BLTC-8e Appendix E:
Sample Answers for End-of-Chapter Hypothetical Questions with Sample Answer
Chapter 28: Agency Relationships in Business
28.2 Hypothetical Question with Sample Answer
Paul Gett is a well-known, wealthy financial expert living in the city of Torris. Adam Wade, Gett’s friend, tells Timothy Brown that he is Gett’s agent for the purchase of rare coins. Wade even shows Brown a local newspaper clipping mentioning Gett’s interest in coin collecting. Brown, knowing of Wade’s friendship with Gett, contracts with Wade to sell a rare coin valued at $25,000 to Gett. Wade takes the coin and disappears with it. On the payment due date, Brown seeks to collect from Gett, claiming that Wade’s agency made Gett liable. Gett does not deny that Wade was a friend, but he claims that Wade was never his agent. Discuss fully whether an agency was in existence at the time the contract for the rare coin was made.
Sample Answer:
Agency is usually a consensual relationship in that the principal and agent agree that the agent will have the authority to act for the principal, binding the principal to any contract with a third party. If no agency in fact exists, the purported agent’s contracts with third parties are not binding on the principal. In this case, no agency by agreement was created. Brown may claim that an agency by estoppel was created; however, this argument will fail. Agency by estoppel is applicable only when a principal causes a third person to believe that another person is the principal’s agent. Then the third party’s actions in dealing with the agent are in reliance upon the principal’s words or actions and the third party’s reasonable belief that the agent has authority. This is said to estop the principal from claiming that in fact no agency existed. Acts and declarations of the agent, however, do not in and of themselves create an agency by estoppel, because such actions should not reasonably lead a third person to believe that the purported agent has authority. In this case, Wade’s declarations and allegations alone led Brown to believe that Wade was an agent. Gett’s actions were not involved. It is not reasonable to believe that someone is an agent solely because he or she is a friend of the principal. Therefore, Brown cannot hold Gett liable unless Gett ratifies Wade’s contract—which is unlikely, as Wade has disappeared with the rare coin.