CPA Exam — REG (Regulation)Business LawHard
A general partnership, 'Alpha & Beta,' has two partners, Alpha and Beta. Alpha performs an act that is within the ordinary course of the partnership's business, but Beta had expressly told Alpha not to perform that specific act. A third party, unaware of Beta's instruction, reasonably believes Alpha has the authority to act for the partnership and contracts with Alpha on behalf of Alpha & Beta. Is the partnership bound by Alpha's act?
- ANo, because Alpha lacked actual authority due to Beta's express instruction.
- BYes, because Alpha had apparent authority, and the act was in the ordinary course of business.
- CYes, but only if Beta later ratifies Alpha's unauthorized act.
- DNo, because one partner cannot unilaterally bind the partnership against another partner's express wishes.
Show answer & explanationAnswer & explanation
Correct answer: B. Yes, because Alpha had apparent authority, and the act was in the ordinary course of business.
In a general partnership, each partner has apparent authority to bind the partnership in matters within the ordinary course of business, unless the third party knows of a limitation on that authority. Since the third party was unaware of Beta's instruction, Alpha's apparent authority binds the partnership.
Why the other options are wrong
- A. Alpha did lack *actual* authority, but apparent authority can still bind the partnership to third parties.
- C. Ratification would bind the partnership, but apparent authority binds it from the outset without needing post-hoc approval.
- D. While Beta's instruction affected Alpha's actual authority, it does not negate Alpha's apparent authority to an unaware third party.
Partner's Apparent Authority
The authority of a partner to bind the partnership to third parties who reasonably believe the partner has authority, based on the partnership's ordinary course of business, even if the partner lacks actual authority.
- Arises from the reasonable belief of a third party.
- Applies to acts within the ordinary course of the partnership's business.
- Third party must not have knowledge of any limitation on authority.
- Partnership is bound by such acts.
Memory trick: A-A-L: Actual, Apparent, or Liable.