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
B1. Only through its agents can a corporation function and enter into contracts.
B2. Agency relationships do not exist between employers and employees.
B3. Employment laws apply only to the employer-employee relationship.
B4. Through agents, a principal can conduct multiple business operations simultaneously.
B5. A worker engaged in an occupation or business distinct from that of an employer
points to independent-contractor status.
B6. Work done by a specialist without supervision indicates employee status.
B7. An independent contractor may not act in the capacity of an agent.
B8. Considerable control over the details of work indicates agent status.
B9. Any copyrighted work created by an employee, whether or not an employer
requested it, is a “work for hire.”
B10. An agreement to form an agency relationship must be in writing.
B11. An agency relationship created for a purpose that is illegal is unenforceable.
B12. A person must have contractual capacity to be a principal.
B13. Agency by operation of law may not occur in emergency situations.
B14. All agency relationships are based on contract.
B15. An agent is required to notify the principal of all matters concerning the subject
matter of the agency.
B16. An agent’s actions must be strictly for the benefit of the principal.
B17. An agent has a duty to follow all clearly stated instructions of the principal, lawful or
not.
B18. A principal owes an agent a duty of obedience.
B19. An agent has the right to perform agency duties without interference by the principal.
B20. Anything that an agent obtains by virtue of the agency relationship belongs to the
principal.
MULTIPLE CHOICE QUESTIONS
B1. 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.
B2. Espresso Roast Company hires Forrest to work on Espresso’s shipping dock, checking
outgoing loads and dispatching Espresso’s drivers. With respect to Forrest, Espresso is
most likely
a. an agent.
b. an independent contractor.
c. a principal.
d. a work for hire.
Fact Pattern 32-1B (Questions B3-B5 apply)
Liz and Molly work as clerks in Nia’s Dress Shop. Nia withholds federal taxes from their pay,
and controls the methods and details of the performance of their work. Liz and Molly are not
authorized to modify the prices or other terms of a sale at the shop.
B3. Refer to Fact Pattern 32-1B. Nia authorizes Liz to sell clothes at remote locations at
prices that Liz negotiates in those locations. With respect to sales at those locations,
Liz is
a. an independent contractor.
b. Nia’s employee only.
c. Nia’s employee and agent.
d. Nia’s principal.
B4. Refer to Fact Pattern 32-1B. At the shop, Liz and Molly are
a. independent contractors.
b. Nia’s employees only.
c. Nia’s employees and agents.
d. Nia’s principals.
B5. Refer to Fact Pattern 32-1B. Nia hires O’Reilly’s Carpet Company to clean the carpets
of her shop. Nia gives O’Reilly’s instructions as to what needs to be cleaned and when.
O’Reilly’s is
a. an independent contractor.
b. Nia’s employee only.
c. Nia’s employee and agent.
d. Nia’s principal.
B6. KupaJava hires Lola to manage one of KupaJava’s seven drive-through coffee stands.
KupaJava agrees to pay Lola a salary, plus commission. KupaJava 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. work for hire.
B7. Omar is Precise Service Company’s chief executive officer. On Precise’s behalf, Omar
solicits business, hires and fires workers, and handles the finances. Precise pays Omar
varying amounts, depending on his “needs.” Omar is most likely
a. a principal.
b. an employee.
c. an employer.
d. an independent contractor.
B8. Carol agrees with Dede and other performers to sign contracts with promoters and
others on the performers’ behalf. Carol is
a. an agent.
b. an employee.
c. an employer.
d. a principal.
B9. 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.
B10. Macro Corporation and National Purchasing Company may create an agency
agreement
a. by conduct, in writing, or orally.
b. by conduct or orally only.
c. in writing only.
d. under no circumstances.
B11. Dizzy is not Edwina’s agent but enters into a contract with Frida on Edwina’s behalf.
Edwina later contacts Frida to approve 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.
B12. Jay holds himself out as possessing special accounting skills. As an agent, he must
exercise the degree of skill or care expected of
a. a person having those skills.
b. an average, unskilled person.
c. a reasonable person.
d. the principal.
B13. Elle is an agent for Fine Cosmetics, Inc. Elle owes Fine Cosmetics the duty of
a. avoidance.
b. compensation.
c. indemnification.
d. performance.
B14. 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.
B15. Prospective Enterprises (PE) employs Quinn to buy property for a possible commercial
development. Quinn secretly buys some of the property and sells it to PE at a profit.
Quinn has breached
a. no duty.
b. the duty of accounting.
c. the duty of loyalty.
d. the duty of notification.
B16. Regional Investment Corporation (RIC) hires Sam, a real estate agent, to locate
investment properties for RIC. Sam learns of a warehouse available for $100,000, but
neglects to tell RIC. Most likely, Sam
a. breached the agent’s fiduciary duties to the principal.
b. did nothing wrong.
c. failed to take advantage of a business opportunity.
d. assumed that the information was confidential.
B17. Mona is an agent for Nationwide Restaurant Corporation (NRC). In acting as an agent,
Mona follows all of NRC’s clearly stated instructions. This responsibility arises under
a. no agent’s duty.
b. the agent’s duty of loyalty.
c. the agent’s duty of notification.
d. the agent’s duty of obedience.
B18. Jody is an agent for Kwik Credit Company (KCC). In the course of Jody’s performance
for KCC, Jody pays Leo for certain auto maintenance and repair services. Jody’s right
to obtain the amount of those payments from KCC arises under the principal’s duty of
a. avoidance.
b. cooperation.
c. indemnification.
d. reimbursement.
B19. National Computer Corporation (NCC) employs Cynthia as an agent. NCC gives her an
exclusive territory in which to sell NCC products. NCC cannot compete with her in that
territory under the duty of
a. compensation.
b. cooperation.
c. indemnification.
d. reimbursement.
B20. United Sales Corporation hires Victor to act as its agent. United’s right not to perform
a contract entered into by Victor, if Victor breaches their agency agreement, is the
right of
a. avoidance.
b. indemnification.
c. nullification.
d. termination.
ESSAY QUESTIONS
B1. 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 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.
B2. Herschel contracts with Ivy to buy a certain coffee shop, Java Jive, for Ivy, who asks
Herschel not to reveal her identity. Herschel makes a deal with Kendal, the owner of
the restaurant, and makes a down payment. Ivy fails to pay the rest of the price, and
does not pay Herschel for his services. Does Herschel have any recourse against Ivy? If
so, on what basis and to what extent?