Bar Exam (Next Generation) Quiz: Agents Authority To Bind Principal
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Agents Authority To Bind PrincipalQuestion 1 of 18

Metro Supply sold restaurant equipment. Ito was Metro's outside sales representative with actual authority to solicit orders and transmit them to Metro for acceptance, but no authority to receive payments. For the past two years, whenever Oceana Diner ordered supplies, Metro's delivery driver had picked up a check from Oceana payable to Metro and delivered it to Metro's office. Last month, Ito visited Oceana, presented an invoice stating 'payment due upon receipt,' and asked the diner's manager to pay him directly so he could 'get credit for the sale.' The manager gave Ito a check payable to Metro for the invoice amount. Ito never delivered the check to Metro and disappeared. Metro now demands payment from Oceana.

Is Oceana liable?

No, because Oceana reasonably relied on Ito's apparent authority to collect payment, given that he was Metro's sales representative and presented an invoice.
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.
No, because giving a check payable to Metro to an agent who is authorized to solicit orders discharges the debt when the check is later presented to Metro.
Yes, because an invoice stating payment due upon receipt authorizes a sales representative to collect payment.
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Bar Exam (Next Generation) Quiz

Bar Exam (Next Generation) Quiz: Agents Authority To Bind Principal

Practice Agents Authority To Bind Principal in Bar Exam (Next Generation) with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Agents Authority To Bind Principal, giving you a quick way to practice the rules, question types, and explanations that matter most for Bar Exam (Next Generation).

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

All questions

Question 1

Metro Supply sold restaurant equipment. Ito was Metro's outside sales representative with actual authority to solicit orders and transmit them to Metro for acceptance, but no authority to receive payments. For the past two years, whenever Oceana Diner ordered supplies, Metro's delivery driver had picked up a check from Oceana payable to Metro and delivered it to Metro's office. Last month, Ito visited Oceana, presented an invoice stating 'payment due upon receipt,' and asked the diner's manager to pay him directly so he could 'get credit for the sale.' The manager gave Ito a check payable to Metro for the invoice amount. Ito never delivered the check to Metro and disappeared. Metro now demands payment from Oceana.

Is Oceana liable?

  1. No, because Oceana reasonably relied on Ito's apparent authority to collect payment, given that he was Metro's sales representative and presented an invoice.
  2. 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. (correct answer)
  3. No, because giving a check payable to Metro to an agent who is authorized to solicit orders discharges the debt when the check is later presented to Metro.
  4. Yes, because an invoice stating payment due upon receipt authorizes a sales representative to collect payment.
Explanation: 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.

Question 2

Morris held a durable power of attorney from his elderly aunt, Yee, authorizing Morris to manage Yee's real estate and to mortgage, sell, or lease her property as Morris deemed advisable. Without Yee's knowledge, Morris borrowed $150,000 from Commercial Bank for his own landscaping business, signing the loan documents as 'attorney-in-fact for Yee' and giving the bank a mortgage on Yee's house. The bank knew Morris was borrowing for his own business and that Yee was not receiving the loan proceeds, but assumed the broad POA gave Morris authority. Yee refused to honor the mortgage.

Is Yee's house subject to the mortgage?

  1. Yes, because the power of attorney expressly authorized Morris to mortgage Yee's property, and Yee is bound by the terms of the POA she signed.
  2. Yes, because a third party may rely on a power of attorney unless it has actual notice that the agent is acting improperly, and the bank had no such notice.
  3. 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. (correct answer)
  4. No, because a power of attorney authorizing an agent to mortgage real property is invalid unless it is signed by a licensed attorney.
Explanation: 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.

Question 3

A technology company's board of directors appointed Mei as "Chief Operating Officer." The company's internal policies, known to Mei, required board approval for any sale of company assets outside the ordinary course of business. Without board approval, Mei signed a contract to sell the company's main production facility to a real estate developer. The developer knew Mei's title but did not know about the internal policy. The company now refuses to complete the sale, and the developer sues.

Which issue is most likely to determine whether the company is bound by Mei's contract?

  1. Whether the sale of the production facility was an extraordinary transaction outside the ordinary course of the company's business. (correct answer)
  2. Whether Mei believed that the sale was financially beneficial to the company despite the lack of board approval.
  3. Whether the developer knew that Mei had previously negotiated other contracts on behalf of the company.
  4. Whether the developer's offer was at or above the fair market value of the production facility.
Explanation: 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.

