Section 231 of the Indian Contract Act, 1872, governs the legal relationship between an agent, a principal, and a third party in situations where the agent enters into a contract without disclosing the existence or identity of the principal. The fundamental principle of this provision is to hold the agent personally liable when they fail to reveal the principal's identity during contractual dealings with a third party. This ensures the protection of the third party’s interests and prevents agents from evading liability by acting solely as intermediaries for a principal whose identity remains undisclosed.
 
Section 231 states that:
“Where an agent enters into a contract without disclosing the existence of a principal, the agent is personally liable on the contract unless the terms of the contract exclude such liability.”
This provision signifies two primary concepts:

• Agent's Personal Liability: The agent is held liable to the third party if they do not disclose the principal’s identity at the time of the contract’s formation.
• Non-Exclusion Clause: If the terms of the contract provide otherwise, the agent may not be personally liable. However, this exception is applicable only if the contract explicitly excludes the agent’s personal liability.

The rationale behind Section 231 is to ensure that third parties are not left without recourse in cases where the agent fails to reveal the existence of a principal. The third party, acting in good faith, should be able to sue the agent directly if the principal’s identity is hidden.
 

Scope and Application of Section 231

The section applies primarily to situations where an agent acts in an undisclosed capacity. That is, the agent enters into a contract without informing the third party that they are acting on behalf of someone else (the principal). In such cases, the agent is personally bound by the contract, and the principal is not immediately liable to the third party.

The section ensures fairness in contractual dealings by holding the agent responsible for their actions, especially when they attempt to evade responsibility by concealing the principal’s identity. This protection is crucial for the third party, as it provides them with a point of recourse when the principal is not immediately identifiable or reachable..
 
Key Legal Principles and Case Law 
To understand the application of Section 231 and the liability of an undisclosed agent, it is essential to examine key legal principles and precedents established by courts.

1. Keighley, Maxsted & Co v. Durant (1901)
   • Facts: An agent entered into a contract with a third party without revealing the identity of the principal. When disputes arose over the contract, the principal denied being bound by the agreement, and the third party sought to enforce the contract against the agent.
   • Legal Principle: The court held that when an agent does not disclose the existence of the principal, the agent is personally liable to the third party. The agent's failure to disclose the principal’s identity effectively made the agent the party directly responsible for the contract.
   • Application: In this case, the agent's failure to disclose the principal's identity bound them to the third party. The third party had the right to sue the agent, and the agent could not avoid liability by claiming to be acting on behalf of a principal whose identity was concealed. This case sets the precedent that an undisclosed agent is personally liable for the contract entered into, and it illustrates the rationale behind Section 231.
      
2. Reed v. The Queen (1893)
   • Facts: An agent acted on behalf of a principal without disclosing the principal's identity in a commercial transaction. The third party, unaware of the principal’s existence, sued the agent when the terms of the agreement were not fulfilled.
   • Legal Principle: The court reinforced the idea that an undisclosed agent is liable to the third party. The agent’s failure to reveal the principal’s identity prevents the third party from holding the principal accountable directly.
   • Application: This case highlights that the undisclosed agent remains liable even if they are merely acting as an intermediary. The third party's ignorance of the principal’s identity strengthens the argument that the agent should be held responsible for their actions under the contract.
      
3. Montgomery v. The Queensherry (1933)
   • Facts: In this case, an agent entered into a contract with a third party, but the principal’s identity was never revealed. When the third party sought to enforce the contract, the agent attempted to escape liability by claiming they were merely acting as an agent.
   • Legal Principle: The court ruled that the agent was personally liable for the contract, as the principal’s identity was never disclosed. It emphasized that an undisclosed agent does not have the defense of representing a principal if the third party was not informed.
   • Application: This case further solidifies the notion that the agent must disclose the principal’s identity to avoid personal liability. If an agent fails to do so, they remain personally liable for any breach of contract or other legal obligations that arise from the agreement.
      
