Agency & Partnership Take-Home Practice Exam 2024 PDF

**Take-Home Practice Exam** **Due Week of October 21-22, 2024** **Outline of Issues** The issue in each of the three transactions is whether Agent had the authority to purchase the item on behalf of Principal, and whether there is thus any authority binding the Principal to pay for each transacti...

**Take-Home Practice Exam** **Due Week of October 21-22, 2024** **Outline of Issues** The issue in each of the three transactions is whether Agent had the authority to purchase the item on behalf of Principal, and whether there is thus any authority binding the Principal to pay for each transaction. 1. **[Liability of Principal to Bellseller]** [Formation of Agency] Fundamental to any liability is whether there was a principal-agent relationship. Agency is defined as the relationship that arises when one person (the principal) manifests an intention that another person (the agent) act on the principal's behalf. In addition to this intention, agency requires capacity, consent, and control, and an agent must be otherwise not disqualified to act as an agent. The facts indicate that Principal, an antiques dealer, acquires inventory by using a group of buyers, paying the buyers a commission, training the buyers, gives the buyers credentials and specific instructions on what to purchase, and has the buyers use the Principal's forms. All of these activities suggest an intention that the buyers, including Agent, act on Principal's behalf in acquiring inventory. *Capacity* Moreover, Principal and Agent are presumably adults, and thus have capacity. *Consent* Agent, by agreeing to purchase the inventory, has consented to the agency relationship. *Control* And the training, giving of credentials, giving of instructions, and use of the Principal's forms suggests a high level of control by Principal over Agent's conduct. While the buyers, including Agent, are trained to evaluate potential purchases, that evaluation is based on Principal's specific training, and thus is still within Principal's control. Accordingly, all the requirements of an agency relationship between Principal and Buyer have been met. [Types of Authority] There are several types of authority of an agent: actual authority; apparent authority; and ratification. Actual authority includes both express and implied authority. Express authority means that the agent expressly has the authority from the principal to act. Implied authority means that the nature of the agent's position implies authority from the principal to act in a particular matter---either from custom and usage, by acquiescence (including a failure to inquire), or because of emergency or necessity. Apparent authority requires that the principal communicates by some statement or act to a third party the apparent authority of the agent to act on behalf of the principal with respect to that third party. Ratification requires that the principal agrees to be bound by the unauthorized acts of the agent, which requires actual knowledge of those unauthorized acts. [Disclosed Principal Liability] A disclosed principal in a transaction is one where the third party knows the identity of the principal. The agent is never liable to the third party on a contract entered into by an authorized agent on behalf of a fully disclosed principal. Given the use of the credentials and authorization, Principal was always a disclosed principal. Thus, if Agent had authority to bind Principal in a transaction, Principal will be liable for that transaction. [Agent's Authority in this Transaction] *Actual Express Authority* Agent had actual express authority to purchase the church bell from Bellseller for \$3,500, because the bell was on Principal's acquisition list, and within the Principal's stated price range. However, the actual express authority extended only to authority to buy the bell for Principal---not Greta. Thus, Agent had no actual express authority to buy the bell for Greta, and Principal is not bound by actual express authority to be liable to Bellseller for the price of the bell. *Actual Implied Authority* There was certainly no implied authority from Principal to buy a bell for a rival antiques dealer such as Greta, since the only authority was to buy the bell for Principal. *Apparent Authority* However, Principal gave Agent credentials, which Agent used to buy the church bell from Bellseller. A reasonable person, on seeing the credentials, would believe that Agent had authority from Principal to buy the church bell for Principal. The credentials, then, are a communication from Principal to anyone seeing the credentials, including Bellseller, of apparent authority of Agent to act on behalf of Principal in purchasing the church bell. Agent thus had apparent authority to buy the church bell and bind Principal. *Ratification* Because Principal decided he did not want the bell and refused payment after learning of Agent's actions, Principal did not ratify the purchase of the church bell by Agent. [Agent Breach of Duty] Agent's purchase of the church bell for Greta also constituted a breach of the duty of loyalty. This is a duty of undivided loyalty---but purchase of the bell on behalf of Greta, in part to get a \$250 kickback, is not undivided loyalty to Principal. [Conclusion] Principal is liable to Bellseller for the \$3,500 for the church bell because Agent had apparent authority. 