Which statement best differentiates actual authority from apparent authority, and how each binds the principal to contracts entered by the agent?

• A. Actual authority is granted by the principal to the agent (express or implied).
• B. Apparent authority arises from the principal's representations to a third party, making the third party reasonably believe the agent has authority.
• C. Both actual authority and apparent authority bind the principal to contracts entered within their respective authorities.
• D. Apparent authority can bind a principal even if the agent has no authority and no representations were made.

Answer: (C)

The key idea here is that there are two ways an agent can bind the principal to contracts: actual authority and apparent authority. Actual authority is the power the principal truly gives the agent, either expressly or via implied powers drawn from the agent’s role, duties, or past practice. The agent can bind the principal to contracts made within that scope because the authority is real and granted.

Apparent authority, on the other hand, comes from what the principal represents or how the principal’s conduct leads a third party to reasonably believe the agent has authority. The agent may have no real authority, but if the principal’s representations create a reasonable belief in the agent’s authority, the principal can still be bound by contracts the agent negotiates within that appearance of authority.

The statement that both actual authority and apparent authority bind the principal to contracts entered within their respective authorities is the best answer because it captures those two independent pathways by which a principal can be bound: real authority to bind within its scope, and created authority through appearances or representations that the third party reasonably relies on. The other options describe only one side or misstate how apparent authority works (for example, it cannot bind if there were no representations or conduct creating that appearance).