Question 4

Thornton ran a used-car dealership and employed Vance as sales manager. Vance had actual authority to sell the dealership's cars, but Thornton privately instructed Vance that discounts exceeding $1,000 required Thornton's prior approval. For more than two years, Vance regularly discounted cars by as much as $1,500 without seeking approval; Thornton, though aware, never objected. This month, Vance sold a car listed at $18,000 to Calloway, a first-time customer, for $16,600. Vance did not mention the discount limit,and Calloway did not know of Thornton's instruction.

Is Thornton bound to the sale?

  1. No, because Calloway had no prior dealings with Thornton and could not rely on Thornton's course of dealing with other customers.
  2. Yes, because Vance had actual authority to sell cars,anda principal's private instructions are ineffective to limit an agent's actual authority unless the third party knows them.
  3. No, because Vance exceeded his actual authority,andan agent can never bind a principal to terms that exceed the agent's actual authority.
  4. 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. (correct answer)
Explanation: 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.

Question 5

Okafor and Liu formed a joint venture to acquire and renovate residential properties. Their written agreement provided that neither could purchase any property without the other's prior written consent. While Liu was abroad, Okafor, without consulting Liu, signed a contract to purchase a four-unit apartment building from Vega, telling Vega thatthe purchase was within the venture's scope. Vega knew Okaforand Liu had formed the venture but did not know of the consent requirement. Liu refused to be bound. Is Liu bound by the purchase contract?

Is Liu bound by the purchase contract?

  1. 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. (correct answer)
  2. Yes, because each co-venturer has actual authority to bind the other to any act reasonably believed to further the venture's objectives.
  3. No, because the venture agreement expressly required the other venturer's written consent,and a third party is charged with notice of the terms of a written joint-venture agreement.
  4. No, because purchasing real property is an extraordinary act outside any joint venture's ordinary course unless all co-venturers join in the purchase.
Explanation: 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.

Question 6

Sterling Office Furniture, Inc. employed Mei as a purchasing assistant. Sterling's internal purchasing policy, which was never shown to any supplier, required orders exceeding $20,000 to be approved by the chief financial officer and limited Mei's authority to orders of $20,000 or less. On March 3, Mei ordered 55,000ofofficechairsfromHarborSeatingCo.,signing"Mei,forSterling."TheorderexceededMei′sauthorityandhadnotbeenapproved.OnMarch12,Sterling′spresident,afterlearningthefulldetailsoftheorder,instructedSterling′saccountingdepartmenttopayHarbor′sinvoice,andSterlingkeptandusedthechairs.HarborknewthatSterlinghadconfirmedandpaidtheMarchorderinfullafteritwasplaced.OnJune3,MeiplacedasecondorderwithHarbor—55,000 of office chairs from Harbor Seating Co., signing "Mei, for Sterling." The order exceeded Mei's authority and had not been approved. On March 12, Sterling's president, after learning the full details of the order, instructed Sterling's accounting department to pay Harbor's invoice, and Sterling kept and used the chairs. Harbor knew that Sterling had confirmed and paid the March order in full after it was placed. On June 3, Mei placed a second order with Harbor—55,000 of the same chairs—again signing "Mei, for Sterling." Sterling refused to accept or pay for the June order, and Harbor sued Sterling for the price.

In Harborview Corp. v. Delgado (2021), the highest court of this jurisdiction held: "Ratification by a principal of an agent's unauthorized act makes that act as binding as if it had been authorized at the outset; it does not, however, operate as a grant of authority to the agent to enter future transactions. A ratified transaction may nonetheless be relied on by a third party as a manifestation of the principal that the agent has authority to enter subsequent transactions, provided the third party knew of the ratification and provided the subsequent transaction is of the same nature and does not vary materially in scope or risk from the ratified transaction."

Is Sterling bound to pay for the June order?

  1. 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. (correct answer)
  2. Yes, because Sterling's ratification of the March order gave Mei actual authority to place later orders of the same kind, and the June order was within the scope of that authority.
  3. No, because ratification of an unauthorized act binds the principal only as to that act and confers no authority on the agent for any future transaction, so Mei had no authority to place the June order.
  4. No, because Harbor knew that the March order had been unauthorized, and that knowledge put Harbor on notice that Mei could not place the June order without first obtaining Sterling's approval.
Explanation: 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.

Question 7

Nadia owns a chain of art-supply stores. She hired Marco as a store manager and publicly described him to vendors as having "full authority to run the store's daily operations." Later, in a private meeting with Marco only, Nadia told him that he could no longer sign purchase contracts above $10,000 without her approval. Marco nevertheless signed a $25,000 contract to buy premium paints from Brighton Supply, a new vendor that had read Nadia's public statement about Marco's authority. Nadia now refuses to honor the contract.

