CHAPTER 16 – AGENCY LAW
TRUE/FALSE
1. Larry decided to relocate to Germany. Larry hired Happy Homes, Inc. to find a buyer and contract for
the sale of his house in the U.S. The agency relationship between Larry and Happy Homes must be
evidenced with a written agreement.
2. If Denise is hired to work as a cashier, she has the implied authority to do acts reasonably necessary to
carry out her job.
3. Erica’s supervisor told her to arrange for a conference room at the Kelly Inn. Erica has express
authority to contract for the room.
4. An agent must obey all instructions of the principal.
5. Jolene hired Lacy to find a buyer for her house. Adam was interested in buying the house. If both
Jolene and Adam agree, Lacy, a real estate agent, may represent both parties.
6. As a general rule, an agent is liable on contracts entered into on behalf of a fully disclosed principal.
7. You cannot be held liable for the actions of your agents if the agents are violating your instructions.
8. If apparent authority is present, the principal is liable for even the unauthorized acts of the agent.
9. The bankruptcy of an agent automatically terminates an agency relationship.
10. Generally, either party to an agency relationship has the power to terminate it at any time.
11. Rob agrees to act as an agent for Diane in selling her car. Diane has a duty of loyalty to Rob.
12. Kaiya is a sales representative of TriColor. Kaiya owes a fiduciary duty to TriColor.
13. A principal must indemnify an agent for any expenses incurred in carrying out agency responsibilities,
but the principal will not be responsible for indemnifying an agent for any unauthorized purchases.
14. If a principal accepts the benefits of a whole unauthorized contract, the principal is deemed to have
ratified the contract and is bound as if the act had been originally authorized.
15. An agent is always liable for his or her own torts committed within the scope of the agency
relationship.
MULTIPLE CHOICE
1. Which of the following persons is an agent?
a.
Diane, a shoe salesperson for a retail store.
b.
Tim, a real estate broker for a large real estate company.
c.
Craig, a telephone marketing employee.
d.
All the above.
2. Which of the following is not required of an agency relationship?
a.
Consideration.
b.
Fiduciary relationship.
c.
Consent of the parties to act as agent or principal.
d.
Control of principal over agent’s conduct.
3. The equal dignities rule relative to agency law applies to an agent:
a.
hired to contract for a booth at a trade show scheduled to occur in two years.
b.
selling real estate for the principal.
c.
authorized to enter into a two-year lease for her principal.
d.
All the above.
4. Mohammad was an employee in the new product development department of Estay Inc. Mohammad
was directly involved in the development of a new product that Estay intended to launch in 6 months.
Estay took great care to keep information concerning the new product a secret. Ceries, Inc., a
competitor of Estay, persuaded Mohammad to leave Estay to direct Ceries’ marketing department.
Which statement is correct?
a.
Mohammad can share with Ceries the confidential information he knows about Estay’s
new product because he was directly involved in its development.
b.
Mohammad can share with Ceries the confidential information he knows about Estay’s
new product because his agency relationship with Estay is terminated.
c.
Mohammad cannot share with Ceries the confidential information he knows about Estay’s
new product because of the equal dignities rule.
d.
Mohammad cannot share with Ceries the confidential information he knows about Estay’s
new product because he has a duty not to disclose confidential information he acquired
during the agency.
5. An agency relationship can be created:
a.
by the conduct of the parties.
b.
by an oral agreement in all circumstances.
c.
only by a written agreement.
d.
only by the meeting of all the standards of contract law.
6. Ron is the business agent for Kansas Sunshine, a rock band. He is also the agent for another popular
Midwestern rock group, City Sand. Ron negotiates a deal with a Kansas City promoter to have City
Sand play after a professional football game. The promoter was willing to pay $250,000 for both
groups to play after the game; however, Ron talked her into booking just City Sand for $175,000.
Given his contract with City Sand, Ron made more money under this arrangement. Has Ron violated
his fiduciary duty to Kansas Sunshine?
a.
Yes. It appears that Ron put his own interests ahead of his principal’s interests.
b.
Yes. Ron cannot, under any circumstances, act as an agent for both groups.
c.
Both a and b are correct.
d.
Neither a nor b is correct since it is very common for rock band agents to represent several
groups at the same time.
7. John hired Tim to sell his house. Which statement is correct?
a.
John is Tim’s principal.
b.
Tim, but not John, can terminate the agency.
c.
This illustrates a power coupled with an interest.
d.
All the above are correct.
8. Nikki was an tax accountant with HBR Accounting. Nikki decided to do some private tax consulting in
the evenings and on weekends. HBR is unaware of Nikki’s consulting work. Which statement is
correct?
a.
