XML in a Nutshell, 3rd Edition

Name

Entity Declared

Text from specification

In a document without any DTD, a document with only an internal DTD subset that contains no parameter entity references, or a document with standalone='yes' for an entity reference that does not occur within the external subset or a parameter entity, the Name given in the entity reference must match that in an entity declaration that does not occur within the external subset or a parameter entity, except that well-formed documents need not declare any of the following entities: amp, lt, gt, apos, quot. The declaration of a parameter entity must precede any reference to it. Similarly, the declaration of a general entity must precede any reference to it, which appears in a default value in an attribute-list declaration. Note that if entities are declared in the external subset or in external parameter entities, a non-validating processor is not obligated to read and process their declarations; for such documents, the rule that an entity must be declared is a well-formedness constraint only if standalone='yes‘.

Explanation

This long constraint lists the only situations in which an entity reference may appear without a corresponding entity declaration. Since a nonvalidating parser is not obliged to read and parse the external subset, the parser must give the document the benefit of the doubt, if an entity could possibly have been declared.