4. Lakhmi Narayan Ram Gopal v. Hyderabad Government (1954)
   • Facts: In this case, an agent entered into a commercial transaction with the third party without disclosing the existence of the principal. The third party sought to enforce the contract and hold the agent personally accountable, as the principal’s identity had not been revealed.
   • Legal Principle: The Supreme Court emphasized that an agent who does not disclose the principal's identity is personally liable for the obligations that arise under the contract. The court held that the agent, by not revealing the principal, bears the legal consequences directly.
   • Application to Company B: In the context of Company B, if it engaged in contractual dealings with a third party without disclosing its principal, Company A, it would be liable for the contract under the principle laid out in this case. Despite acting on behalf of Company A, the failure to disclose this relationship would bind Company B to the contractual obligations.
      
5. Kapila Hingorani v. State of Bihar (2003)
   • Facts: In this case, the principle of “lifting the corporate veil” was invoked to hold subsidiaries accountable for the parent company's obligations. The case involved a situation where the relationship between a subsidiary and the parent company lacked transparency.
   • Legal Principle: The principle of lifting the corporate veil allows the court to disregard the separate legal identity of a corporation or agent and hold it liable for the actions of its parent company or principal.
   • Application to Company B: If there was an attempt to avoid liability by obscuring its relationship with the principal, a similar principle of lifting the veil could be applied. The courts could hold Company B accountable for failing to disclose the principal.
      
6. Associated Cement Companies Ltd. v. Keshvanand (1998)
   • Facts: This case involved an agency relationship where the agent attempted to avoid liability in a commercial contract by claiming it was acting only as an intermediary.
   • Legal Principle: The court ruled that an agent cannot avoid liability if they engage in activities that imply a direct contractual relationship with the third party.
   • Application to Company B: In the case of Company B, its involvement in making payments and engaging in contractual activities would likely imply a direct contractual relationship with the third party.
      
7. Rajendran v. S.S. Durgaprasad & Co. (1961)
   • Facts: In this case, an agent entered into a contract with a third party without disclosing the identity of the principal. When the third party sought to enforce the contract, the agent was held personally liable.
   • Legal Principle: The court held that an undisclosed agent is personally liable for the contract since the principal's identity had not been disclosed at the time of the contract.
   • Application: This case reinforces the principle that an undisclosed agent is liable for the contractual obligations, even if the agent was acting on behalf of a principal whose identity was not disclosed to the third party.
      
8. N. S. Ramaswamy v. S. T. Murthy (1993)
   • Facts: This case involved a situation where the agent did not disclose the identity of the principal.
   • Legal Principle: The court held that the agent is personally liable if the principal’s identity is concealed, reinforcing the distinction between disclosed and undisclosed agents.
   • Application: This case aligns with Section 231 of the Indian Contract Act by reinforcing that an undisclosed agent is personally liable for the contract entered into on behalf of the principal whose identity is concealed.

 
Scenario: Company B’s Liability
In a scenario where Company B enters into a contract without revealing that it is acting as an agent for Company A, and the third party (Company C) later seeks to enforce the agreement, Company B will be personally liable under Section 231 of the Indian Contract Act, 1872. The absence of disclosure regarding the agency relationship means that Company B becomes the party directly responsible for the contract. Even though Company B was acting on behalf of Company A, its failure to disclose this fact to Company C makes it liable for any breach of contract. Company C can sue Company B directly and Company B cannot escape liability by claiming to represent a principal it has not disclosed.

Commercial Context and Implications

In commercial transactions, it is essential for an agent to disclose the principal’s identity for the following reasons:

• Transparency and Accountability: Disclosure ensures that the third party is aware of who they are dealing with and whom to hold accountable for the contract.
• Preventing Evasion of Liability: When agents like Company B participate in contractual activities, such as making payments, they create a legitimate expectation that they are assuming responsibility for the agreement. Allowing Company B to later deny liability by hiding its agency status would undermine principles of fairness and good faith in business dealings.

Recommendations for Addressing the Dispute

To address the dispute, the third party (such as the supplier of goods) should take the following steps:

• Invoke Section 231: The third party should assert that Company B’s failure to disclose its role as an agent makes it personally liable under Section 231 of the Indian Contract Act.
• Cite Relevant Case Law: The third party should rely on precedents such as Keighley, Maxsted & Co v. Durant and Lakhmi Narayan Ram Gopal v. Hyderabad Government to substantiate the claim that the undisclosed agent is personally liable.
• Request Lifting of the Corporate Veil: If necessary, the third party may argue for the lifting of the corporate veil, especially if Company B attempts to use its corporate structure to evade liability, similar to the principle in Kapila Hingorani v. State of Bihar.