Nikki has not breached a fiduciary duty to HBR since her consulting is done after her
work for HBR.
b.
Nikki has not breached a fiduciary duty to HBR since her behavior does not reflect badly
on the accounting firm.
c.
Nikki has not breached a fiduciary duty to HBR since Nikki has a contractual relationship
with her clients, not her employer.
d.
Nikki has breached a fiduciary duty to HBR since she is competing with HBR.
9. The doctrine of estoppel would most often apply in situations of:
a.
implied authority.
b.
apparent authority.
c.
transaction authority.
d.
actual authority.
10. Cameron, editor of the local newspaper, assigned to Jim the writing of a story about pollution of a
nearby stream. Although Jim used reasonable care in gathering and checking his information,
unknown to Jim, the story contained a defamatory statement about Maureen. Maureen reads the story
and sues Jim for libel. Cameron, who read and published the story:
a.
must indemnify Jim for Maureen’s claim.
b.
need not indemnify Jim for Maureen’s claim because Jim should have checked his facts
more carefully.
c.
need not indemnify Jim for Maureen’s claim because Jim breached his duty to obey
instructions.
d.
can recover damages from Jim for any injury to the newspaper resulting from Jim’s story.
11. An agent may not engage in inappropriate behavior that reflects badly on the principal. This rule
applies to conduct:
a.
during working hours.
b.
during off-duty time.
c.
during both working hours and off-duty time.
d.
only by public officials.
12. Pamela hired Lena to sell her business. Lena:
a.
can buy the business as long as the price is fair.
b.
can buy the business as long as she qualifies for financing.
c.
can buy the business only with Pamela’s permission.
d.
cannot buy the business under any circumstances.
13. An agency will be terminated in all but which one of the following situations?
a.
The principal and agent agree on an agency relationship to sell a boat, and the boat is sold.
b.
A travel agent files for individual bankruptcy under Chapter 13.
c.
The agent violates his duty of loyalty.
d.
An electrician, an agent of a contractor, has her license revoked.
14. Janet was employed as a sales representative for Esday, Inc. An appreciative customer gave her a
diamond bracelet for all her hard work on a complicated contract. Can Janet keep the bracelet?
a.
Yes. The bracelet was given to Janet personally and intended for her.
b.
Yes, but only if she discloses the gift to Esday and Esday consents to her keeping the
bracelet.
c.
No. An agent is not allowed under any circumstances to personally profit as a result of the
agency relationship.
d.
No. The bracelet is regarded as an unfair trade practice and violates antitrust law.
15. Chance is a traveling marketing representative for a publishing company. He is an independent
contractor. One afternoon while driving to a meeting, he negligently runs a stop sign and causes an
accident. He has never had a traffic accident or ticket before this. Judy is injured. Judy can:
a.
hold both Chance and his company liable for her injury.
b.
hold the company but not Chance liable.
c.
hold Chance but not the company liable.
d.
not hold Chance or his company liable for her injury.
16. Mrs. O’Leary hired Jenna to sell her house in Michigan. She executed a power of attorney in favor of
Jenna authorizing her to do “anything and everything associated with the sale of real estate, acting as a
prudent person.” On May 30, Jenna finalized a deal with Brandon for the purchase of the house.
Brandon and Jenna signed the real estate contract that day. Jenna learned the next day that Mrs.
O’Leary had died May 29.
a.
The contract is void since the agency terminated May 29.
b.
The contract is valid since the agency’s purpose was achieved before Jenna was notified of
Mrs. O’Leary’s death.
c.
The contract is voidable at the option of Mrs. O’Leary’s estate.
d.
The contract is voidable at the option of Brandon.
17. Jim agreed to show Donna’s car to a potential buyer, as a favor to Donna. Donna was not able to be
home since she had to attend a meeting. After showing the car, Jim left the keys in it and the car was
stolen. Which statement is correct?
a.
Since Jim is a gratuitous agent, he will only be liable for the loss of the car if his conduct
constitutes gross negligence.
b.
Since Jim is a gratuitous agent, he will be liable for the loss of the car if his conduct
constitutes ordinary negligence.
c.
Since Jim is a gratuitous agent, he has no liability for the car.
d.
Since Jim is a gratuitous agent, he is strictly liable for the loss of the car.
