Chapter 28
Agency Relationships in Business
N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows.
N A question new to this edition of the Test Bank.
+ A question modified from the previous edition of the Test Bank,
= A question included in the previous edition of the Test Bank.
TRUE/FALSE QUESTIONS
1. A principal has the right to control an agent’s conduct in matters entrusted to
the agent.
2. Through agents, a principal can conduct multiple business operations
simultaneously.
3. In a principal-agent relationship, the parties agree that the principal will act on
behalf and instead of the agent in negotiating and transacting business with
third persons.
4. Employees who deal with third parties are agents of their employers.
5. An employer has no control over an employee’s work.
6. Real estate brokers are independent contractors.
7. An independent contractor is an employee.
8. The relationship between a principal and an independent contractor always
involves an agency relationship.
9. An independent contractor is an employer who controls his or her agent’s
performance.
10. An agency relationship can only be formed with a written agreement.
11. A person must have contractual capacity to be an agent.
12. An agency relationship created for an illegal purpose is enforceable.
CHAPTER 28: AGENCY RELATIONSHIPS IN BUSINESS 3
13. An agency relationship must be based on an express or implied agreement that
the agent will act for principal and that the principal agrees to have the agent so
act.
14. An agency relationship cannot exist in the absence of a formal agreement.
15. A principal who causes a third person to believe that another person is the
principal’s agent can be estopped from denying the agency relationship.
16. An agency relationship may occur by operation of law in a family.
17. Generally, the agent owes the principal no duties.
18. Remedies of the agent for breach of duty by the principal arise out of contract and tort
law.
19. It is basic tenet of agency law that notice to the agent is notice to the principal.
20. An agent has a duty to keep and make available to the principal an account of all
property and funds received and paid out on behalf of the principal.
21. If a principal cannot be contacted in an emergency situation, an agent cannot
deviate from previously given instructions.
22. A principal owes an agent a duty of compensation.
23. Authority declared in clear, direct, definite terms is express authority.
24. Giving an agent a power of attorney confers implied authority.
25. The equal dignity rule requires that a principal and agent treat each other with
“equal dignity.”
26. For an agent’s implied authority to be effective, a principal must ratify it.
27. If a principal does not ratify an authorized contract, the principal is not bound.
28. If a principal ratifies a contract without knowing all of the facts, the principal can
rescind the contract.
29. If a principal does not ratify an unauthorized contract, the principal is not
bound.
30. A disclosed principal is a principal whose identity is not known by the third party
at the time the contract is made by the agent.
31. A principal is not liable on any contract made by the agent acting outside the
scope of his or her authority.
32. Under the doctrine of respondeat superior, an agent is liable for the principal’s
negligence.
33. A principal is responsible for all intentional torts committed by an agent.
34. An agency can terminate once its purpose is achieved.
35. When an agency relationship is terminated, the principal has a duty to personally
notify third parties who knew of its existence.
MULTIPLE CHOICE QUESTIONS
1. Ozzy is an officer of Prudent Financial Corporation. Ozzy serves in a
representative capacity for Prudent Financial’s owners. With respect to binding
Prudent Financial to contracts, Ozzy is
a. an agent and has the authority.
b. an agent but does not have the authority.
c. not an agent and does not have the authority.
d. not an agent but does have the authority.
2. Jackson Lumber hires Owen to purchase wood from various sources on behalf
of Jackson Lumber. In this relationship, Jackson Lumber is the
a. employee.
b. independent contractor.
c. principal.
d. agent.
3. KupaJava hires Lola to manage one of KupaJava’s seven drive-through coffee
stands. KupaJava agrees to pay Lola a salary, plus commission. KupaJava
CHAPTER 28: AGENCY RELATIONSHIPS IN BUSINESS 7
stipulates the standards that should be observed, the goals that should be
attained, and the methods that should be used. Lola is most likely KupaJava’s
a. employee.
b. independent contractor.
c. principal.
d. power of attorney.
