Two Cheers for Certainty: The Rights and Liabilities of Undisclosed Parties

AuthorBenjamin Zarnett
ProfessionGoodmans LLP
Pages3-21
Two
Cheers
faor
Certainty:
I.
INTRODUCTION
Appellate courts
in
Canada have addressed,
on a
number
of
occasions,
the
rights
and
liabilities
of
persons
who are not
named
as
parties
to
con-
tracts. These
issues
are of
great importance
to the
real estate
and
real
estate litigation bars, because
of the
frequent
use in
real estate transac-
tions
of
structures
trusts,
bare trusts, nominee corporations, undis-
closed agencies,
and
others
which involve persons
who are in one
sense
part
of the
transactions
but who are
intentionally
not
signatories
to the
actual contracts with third parties.
The
courts have confronted,
in
dealing with these
issues,
arguments
about what rules
or
series
of
rules,
and
what exceptions
to
those rules,
best meld justice
and
fairness
on the one
hand with commercial reality
and
certainty
on the
other.
This paper attempts
to
outline
the
rules
as the
courts have
found
them,
to
identify
the
underlying rationales,
and to
provide
an
analytical
framework
for
considering what these rights
and
liabilities will
be in
different
circumstances.
Based
on the
case law, this requires three ques-
tions
to be
addressed:
Of
Goodmans
LLP,
Toronto.
3
The
Rights
and
Liabilities
of
Undisclosed Parties
Benjamin
Zarnett
4
Benjamin Zarnett
a)
What
are the
rights
and
liabilities
if the
contract
is
simple (i.e.,
not
under seal)?
b)
What
are the
rights
and
liabilities
if the
contract
is
under seal?
c)
How
does
one
distinguish category
(a)
from
category (b)?
II.
SIMPLE
CONTRACTS
1)
The
General Rule
of
Agency
Under
the
general rule
of
agency, where
a
duly authorized agent enters
into
a
simple contract (i.e.,
a
contract that
is not
under seal) with
a
third
party
on
behalf
of a
principal,
the
principal
can
both sue,
and be
sued
by,
the
third party. This general rule applies even
in
circumstances
where
the
principal
is
undisclosed; that
is,
where
the
third party does
not
know
at the
time
of
contracting that
the
principal exists.
The
gener-
al
rule also applies where
the
agent
is
what
is
known
as a
"bare trustee"
or
nominee.
2)
The
Liability
of
Disclosed Principals
Where
the
agent acts
on
behalf
of a
disclosed
principal, that
is,
where
the
third party knows that
the
agent
is
entering into
the
contract
on
behalf
of
another person,
the
agent acts
as
nothing more than
a
conduit
through whom
the
parties' respective
offer
and
acceptance
flow.
Direct
contractual relations
are
created between
the
third party
and the
princi-
pal. Accordingly,
the
rights
and
obligations that arise under
the
contract
are
binding
on, and can be
enforced
by and
between,
the
principal
and
the
third party.
As one
author
has put it:
A
direct contractual relationship
is
thereby created between principal
and
third
party
by the
acts
of the
agent,
who is
not, himself,
a
party
to
that relationship. This,
indeed,
is the
very purpose
and
rationale
of
agency.1
G.H.L.
Fridman,
The Law
of
Agency,
7th ed.
(Toronto:
Butterworths, 1996)
at
20-21,
216-17;
see
also S.M. Waddams,
The
Law
of
Contracts,
3d ed.
(Toronto:
Canada
Law
Book,
1993)
at
para. 252.
1

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