- Is Thornton bound to the sale?
Answer: Yes, because Thornton held Vance out as sales manager, and Vance's position made the $1,400 discount appear authorized to a reasonable buyer; Calloway had no notice of the secret limit.
Whenever you see an agency question asking whether a principal is bound by an agent's deal, separate actual authority from apparent authority. Actual authority comes from the principal's communications to the agent; apparent authority comes from the principal's manifestations to the third party. A secret limit on the agent usually cabbages the agent from the principal, but it does not protect the principal against an innocent third party who reasonably relied on appearances.
Here, Thornton's private instruction capped discounts at $1,000, so Vance lacked actual authority for the $1,400 discount. But Thornton also hired Vance as "sales manager," gave him authority to sell cars, and knowingly allowed years of unapproved discounts up to $1,500. To a reasonable first-time buyer like Calloway, the sales manager's price cut appeared normal. Since Calloway knew nothing of the secret cap, Thornton is bound.
The choice saying the buyer needed prior dealings fails because apparent authority can arise from position and regular practice, not prior personal dealings. The choice saying private instructions are ineffective to limit actual authority is wrong—they do limit actual authority between principal and agent; the key is that apparent authority still binds the principal. The choice saying an agent can never bind a principal beyond actual authority ignores the entire doctrine of apparent authority.
Remember: on the bar exam, if the principal does something that makes the agent look authorized, and the third party reasonably relies, the principal is bound—even if the agent secretly broke the rules.
- Which additional fact, if true, would most help Nadia avoid liability on the contract?
Answer: Brighton's owner knew, before signing, that Nadia had privately restricted Marco's authority.
Agency questions like this are really about authority and third-party knowledge. Nadia's public statement gave Marco apparent authority to run daily operations, even though she secretly limited his contract power. That private limit only matters if Brighton knew about it — because apparent authority rests on the third party's reasonable reliance on the principal's manifestations, not on secret instructions.
The additional fact that Brighton's owner knew, before signing, that Nadia had privately restricted Marco's authority destroys that reliance. If Brighton knew Marco lacked authority to sign a $25,000 contract, it cannot claim it reasonably believed he had full authority. So Nadia would not be bound by apparent authority.
Why not the others? Marco signed in his own name rather than as an agent might seem helpful, but apparent authority binds the principal based on Nadia's holding-out, not on the signature format. Brighton already knew from the public statement that Marco ran the store, so his personal signature alone would not erase that apparent authority. The contract not being submitted to Nadia for written approval also fails — that was an internal, private requirement never communicated to Brighton; secret instructions do not defeat apparent authority. And Brighton's prices being slightly higher than a comparable supplier is irrelevant; a bad bargain is not a defense to an otherwise authorized contract.
Study tip: On agency questions, separate actual authority (what the principal privately gave the agent) from apparent authority (what the principal led the third party to believe). Ask yourself: Did the third party know of the private limit? If yes, the principal can avoid liability; if no, the principal likely remains bound.
- Which issue is most likely to determine whether the company is bound by Mei's contract?
Answer: Whether the sale of the production facility was an extraordinary transaction outside the ordinary course of the company's business.
This question tests the scope of a corporate officer's authority. When you see an officer signing a contract for a company, separate actual authority from apparent authority. Mei knew the internal policy required board approval, so she had no actual authority. The company could still be bound if she had apparent authority—authority the company's own actions led the developer to reasonably believe she had.
Here, the company made Mei its Chief Operating Officer, so she appeared to have the authority customary for that office. But the key limit is that a COO can ordinarily bind the company only in the ordinary course of business. Selling the company's main production facility is an extraordinary transaction, and that fact would put a reasonable developer on notice that board approval was likely required. Therefore, whether the sale was extraordinary outside the ordinary course is the decisive issue.
The developer's ignorance of the internal policy does not matter—the extraordinary nature of the sale itself triggers caution. Whether Mei believed the sale was financially beneficial is irrelevant; her subjective belief cannot create authority. Whether she had previously negotiated other contracts could support apparent authority for similar, ordinary deals, but it cannot justify a once-in-the-ordinary-course asset sale. Finally, whether the offer was at fair market value is also a trap: a fair price does not replace board approval.
On the exam, always classify the transaction first. If it is extraordinary, assume an officer lacks power to bind without board authorization.
