Dammann's Agency MCQs Flashcards
When Jennifer, a famous actress, walks by a jewelry store, she notices a beautiful ring in the window. Unfortunately, she does not have her credit card with her. Later in the day, she tells a friend of hers, Ben, about the ring, saying: “I would love to have that ring but don’t have the time to go to the jewelry store tomorrow.” Ben offers to buy the ring on her behalf. Jennifer is delighted and tells him: “You are such a darling. Just make sure that you make it clear that you are buying the ring on my behalf. After all, I am famous, and the store owner will probably sell it at a lower price if he knows I’m the buyer. Also, you don’t have to pay the store owner immediately. Just tell him he will be paid by the end of the week.” Ben agrees to do this. Later, however, he thinks the matter over and comes to the conclusion that he will probably be able to buy the ring more cheaply if he does not mention Jennifer’s involvement. The next day, therefore, Ben goes to the jewelry store and buys the ring at a price of $1000 without ever mentioning that he is acting on someone else’s behalf. George is the owner and operator of the store. Ben receives the ring after promising that George will get the money by the end of the week. Which of the following statements is most correct?
(A)Jennifer is an undisclosed principal.
(B)Jennifer is an unidentified principal.
(C)Jennifer is a disclosed principal.
(D)Ben has overstepped his actual authority but has acted with apparent authority.
(A) is the correct answer.
Under §1.04(2)(b) of the Restatement (Third) of Agency, a “principal is undisclosed if, when an agent and a third party interact, the third party has no notice that the agent is acting for the principal.” According to §1.04(4), a person has notice of a fact “if the person knows the fact, has reason to know the fact, has received an effective notification of the fact, or should know the fact to fulfill the duty owed to another person.” Applying this definition, we find that George, our third party, did not have notice of the fact that Ben was acting on Jennifer’s behalf. Accordingly, Jennifer is an undisclosed principal. The fact that Ben should have disclosed Jennifer’s involvement is immaterial.
(B) is incorrect.
Under §1.04(2)(c) of the Restatement (Third) of Agency, a “principal is unidentified if, when an agent and a third party interact, the third party has notice that the agent is acting for a principal but does not have notice of the principal’s identity.” According to §1.04(4), a person has notice of a fact “if the person knows the fact, has reason to know the fact, has received an effective notification of the fact, or should know the fact to fulfill the duty owed to another person.” In the case at hand, George did not know and had no reason to know that the transaction involved anyone else but Ben. Therefore, Jennifer cannot be an unidentified principal.
(C) is incorrect.
Under §1.04(2)(a) of the Restatement (Third) of Agency, a “principal is disclosed if, when an agent and a third party interact, the third party has notice that the agent is acting for a principal and has notice of the principal’s identity.” According to §1.04(4), a person has notice of a fact “if the person knows the fact, has reason to know the fact, has received an effective notification of the fact, or should know the fact to fulfill the duty owed to another person.” In the case at hand, George did not know and had no reason to know that the transaction involved anyone else but Ben. Therefore, Jennifer cannot be a disclosed principal.
(D) is incorrect.
According to §2.03 of the Restatement (Third) of Agency, apparent authority requires that “a third party reasonably believes the actor has authority to act on behalf of the principal and that belief is traceable to the principal’s manifestations.” In the case at hand, George did not believe that Ben had authority to act for Jennifer. Accordingly, Ben did not act with apparent authority.
Peter sends his employee Raphael to buy a pizza at Casey’s Italian restaurant. Raphael tells Casey that he, Raphael, is acting for Peter. Secretly, though, Raphael wants the contract to be between himself and Casey. Casey, taking Raphael at his word, assumes that the latter is acting on behalf of Peter. Has a contract been formed between Casey and Peter?
(A)Yes, because Raphael acted with actual authority and because Casey reasonably assumed that Raphael was Peter’s agent.
(B)Yes, because Raphael acted with apparent authority and because Casey reasonably assumed that Raphael was Peter’s agent.
(C)No, because Raphael did not have authority.
(D)No, because Raphael acted for himself rather than for Peter.
(A) is the correct answer.
