, Waters J stated in respect of information as to the financial standing of the purchaser:

...I would deem it [the real estate agent’s] duty to convey to the vendor any material, information or advice which the vendor should know in order to guide him in transacting the business in progress. [33]

As to what are matters which would affect the vendor’s judgment, the rule is that a real estate agent should disclose what a reasonable agent would consider material in the ordinary course of business.[34]

The real estate agent is required to make full disclosure of all offers made to purchase the property. There must be full and accurate disclosure of all material facts to the vendor before obtaining consent to enter into the contract of sale. This duty of disclosure continues until the completion of the contract.[35]

Should the real estate agent become aware that the purchaser being dealt with is in fact acting as an agent for an undisclosed principal, the real estate agent would be under a duty to disclose that information to the vendor. The identity of the purchaser would be information which “the vendor should know in order to guide him in transacting the business in progress”.[36] This would be even more applicable if the real estate agent was aware that the identity of the purchaser was a material element of the contract for the sale of the property.[37]

Section 52 Trade Practices Act 1974 (Cth)

Section 52(1) of the Trade Practices Act 1974 (Cth) (hereinafter referred to as ‘the Act’) provides:

A corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive, or is likely to mislead or deceive.

The section is directed at foreign corporations, trading and financial corporations formed within Australia, bodies corporate incorporated in a Territory and any holding company of the preceding.[38] By virtue of the operation of s 6, the application of s 52 extends to persons in specific circumstances.

Section 52 will apply to natural persons where:

(i)the person engages in conduct in the course of interstate trade or commerce with a Territory or the Commonwealth, or in trade or commerce with a place outside of Australia;[39]

(ii)the person engages in conduct in the course of telephone, telegraphic, or postal services or telephone or radio broadcasts;[40]

(iii)the person engages in conduct in the course of advertising for business or professional services.[41]

The section applies to corporations which engage in “trade or commerce”.[42] Conduct in the course of negotiations is within the ambit of the section. But the private sale of goods or land is not.[43]

As to whether the conduct in question is misleading or deceptive, it is determined objectively in view of the existing circumstances.[44] It is not necessary to establish that there was any intention to mislead or deceive.[45] Conduct which can be characterised as inducing or capable of inducing error will be characterised as misleading or deceptive.[46]

The Act provides that a remedy may be obtained against the person who has contravened the Act and any person who is “involved in the contravention”.[47] A person is defined to be “involved in the contravention” if they have knowledge of the facts which constitute the contravention of the Act.[48]

All States have enacted legislation mirroring the Commonwealth Act, the remedies being limited to “consumers”. In Queensland, s 6 of the Fair Trading Act 1989 defines “consumer” to include:

(i)a person who acquires an interest in land otherwise than for a business carried on by that person;

(ii)a person who acquires an interest in land for a business if the interest in land is not more than $40,000; or

(iii)a corporation which acquires an interest in land for less than $40,000.

Due to this restricted definition of “consumer”, it is more likely that an action brought in relation to a land contract, will not come under the Fair Trading legislation of the States, but recourse will have to be to the Federal Act.

Section 52 and the Common Law

As an increasing number of cases were brought under s 52, there was much debate as to whether the Act imposes a code of conduct in commercial dealings that alters the common law. The case law has now established that s 52 imposes a “broadly stated standard of commercial probity”.[49] Section 52 does not alter the common law by imposing a duty of disclosure, but it does impose a code of conduct.

As to what is the standard of conduct imposed, in General Newspapers Pty Ltd v Telstra Corporation it was observed that:

[Section 52] does not require arms’ length negotiations to be completely open or require full disclosure at all times. The particular facts of the case must be considered in the light of the ordinary incidents and character of the commercial behaviour.[50]

The obligation to disclose material matters in the course of negotiation is considered by the courts on a case by case basis. Whether conduct in commercial transactions, that under the general law is merely considered to be ordinary business practice is caught by s 52, is dependent on the circumstances.

At common law, parties to a commercial dealing who are at arms’ length have no duty of disclosure.[51] In Poseidon Ltd v Adelaide Petroleum NL,[52] it was held that s 52 did not challenge the usual practices of commercial negotiation, but that the bargaining process is not a licence to deceive. It is common in negotiations that one party will possess information which, if the other party had knowledge of, may cause the other party to alter their negotiating stance. In the recent case of Walker Corporation Ltd & Anor v Australia NID Pty Ltd & Ors,[53] a vendor orally agreed to sell real estate to a purchaser, but before contracts were exchanged, the vendor received a higher offer and contracted with the new purchaser. The original purchaser claimed that the vendor was guilty of misleading or deceptive conduct by silence in failing to inform them that it was considering another offer for the property.

The court held that the mere act of the vendor agreeing to sell when it had already orally agreed to sell for a lesser sum, would not ordinarily be a breach of s 52, as the vendor was not bound to sell to the original purchaser. The court made reference to the accepted commercial dealings in such situations:

Although s 52 must be applied according to the words which it uses and ought not be read down by reference to principles of common law or equity, a judgment as to what is and what is not deceptive conduct ought not be made without regard to relevant relationships established by principles of law applying in commercial transactions.[54]

Silence in Negotiations

Failing to disclose information may to amount to misleading or deceptive conduct. Silence will only be in breach of s 52 when the person who has failed to make the disclosure is aware or has knowledge of the information which has been omitted. The silence in respect of a fact is “conduct” as defined under the Act, if the failure to disclose involves some actual or deemed decision making.[55]