- Is Trident bound by the contract?
Answer: No, because a CEO has no actual or apparent authority to sell all or substantially all of a corporation's assets without board approval, and Vega is charged with knowledge that such extraordinary transactions require corporate approval.
Whenever you see a question about a corporate officer's power to bind the company, separate actual authority from apparent authority—and remember that some transactions are so fundamental that the law presumes outsiders know they need board action. The sale of all or substantially all of a corporation's assets is exactly that kind of extraordinary transaction.
Here, Gruber lacked actual authority because the board never approved the sale. The harder issue is apparent authority: Vega knew Gruber was CEO, but apparent authority cannot overcome the legal requirement that a sale of all corporate assets be authorized by the board. Vega is charged with knowledge that an extraordinary sale requires corporate approval, so it cannot reasonably rely on Gruber's title alone. Trident is therefore not bound.
The choice saying Gruber had apparent authority to bind Trident to contracts in the ordinary course fails because selling all manufacturing equipment, inventory, and goodwill is not an ordinary-course contract—it is a winding-up sale. The choice suggesting shareholders could ratify by accepting proceeds misunderstands ratification: the board refused, and no shareholder ratification occurred, so there was no contract to breach. The remaining choice correctly notes no actual authority but wrongly claims apparent authority can never arise from an officer's position unless confirmed in writing; in other situations an officer's position plus corporate conduct can create apparent authority, just not for extraordinary asset sales.
For the exam, remember the presumption: ordinary contracts may bind the corporation, but extraordinary acts—selling all assets, merging, amending articles—require director or shareholder approval, and outsiders are legally presumed to know that.
- Is Praxis bound to pay Carton House for the February 1 order?
Answer: No, because Carton House received the termination letter when it was delivered to its warehouse, and a third party who has received notice of termination cannot reasonably believe the agent retains authority.
Whenever you see an agency question involving a terminated agent, focus on apparent authority after termination. Actual authority ends immediately, but apparent authority can continue until the third party receives notice.
Here, Praxis did enough to terminate apparent authority. The termination letter was delivered to Carton House's warehouse—an address at which it receives business correspondence—and signed for by a receiving clerk. Under Section 305(d), notice is received at that moment, even though the clerk never read it and the employee who processed Aldo's order never saw it. Therefore, Carton House had notice of Aldo's termination, so its belief that Aldo still had authority was unreasonable under Section 305(c). Praxis is not bound.
The choice saying Aldo's continued possession of purchasing forms and the company credit card created apparent authority misses the key point: a manifestation can create apparent authority, but notice of termination makes the third party's belief unreasonable. The choice saying Carton House did not receive notice because the employee never read the letter contradicts Section 305(d), which makes delivery sufficient. And the choice saying Praxis wins because Aldo's actual authority ended confuses actual authority with apparent authority; the statute says termination of actual authority does not by itself terminate apparent authority.
Study tip: on agency questions, separate actual authority from apparent authority, and always check whether the third party received notice before the transaction. Delivery to a business address counts—even if unread.
- Is Palmer bound to the lease for its full term?
Answer: Yes, because Palmer, with knowledge of the lease, accepted its benefits and paid rent, thereby ratifying the entire lease, including its burdensome terms.
Whenever you see an unauthorized agent contracting on the principal's behalf, the key is ratification: the principal's later words or conduct can bind him to the entire contract if he knows the material terms. Here, Palmer's CEO read the lease in full—so she knew the burdensome waiver-of-offset clause—and then directed the controller to pay rent. That is not mere receipt of benefits; it is an affirmative act manifesting an intent to adopt the lease. By saying she would "take the good with the bad," she ratified the whole agreement. Thus Palmer is bound for the full term, including the waiver clause.
That also exposes why the other choices miss the mark. "Ratification requires express written approval" is wrong: ratification may be implied from conduct, and paying rent with knowledge of the lease is enough. "A principal may ratify only advantageous terms" is backwards: ratification is all-or-nothing; Palmer cannot keep the warehouse space while escaping the waiver-of-offset clause. "An unauthorized contract becomes enforceable automatically absent repudiation" is also wrong: silence or failure to repudiate generally does not ratify; Palmers's conduct went beyond inaction because it paid rent while benefitting from the lease. So the key trap is treating ratification like selecting à la carte terms. On the bar exam, ask: did the principal know the material terms and then accept benefits or perform? If yes, the whole contract binds—burdens included.