It is clear that a contract was formed because the agreement between Raphael and Casey was based on mutual assent and consideration. The decisive question, though, is whether that contract binds Peter. This depends on whether Raphael as Peter’s agent has managed to bind Peter to the contract.
If you are faced with the question of whether an agent has bound the principal, you need to ask two questions. First, did the agent act on behalf of the principal in concluding the contract? And second, did the agent have the authority to bind the principal to that contract?
To determine whether the agent acted on behalf of the principal, you need to establish the principal’s status. When dealing with a disclosed or unidentified principal, the question of whether the contract was entered into on behalf of the principal is determined from the perspective of the third party. The question, in other words, is how the third party could reasonably understand the agent’s conduct. By contrast, what matters in the case of an undisclosed principal is the intention of the agent.
Under §1.04(2)(a) of the Restatement (Third) of Agency, a “principal is disclosed if, when an agent and a third party interact, the third party has notice that the agent is acting for a principal and has notice of the principal’s identity.” Here, Casey had notice that Raphael was acting for Peter, so Peter was a disclosed principal. Accordingly, in determining whether Raphael was acting on Peter’s behalf, we need to focus on Casey’s (that is, the third party’s) perspective. Given that Raphael had told Casey that he, Raphael, was acting for Peter, we therefore conclude that Raphael was acting on Peter’s behalf.
The question remains whether Raphael had the necessary authority to bind Peter to the contract. Basically, the Restatement (Third) of Agency recognizes two types of authority that allow the agent to bind the principal, namely actual authority and apparent authority. Moreover, even if the agent has neither actual nor apparent authority to bind the principal, the principal may be bound as a result of estoppel or ratification. Under §2.01 of the Restatement (Third) of Agency, “[a]n agent acts with actual authority when, at the time of taking action that has legal consequences for the principal, the agent reasonably believes, in accordance with the principal’s manifestations to the agent, that the principal wishes the agent so to act.” Here, Raphael knew that Peter wanted him to act as Peter’s agent in buying the pizza. Therefore, Raphael had actual authority. Given that Raphael acted on Peter’s behalf and had actual authority, a binding contract was formed between Peter and Casey.
(B) is incorrect.
Raphael acted with actual rather than apparent authority (see the answer to choice A).
(C) is incorrect.
Raphael had actual authority (see the answer to choice A).
(D) is incorrect.
The fact that Raphael secretly intended to conclude the contract for himself is immaterial (see the answer to choice A).
Arturo tells his employee Charlie to rent a Ferrari for him from a nearby car rental enterprise. As soon as Charlie has left, Arturo calls the relevant car rental enterprise, states his name, and says: “I have sent my employee Charlie over to rent a car for me. He can rent any car as long as it is luxurious.” The employee in charge at the car rental enterprise concludes that Charlie has authority to rent a luxurious car for Arturo, no matter the brand. As it happens, the car rental no longer has Ferraris in store. Therefore, Charlie decides to rent a Bentley instead. Is Arturo bound to the contract, and, if so, why?
(A)Arturo is bound to the contract because Charlie acted with actual authority.
(B)Arturo is bound to the contract because Charlie acted with apparent authority.
(C)Arturo is bound to the contract because the contract was ratified.
(D)Arturo is bound to the contract because of estoppel.
(B) is the correct answer.
It is clear that a contract was formed because the agreement between Charlie and the car rental company involved both mutual assent and consideration. The decisive question, though, is whether and how that contract binds Arturo.
If you are faced with the question of whether an agent has bound the principal, you need to ask two questions. First, did the agent act on behalf of the principal in concluding the contract? And second, did the agent have the authority to bind the principal to that contract?
To determine whether the agent acted on behalf of the principal, you need to distinguish. When dealing with a disclosed or unidentified principal, the question of whether the contract was entered into on behalf of the principal is determined from the perspective of the third party. The question, in other words, is how the third party could reasonably understand the agent’s conduct. By contrast, what matters in the case of an undisclosed principal is the intention of the agent.
