Biz Orgs Midterm Review Quiz

Sarah runs a successful bakery business as a sole proprietor. One day, a customer slips and falls due to a wet floor. The customer sues Sarah.

What is Sarah's liability?

• Personally, with the exception of her homestead

• Complete and unlimited personal liability

• Only what the sole proprietorship can cover

Jack appoints Tom as his agent to purchase a car on his behalf. Tom enters into a contract with a car dealer to buy a specific model of car for Jack. Before Tom finalizes the purchase, Jack revokes Tom's authority.

Is Jack bound by the contract entered into by Tom with the car dealer?

• Yes.

• No.

Answer explanation

Under the principle of revocation of authority, Jack may terminate Tom's authority at any time before the transaction is completed. After that, Tom will no longer have the legal capacity to bind Jack to any contract with any third party.

Carl is 16-years-old and wants to buy a car after getting his license. Carl sends his Butler out with a blank check with Carl's name on it and tells his Butler to buy him the nicest car he can find. The Butler finds a nice car and signs a contract for the car with a car dealership. The car gets delivered a week later, but as the truck pulls up, Carl informs the car dealership he no longer wishes to buy the car despite the agreement having been signed in his name.

Can the car dealership enforce the contract against Carl?

• Yes, because the Butler properly acted as an authorized agent.

• Yes, because the Butler is an employee of the son's parents, who are the son's principal.

• No, because the Butler acted outside the scope of his agency as a butler.

• No, because Carl is a minor.

Answer explanation

The general rule is that a minor may enter into a contract, but that contract may be disaffirmed with a third party at any time. This also applies to agency. The other answers are irrelevant given that the son is a minor.

Peter sends his employee Raphael to buy a pizza at Casey’s Italian restaurant. Raphael tells Casey that he, Raphael, is acting for Peter. Secretly, though, Raphael wants the contract to be between himself and Casey. Casey, taking Raphael at his word, assumes that Raphael is acting on behalf of Peter. Raphael signs the contract with Peter's name.

Has a contract been formed between Casey and Peter?

• Yes, because Raphael acted with actual authority and because Casey reasonably assumed that Raphael was Peter’s agent.

• Yes, because Raphael acted with apparent authority and because Casey reasonably assumed that Raphael was Peter’s agent.

• No, because Raphael did not have authority.

• No, because Raphael acted for himself rather than for Peter.

Arturo tells his employee Charlie to rent a Ferrari for him from a nearby car rental enterprise. As soon as Charlie has left, Arturo calls the relevant car rental enterprise, states his name, and says: “I have sent my employee Charlie over to rent a car for me. He can rent any car as long as it is luxurious.” The employee in charge at the car rental enterprise concludes that Charlie has authority to rent a luxurious car for Arturo, no matter the brand. As it happens, the car rental no longer has Ferraris in store. Therefore, Charlie decides to rent a Bentley instead.

Is Arturo bound to the contract, and, if so, why?

• Arturo is bound to the contract because Charlie acted with actual authority

• Arturo is bound to the contract because Charlie acted with apparent authority

• Arturo is bound to the contract because the contract was ratified

• Arturo is bound to the contract because of estoppel

Answer explanation

Arturo never told Charlie about what the bounds of his agency were in terms of what car he was expected to buy, but he still acted within the scope of his duties (with the help of the employee, who never told him of the narrowing of the scope of his duties. Because Charlie never acted outside the scope of his duties, he had apparent authority, and thus bound Arturo to the contract he signed on his behalf.

Doug and Morgan operate a valid partnership where they sell rubber ducks together, called "Duck Co." They agree with each other to sell ducks at full market price for the first 3 months of operation, meaning no discounts. Morgan starts speaking with a local toy company, and agrees to sell rubber ducks at a 25% discount. The contract is signed with the partnership's name. Doug discovers this and says the contract is void, as this was not what they agreed to do. The buyer sues Duck Co. to enforce the contract.

Is Duck Co. bound to this contract?

• Yes, because the contract has their name on it and thus binds them to it no matter what.

• Yes, because the contract was still in the ordinary course of business.

• No, because the terms of the contract were outside the scope of Morgan's authority.

• No, because Doug voided the contract after the fact.

Answer explanation

Even if a partner enters into a contract outside the scope of their prescribed authority, courts will often determine that certain partners use apparent authority when their actions are within the course of ordinary business. Here, despite Morgan going outside the scope of her authority, the buyer was a good faith buyer and relied on Morgan's contract to sell things that were within the scope of Duck Co.'s business.

An uncle and nephew jointly own a hardware store. The uncle runs the store, the nephew works as a cashier. The uncle pays the nephew a salary, and also pays the nephew 10% of the store's profits.

A customer buys a saw from the store, which explodes and causes injury to the customer. The customer sues the uncle and nephew jointly for her injuries. The customer contends that the nephew is a partner.

Which of the following supports the customer's position that the nephew is a partner?

• The nephew owned the storefront property jointly with the uncle.

• The nephew sold the tool to the customer as the cashier.

• The nephew received 10% of the profits.

• The uncle's will left the hardware store to the nephew in its entirety.

Answer explanation

Because the nephew was sharing in profits with the uncle, he is considered a partner. If he was just being paid salary, he would just be an employee. However, the profit sharing means he can be held liable as a partner with the uncle. Whether or not they owned the store jointly is largely irrelevant, as they did not expressly purchase the store as partners for the partnership.

Elon Perfume wants to accumulate shares in a company, but did not want to buy them personally because his name association would drive up the cost. Perfume appoints an agent to buy a block of shares in the company. The agent tells the stock broker that he is acting on behalf of someone "who shall remain nameless, but whose name you would recognize." The agent signs the contract to buy the shares. Days later, the stock price dropped heavily, and Perfume refused to pay for the shares. The stock broker sues to compel payment.

Who is liable?

• Only Elon Perfume, since the broker knew the agent was working on behalf of someone.

• Only Elon Perfume because he was a disclosed principal.

• Only the agent because Elon Perfume did not ratify the agent's actions.

• Both Elon Perfume and the agent, since Perfume was a disclosed but unidentified principal.

Answer explanation

For partially- and undisclosed principals, both the agent and the principal can be held liable for contracts entered into with a third party.

Lisa and Mike decide to start a catering business together as general partners. They contribute equal amounts of capital and share profits and losses equally. However, they do not formalize their partnership agreement in writing. After a few months, the business encounters financial difficulties, and Lisa wants to dissolve the partnership. Mike disagrees and wants to continue the business.

What happens now? Select all that apply.

• The partnership is officially dissolved and nothing else must happen.

• Mike's objection may require judicial intervention to determine continuation or dissolution.

• Lisa's desire to dissolve the partnership triggers the winding up process.

• Since Lisa and Mike are partners, they share debts and must begin liquidating partnership assets to satisfy debts to creditors.

Answer explanation

In the absence of a written partnership agreement, Lisa and Mike's business is presumed to be a general partnership under the law. As general partners, they share equal liability for the debts and obligations of the business, regardless of their respective contributions. Lisa's desire to dissolve the partnership triggers the process of winding up the partnership affairs and liquidating its assets to satisfy creditors. Mike's objection to dissolution may require judicial intervention to resolve the dispute and determine the appropriate course of action for the partnership's continuation or dissolution.

In which type of business ownership structure does each owner in the group risk losing his/her personal property even though responsibilities are shared?

• limited liability company

• sole proprietorship

• partnership

• corporation