Future Business Leaders of America (FBLA) Business Law Practice Exam

What is a key outcome of establishing actual authority in a business relationship?

1. Increased trust between parties

2. Formal termination of agency

3. Defined responsibilities for the agent

4. Complete power to act on behalf of the principal

The correct answer is: Defined responsibilities for the agent

Establishing actual authority in a business relationship leads to defined responsibilities for the agent. Actual authority arises when a principal explicitly grants an agent the ability to act on their behalf, which includes outlining specific tasks and powers that the agent can perform. This clarity is crucial for both the principal and the agent, as it establishes boundaries for the agent's actions and ensures that the principal's interests are adequately represented. When actual authority is clearly defined, it minimizes misunderstandings and provides a framework within which the agent operates. This organization is vital in ensuring that the agent makes decisions and takes actions that align with the principal's objectives. It also helps to prevent unauthorized actions that could lead to liability for the principal or undesired outcomes in business transactions. In contrast, increased trust between parties may arise from the establishment of actual authority but is not a direct outcome. Formal termination of agency and complete power to act on behalf of the principal are not accurate reflections of the outcome related to the establishment of actual authority either; rather, they are different concepts related to the dynamics of the principal-agent relationship.