Which additional fact, if true, would most help Nadia avoid liability on the contract?

  1. Brighton's owner knew, before signing, that Nadia had privately restricted Marco's authority. (correct answer)
  2. Marco signed the contract in his own name rather than as an agent of Nadia's business.
  3. The $25,000 contract was not submitted to Nadia for her written approval.
  4. Brighton's prices were slightly higher than the prices of another comparable supplier.
Explanation: 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.

Question 8

Gruber was president and CEO of Trident Manufacturing, a corporation with three shareholders and a board of directors. Without consulting the board or shareholders, Gruber signed a contract to sell all of Trident's manufacturing equipment, inventory, and goodwill to Vega Industries for $2 million. Vega's president knew Gruber was Trident's CEO but assumed Gruber had authority to sell all corporate assets. Trident's board refused to approve the sale.

Is Trident bound by the contract?

  1. Yes, because Gruber, as CEO, had apparent authority to bind Trident to contracts made in the ordinary course of business, and the sale of all assets for fair value was in Trident's ordinary course.
  2. 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. (correct answer)
  3. Yes, because the shareholders could ratify the sale by accepting the proceeds, and Trident's refusal was a breach of the contract.
  4. No, because Gruber lacked actual authority, and apparent authority cannot arise from an officer's position unless the officer's authority is confirmed in writing by the board.
Explanation: 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.

Question 9

Delacruz owed Rosario $50,000, secured by a mortgage on Delacruz's warehouse. The mortgage included a power of sale appointing Rosario as Delacruz's attorney-in-fact with authority to sell the warehouse and apply the proceeds to the debt if Delacruz defaulted. Delacruz defaulted. Before Rosario sold the property, Delacruz attempted to revoke Rosario's authority, telling her he would sell the warehouse himself and pay her from the proceeds. Rosario nonetheless contracted to sell the warehouse to Nguyen, who knew of the mortgage and power of sale.

Is Nguyen's contract enforceable against Delacruz?

  1. Yes, because Rosario's authority was coupled with an interest in the warehouse, making it irrevocable so long as the secured debt remained unpaid. (correct answer)
  2. Yes, because a debtor's attempted revocation of a power of attorney is ineffective unless it is delivered in writing and recorded before the agent acts.
  3. No, because Delacruz's attempted revocation terminated Rosario's actual authority before Rosario acted.
  4. No, because an agency coupled with an interest terminates when the principal revokes it, leaving Rosario only a right to damages for breach.
Explanation: 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.

Question 10

Praxis Manufacturing Corp. employed Aldo as its regional purchasing manager for six years, during which Aldo regularly bought packaging materials from Carton House, Inc., dealing with Carton House about twice a month. On January 15, Praxis terminated Aldo's employment for theft. On January 20, Praxis mailed a letter to Carton House stating that Aldo's authority "has been terminated" and that he "may no longer place orders or sign contracts for Praxis." The letter was addressed to the Carton House warehouse, the address on Praxis's vendor records, and was signed for by a Carton House receiving clerk, who placed it in the warehouse office unread. On February 1, Aldo—still in possession of Praxis purchasing forms and a Praxis company credit card—ordered $80,000 of packaging materials from Carton House on Praxis's account, signing "Aldo, for Praxis." The Carton House employee who processed the order had not seen the letter and did not know Aldo had been fired. Carton House delivered the materials, and Praxis refused to pay.

The Modern Business Agency Act, in effect in this jurisdiction, provides in Section 305:

(a) The termination of an agent's actual authority does not by itself terminate the agent's apparent authority.

(b) An agent's act is within the agent's apparent authority only if the third party believes the agent has authority to do the act and the third party's belief is reasonable.

(c) A third party's belief is not reasonable if the third party has received notice from the principal that the agent's authority has been terminated.

(d) A third party receives notice when the notice is delivered to an address at which the third party receives business correspondence or deliveries, regardless of whether the notice is read or routed to the individual who transacts with the agent.

Is Praxis bound to pay Carton House for the February 1 order?

  1. Yes, because Aldo's continued possession of Praxis purchasing forms and a Praxis company credit card was a manifestation by Praxis creating apparent authority, so Carton House's belief in Aldo's authority was reasonable.
  2. Yes, because the termination letter was never actually read by the Carton House employee who processed the order, and Carton House therefore did not receive notice of Aldo's termination.
  3. No, because Aldo's actual authority ended on January 15, and an agent who lacks actual authority cannot bind the principal to a new contract.
  4. 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. (correct answer)
Explanation: 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.