4. Clara is a salesperson in The Corner Store. When Carla makes a sale to
Jenny, the sale is
a. binding on The Corner Store.
b. binding on Carla.
c. binding on The Corner Store only if the owner of The Corner Store is
present when the sale is made.
d. not binding on anyone.
5. Genetic Seed Company hires Howie to work on Genetic’s shipping dock,
accepting deliveries and dealing with other companies’ drivers. With respect to
Genetic, Howie is most likely
a. an agent.
b. an independent contractor.
c. a principal.
d. a work for hire.
6. Ester is a lighting technician who hires out on a per-project basis to film and television
production companies, as well as theatres and other venues that stage dramatic and
musical performances. In this capacity, Ester is
a. an agent.
b. an employee.
c. an independent contractor.
d. a principal.
8 UNIT FOUR: AGENCY AND EMPLOYMENT LAW
7. Delite Candy Company hires Elton to sell Delite’s products in a certain area.
Delite agrees to pay Elton a salary, plus commission, for a trial period. They
also agree that Elton can sell using any methods and during any hours that
seem appropriate. The most important factor in whether Elton is Delite’s
employee is
a. the amount of Elton’s salary.
b. the control Delite has over the details of the work.
c. the length of the trial period.
d. the title that designates Elton’s position.
8. George and James create an agency relationship to facilitate the sale of illegal
narcotics. This agency relationship
a. is illegal.
b. is legal.
c. will be recognized by some states, but not others.
d. can exist, but will be subject to sanctions for illegal activity.
9. Jim agrees to act on Kit’s behalf, subject to Kit’s control, and Kit trusts Jim to so
act. This describes a relationship between
a. a business and its competitors.
b. a government and its governed.
c. a parent and a child.
d. a principal and an agent.
10. Sela agrees to act on Thom’s behalf, subject to Thom’s control, and Thom
trusts Sela to so act. They set out the terms in a written document, which they
both sign. This is
a. an agency by agreement.
b. an agency by estoppel.
c. an agency by ratification.
d. not the creation of an agency relationship.
11. Gayla asks Jessie to contract with Jessie’s high school classmates to babysit
for Gayla’s new baby. Jessie orally agrees to do so. This is
a. an agency by agreement.
b. an agency by estoppel.
c. an agency by ratification.
d. not the creation of an agency relationship.
12. Carol is married to Andy. Carol buys food for their children’s lunches and
charges the cost to Andy’s account. This is
a. an agency by operation of law.
b. an agency by estoppel.
c. an agency by ratification.
d. not the creation of an agency relationship.
13. Dizzy is not Edwina’s agent but enters into a contract with Frida on Edwina’s
behalf. Edwina later contacts Frida to affirm the contract. This is
a. an agency by agreement.
b. an agency by estoppel.
c. an agency by ratification.
d. not the creation of an agency relationship.
14. Bernard is an expert on exotic flowers. Fine Floral Fixtures, Inc. (FFF) hires
Bernard to order exotic flowers from various greenhouses. Bernard does not
bother to examine the quality of the flowers he purchases on behalf of FFF.
Bernard has breached
a. the duty of performance.
b. the duty of loyalty.
c. no duty.
d. the duty of notification.
15. Rita is appointed as an agent for Superior Sales, Inc. The agency agreement is
silent as to the level of sales that Rita is expected to achieve. She must
a. achieve nothing because the agreement says nothing on the issue.
b. attain the level that Rita achieved with her previous employer.
c. maintain the level Superior attained before Rita became an agent.
d. use reasonable diligence and skill in selling.
16. Mackenzie, an agent for Lindsay, signs an agreement with Kirk on Lindsay’s behalf
but neglects to tell her that the agreement requires the payment of a certain tax. The
government prosecutes Lindsay for failing to pay the tax. She is
a. liable, because notice to Mackenzie is notice to Lindsay.
b. liable, because notice to Kirk is notice to Lindsay.
c. not liable, because Mackenzie did not tell Lindsay about the tax.
d. not liable, because Kirk did not tell Lindsay about the tax.