Under §1.04(2)(a) of the Restatement (Third) of Agency, “[a] principal is disclosed if, when an agent and a third party interact, the third party has notice that the agent is acting for a principal and has notice of the principal’s identity.” In the case at hand, Arturo’s phone call to the car rental company ensured that the car rental agency had notice that Charlie was acting for Arturo, so Arturo was a disclosed principal. Accordingly, in determining whether Charlie was acting for Arturo, we have to focus on the car rental agency’s perspective. Since the car rental agency knew that Charlie was acting for Arturo, we can conclude that Charlie was acting on Arturo’s behalf.
The second question is whether and Charlie had the necessary authority to bind Arturo to the contract. The Restatement (Third) recognizes two types of authority that allow the agent to bind the principal, namely actual authority and apparent authority. Moreover, even if the agent has neither actual nor apparent authority to bind the principal, the principal may be bound as a result of estoppel or ratification. Under §2.01 of the Restatement (Third) of Agency, “[a]n agent acts with actual authority when, at the time of taking action that has legal consequences for the principal, the agent reasonably believes, in accordance with the principal’s manifestations to the agent, that the principal wishes the agent so to act.” In the case at hand, Charlie had reasonable grounds for believing that Arturo wanted him to rent a car but only a Ferrari, not a Bentley. Therefore, Charlie did not have actual authority to rent the Bentley.
What about apparent authority? According to §2.03 of the Restatement (Third) of Agency, apparent authority requires that “a third party reasonably believes the actor has authority to act on behalf of the principal and that belief
is traceable to the principal’s manifestations.” Given that Arturo had called ahead and told the rental agency that Charlie was authorized to rent any luxurious cars, these requirements are met. Therefore, Charlie acted with apparent authority.
(A) is incorrect.
In the case at hand, Charlie acted with apparent rather than actual authority (see the answer to choice B).
(C) is incorrect.
Charlie had apparent authority (see the answer to choice B). Therefore, there was no room for ratification.
(D) is incorrect.
Charlie had apparent authority (see the answer to choice B).
Nyusha, who owns and operates a ranch, tells her employee Dylan to go see Marcus, a horse trader, and inquire if he has any good horses to sell. Nyusha also tells Dylan not to buy any animals yet but simply to report back on what Marcus might be offering. Dylan goes to Marcus and tells him that she is looking to buy some horses for Nyusha. He offers her a white horse for $20,000 and a black horse for $25,000. Disregarding her instructions, Dylan buys both horses in Nyusha’s name as part of a single transaction for a total price of $45,000. The contract is in writing and signed by both Dylan and Nyusha. Dylan purchased the horses because she is convinced that Nyusha will be o.k. with the deal. When she reports back to Nyusha, the latter is shocked. Nyusha then visits Marcus, tells him that Dylan was not allowed to buy anything and also says: “I like the black horse, so I will pay you the $25,000, but I am not taking the white horse.” Marcus, who has another willing buyer for both horses, tells Nyusha to “get lost.” Does Nyusha have any rights against Marcus?
(A)Yes, because Dylan acted with actual authority.
(B)Yes, because Dylan acted with apparent authority.
(C)Yes, because Nyusha ratified the contract.
(D)No.
(D) is the correct answer.
It is clear that a contract was formed because the agreement signed by Dylan and Marcus was based on mutual assent and consideration. Also, the contract was in writing and signed by both parties, such that the writing requirement in §2–201 of the Uniform Commercial Code for sales contracts for $500 or more was satisfied. The question, though, is whether Nyusha can derive any rights from this contract.
A contract entered into by the agent binds the principal if the agent acted on behalf of the principal and with the authority to bind the principal. In this case, Dylan acted on behalf of the principal (for a closer analysis of the relevant principles see the answer to question 2). But did Dylan have the necessary authority?
Under §2.01 of the Restatement (Third) of Agency, “[a]n agent acts with actual authority when, at the time of taking action that has legal consequences for the principal, the agent reasonably believes, in accordance with the principal’s manifestations to the agent, that the principal wishes the agent so to act.” In the case at hand, Dylan knew full well that Nyusha did not want her to buy any horses, so Dylan did not have actual authority.
What about apparent authority? Under §2.03 of the Restatement (Third) of Agency, apparent authority requires that “a third party reasonably believes the actor has authority to act on behalf of the principal and that belief is traceable to the principal’s manifestations.” In the case at hand, Nyusha had not done anything that would suggest to Marcus that Dylan had authority to buy horses. Accordingly, Dylan did not have apparent authority either.