18. Tom, the production manager at Esday, was told by his supervisor to hire Elton, a 15- year-old, to
operate an industrial machine. Hiring the 15-year-old violates the child labor laws. Tom:
a.
should hire Elton. Tom has a duty to obey Esday’s instructions.
b.
should hire Elton. Tom has a duty of care to ensure that the government does not discover
that Elton is 15 years old.
c.
should not hire Elton. Tom has a duty of care and he would not be caring for Elton.
d.
should not hire Elton. Tom has a duty to obey Esday‘s instructions only if they are legal
and ethical.
19. If the agent is disloyal to the principal:
a.
the agency agreement automatically terminates and the principal may rescind the
transaction.
b.
the principal has the right to collect any actual damages sustained as a result of the agent’s
disloyalty.
c.
the principal has a right to recover any profits earned as a result of his agent’s disloyal
conduct.
d.
All the above are correct.
20. What is not a key factor and or condition of the principal-agent relationship?
a.
Anonymity.
b.
Consent.
c.
Control.
d.
Obedience.
21. HBR Accounting hired Denise, a CPA, to prepare tax returns. Which statement is correct?
a.
Denise is a gratuitous agent and has a duty not to commit gross negligence.
b.
Denise is an agent and has a duty not to commit ordinary negligence.
c.
Denise, as a CPA, is an agent with special skills. She is held to a higher duty than ordinary
negligence.
d.
Denise, as a CPA, is an agent with special skills. She is held to a lower standard than
ordinary negligence.
22. Express authority can be created by:
a.
words spoken directly to the agent.
b.
conduct.
c.
written words given to one person to give to another person, the agent.
d.
All the above.
23. Circus Pizza contracted with Art to run its birthday parties. Art’s responsibilities included supervising
the children and organizing the games. Circus did not investigate Art’s background, which included a
history of assaulting children. Art assaulted a 7-year-old girl in the restaurant’s kitchen during a
birthday party. Circus Pizza:
a.
cannot be liable for the damages because Art committed an unforeseeable intentional tort.
b.
cannot be held liable for the damages because Art’s conduct was not in the scope of
employment.
c.
may be held liable on the basis of negligent hiring.
d.
may be held liable only if Circus actually knew of Art’s background.
24. When a principal is unidentified (partially disclosed):
a.
the agent and principal will be jointly and severally liable on the contract.
b.
the agent and principal will be only jointly liable on the contract.
c.
only the principal can be liable.
d.
only the agent is liable.
25. Factors influencing whether a servant is acting within the scope of employment include all but which
of the following?
a.
The act is similar to the one the principal authorized.
b.
The act is not seriously criminal.
c.
The act took place during hours that the servant is generally employed.
d.
All of the answer choices are factors in determining if an act is “within the scope of
employment.”
ESSAY
1. Alex worked for years for MegaCorp. During his employment with MegaCorp, he learned a great deal
of confidential information and knew that if this information got into the hands of competitors or the
general public, MegaCorp could suffer great business losses. Alex claims that he was wrongfully fired
by MegaCorp and accordingly he believes he has no obligation to MegaCorp to keep any information
he acquired with them as confidential. MegaCorp claims that Alex is under a continuing duty to keep
confidential information secret, even though he is no longer with the company. Who is right? Why?
2. A principal is bound by contracts that an agent enters into with authority. Discuss the various types of
contractual authority an agent may have.
3. Barnett was orally hired by Paula to locate desirable real estate that she could use for rental property.
She stated she wanted to find a four-plex that could be purchased for under $200,000 that could be
rented for at least $1,000 per month per unit (which equates to $4,000 rental per month for the
property). Barnett located a four-plex that could be purchased for $160,000 and was renting for $1,200
per unit. It was such a good deal that he purchased it for himself. About two months later he found a
second property that was listed for $199,000 and rented for $1,000 per unit. Paula purchased the
property. Afterwards, she learned that Barnett had bought the $160,000 four-plex for himself without
telling her about it. Paula believes that Barnett has acted improperly. Barnett claims that he did what
she asked — he found a property for under $200,000 that rented for $1,000 per unit. He also claims that
since their agreement was oral, he has a legal defense if she pursues the matter in court. Does Paula
have any legal recourse against Barnett? Explain.
4. Andrew has been hired to do some work for Rossi Enterprises. What factors would a court consider in
determining if Andrew is an employee or an independent contractor? Why does the designation
matter?
ANS:
5. Grant is a delivery person for Watkins Furniture. One day, after delivering a chair to Nadine’s house,
he stopped at a fast food restaurant to get a sandwich at the drive-through window. As he was leaving
the parking lot, he accidentally hit the rear of Blanche’s car. Discuss the possible liability of Watkins
for Grant’s accident. Would there be any difference in the potential liability of Watkins if Grant had
the accident after driving 30 miles away to visit a friend?