Which statement about agency authority is correct?

• A. If a principal orally appoints another party as agent, apparent authority exists until the appointment is written and signed.
• B. The primary distinction between apparent and actual authority is that apparent authority is determined by the reasonable perceptions of third parties.
• C. If there is a dispute over the extent of an agent's authority, a final determination is based on what the principal considered the agent's scope of authority to be.
• D. Implied authority is a type of apparent authority that is created as a result of the agent's conduct with third parties.

Answer: (B)

The concept being tested is how authority in agency relationships is defined and distinguished. Apparent authority depends on what a reasonable third party believes the agent is authorized to do, based on the principal’s representations and the agent’s position or conduct. This realism-based view means the third party’s perceptions drive whether authority is deemed to exist on the outside, even if the agent has no actual authority.

That’s why the statement identifying the primary distinction as being determined by the reasonable perceptions of third parties is the best fit. It captures the essence of apparent authority: the justification for holding the principal liable to third parties rests on the third party’s reasonable beliefs about the agent’s power, as shaped by the principal’s actions and communications.

Why the other statements don’t fit: authority arising purely from a written appointment is not correct, because apparent authority can exist even without a formal written grant and can end or change with the principal’s actions; a dispute over an agent’s authority is not determined solely by the principal’s internal view of the scope of authority but by what the principal represented and what third parties reasonably believed; and implied authority is a form of actual authority, not apparent, arising from the principal’s conduct or the agent’s duties rather than from third-party perceptions.