- Is Yee's house subject to the mortgage?
Answer: No, because an agent cannot bind a principal to a transaction from which the agent personally benefits unless the principal specifically authorized it, and the bank's knowledge of the self-dealing makes its reliance unreasonable.
When you see an agency question involving a power of attorney, the core issue is usually not whether the document granted authority, but whether a third party could reasonably rely on that authority. Here, even a broad POA does not protect a lender that knows the agent is using the principal's property for his own benefit.
The right result is that Yee's house is not subject to the mortgage. Morris acted as Yee's fiduciary, and an agent may not bind a principal to a self-dealing transaction unless the principal specifically authorized it. Yee never authorized Morris to borrow for his landscaping business or to mortgage her house for his personal debt. The bank knew the loan proceeds were going to Morris's business, not to Yee. That knowledge defeats any claim of apparent authority because reliance on the POA was not reasonable.
As for the first wrong answer, the POA did authorize Morris to mortgage property, but that authority was for managing Yee's affairs, not for enriching himself; actual authority never includes undisclosed self-dealing. The second wrong answer overstates the reliance rule: a third party may rely on a POA, but not when it has actual notice of improper conduct—and the bank did. The last wrong answer is a pure myth: a power of attorney need not be signed by a licensed attorney; it is signed by the principal.
Study tip: for agency questions, ask whether the third party knew or had reason to know the agent was acting adversely to the principal. If yes, the principal is not bound.
- Is Bell & Owens liable on the guaranty?
Answer: No, because a partner has no actual or apparent authority to guarantee a third party's debt unless the guaranty furthers the partnership's business, and this guaranty was not apparently within the ordinary course of a hardware-store partnership.
Whenever you see a partner trying to bind the partnership, think authority: actual or apparent. Actual authority comes from the partnership agreement or implied powers needed for ordinary business. Apparent authority comes from the partnership holding the partner out as authorized to do acts in the ordinary course of its business.
Here, Owens signed a guaranty for his brother's restaurant loan. That is correct: a partner has no actual or apparent authority to guarantee a third party's debt unless the guaranty furthers the partnership's business. Guaranteeing a relative's start-up loan is not in the ordinary course of a hardware-store partnership, and nothing suggests the partnership regularly issued guarantees. So Bell & Owens is not liable.
The first wrong answer claims apparent authority applies to "any act that appears to be within the ordinary scope" and that the bank reasonably believed a partner could guarantee the loan; that fails because guaranteeing this loan did not appear to be within the ordinary scope of a hardware store, no matter how reasonable the bank's subjective belief was. The second wrong answer invokes actual authority based on acts "incident to carrying on its business"; but a relative's personal loan is not incident to the hardware business. The fourth wrong answer says a partner can bind the partnership only by writing signed by all partners; that is false—partners can bind the partnership through ordinary-course dealings, and no all-partners signature rule exists.
Study tip: on bar-exam partnership questions, ask first whether the act is ordinary for that type of business—suretyship is usually outside ordinary authority unless the partnership itself benefits.
- Is Odessa bound by the lease?
Answer: Yes, because Khan had implied authority to take reasonable emergency measures to protect Odessa's property when he could not communicate with Petrova, even though leasing storage was not expressly authorized.
This question tests actual implied authority in agency—specifically, whether an agent can bind the principal by acting beyond express delegation in an emergency. Start by separating what Khan was expressly told he could do from what the emergency reasonably required. His express authority covered packing supplies and warehouse staffing, not leasing storage. But actual authority is not limited to express grants; it includes implied authority to perform acts reasonably necessary to carry out the agent's duties. Here, Khan managed Odessa's warehouse, Petrova was unreachable, and fire threatened perishable inventory within the hour. Leasing cold storage was a reasonable emergency measure to preserve the principal's property, so Odessa is bound.
The choice saying Khan had implied authority to take reasonable emergency measures when he could not communicate with Petrova is correct. The choice claiming a general manager's express authority necessarily includes authority to lease real property goes too far: the source of Khan's power is the emergency necessity, not an automatic incident of the title. The choice saying actual authority extends only to expressly delegated acts is wrong because implied authority is also actual authority. Finally, the choice saying Khan's authority was suspended while Petrova was unavailable misunderstands agency: an agent's authority continues unless terminated, and temporary unreachability does not suspend it.
