Don't Bet the Business

For various reasons, in myriad business transactions, contract negotiations, and even complete closings, can be conducted by an agent on behalf of another person or entity. 

Unless the parties agree otherwise, the one making the contract as an agent for a disclosed principal does not become a party to the contract. The opposite is equally true – one who makes a contract for an undisclosed principal is, in fact, a party to the contract even if later it is claimed that was not the intended result. This possibility, which does happen, can have crippling consequences in the event of a dispute over the contract’s performance.

Think about it, who do you sue, and who is actually responsible for damages in the event of a breach?  So what is a disclosed principal, and does that really require any sort of explanation? 

In Michigan, a principal is disclosed if, when making a contract, the other party to it has notice that an agent was acting for someone else and the other party to the contract actually knows of the identity of that someone else.  

While this may seem obvious, entire contracts are sometimes negotiated and signed without the true identity of a party to be bound having ever been mentioned. There is certainly nothing inherently wrong with this, but should problems arise, it can greatly complicate a claim or a defense. Even in cases where the other side is shown to have reason to know the identity of the contracting principal, in court that may be deemed nothing more than an assumption and we all know the popular idiom about assumptions.

Michigan has a strong policy favoring the freedom to contract. Indeed, Michigan contracts, and pretty much all contracts, are interpreted according to their plain and ordinary terms. In the event of dispute, it is never a safe bet to expect a court to look outside the four corners of an agreement to identify the “real” party responsible if that party has not been disclosed and the contract terms are clear. 

So, what does one do? Occam's Razor is a line of reasoning that says the simplest answer is often correct. That principle can be equally true in the law. If you want to be clear who is responsible for a contract, make it clear in the contract. If there are reasons to hide the identity of the contracting principal during a negotiation, understand the risks involved if that identity is not revealed and made part of the contract at the time of execution.

Assuming the other side knows the true party may simply not be enough. Remember, contract protection is found in its clarity. Unfortunately, that clarity is sometimes only revealed at the end of a verdict form.