Even in the absence of authority, the contract binds the principal if the principal ratifies the contract. Ratification occurs where the principal’s conduct justifies the assumption that the principal wants to be bound by the act undertaken by the agent. However, in order for this to be effective, the relevant act must be ratifiable (§4.03 of the Restatement (Third) of Agency), the principal must have capacity to ratify (§4.04), ratification must occur in a timely manner (§4.05), and the ratification must encompass the act in its entirety (§4.07). In the case at hand, this last requirement is not met since Nyusha only wanted to ratify part of the contract. (Note: If Dylan had entered into two contracts on Nyusha’s behalf, then Nyusha could have ratified one but not the other. But in the case at hand, there was only one contract, and partial ratification is not allowed). Moreover, if the agent has acted without actual or apparent authority, the other party has the right to withdraw from the contract. Once the other party has exercised her withdrawal right, ratification is no longer timely (cf. §4.05(1) of the Restatement (Third) of Agency)).
A contract can also be binding on the principal as a result of estoppel, but in order for estoppel to apply, the other party (in this case: Marcus) has to invoke it. Marcus, however, does not want to be bound to the contract. In sum, Nyusha does not have any contractual rights against Marcus.
(A) is incorrect.
Dylan did not have actual authority (see the answer to choice D).
(B) is incorrect.
Dylan did not have apparent authority (see the answer to choice D).
(C) is incorrect.
Nyusha did not ratify the contract (see the answer to choice D).
atima owns and operates a bookstore called “Best Books.” When she has to leave town for a month to take care of her sick mother, she asks her friend Maya to fill in for her while she is gone. Maya agrees. On the first day that Maya takes care of the store, she notices that the store does not have any books in stock by the popular author Ronny Miegel. Therefore, Maya calls the publisher, George, and, making it clear that she acts for Best Books, orders ten new copies of Miegel’s most recent book for a total price of $300. The publisher assumes that Maya is the owner and operator of Best Books. The books are promptly delivered. Unbeknownst to Maya, Fatima does not like Miegel, and when she returns after a month and learns that Maya has bought ten copies of Miegel’s most recent book, Fatima calls George, explains to him that Maya was just filling in, and tells him that she, Fatima, “is not o.k. with the purchase” and “won’t be held liable for the books.” Are Maya and/or Fatima liable to George?
(A)Fatima is liable to George, and so is Maya.
(B)Fatima is liable to George, but Maya is not.
(C)Fatima is not liable to George, but Maya is.
(D)Fatima is not liable to George, and neither is Maya.
(A) is the correct answer.
It is clear that a contract was formed because the contract was based on mutual assent and consideration (the promise to deliver ten books in exchange for the promise to pay $300). Also note that the total price was not high enough to subject the contract to the writing requirement in §2–201 of the Uniform Commercial Code for sales contracts for $500 or more. (In any case, once goods have been delivered and accepted, the contract is enforceable even if it was not in writing, UCC §2–201(3)(c).)
But is Fatima bound by this contract? Maya is Fatima’s agent. When Fatima and Maya agreed that Maya should run the store, they created an agency relationship with Fatima as the principal and Maya as the agent, for their agreement meant that Maya should act on Fatima’s behalf and subject to her control (cf. §1.01 of the Restatement (Third) of Agency). A contract concluded by an agent binds the principal if the agent acted on behalf of the principal and with the necessary authority.
Did Maya act on behalf of Fatima when she concluded the contract with George? George had no reason to know that Maya was not the owner and operator of the bookstore. Accordingly, Fatima was an undisclosed principal (see §1.04(2)(b) of the Restatement (Third) of Agency). In the case of an undisclosed principal, the question of whether the agent acted on behalf of the principal is resolved by determining the agent’s intent at the time the contract was formed. When Maya ordered the books, she wanted to acquire them not for herself but for the store, and hence for Fatima, so that Maya acted on Fatima’s behalf.