Study tip: when an agent exceeds express authority, ask whether the act was impliedly authorized as necessary or incidental to the agency, and whether an emergency justified acting without communication. If yes, the principal is bound.
- Will Tobin likely prevail?
Answer: No, because the sale of a corporation's principal place of business is an extraordinary transaction, and a CEO has apparent authority only for transactions in the ordinary course of the corporation's business.
In an agency/corporate authority question, the central issue is usually the distinction between actual authority and apparent authority, and whether the transaction is ordinary or extraordinary. Actual authority comes from the board's authorization; apparent authority arises from the principal's manifestations to the third party. Here, the board never approved the sale, so Danforth lacked actual authority. The question is whether she had apparent authority.
She did not. A CEO has apparent authority to bind a corporation only in transactions that are in the ordinary course of the corporation's business. Selling the headquarters building—the principal place of business, the only significant real property, and roughly 40 percent of the company's assets—is extraordinary. Tobin knew Danforth was CEO, but that title alone does not reasonably signal authority to sell the company's main asset, especially when he did not confirm board approval. Therefore OmniSports is not bound.
Choice A is too broad: a corporation can be bound by an officer's unauthorized act through apparent authority, even when actual authority is lacking. Choice B overstates the rule: a CEO's apparent authority is not for "any transaction reasonably related" to business, but only for ordinary-course transactions. Choice C confuses corporate power with officer authority: the articles' broad purpose clause means the sale is not beyond the corporation's powers, but it does not give the CEO actual authority.
On the bar, whenever a manager sells a major corporate asset, ask: is this ordinary or extraordinary? If extraordinary, the officer likely needs board approval, and a third party cannot rely on the officer's title alone.
- Which legal issue is most likely to determine whether Priya is bound to the remaining contract?
Answer: Whether Priya's knowing acceptance and use of the soil amounted to ratification of Devon's contract.
When an agent exceeds actual authority, ask first whether the principal later ratified the act. Ratification happens when the principal, knowing the material facts, accepts the benefit or otherwise affirms the deal. Devon was told never to sign multi-year contracts, so the two-year soil contract was outside his actual authority. But Priya saw the first shipment, used the soil, and sold plants grown in it. That knowing acceptance and use is the classic ratification: she cannot cancel later by claiming Devon lacked authority. That ratification issue is determinative.
Devon's warehouse-manager position might suggest apparent authority, but apparent authority depends on whether GreenGrow reasonably believed Priya had cloaked Devon with authority. Here Priya's later knowing acceptance is more direct, and it binds her through ratification. The oral agreement about Devon's duties matters only to show he lacked actual authority; it does not address whether Priya's conduct after the contract satisfied it. GreenGrow's soil quality is irrelevant—ratification can occur even if the goods were defective, because the issue is Priya's affirmation, not the product's condition.
Study tip: whenever the principal learns of an unauthorized agent contract and keeps the benefits, check ratification first. Knowledge plus acceptance equals affirmation.
- Is Liu bound by the purchase contract?
Answer: Yes, because Okafor had apparent authority to bind the joint venture to purchases within the ordinary scope of the venture,and Vega had no notice of the consent requirement.
Whenever you see a co-venturer or partner acting without the other's knowledge, think agency principles: actual authority comes from the agreement, but apparent authority arises from the principal's holding out. Here, Okafor was a co-venturer buying apartment buildings, and Vega knew the venture existed. Because Okafor was acting in the ordinary scope of a real-estate venture, he had apparent authority to bind the joint venture. Vega had no notice of the secret written consent requirement, so Liu is bound by the purchase contract.
The "each co-venturer has actual authority" choice is wrong: actual authority is defined by the agreement, which expressly required Liu's written consent—so Okafor exceeded his actual authority. The "third party is charged with notice" choice misunderstands the law: third parties are not charged with notice of internal restrictions in a joint-venture agreement they have never seen. The "purchasing real property is extraordinary" choice is also wrong: for a joint venture formed specifically to acquire and renovate properties, buying real property is squarely within the ordinary course of its business.
Your study tip: on bar questions, when one owner secretly violates an internal agreement, ask whether the third party knew about the restriction. If not, apparent authority usually binds the venture—internal limits don't protect outsiders acting in good faith.
