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Chapter 20. Relationship with Third Parties
1. Roy is the promoter of a new corporation that has not yet been organized. On behalf of the as-yet unincorporated
business, he enters into a three-year lease agreement for office space and personally signs the lease in his own
name. The corporation is liable on the contract, because Roy is its agent.
a. True
b. False
2. The purpose of an agency relationship is to allow principals to extend their business activities.
a. True
b. False
3. An agent has the power to contractually bind her principal whenever she has actual or apparent authority and acts
within her authority.
a. True
b. False
4. Apparent authority is actual authority.
a. True
b. False
5. Apparent authority can arise where there is an undisclosed principal as well as where the principal is disclosed.
a. True
b. False
6. Ordinarily, an agent may delegate his duties to an equally qualified subagent.
a. True
b. False
7. A subagent owes a fiduciary duty to only the principal.
a. True
b. False
8. An employer may not be held liable if her employee sells liquor to an underage person if this criminal act was
unauthorized by the employer.
a. True
b. False
9. An agent is personally liable for the torts he commits while in the scope of his employment.
a. True
b. False
10. Martinez makes a contract with Bowers on behalf of a disclosed principal. If Bowers breaches the contract,
ordinarily Martinez has no right of action against Bowers.
a. True
b. False
11. Sunset Properties, Inc. hires William to manage its 48-unit apartment complex. Nothing is said as to expenses.
William purchases fuel to heat the apartments and arranges for a repairman to do ordinary maintenance. William will
be personally liable for these expenses, because he has no authority to incur them.
a. True
b. False
12. A principal who authorizes his agent to commit a tortious act with respect to the property or person of another is not
liable for the injury or loss sustained by that person.
a. True
b. False
13. The liability of an employer under the doctrine of respondeat superior is limited to wrongdoing by the employee in
the course of his employment.
a. True
b. False
14. Even though an agent exceeds his express authority, the principal may still be bound.
a. True
b. False
15. Unless otherwise agreed, an agent making a contract for an unidentified principal is not a party to the contract.
a. True
b. False
16. An agent for an unidentified principal is liable on the contract to the third party no matter whether the particular
transaction is authorized or not.
a. True
b. False
17. Upon the termination of an agency, the agent's actual authority ceases. However, his apparent authority may
continue until actual notice of the termination is given to third parties.
a. True
b. False
18. In general, an undisclosed principal and the third party to a contract are contractually bound if the agent acts within
the scope of his actual authority in making the contract.
a. True
b. False
19. Julie writes a letter to Mitchell authorizing him to sell her boat and sends a copy of the letter to Jared, a prospective
buyer. The next day, Julie writes Mitchell a letter revoking his authority to sell the boat, but she does not send a copy
of the second letter to Jared. Although Mitchell has no actual authority to sell the boat now, he continues to have
apparent authority with respect to Jared.
a. True
b. False
20. If an agent exceeds his actual and apparent authority, the principal is not bound, which makes the agent a party to
the contract.
a. True
b. False
21. Constructive notice of termination of an agency may not occur by mere publication in a newspaper.
a. True
b. False
22. Ann, in the presence of Betty, tells Thomas that Ann is Betty's agent. In reality, Ann had no authority. Betty hears
the statement, but she says nothing. In reliance, Thomas ships goods to Betty on Ann's order. Betty is liable even
though no actual authority existed.
a. True
b. False
23. Ratification and adoption of contracts have the same effect; they are both retroactive and both release the purported
agent.
a. True
b. False
24. The contract liability of the principal may depend upon whether the principal is disclosed, partially disclosed, or
undisclosed.
a. True
b. False
25. Apparent authority arises out of words or conduct of a disclosed or unidentified principal manifested to third persons.
a. True
b. False
26. A principal is contractually bound to a third party if the agent acts without any authority but the principal ratifies the
contract.
a. True
b. False
27. An employer may have criminal liability for the acts of his employee.
a. True
b. False
28. An employer can be liable for an agent's negligence, but he will never be liable for his intentional torts.
a. True
b. False
29. The Second and Third Restatements are the same regarding when an agent’s apparent authority ceases.
a. True
b. False
30. There can be apparent authority where a third party knows the agent has no actual authority.
a. True
b. False
31. The Second Restatement provides that the death of a principal terminates all authority of an agent, including
apparent authority, even though no notice is given to third parties.