The question remains whether Maya acted with authority. The Restatement (Third) of Agency recognizes both actual and apparent authority. Actual authority exists where “the agent reasonably believes, in accordance with the principal’s manifestations to the agent, that the principal wishes the agent so to act” (see §2.01 of the Restatement (Third) of Agency). In the case at hand, Fatima had asked Maya to “fill in” for her. Maya could reasonably understand this statement to mean that Fatima wanted her to run the store in the ordinary course of business, and this includes purchasing popular books for the store. Accordingly, Maya acted not only on behalf of Fatima but also with actual authority, when she purchased the books for the store. It follows that Fatima is bound by the contract with George and hence personally liable.
What about Maya’s liability? Under §6.03 of the Restatement, where “an agent acting with actual authority makes a contract on behalf of an undisclosed principal,” the agent also is a party to the contract. At first glance, this may seem slightly unfair since the third party can now hold two parties liable—the principal and the agent. Upon closer inspection, however, this makes a lot of sense since the third party reasonably believed that the agent was the other party and therefore should be able to hold that agent liable. Since Fatima is an undisclosed principal, this means that Maya, as her agent, remains a party to the contract and is therefore liable to George.
(B) is incorrect.
Both Fatima and Maya are liable to George (see the answer to choice A).
(C) is incorrect.
Both Fatima and Maya are liable to George (see the answer to choice A).
(D) is incorrect.
Both Fatima and Maya are liable to George (see the answer to choice A).
Genevieve owns and operates a garage. She has seven mechanics working for her, including Kenji, who has only recently become Genevieve’s employee. Every morning at 6 a.m., the mechanics come in, and the work begins. Genevieve then assigns Kenji what she calls “the first job of the day”—getting breakfast for everyone from a nearby fast food restaurant. Kenji originally tried to refuse, but Genevieve pointed out that she was not only giving him money for the purchase but also reimbursing him for the cost of the gas. She also noted that having one employee purchase breakfast for the whole group saved time and allowed the others to get more work done. One day, when Kenji is sent off to get breakfast, he is still tired and negligently damages a car belonging to a person named Travis while trying to park his own. Who is liable for the damage?
(A)Kenji is liable to Travis, but Genevieve is not.
(B)Genevieve is liable to Travis, but Kenji is not.
(C)Genevieve is liable to Travis, and so is Kenji.
(D)Genevieve is not liable to Travis, and neither is Kenji.
(C) is the correct answer.
Both Kenji and Genevieve are liable to Travis. As regards Kenji, he is liable to Travis because he has committed a tort (negligence). The fact that Kenji acted as Genevieve’s employee does not remove his own liability for torts that he commits (cf. §7.01 of the Restatement (Third) of Agency, which notes that “an agent is subject to liability to a third party harmed by the agent’s tortious conduct.”).
Genevieve is also liable to Travis. Her liability is based on the theory of respondeat superior. As noted in §7.07(1) of the Restatement (Third) of Agency), “[a]n employer is subject to vicarious liability for a tort committed by its employee acting within the scope of employment.” Furthermore, “[a]n employee acts within the scope of employment when performing work assigned by the employer or engaging in a course of conduct subject to the employer’s control,” §7.07(2) of the Restatement (Third) of Agency). By contrast, an “employee’s act is not within the scope of employment when it occurs within an independent course of conduct not intended by the employee to serve any purpose of the employer,” §7.07(2) of the Restatement (Third) of Agency). In the case at hand, Kenji committed the tort while performing a task assigned to him by Genevieve (getting breakfast), and he was subject to her control, given that she was able to give him instructions. Kenji had not engaged in any independent course of conduct, and the breakfast run was in fact intended to serve his employer’s purpose. Accordingly, Kenji was in fact acting within the scope of his employment, which meant that Genevieve was personally liable.
(A) is incorrect.
Both Kenji and Genevieve are liable (see the answer to choice C).
(B) is incorrect.
Both Kenji and Genevieve are liable (see the answer to choice C).
(D) is incorrect.
Both Kenji and Genevieve are liable (see the answer to choice C)
Carl is a wealthy landowner. One fine day, he learns that one of the neighboring ranches will be auctioned and decides to try and buy it. Unfortunately for Carl, the auction will take place on July 1, when Carl will be spending his summer vacation in Europe. He therefore instructs his secretary, Gino, to attend the auction in Carl’s name and bid up to $5,000,000 for the property. Gino has never before bought any land in Carl’s name, but he has frequently undertaken minor purchases for Carl such as buying flowers for Carl’s garden or toys for Carl’s children.