Question 11

Apex Insurance hired Rivas as regional sales director. Apex's written agreement with Rivas gave him authority to solicit applications for commercial policies and to issue Apex's standard coverage binders, but stated that no single risk could be bound for more than $25,000 without the prior approval of Apex's president. Over the years, Apex issued $20,000 binders for Barnett's grain warehouses through Rivas. Last month, Barnett asked Rivas to bind $100,000 coverage on a new warehouse. Rivas told Barnett that Apex's rules capped his authority at $25,000 but that he had obtained oral permission from Apex's president to exceed the cap because of Barnett's good loss history. Rivas then executed Apex's standard binder. In fact, Rivas had no such permission. Barnett paid the premium. Is Apex bound by the binder?'

Is Apex bound by the binder?

  1. Yes, because Apex clothed Rivas with the position of regional sales director and supplied him with standard binder forms, making his act apparently authorized.
  2. Yes, because Barnett reasonably relied on Rivas's representation that Apex's president had approved the higher coverage, and Apex's prior dealings with Barnett made that reliance reasonable.
  3. 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. (correct answer)
  4. No, because an insurance binder is not enforceable unless it is issued by an officer of the insurance company.
Explanation: 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.

Question 12

Without authority, a former manager of Palmer Foods signed a one-year lease on behalf of Palmer for warehouse space at $5,000 per month. The lease included a clause waiving Palmer's right to offset damages for the landlord's failure to repair. When Palmer's CEO learned of the lease, she read it in full and instructed Palmer's controller to pay the monthly rent, saying she would 'take the good with the bad.' After three months, Palmer vacated and refused to pay the remaining rent, arguing that its monthly payments did not ratify the waiver-of-offset clause. Is Palmer bound to the lease for its full term?

Is Palmer bound to the lease for its full term?

  1. No, because ratification requires an express written approval by the principal, and paying rent was merely performance under the contract, not ratification.
  2. Yes, because Palmer, with knowledge of the lease, accepted its benefits and paid rent, thereby ratifying the entire lease, including its burdensome terms. (correct answer)
  3. No, because a principal may ratify only the advantageous terms of an unauthorized contract and reject burdensome terms such as the waiver-of-offset clause.
  4. Yes, because an unauthorized agent's contract becomes enforceable automatically if the principal does not repudiate it within a reasonable time.
Explanation: 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.

Question 13

Owens and Bell were partners in Bell & Owens, a general partnership operating a chain of hardware stores. Owens's brother sought a bank loan for $200,000 to start a restaurant. At his brother's request, Owens signed a guaranty on behalf of the partnership, guaranteeing repayment of the loan if his brother defaulted. The bank knew Owens was a partner in Bell & Owens and did not know of any limitation on his authority. The brother defaulted.

Is Bell & Owens liable on the guaranty?

  1. Yes, because partners have apparent authority to bind the partnership by any act that appears to be within the ordinary scope of partnership business, and the bank reasonably believed a partner could guarantee the loan.
  2. Yes, because each partner has actual authority to bind the partnership to contracts incident to carrying on its business, and guaranteeing a relative's business loan was incident to the partnership's business.
  3. 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. (correct answer)
  4. No, because a partner can bind the partnership only by contracts in writing signed by all partners, and Owens signed alone.
Explanation: 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.

Question 14

Vera, an art collector, hired Pierce, an art dealer, to bid on her behalf at an auction for a painting by a well-known artist. Vera expressly told Pierce that she would not pay more than $1.2 million for the painting. Pierce did not disclose to the auction house that he was bidding for Vera and signed the purchase agreement in his own name as "Pierce, buyer." After spirited bidding, Pierce made the winning bid of $1.3 million because he wanted to secure Vera's future business. When Vera learned of the purchase, she refused to pay. The auction house, which had by then learned that Pierce was acting for Vera, sued Vera for the price.

Which of the following is the best statement of the auction house's rights and of the respective liabilities of Vera and Pierce?

  1. Vera is liable because an agent's contract made on a principal's behalf binds the principal whenever the third party reasonably believed that the agent was acting with authority.
  2. Vera is liable because Pierce's signature as buyer did not disclose that he acted for Vera, and an undisclosed principal is bound by all contracts made by the agent without regard to the agent's compliance with instructions.
  3. 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. (correct answer)
  4. Vera is not liable because Pierce signed the agreement in his own name rather than as Vera's agent, and Pierce is not personally liable because the auction house later learned of Vera's involvement.
Explanation: 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.

