Cross-7e

Appendix I:

Sample Answers for End-of-Chapter

Questions with Sample Answer

Chapter 19: Agency

19–3. Question with Sample Answer

Lei Chu-Ming is a purchasing agent-employee for the A & B Coal Supply partnership. Chu-Ming has authority to purchase the coal needed by A & B to satisfy the needs of its customers. While Chu-Ming is leaving a coal mine from which she has just purchased a large quantity of coal, her car breaks down. She walks into a small roadside grocery store for help. While there, she runs into Darin Wilson, who owns 360 acres back in the mountains with all mineral rights. Wilson, in need of cash, offers to sell Chu-Ming the property for $1,500 per acre. On inspection of the property, Chu-Ming forms the opinion that the subsurface contains valuable coal deposits. Chu-Ming contracts to purchase the property for A & B Coal Supply, signing the contract “A & B Coal Supply, Lei Chu-Ming, agent.” The closing date is August 1. Chu-Ming takes the contract to the partnership. The managing partner is furious, as A & B is not in the property business. Later, just before closing, both Wilson and the partnership learn that the value of the land is at least $15,000 per acre. Discuss the rights of A & B and Wilson concerning the land contract.

Sample Answer:

As a general rule, a principal and third party are bound only to a contract made by the principal’s agent within the scope of the agent’s authority. An agent’s authority to act can come from actual authority given to the agent (express or implied), apparent authority, or authority derived from an emergency. Express authority is directly given by the principal to the agent. Implied authority is deemed customary or inferred from the agent’s position. Apparent authority is created when a principal gives a third person reason to believe the agent possesses authority not truly possessed. In this case, no express authority was given, and certainly no implied authority exists for a purchasing agent of goods to acquire realty. Moreover, A & B did nothing to lead Wilson to believe that Chu-Ming had authority to purchase land on its behalf. In addition, there was no emergency creating a need for Chu-Ming to purchase the land. Therefore, although Chu-Ming indicated in the contract that she was an agent, she acted outside the scope of her authority. Because of this, the contract between Chu-Ming and Wilson is treated merely as an unaccepted offer. As such, neither Wilson nor A & B is bound unless A & B ratifies (accepts) the contract before Wilson withdraws (revokes) the offer. Ratification can take place only when the principal is aware of all material facts and makes some act of affirmation. If A & B affirms the contract before Wilson withdraws, A & B can enforce Chu-Ming’s contract. If Wilson withdraws first, Chu-Ming’s contract cannot be enforced by A & B.