Paul owns a small construction firm. David, his employee, signs contracts with customers on behalf of the company. Which of the following statements concerning David's capacity to be an agent for Paul is correct?

• A. I only
• B. II only
• C. Both I and II
• D. Neither I nor II

Answer: (D)

The key idea is how an employee can act as an agent to bind a principal, which depends on authority. A person who signs contracts on behalf of a company does so as an agent, but the company is bound only if the agent has actual authority (express or implied) or apparent authority (the third party’s reasonable belief based on the principal’s representations).

In this case, David signs contracts for Paul’s firm. Whether Paul is bound by those contracts hinges on whether David has been given authority to sign. If Paul expressly told David to sign contracts, or if David’s role and past practice give him implied authority to sign in ordinary course, or if Paul’s actions led third parties to believe David had authority (apparent authority), then the company would be bound. If none of these authorities exists, David cannot bind Paul, and the statements about his capacity would be incorrect.

Since the selected answer indicates that neither statement about David’s capacity is correct, the takeaway is that mere employment does not automatically grant binding authority; the actual status depends on the presence or absence of express, implied, or apparent authority.