On the day of the auction, there are several bidders who try to purchase the ranch in question, and in the heat of the bidding war, Gino gets carried away. He wins the auction but only after bidding $5,500,000. After realizing that he has exceeded the limit imposed by Carl, Gino is panicked. At that moment, another bidder, Louis, walks up to Gino and offers to buy a particular piece of land that forms part of the ranch for $500,000. Gino, explicitly acting in Carl’s name, gladly accepts, and they both sign a written sales contract to this effect. Because the relevant part of the land amounts to only 5% of the overall area of the ranch, Gino is sure that Carl will not mind.
Two weeks later, Carl returns from this vacation. Gino confesses that he has acquired the ranch for $5,500,000 but forgets to mention that he also sold part of the property. Carl is shocked but says: “Well, what’s done is done, I would rather overpay than not get the ranch at all.” He then pays the $5,500,000, and the property is transferred to Carl. A week later, Louis contacts Carl and points out that he, Louis, has bought part of the ranch. Carl flatly tells him that he does not feel bound by the contract signed by Gino and Louis. Which of the following statements is correct?
(A)Neither the contract in the amount of $5,500,000 nor the contract in the amount of $500,000 binds Carl.
(B)The contract in the amount of $5,500,000 binds Carl, whereas the contract in the amount of $500,000 does not bind Carl.
(C)The contract in the amount of $500,000 binds Carl, whereas the contract in the amount of $5,500,000 does not bind Carl.
(D)Both contracts bind Carl.
(B) is the correct answer.
Let’s focus, first, on the contract in the amount of $5,500,000. Mutual assent and consideration requirements are satisfied. Moreover, we do not have to worry about the statute of frauds. Whereas real estate sales generally have to be in writing to be enforceable, even an oral real estate sale becomes enforceable once ownership of the land has been transferred.
The only question, therefore, is whether the contract binds Carl under the rules of agency law. Gino explicitly acted in Carl’s name, but did he have authority?
Carl had only allowed Gino to bid up to $5,000,000, so Gino lacked actual authority within the meaning of §2.01 of the Restatement (Third) of Agency. Furthermore, there was no apparent authority. Under §2.03 of the Restatement (Third) of Agency, an agent acts with apparent authority “when a third party reasonably believes the actor has authority to act on behalf of the principal and that belief is traceable to the principal’s manifestations.” From the auctioneer’s perspective, the only factor suggesting that Gino had the authority to bid $5,500,000 was the fact that Gino actually bid this amount. And this action is not traceable to the principal’s manifestations since Carl had not authorized this bid. Admittedly, Gino had previously undertaken various purchases for Carl, but they were minor purchases and did not involve real estate, so even if the auctioneer knew of the relevant transactions, they did not justify the belief that Gino had the necessary authority to bid $5,500,000 for the ranch.
Even in the absence of actual or apparent authority, a transaction is binding on the principal if it has been ratified. Ratification occurs where the principal’s conduct justifies the assumption that the principal wants to be bound by the act undertaken by the agent. However, in order for this to be effective, the relevant act must be ratifiable (§4.03 of the Restatement (Third) of Agency), the principal must have capacity to ratify (§4.04), ratification must occur in a timely manner (§4.05), and the ratification must encompass the act in its entirety (§4.07). In the case at hand, all of these requirements are met; in particular, Carl has made it very clear that he wants to be bound by the contract. Therefore, the contract in the amount of $5,500,000 binds Carl.
What about the second contract, the one in the amount of $500,000? As before, we have mutual consent and consideration. Moreover, the contract was in writing and therefore satisfies the statute of frauds. The question, though, is whether the contract binds Carl under the rules of agency law. As before Gino lacked actual authority because Carl had never indicated to Gino that Gino was authorized to sell any property. Furthermore, Gino lacked apparent authority since there was nothing in Carl’s conduct that the third party, Louis, could interpret as meaning that Gino had authority. Carl did not ratify the sale either because he did not even know about it at first and flatly rejected it once it was brought to his attention. Finally, there are no factors suggesting that Carl might be estopped from asserting Gino’s lack of authority. It follows that the $500,000 contract does not bind Carl.