17. Bob, a salesperson at a Carpets Galore store, tells Dita, a customer, “Buy your
carpet here, and I’ll install it for half of what the store would charge.” Dita buys
the carpet, which Bob installs for half the store’s price. Bob keeps the money.
Bob has breached
a. no duty.
b. the duty of loyalty.
c. the duty of notification.
d. the duty of obedience.
18. Will is an agent for MaryElise. MaryElise gives Will clear instructions to only
enter into contracts on Mondays, Wednesdays, or Fridays. Will enters into a
contract on MaryElise’s behalf on Tuesday. Will has breached
a. the duty of performance.
b. the duty of loyalty.
c. no duty.
d. the duty of obedience.
19. Julia is an agent who purchases wool for Kara’s Knitting Company. In the
course of her performance for Kara’s Knitting Company, Julia pays for the gas
for the company car and for some storage boxes for the wool. Kara’s Knitting
Company must reimburse Julia because of the principal’s
a. duty of performance.
b. duty of loyalty.
c. duty of compensation.
d. duty of reimbursement.
20. Rangle contracts with Siena to buy a certain horse for her. Rangle makes a deal with
Timberline Stables, the owner of the horse, and makes a down payment. Siena fails to
pay the rest of the price. Timberline sues Rangle for breach of contract. His right to
hold Siena liable for any damages that he has to pay is the right of
a. avoidance.
b. cooperation.
c. indemnification.
d. reimbursement.
21. Lather Up Soap Products Company grants its agent Kathy an exclusive terri–
tory in which to sell Lather Up products. The firm cannot compete with Kathy in
that territory under the principal’s duty of
a. avoidance.
b. cooperation.
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c. indemnification.
d. reimbursement.
22. Cory employs Daily Delivery Agency as an agent under a written agreement
that describes the rights and duties of both parties. This is
a. apparent authority.
b. equal authority.
c. express authority.
d. implied authority.
23. Geoff serves in a representative capacity for Huck. To accomplish the
objectives of this relationship, Geoff’s authority can be implied
a. by contradiction.
b. by custom.
c. by lack of reason.
d. under no circumstances.
24. Sonia manages a Tasty Pastry store for United Food Company. To manage the
business, Sonia’s authority can be implied by
a. an inference from the position Sonia occupies.
b. any inference a reasonable customer or supplier would make.
c. any inference Sonia chooses to make.
d. no inference.
25. Based on Nan’s conduct, Odel reasonably believes that Poppy has the
authority to act on Nan’s behalf even though Poppy does not have the actual
authority to do so. In this circumstance, Poppy has
a. apparent authority.
b. express authority.
c. implied authority.
d. no authority.
26. Without authorization, Rolf contracts on behalf of Sari to have Tige paint the
interior and exterior of Sari’s house. Sari ratifies the contract. Later, Sari tries to
rescind the part of the contract relating to the exterior. This attempt will be
a. partly successful.
b. partly unsuccessful.
c. totally successful.
d. totally unsuccessful.
27. Bud approves on behalf of Cody—but without authorization—a contract with
Dik to build a new silo. Cody does not ratify the contract. Later, Dik tries to
enforce the deal. This attempt will be
a. partly successful.
b. partly unsuccessful.
c. totally successful.
d. totally unsuccessful.
28. Iggy hires Joy to act as his agent to purchase Kup-a-Koffee Company. Iggy
tells Joy to reveal only that she is buying the firm on behalf of a third party,
without telling Kup-a-Koffee’s seller who that third party is. Iggy is
a. a disclosed principal.
b. an implied principal.
c. an undisclosed principal.
d. a partially disclosed principal.