Question 15

Danforth is the chief executive officer of OmniSports Corp., a regional sporting goods chain. OmniSports's articles of incorporation provide that the corporation may engage in "any lawful business." The board of directors has never authorized the sale of OmniSports's headquarters building. Danforth, describing herself as OmniSports's CEO, signed a contract to sell the headquarters building—the company's principal place of business, its only significant real property, and roughly 40 percent of its total assets—to Tobin, a real estate developer. Tobin knew Danforth was the CEO but did not know whether the board had approved the sale. OmniSports later refused to convey the building, and Tobin sued for specific performance.

Will Tobin likely prevail?

  1. No, because the board never approved the sale, so Danforth lacked actual authority, and a corporation is never bound by an officer's act that exceeds the officer's actual authority.
  2. Yes, because a corporation's CEO has apparent authority to bind the corporation in any transaction reasonably related to the corporation's business, and Tobin had no notice that the board had not approved the sale.
  3. Yes, because OmniSports's articles of incorporation authorize it to engage in "any lawful business," and the sale of the headquarters building is therefore within the corporation's powers and the CEO's actual authority.
  4. 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. (correct answer)
Explanation: 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.

Question 16

Odessa Manufacturing employed Khan as general manager of its Austin warehouse with express authority to purchase packing supplies and to hire and fire warehouse staff. Odessa's owner, Petrova, was traveling in Antarctica and unreachable. One afternoon, a fire broke out in a building adjacent to the warehouse. Fire officials warned Khan that the warehouse might ignite within the hour. With no time to obtain instructions, Khan contracted with Swift Movers to move Odessa's perishable inventory to a cold-storage facility, signing a six-month lease at market rates for the storage space. Petrova later refused to honor the lease, arguing that Khan had no authority to lease storage space. Is Odessa bound by the lease?'

Is Odessa bound by the lease?

  1. 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. (correct answer)
  2. Yes, because a general manager's express authority to manage a warehouse necessarily includes authority to lease real property incumbent to warehouse operations.
  3. No, because an agent's actual authority extends only to acts expressly delegated, and a general manager has no authority to bind his principal to a lease of real property.
  4. No, because Khan's authority was suspended while Petrova was unavailable, so he lacked power to act on Odessa's behalf.
Explanation: 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.

Question 17

On June ǒ1, without authority, a former employee signed a contract on behalf of Nova Manufacturing to buy a custom industrial printer from Precision Printersfor $80,000. Precision knew the former employee lacked authority but told Nova's CEO on June ǒ2 that it would wait a reasonable time for Nova to ratify. Nova's CEO took no action. On June ǒ25, having heard nothing, Precision sold the printer to another buyer and notified Nova it was withdrawing. On June ǒ30, Nova's board voted to ratify the contract and notified Precision.

Is Nova bound by the contract?

  1. Yes, because a third party that knows an agent lacks authority cannot later withdraw before the principal has had a reasonable opportunity to ratify.
  2. No, because a contract made by an agent without actual authority is void ab initio and cannot be ratified once the third party had knowledge of the lack of authority.
  3. Yes, because ratification relates back to the date of the agent's act, making Nova bound as of June 1 and Precision's withdrawal ineffective.
  4. No, because Precision withdrew before Nova ratified, and ratification is ineffective if the third party withdraws before the principal manifests assent. (correct answer)
Explanation: 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.

Question 18

Priya owns a wholesale flower business. She hired Devon as a warehouse manager and told him, "You handle everything in the warehouse, but never sign any multi-year contracts." Devon, without asking Priya, signed a two-year contract with GreenGrow to buy all of the business's potting soil. When the first shipment arrived, Priya saw it, used the soil in her operations, and sold plants grown in it. Two months later, Priya tried to cancel the remaining contract, saying Devon had no authority.

Which legal issue is most likely to determine whether Priya is bound to the remaining contract?

  1. Whether Devon's position as warehouse manager gave GreenGrow reason to believe he could bind Priya.
  2. Whether Priya's knowing acceptance and use of the soil amounted to ratification of Devon's contract. (correct answer)
  3. Whether Priya and Devon had a valid oral agreement about Devon's duties.
  4. Whether GreenGrow's soil was of merchantable quality and suitable for Priya's business.
Explanation: 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.