(A) is incorrect.
Only the contract in the amount of $5,500,000 binds Carl (see the answer to choice B).
(C) is incorrect.
Only the contract in the amount of $5,500,000 binds Carl (see the answer to choice B).
(D) is incorrect.
Only the contract in the amount of $5,500,000 binds Carl (see the answer to choice B).
Gerard is an eccentric billionaire living in Big City. One day, Jeff, one of Gerard’s personal assistants, reports to him that a scam artist named Joe seems to be making the rounds in Big City. Joe’s modus operandi is as follows: Joe visits luxury car dealerships and pretends to be working for Gerard. Acting in Gerard’s name, Joe then acquires luxury cars and drives them away, promising that Gerard will pay within the next 30 days. So far, no one has realized that Joe is a scam artist except Jeff and Gerard. Jeff points out that Joe has already defrauded six of Big City’s seven luxury car dealerships, and Jeff proposes warning the seventh so that it does not fall victim to the same trick. However, Gerard replies: “No, this is far too amusing. Let’s just wait and see if that store is as dumb as the others.” Two days later, Joe visits the seventh luxury car dealership, which is owned and operated by Susan. Susan has already heard that Joe has been buying luxury cars for Gerard but does not realize that Joe is a scam artist. Therefore, she readily agrees to sell a new Mercedes at a price of $120,000. They both sign the contract, and as usual, Joe does so in Gerard’s name. Then Joe drives away in the Mercedes and is never heard of again.
After a while, Susan asks Gerard to pay for the Mercedes. However, Gerard refuses, pointing out that Joe was just a scam artist abusing Gerard’s good name. Who, if anyone, is liable to Susan?
(A)Both Joe and Gerard are liable to Susan.
(B)Joe is liable, but Gerard is not.
(C)Gerard is liable to Susan, but Joe is not.
(D)Neither Joe nor Gerard is liable to Susan.
(A) is the correct answer.
Let’s start with the question of whether Gerard is liable to Susan. A contract was formed, given that mutual assent and consideration are present. But the question is whether that contract binds Gerard. Obviously, Joe lacked actual authority given that Gerard never indicated to Joe that Joe could buy the cars in Gerard’s name. Moreover, Joe did not have apparent authority either since Gerard did not engage in any conduct from which Susan could draw the reasonable conclusion that Gerard had authorized Joe to act in Gerard’s name. Furthermore, Gerard never ratified the transaction. Quite to the contrary, when Susan first contacted him, Gerard flatly refused.
But the question remains whether Gerard is estopped from asserting Joe’s lack of authority. As noted in §2.05 of the Restatement (Third) of Agency, “[a] person who has not made a manifestation that an actor has authority as an agent and who is not otherwise liable as a party to a transaction purportedly done by the actor on that person’s account is subject to liability to a third party who justifiably is induced to make a detrimental change in position because the transaction is believed to be on the person’s account, if (1) the person intentionally or carelessly caused such belief, or (2) having notice of such belief and that it might induce others to change their positions, the person did not take reasonable steps to notify them of the facts.” Susan justifiably believed, based on what she had heard from other luxury car sellers, that Joe was Gerard’s agent. Moreover, while Gerard cannot be blamed for causing that belief, he knew that the luxury car sellers believed Joe to be his agent and that they were likely to sell him cars and yet failed to intervene. Therefore, Gerard is liable to Susan.
How about Joe? Your common sense, at the very least, should suggest that he, too, must be liable. Indeed, as noted in §6.10 of the Restatement (Third) of Agency, a person who acts in another’s name without having authority, is liable to the third party. Therefore, Joe, too, is liable to Susan.
(B) is incorrect.
Both Gerard and Joe are liable to Susan (see the answer to choice A).
(C) is incorrect.
Both Gerard and Joe are liable to Susan (see the answer to choice A).
(D) is incorrect.
Both Gerard and Joe are liable to Susan (see the answer to choice A).
