Are You Contracting With a Principal or an Agent? The Distinction Matters

When entering into a contract with a limited company, it is vital to know whether it is acting as principal, in its own right, or as an agent for someone else. Exactly that issue arose in a High Court case concerning a ship renovation agreement.

A shipyard contracted with a company to drydock, convert and paint a barge which was intended to be moored off Westminster with a view to promoting environmental awareness. The company did not own the vessel or have any other interest in her. However, the names and signatures of her owners, two men who were directors and shareholders of the company, did not appear on the contract.

After the shipyard complained that it was owed more than £100,000 for its work, the barge was arrested and sold by the Admiralty Marshall. She fetched a price of just £30,000 and the shipyard launched proceedings against her owners with a view to recovering that sum and the balance of the cost of the works. In upholding the shipyard's claim, the Admiralty Registrar held that the company had entered into the contract as agent for the owners, as undisclosed principals.

In ruling on a challenge to that decision brought by one of the owners, the High Court noted that the company was described as 'the client' in the contract. The shipyard thus bore the heavy burden of proving that the company had acted as agent for the owners, so that they too were bound by the contract's terms.

In rejecting the appeal, however, the Court found that that burden had clearly been discharged in that the company had no interest in the vessel, either as owner, charterer or in possession, and was under no obligation to fund her renovation. A reasonable person would have concluded that the works could not be carried out without the authority of the owners and it would have made no commercial sense for the company to enter into the contract other than as their agent.

The company had no right to make use of the barge and it would on the face of it have been a breach of the owners' duties as directors to commit it to a contract whereby it was obliged to pay for renovation of a vessel in which it had no interest. The Court's decision meant that, pursuant to Section 21(4) of the Senior Courts Act 1981, the shipyard was entitled to enforce its claim against the vessel. It was also enforceable in person against the owner who had acknowledged service of the proceedings.