- Is Oceana liable?
Answer: Yes, because Ito had no actual or apparent authority to receive payment, and Oceana's payment to him did not discharge its debt to Metro.
This question tests agency authority, specifically whether a debtor is discharged when paying an unauthorized agent. The key distinction is between actual authority, apparent authority, and the principal's holding out.
Ito had actual authority only to solicit and transmit orders, not to receive payment. So the real issue is whether Metro gave Oceana reason to believe Ito could collect payment. It did not: the past practice was that Metro's delivery driver picked up checks and delivered them to Metro's office—not that Ito collected them. A sales representative presenting an invoice, even one saying "payment due upon receipt," is not the kind of holding out that creates apparent authority to accept payment. The manager gave Ito a check payable to Metro, but Ito never delivered it. Because payment was not made to Metro or an authorized agent, Oceana's debt was not discharged, so Oceana is liable.
The choice saying Oceana reasonably relied on Ito's apparent authority confuses ordinary sales solicitation with authority to collect payment. The choice saying a check given to an agent authorized to solicit orders discharges the debt when later presented ignores both Ito's lack of collection authority and the fact that the check was never presented. The choice saying the invoice itself authorized collection is also wrong: a document cannot expand an agent's actual authority beyond what the principal granted.
On the bar exam, remember: an agent's authority to solicit orders does not imply authority to collect payment—unless the principal's conduct creates that appearance.
- Is Nguyen's contract enforceable against Delacruz?
Answer: Yes, because Rosario's authority was coupled with an interest in the warehouse, making it irrevocable so long as the secured debt remained unpaid.
Whenever you see a mortgage containing a power of sale, think about agency law's "power coupled with an interest." This is an exception to the general rule that a principal can revoke an agent's authority at any time: if the agent holds a present property interest in the subject matter, the authority becomes irrevocable for as long as that interest lasts.
Here, Rosario's power of sale was part of the mortgage securing Delacruz's $50,000 debt. Her authority was not merely a favor; it protected her security interest in the warehouse. Because that interest remained unpaid, Delacruz could not revoke her power by telling her he would sell the property himself. Therefore, Rosario still had authority to contract with Nguyen, making the contract enforceable against Delacruz.
The answer claiming Delacruz's attempted revocation terminated Rosario's actual authority misses the central exception: a power coupled with an interest survives revocation. Similarly, the answer that an agency coupled with an interest terminates on revocation, leaving only damages, confuses ordinary agency with this special mortgage context. Finally, the answer about needing written, recorded revocation is not a general rule and is irrelevant because revocation was ineffective here.
On exam day, when you see a power of attorney in a security agreement, ask: does the agent hold an interest in the property itself? If yes, the power is irrevocable while that interest exists — the principal's attempt to revoke changes nothing.
- Which of the following is the best statement of the auction house's rights and of the respective liabilities of Vera and Pierce?
Answer: Vera is not liable because Pierce's bid exceeded the limit on his actual authority, but Pierce is personally liable to the auction house on the purchase agreement he signed.
When you see an agency question involving a purchase, start by separating two issues: did the agent have actual authority for the deal, and did the third party know the agent was acting for a principal? Here, Vera gave Pierce actual authority to bid only up to $1.2 million. By bidding $1.3 million, Pierce stepped outside her instructions. Because the auction house did not know Vera was his principal, it cannot claim apparent authority based on her conduct, and she never ratified the purchase. So Vera is not bound. Pierce is liable because he signed the purchase agreement in his own name as "Pierce, buyer," and an agent who contracts as the party or exceeds his authority is personally responsible to the third party.
The first wrong choice says Vera is liable merely because the auction house reasonably believed Pierce had authority. That confuses apparent authority, but apparent authority must come from the principal's manifestations to the third party, not from the agent's own conduct. The second wrong choice says an undisclosed principal is bound by all contracts an agent makes, ignoring the agent's instructions. Not true: an undisclosed principal is bound only by authorized acts. The fourth choice correctly says Vera is not liable but wrongly says Pierce is not liable because the auction house later learned of Vera's involvement. Learning the principal's identity after the fact does not retroactively free an unauthorized agent from the contract he personally signed.
Strategy tip: when authority is limited and the agent exceeds it, the agent bears the loss, not the principal.
