Chapter 32
Agency Formation and Duties
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
A1. A principal does not have the right to control an agent’s conduct in matters entrusted
to the agent.
A2. An agent is authorized to act on behalf of a principal in doing business with third
parties.
A3. An employee may not act in the capacity of an agent.
A4. Normally, all employees who deal with third parties are deemed to be agents.
A5. Employment laws do not apply to independent contractors.
A6. Agency relationships exist only within employment relationships.
A7. Independent contractors have no control over the details of their work performance.
A8. A person cannot be both an independent contractor and an agent.
A9. Agency relationships normally are consensual.
A10. A person must have contractual capacity to be an agent.
A11. An agreement to form an agency relationship can be oral.
A12. Acts of a purported agent in and of themselves can create an agency by estoppel.
A13. A principal owes his or her agent a duty to act in good faith.
A14. When an agent fails to perform his or her duties, liability for breach of contract may
result.
A15. An agent’s deviation from the lawful, clearly stated instructions of the principal is a
violation of the duty of obedience.
A16. 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.
A17. A principal owes an agent a duty of estoppel.
A18. When an agency relationship is gratuitous, the agent does not act in exchange for
payment.
A19. Remedies of the agent for breach of duty by the principal follow normal contract and
tort remedies.
A20. When the principal-agent relationship is not contractual, the agent has no right to
specific performance.
MULTIPLE CHOICE QUESTIONS
A1. 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.
A2. 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.
A3. Diego is a truck driver for Entertainment Supplies Company (ESC). Diego does exactly
what ESC tells him. Diego is
a. an employee.
b. an employer.
c. an independent contractor.
d. a principal.
Fact Pattern 32–1A (Questions A4–A5 apply)
Janet and Julie work at ABC Interiors. Janet is a designer who works with clients of ABC on
interior design projects. ABC closely supervises all of its designers, and dictates their work
schedules. Julie works part-time in the evenings cleaning the offices.
A4. Refer to Fact Pattern 32-1A. Janet is ABC’s
a. employee, agent, and independent contractor.
b. employee and agent.
c. employee but not agent.
d. independent contractor.
A5. Refer to Fact Pattern 32-1A. Julie is ABC’s
a. agent but not employee.
b. employee and agent.
c. employee or independent contractor, depending on whether ABC controls the
details of her physical performance.
d. independent contractor.
A6. Delicious Coffee Company hires Elton to sell Delicious’s products in a certain area.
Delicious 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 key factor in whether Elton is Delicious’s employee is
a. the amount of Elton’s salary.
b. the control Delicious has over the details of the work.
c. the length of the trial period.
d. the title that designates Elton’s position.
A7. Calvin is a minor. In most states, Calvin may be
a. an agent but not a principal.
b. an agent or a principal.
c. a principal but not an agent.
d. neither an agent nor a principal.
A8. 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.
A9. Louis, a certified public accountant and an investor, and Maria, an insurance
salesperson and a realtor, may create an agency relationship for
a. a business purpose only.
b. a legal purpose only.
c. any purpose.
d. no purpose.
A10. Jill introduces Kelly to her friends as “my associate.” Kelly purports to act as Jill’s agent
in several business transactions with those friends. If Jill is liable for Kelly’s actions, it
will be under
a. the doctrine of estoppel.
b. the equal dignity rule.
c. the fiduciary principle.
d. the good faith statute.
A11. Home Development Company employs llya to buy property for a future residential
development. Ilya secretly buys some of the property and sells it to Home
Development at a profit. Ilya has breached
a. no duty.
b. the duty of accounting.
c. the duty of loyalty.
d. the duty of notification.
A12. 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.
A13. 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.
A14. Tri-state Financial Corporation hires Uri, a real estate agent, to locate investment
properties for Tri-state. Uri learns of a warehouse available for $100,000, informs Tri–
state, and makes an offer of $90,000 on Tri-state’s instruction. The offer is rejected.
Uri
a. breached the agent’s fiduciary duties to the principal.
b. did nothing wrong.
c. failed to take advantage of a business opportunity.
d. made an unreasonable offer based on current market value.
A15. Glen is an agent for Hi-Flite, Inc. On Hi-Flite’s behalf and at its request, Glen pays Ian
for certain plane maintenance and repair services. Glen’s right to obtain the amount
of those payments from Hi-Flite arises under the principal’s duty of
a. avoidance.
b. cooperation.
c. indemnification.
d. reimbursement.
A16. 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.
A17. Clearview 3D HD TV Company grants its agent Blossom an exclusive territory in which
to sell Clearview products. Clearview cannot compete with Blossom in that territory
under the principal’s duty of
a. avoidance.
b. cooperation.
c. indemnification.
d. reimbursement.
A18. Pam is an agent for Refined Chemicals Corporation. Refined Chemicals owes Pam the
duty of
a. accounting.
b. obedience.
c. performance.
d. safe working conditions.
A19. Teresa owns a used-car lot where Salvatore works as a salesperson. Teresa tells
Salvatore not to make any warranties for the cars. To make a sale to Rosa, however,
Salvatore adds a 50,000-mile warranty. Later, Rosa sues Teresa for breach of
warranty. Teresa’s right to hold Salvatore liable for any damages she has to pay is the
right of
a. avoidance.
b. cooperation.
c. indemnification.
d. reimbursement.
A20. Miracle Motors employs Norris as a sales agent for a trial period. At the end of the
period, Miracle Motors and Norris disagree on the amount of the commissions Norris
is due for sales that he made. Norris may demand
a. a constructive trust.
b. an accounting.
c. nothing.
d. specific performance.
ESSAY QUESTIONS
A1. Arnold is the chief executive officer of Beta Corporation. Arnold’s responsibilities
include decisions on product development, marketing, and other significant business
directions. Arnold is subject to the approval and oversight of Beta’s board of directors.
Carol is a Beta manager whose duties include the firm’s day–to-day hiring, firing,
purchasing, and selling. Dave is a Beta salesperson, whose daily activities are con-
trolled by Carol. Erin writes technical manuals for Beta products according to Arnold’s
instructions and subject to Beta’s control, but has no dealings with Beta customers or
suppliers. Fred edits the manuals on a contract-per-manual basis and is not otherwise
subject to Beta’s control. Who is a principal? Who is an agent? Who is an employee?
Who is an independent contractor?
A2. Ella agrees to act as Fab’s agent in settlement negotiations with Global Insurance
Company. Ella works out a profitable compromise for Fab, but deposits the company’s
payment in her own account and refuses to give it to Fab. Fab files a suit against Ella.
What remedies might the court impose?