a. True
b. False
32. Under the Uniform Durable Power of Attorney Act, if a principal who has executed a written durable power of
attorney becomes incapacitated, the actual authority of an agent survives.
a. True
b. False
33. If Sierra orally requests her agent Scott to sell her desk for at least $450, Scott’s authority to sell the desk for this
amount is actual and express.
a. True
b. False
34. A person who purports to act as agent for a principal whom both the agent and the third party know to be wholly
incompetent is personally liable on a contract entered into with a third person on behalf of such a principal.
a. True
b. False
35. Samuel writes to Emma authorizing her to sell his automobile for $3,000. Emma, although she has no authority to
delegate this task, asks Renaldo to try to sell the car. If Renaldo makes a contract with Michelle for the sale of the
car, Samuel is not obligated to sell to Michelle, and Samuel acquires no rights against Michelle.
a. True
b. False
36. The principal may ratify either the entire contract or certain parts of it.
a. True
b. False
37. An agent who makes a contract with a third person on behalf of a disclosed principal usually is not a party to the
contract.
a. True
b. False
38. The doctrine of is the basis for an employer's liability for an unauthorized tort committed by his employee in the
course of his employment.
a. indemnification
b. respondeat superior
c. apparent authority
d. direct liability
39. Which of the following is true regarding an agent who is acting for an undisclosed principal?
a. The agent with actual authority will bind both himself and the principal on most contracts.
b. The third party will never be bound in a contract with the principal.
c. An undisclosed principal will bind only himself and not the agent.
d. Failure to disclose the name of the principal is a form of fraud.
40. An agent acts for a(n) principal when she appears to be acting on her own behalf and the third person with
whom she is dealing has no knowledge that she is an agent.
a. unidentified
b. undisclosed
c. unauthorized
d. disclosed
41. Richard writes a letter to Sarah authorizing her to sell his car and sends a copy of the letter to Timothy, a prospective
purchaser. If the next day Richard sends a letter to Sarah revoking her authority, but he fails to notify Timothy,
Sarah:
a. has actual authority to sell the car to Timothy.
b. has implied authority to sell the car to Timothy.
c. has apparent authority with respect to Timothy to sell the car.
d. is empowered under the doctrine of respondeat superior to negotiate the contract.
42. If an agent at his principal's direction fixes prices with the principal's competitors:
a. only the agent is criminally liable.
b. only the principal is criminally liable.
c. both the principal and agent are criminally liable.
d. any liability would be civil only.
43. A principal may be held liable for the torts of an independent contractor:
a. whenever the contractor is performing work or rendering services for the principal.
b. if the principal fails to supervise the contractor.
c. if the contractor negligently performs an inherently dangerous activity.
d. All of these.
44. Pat bought a cotton sweater at Ivey's Fashion Store. Sue, the salesperson, told her the sweater was guaranteed not
to shrink if washed in cold water by hand. Pat washes the sweater as directed and it shrinks. Which of the following
is correct?
a. Pat has no recourse against the store, because it was only the salesclerk who misrepresented the sweater.
b. Sue has apparent authority to make warranties such as the one that she made. Therefore, the store is bound.
c. If Sue is only a part-time employee, Ivey has no responsibility for misrepresentations she makes.
d. Salesclerks are usually independent contractors. Thus, there is no liability on the part of Ivey.
45. The purpose of an agency relationship is to:
a. allow the principal to extend his business activities by authorizing agents to enter into contracts with third
persons on the principal’s behalf.
b. encourage business growth by protecting employers from liability for torts or criminal activity.
c. allow a principal to contract through agents in ways he would not be able to contract on his own, such as
creating valid contracts in situations where the principal could only create voidable contracts on his own.
d. eliminate the distinction between employees and independent contractors.
46. Apparent authority may arise in all but which of the following ways?
a. The acts are customary of an agent in similar positions in an organization.
b. The principal has acquiesced to prior similar transactions between the agent and the third party.
c. The agent shows the third party a power of attorney from the principal authorizing the agent to enter such a
transaction.
d. An agent tells the third person she has the authority to transact such business on behalf of the principal.
