What type of liability does an undisclosed principal face?

An undisclosed principal is a situation in agency law where the third party is unaware that the agent is acting on behalf of someone else (the principal). In this case, the agent is the one who deals directly with the third party.

The reason the correct answer states that the agent is liable unless the third party is aware of the principal's existence is rooted in the principles of agency law. When an agent acts without disclosing who the principal is, the third party believes they are entering into a contract solely with the agent. Therefore, the agent retains personal liability to that third party for any obligations arising from the contract.

If the third party had knowledge of the principal's existence, the situation would be different, potentially shifting the liability to the principal. However, as long as the principal remains undisclosed, the agent must fulfill the obligations incurred in the transaction. This holds the agent accountable, ensuring that third parties are protected under the assumption that they are dealing directly with the agent.

In conjunction with this, the other options present scenarios that do not accurately reflect agency liability principles, especially in the context of an undisclosed principal. For instance, saying that the agent is fully absolved from liability would misrepresent the responsibilities the agent maintains.