CPA Exam — REG (Regulation)Business LawMedium
A principal, 'Healthy Foods Inc.', hires an agent, 'Procurement Solutions LLC', to purchase organic produce from various farms. The agency agreement explicitly states that 'Procurement Solutions LLC' can only enter into contracts for purchases up to $10,000 without prior written approval from 'Healthy Foods Inc.'. 'Procurement Solutions LLC' enters into a contract with 'Farm Fresh Organics' for a $15,000 order of specialty herbs without obtaining written approval. 'Healthy Foods Inc.' later refuses to accept the delivery, claiming the agent exceeded their authority. If 'Farm Fresh Organics' sues 'Healthy Foods Inc.', what is the likely outcome?
- A'Healthy Foods Inc.' will not be liable because 'Procurement Solutions LLC' exceeded its express authority.
- B'Healthy Foods Inc.' will be liable if 'Farm Fresh Organics' can prove 'Procurement Solutions LLC' had apparent authority.
- C'Healthy Foods Inc.' will be liable because 'Procurement Solutions LLC' had implied authority.
- D'Healthy Foods Inc.' will not be liable because the contract was for goods over $500 and required a written agreement signed by the principal.
Show answer & explanationAnswer & explanation
Correct answer: B. 'Healthy Foods Inc.' will be liable if 'Farm Fresh Organics' can prove 'Procurement Solutions LLC' had apparent authority.
While 'Procurement Solutions LLC' exceeded its express authority, 'Healthy Foods Inc.' could still be liable if 'Farm Fresh Organics' reasonably believed the agent had authority (apparent authority). Apparent authority arises from the principal's actions or inactions that lead a third party to reasonably believe the agent has authority.
Why the other options are wrong
- A. This is true regarding express authority, but it doesn't preclude liability based on apparent authority.
- C. Implied authority covers actions reasonably necessary to carry out express authority, but exceeding a stated monetary limit is generally not covered.
- D. The Statute of Frauds requires certain contracts to be in writing, but it concerns the enforceability of the contract itself, not necessarily the agent's authority to bind the principal beyond express limits, especially when apparent authority is at play.
Apparent Authority (Agency)
Authority that a third party reasonably believes an agent has based on the principal's words or conduct, even if the agent does not have actual (express or implied) authority.
- Created by the principal's actions, not the agent's.
- Third party must reasonably believe the agent has authority.
- Principal is bound by contracts made under apparent authority.
Memory trick: What you SHOW is what you OWE, even if you didn't KNOW.