ExpertHard1 markMultiple Choice
CPA · Question 14 · Area II: Business Law
A principal hires an agent to manage a retail business. The principal instructs the agent not to purchase inventory from Vendor X. However, the agent purchases inventory from Vendor X, who is unaware of the restriction. The principal has previously paid for inventory purchased by the agent from other vendors. Is the principal liable on the contract with Vendor X?
A principal hires an agent to manage a retail business. The principal instructs the agent not to purchase inventory from Vendor X. However, the agent purchases inventory from Vendor X, who is unaware of the restriction. The principal has previously paid for inventory purchased by the agent from other vendors. Is the principal liable on the contract with Vendor X?
Answer options:
A.
No, because the agent lacked actual authority.
B.
Yes, because the agent had apparent authority.
C.
No, because the contract was unauthorized.
D.
Yes, but only if the principal ratifies the contract.
How to approach this question
Distinguish Actual Authority (what P tells A) from Apparent Authority (what P tells/shows 3rd Party). A manager typically has authority to buy inventory.
Full Answer
B.Yes, because the agent had apparent authority.✓ Correct
Apparent authority arises when the principal holds out the agent as having authority (e.g., by giving them the title of 'Manager'). Third parties can reasonably rely on this appearance. Secret limitations on an agent's authority do not affect a third party who is unaware of them.
Common mistakes
Focusing only on the instructions given to the agent (Actual Authority).
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