2. **[Liability of Principal to Tomeseller]** [Agent's Authority in this Transaction] *Actual Express Authority* Agent's actual express authority was limited to buying Bellamy's *Looking Backward* for no more than \$8,000. Agent purchased the book for \$12,500, which exceeded Agent's actual express authority. Principal is not liable based on actual express authority. *Actual Implied Authority* Nothing in Agent's implied authority would allow Agent to spend more that Principal expressly authorized him to spend on the book. There is no custom of paying more than authorized, and Principal has not acquiesced in such conduct. Thus, the Principal is not liable based on actual implied authority. *Apparent Authority* As was true regarding the bell, because Agent had a written authorization from Principal to purchase the Bellamy book, which Agent showed to Tomeseller, a reasonable person, on seeing the authorization, would believe that Agent had authority from Principal to buy the Bellamy book for Principal. The authorization, then, is a communication from Principal to anyone seeing it, including Tomeseller, of apparent authority of Agent to act on behalf of Principal in purchasing the Bellamy book. Agent thus had apparent authority to buy the Bellamy book and bind Principal. *Secret Limiting Instructions* Principal will argue that Agent violated his secret oral instruction to not pay more than \$8,000 for the book. It is true that this was a breach by Agent of his duty of strict obedience. However, Principal's authorization made him a disclosed principal. Even if a principal gives an agent secret limiting instructions, if the agent acts beyond the scope of the limitation when dealing with a third party, the principal will still be bound by the agent's actions and will be liable on the contract, although the principal can then sue the agent for breach of the duty of obedience. Thus, Principal is bound by Agent's purchase, even though the purchase violated the secret limiting instruction regarding the maximum price to be paid for the book. *Ratification* Because Principal decided he did not want the Bellamy book and refused payment after learning of Agent's actions, Principal did not ratify the purchase of the Bellamy book by Agent. [Conclusion] Here, then, Principal is still bound by Agent's purchase of the Bellamy book for \$12,500, and is thus liable to Tomeseller in that amount. Principal can then sue Agent for the difference of \$4,500 between the authorized amount and the actual amount paid. 3. **[Liability of Principal to Lampseller]** [Agent's Authority in this Transaction] *Actual Express and Implied Authority Terminated* Prior to Agent purchasing the whale oil lamp from Lampseller, Principal sent Agent a letter terminating his agency and asking Agent to return his credentials to Principal. An agent's actual (express and implied) authority terminates when he or she knows or should have known of the termination. Thus, this letter terminated Agent's actual express authority and actual implied authority. *Apparent Authority* Principal gave Agent credentials, which Agent used to buy the whale oil lamp from Lampseller. A reasonable person, on seeing the credentials, would believe that Agent had authority from Principal to buy the whale oil lamp for Principal. The credentials, then, are a communication from Principal to anyone seeing the credentials, including Lampseller, of apparent authority of Agent to act on behalf of Principal in purchasing the whale oil lamp. Agent thus had apparent authority to buy the whale oil lamp and bind Principal. If the principal has given the agent a writing manifesting his or her authority that is meant to be shown to third parties, the apparent authority created by the writing will not be terminated with respect to third parties who see and rely on such writing---the principal must communicate the termination of authority to the third parties. Here, Principal did nothing to communicate to anyone, including Lampseller, that Agent's credentials had been revoked. Thus, Agent's apparent authority had not yet been terminated when Agent purchased the lamp. *Ratification* Because Principal decided he did not want the lamp and refused payment after learning of Agent's actions, Principal did not ratify the purchase of the lamp by Agent. Because Agent acted for his own account, he breached his duty of loyalty to Principal, by using Principal's credentials to purchase an item for his own account. [Conclusion] Principal is liable to Lampseller for the \$5,000 for the whale oil lamp because Agent had apparent authority. Principal can then sue Agent for the entire amount on account of Agent's breach of his duty of loyalty.