29. Joli, acting within the scope of her authority for the Cake Bake Shop, contracts
with Valley View Berry Farms to buy an assortment of fruit. Cake Bake is liable
on the contract, and Joli is not, if Cake Bake is
a. a disclosed principal.
b. a partially disclosed principal.
c. an undisclosed principal.
d. an apparent agent.
30. Brad is an employee of Custodial Service, Inc. In deciding whether Brad acts
within the scope of his employment when he commits a tort against Didi, a
court will not consider whether
a. Brad was acting within the scope of the agency.
b. Brad was acting within the scope of his employment.
c. Custodial authorized the act.
d. Custodial was personally at fault.
31. Picabo drives a truck as an employee for Quik Delivery, Inc. Picabo would most
likely be considered acting outside the scope of her employment if she
a. crashed into a car at the airport while off duty.
b. hit a pedestrian in a parking lot during a “working” lunch.
c. ran over an attendant at Quik’s gas station while refueling the truck.
d. smashed into a store-front while intoxicated on-duty.
32. Bayou Development Corporation (BDC) hires Gulfview Brokerage Associates
to sell the condominiums in a building at BDC’s coastal resort. The agency will
terminate
a. after the condos have been sold.
b. if the prices of the condos must be reduced to sell them.
c. once BDC obtains insurance to cover the property.
d. when BDC pays Gulfview its first commission.
33. Miklos employs Nathalie to handle a list of financial transactions on Miklos’s
behalf. This power will terminate on
a. any transaction causing a loss to Miklos.
b. Miklos’s death or incapacity.
c. Miklos’s sixty-fifth birthday.
d. Nathalie’s handling of one of each stipulated transaction.
34. Frida hires Gert, a real estate broker, to act as her agent to sell her house. The
house burns down before being sold. The agency agreement is likely
a. still in force if Frida gives Gert additional consideration.
b. still in force if Gert does not tell prospective customers.
c. terminated by mutual consent of the parties.
d. terminated by operation of law.
35. Treadwell Tire Manufacturing Company employs Uri as an agent. To terminate
Uri’s authority, Treadwell must notify
a. only third parties who are aware of the agency relationship.
b. the public generally.
c. Uri and any third parties who are aware of the agency relationship.
d. Uri only.
ESSAY QUESTIONS
1. Principal Resources Corporation contracts with Quality Construction to build an
addition to Principal’s corporate office building. Quality contracts with Rite
Supply Company for materials for the addition but refuses to pick up the
materials. Meanwhile, Principal hires Skye, a certified public accountant, to
work in its cost-accounting division as an employee, with no authority to hire or
supervise others. Skye asks Theo, an outside experienced accountant, to
advise her on certain accounting procedures but fails to pay Theo for the
service. Principal also contracts with Uma, a salesperson, to solicit orders for
18 UNIT FOUR: AGENCY AND EMPLOYMENT LAW
its products in a designated territory. Uma obtains an order from Verity
Industries, Inc., which is assured the order will be filled soon. But Uma does not
follow through with the paperwork and fails to submit the order to Principal.
Verity suffers a loss. Rite Supply, Theo, and Verity Industries claim Principal is
liable under agency law. Discuss fully whether an agency relationship was
created by Principal with Quality Construction, Skye, or Uma.
2. Brenda is a purchasing agent for Commodities Exchange Corporation. Dennis,
a Commodities corporate officer, gives Brenda written authority to buy for the
firm as many computers and peripheral devices as necessary. The next day,
Dennis calls Brenda and tells her to buy only fifty notebook computers and
nothing else. Brenda shows the written authority to E-Products, Inc., and enters
into a contract with E-Products to buy sixty notebook computers and a
selection of printers, scanners, and extra storage media. E-Products ships the
order to Commodities. Is Commodities liable to E-Products under the contract?
Is Brenda liable? In each case, if so, why? If not, why not?
CHAPTER 28: AGENCY RELATIONSHIPS IN BUSINESS 19