Contract liability of agents and principals

Question 1

Question #5 (AICPA.931114REG-BL)
Which of the following rights will a third party be entitled to after validly contracting with an agent representing an undisclosed principal?

A. Disclosure of the principal by the agent.
B. Ratification of the contract by the principal.
C. Performance of the contract by the agent.
D. Election to void the contract after disclosure of the principal.

Answer 1

C. Performance of the contract by the agent.

Normally, an agent is not bound by a contract signed on behalf of his principal. However, this question illustrates the exception to the rule, because the principal is UNDISCLOSED. In such a situation, the agent can be made to honor the agreement.

Wrong Answer

D. Election to void the contract after disclosure of the principal.

The third party is bound to the contract, because it was validly formed. There is no right to escape the contractual duties if the principal is ultimately revealed, because the third party may compel the agent to perform on the contract.

Question 2

Question #9 (AICPA.910502REG-BL)
Kent, without authority, contracts to buy computer equipment from Fox Corp. for Ace Corp. Kent tells Fox that Kent was acting on Ace’s behalf.
For Ace to ratify the contract with Fox,

A. Kent must be a general agent for Ace.
B. Ace must know all material facts relating to the contract at the time it is ratified.
C. Ace must notify Fox that Ace intends to ratify the contract.
D. Kent must have acted reasonably and in Ace’s best interest.

Answer 2

B. Ace must know all material facts relating to the contract at the time it is ratified.

To ratify such a contract, the principal must know all material facts, affirm the entire contract, have capacity to ratify the contract, act within certain time constraints, and follow the same formalities (as far as a writing requirement) that the original contract had to follow.

Wrong Answer

D. Kent must have acted reasonably and in Ace’s best interest.

Kent clearly did not act in Ace’s best interests by contracting without authority. The ability of a company to ratify such a contract is independent of the contract itself.
If Ace wishes to ratify, IT must meet certain requirements, but Kent need not have done anything except sign a contract allegedly on Ace’s behalf.

Question 3

Question #10 (AICPA.941117REG-BL)

Bolt Corp. dismisses Ace as its general sales agent and notifies all of Ace’s known customers by letter.
Young Corp., a retail outlet located outside of Ace’s previously assigned sales territory, had never dealt with Ace.
Young knew of Ace as a result of various business contacts.
After his dismissal, Ace sold Young goods, to be delivered by Bolt, and received from Young a cash deposit for 20% of the purchase price. It is not unusual for an agent in Ace’s previous position to receive cash deposits.

In an action by Young against Bolt on the sales contract, Young will

A. Lose, because Ace lacked any implied authority to make the contract.
B. Lose, because Ace lacked any express authority to make the contract.
C. Win, because Bolt’s notice was inadequate to terminate Ace’s apparent authority.
D. Win, because a principal is an insurer of an agent’s acts.

Answer 3

C. Win, because Bolt’s notice was inadequate to terminate Ace’s apparent authority.

If an agent has authority of some kind, he can bind a company to contracts he makes on their behalf. This is true even if the professional relationship has been terminated. Apparent authority may remain effective after a termination. To end all authority, a company must give appropriate notice to EVERYONE, not just to existing customers. The company must give PUBLICATION notice to all businesses of the termination. Otherwise, the dismissed agent retains the power to bind his ex-employer to contracts.

Wrong Answer

B. Lose, because Ace lacked any express authority to make the contract.
If an agent has authority of some kind, he can bind a company to contracts he makes on their behalf. This is true even if the professional relationship has been terminated. Only some kind of authority is required; express authority is not necessarily required. Apparent authority may remain effective after a termination. To end all authority, a company must give appropriate notice to EVERYONE, not just to existing customers. The company must give PUBLICATION notice to all businesses of the termination.
Otherwise, the dismissed agent retains the power to bind his ex-employer to contracts.

Question 4

Question #12 (AICPA.931115REG-BL)

North, Inc. hires Sutter as a purchasing agent.
North gives Sutter written authorization to purchase, without limit, electronic appliances. Later, Sutter is told not to purchase more than 300 of each appliance.
Sutter contracts with Orr Corp. to purchase 500 tape recorders. Orr had been shown Sutter’s written authorization.

Which of the following statements is correct?

A.  Sutter will be liable to Orr, because Sutter's actual authority was exceeded.
B.  Sutter will not be liable to reimburse North if North is liable to Orr.
C.  North will be liable to Orr, because of Sutter's actual and apparent authority.
D.  North will not be liable to Orr, because Sutter's actual authority was exceeded.

Answer 4

C. North will be liable to Orr, because of Sutter’s actual and apparent authority.

The written authorization given to Sutter constitutes actual authority. Actual authority exists whenever an agent acts under direct orders, or takes steps reasonably necessary to complete specific directives. For the first 300 of the 500 recorders, Sutter has actual authority. Further, he has apparent authority to buy the other 200, because Orr can reasonably believe that Sutter is authorized to make such a purchase after seeing his authorization.
An agent has apparent authority to act whenever a third party reasonably believes the agent has authority to act

Wrong Answer

A. Sutter will be liable to Orr, because Sutter’s actual authority was exceeded.
The written authorization given to Sutter constitutes actual authority. Actual authority exists whenever an agent acts under direct orders or takes steps reasonably necessary to complete specific directives. For the first 300 of the 500 recorders, Sutter has actual authority. Further, he has apparent authority to buy the other 200, because Orr can reasonably believe that Sutter is authorized to make such a purchase after seeing his authorization.
An agent has apparent authority to act whenever a third party reasonably believes the agent has authority to act. So, Sutter is liable, but it is because of a combination of actual and apparent authority and not owing to actual authority alone.