- Is Nova bound by the contract?
Answer: No, because Precision withdrew before Nova ratified, and ratification is ineffective if the third party withdraws before the principal manifests assent.
Whenever you see an unauthorized agent sign a contract and the principal later tries to approve it, the issue is ratification. Ratification is generally allowed even if the third party knew the agent lacked authority, but the principal must ratify before the third party effectively withdraws. Here, Precision did not withdraw immediately; it told Nova it would wait a reasonable time. After 23 days of silence, Precision sold the printer and notified Nova of withdrawal. That withdrawal ended Nova's power to ratify, so the board's June 30 vote came too late and Nova is not bound.
The first choice says a third party who knows the agent lacks authority cannot withdraw before the principal has a reasonable opportunity to ratify. That is too broad: Precision waited a reasonable period, and withdrawal after that period is effective. The "void ab initio" choice is also wrong because an unauthorized contract is voidable, not void, and the third party's knowledge of the lack of authority does not prevent ratification. The "relates back" choice invokes a real rule—ratification can relate back to the agent's act—but that rule cannot apply after the third party has withdrawn; there is no longer a transaction to adopt.
On ratification questions, ask three things: Did the agent act for the principal? Did the principal ratify? Did the third party withdraw before ratification? If the last answer is yes, no contract.
- Is Sterling bound to pay for the June order?
Answer: Yes, because Sterling's ratification of the March order, of which Harbor knew, was a manifestation that Mei had authority to place the June order, and the June order did not differ materially in nature, scope, or risk from the March order.
Whenever you see an agency question about an agent exceeding authority, separate actual authority from apparent authority. Actual authority comes from the principal's internal grant; apparent authority comes from the principal's manifestations to the third party. Here, Delgado holds that ratification of an unauthorized act does not create actual authority for future deals, but it can create apparent authority if the third party knew of the ratification and the later transaction is materially similar.
Sterling ratified the March order by paying Harbor and keeping the chairs, and Harbor knew that. Under Delgado, that ratification was a manifestation that Mei could enter similar future transactions. The June order was identical in nature—$55,000 of the same chairs—so it did not vary materially in scope or risk. Thus Harbor reasonably relied on apparent authority, and Sterling is bound.
The answer claiming ratification gave Mei actual authority to place later orders is wrong: ratification validates the past act only, not a continuing grant of authority. The answer claiming Sterling is not bound because ratification confers no future authority is also wrong: it ignores Delgado's crucial apparent-authority rule. And the answer claiming Harbor's knowledge that the March order was unauthorized put it on notice is wrong, because the relevant knowledge is of the subsequent ratification, not the original unauthorized status.
For exam day, remember: ratification = retroactive binding effect, plus possible apparent authority for same-type future transactions, but never actual authority.
- Is Apex bound by the binder?
Answer: No, because Rivas had no actual authority to exceed the $25,000 cap, and an agent cannot create his own authority merely by telling a third party that he has obtained approval.
Whenever you see an agency question where an agent exceeded a stated limit, separate actual authority from apparent authority. Actual authority is what the principal actually granted; apparent authority must come from the principal's manifestations to the third party, not from the agent's own statements. Here, Rivas had actual authority only up to $25,000 without presidential approval, so binding $100,000 was beyond his actual authority. Nor did Apex create apparent authority for that amount. Hiring Rivas as regional sales director and supplying standard binder forms could make ordinary binders appear authorized, but Barnett knew the $25,000 cap because Rivas revealed it. Prior $20,000 binders were within the cap, so they gave Barnett no reason to believe Rivas could bind more without approval. Rivas's claim that Apex's president had orally approved was not a manifestation by Apex; an agent cannot bootstrap his own authority by telling a third party he got permission. Thus Apex is not bound.
The first "yes" answer fails because apparent authority does not extend to acts the third party knows are limited. The second "yes" answer fails because reliance on the agent's self-reported approval is not reasonable when the third party knows the agent lacks independent authority. The "no" answer invoking an officer requirement is also wrong; insurers can be bound by binders issued by authorized agents, not only officers. The real rule is that a principal is bound only by acts within the agent's actual or apparent authority, and apparent authority cannot be manufactured by the agent alone. On exam, whenever an agent reveals a limitation, remember: the agent cannot talk his way past it.
