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C H A P T E R 5
Agency
TRUE-FALSE QUESTIONS
1. In agreeing to act on behalf of the principal, the agent becomes a fiduciary.
2. In all cases, an agency agreement must be written in order to be enforceable.
3. Whether a person is an independent contractor or an employee depends on what he or she does, not
how the relationship is characterized by the parties.
4. A master-servant agency is a type of agency that is illegal.
5. An independent contractor is also considered an employee of the person for whom work is being
done.
6. The Electronic Signatures in Global and National Commerce Act provides that contracts executed by
electronic agents are invalid.
7. Implied ratification of an agent’s unauthorized acts can occur through the silence of the principal.
8. The respondeat superior doctrine typically applies to the actions of independent contractors.
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9. The principal has the right to demand reimbursement from the agent for any damages paid to a third
party because of an agent’s negligence.
10. The fact that leased workers are on the payroll of an employment agency does not preclude them
from being considered employees of the company at which they are actually working on a joint
employer theory.
11. The term “usual authority” refers to the authority that an agent has been allowed to exercise in the
past.
12. An agent who refuses to follow legal instructions of a principal has breached the duty of care.
13. An undisclosed principal will be bound by any contract the agent enters into with actual authority.
14. The Telephone Records and Privacy Protection Act of 2006 makes it illegal for a person to use fraud
to obtain individual customer billing records and other customer information from telephone
companies.
15. Principals may be held liable for the torts of independent contractors involving highly dangerous
acts.
16. Leased workers are precluded from being considered employees of the company for which they are
doing work because they are on the payroll of an employment agency.
17. The term “customary authority” refers to authority that agents must have by law.
18. The person hiring an independent contractor bargains both for the results and the means of achieving
the results.
19. The most common form of agency relationship is employer-employee.
20. Federal law provides that electronic agents may legally bind a user to click-wrap agreements.
MULTIPLE-CHOICE QUESTIONS
1. Which of the following is not a duty of an agent to a principal?
A. Loyalty
B. Due care
C. Maximizing profits
D. Obedience
2. An agency relationship can be created by
A. an express contract.
B. an implied contract
C. an express contract but not an implied contract
D. an express contract and an implied contract
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3. An ________ occurs if a principal approves or accepts the benefits of the actions of an otherwise
unauthorized agent.
A. agency by ratification
B. agency by estoppel
C. agency by independent action
D. agency by intervention
4. Which of the following is false regarding an agency relationship?
A. The most common form of agency relationship is the employer-employee relationship.
B. An agent may not be in independent contractor.
C. An agency agreement may be implied.
D. Agency may be established by estoppel.
5. What is the meaning of the term “respondeat superior”?
A. Let the master answer
B. Let the servant respond
C. Let both the master and servant respond
D. The agreement must be in writing
6. Which of the following is an example of a hallmark of the fiduciary relationship?
A. Loyalty
B. Subservience
C. Politeness
D. Both loyalty and subservience, but not politeness
7. Under the duty of ____________ an agent has a duty to act solely for the benefit of his or her
principal in all matters directly connected with the agency undertaking.
A. loyalty
B. subservience
C. trust
D. obedience
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8. Which of the following is true?
A. A principal cannot be bound on contracts made by an agent if the principal’s identity is not
disclosed to the third party.
B. A principal cannot through ratification be bound on contracts made by an agent.
C. A principal can be bound on contracts made by an agent even if the principal’s identity is not
disclosed to the third party.
D. A principal cannot through ratification be bound on contracts made by an agent, but a principal
can be bound on contracts made by an agent even if the principal’s identity is not disclosed to the
third party.
9. Which of the following is true regarding express authority?
A. It may be given by the principal’s actual words but not by action.
B. It may be given by written contract only.
C. It may be given by the principal’s actual words and also by an action that indicates the principal’s
consent.
D. It may be given by action but only after a contract of agency has been signed.
10. Once an agent is given express authority, he or she also has _______ authority to do whatever is
reasonable to complete the task he or she has been instructed to undertake.
A. implied
B. absolute
C. limited
D. contractual
11. Which of the following is true regarding a principal’s duty to pay unemployment taxes?
A. A principal must pay unemployment taxes for both an employee and an independent contractor.
B. A principal must pay unemployment taxes for an independent contractor but not for an employee.
C. A principal must pay unemployment taxes for an employee but not for an independent contractor.
D. A principal is not required to pay unemployment taxes for either an employee or an independent
contractor.
12. Unless state law is to the contrary, an agent may lawfully conceal ________ of the principal.
A. the existence
B. the identity
C. the existence and identity
D. nothing regarding
13. An agent may bind the principal due to the agent’s ________ authority.
A. express
B. implied
C. apparent
D. express, implied, or apparent
14. Which of the following is true regarding situations in which an agent enters into a contract without
authority?
A. The principal is not bound nor is the agent bound.
B. The principal is bound and the agent may be personally liable.
C. The principal is not bound, but the agent may personally liable.
D. Neither the principal nor the agent is bound if the contract is oral; but if the contract is written,
both the principal and agent are bound.
15. The most basic legal characteristic of the employer-employee relationship is that the employer has
the right to
A. deduct taxes
B. control the conduct of the employee
C. provide health care
D. deduct taxes, control the conduct of the employee, and provide health care
16. Which of the following is true regarding an independent contractor’s entitlement to fringe benefits
offered by a principal?
A. An independent contractor is generally eligible for the same fringe benefits provided to
employees.
B. An independent contractor is generally eligible for the same medical insurance provided to
employees but not for retirement benefits.
C. An independent contractor is generally eligible for the same retirement benefits provided to
employees but not for medical benefits.
68 MANAGERS AND THE LEGAL ENVIRONMENT
D. An independent contractor is not generally eligible for the fringe benefits provided to employees.
17. Which of the following is not usually considered an independent contractor?
A. A delivery driver working for a delivery service
B. A lawyer working for a client
C. A plumber working for a homeowner
D. An architect working for a developer
18. Which of the following is not one of the factors the law looks at in distinguishing between
employees and independent contractors?
A. The amount of experience of the worker
B. Whether the work is usually performed by a specialist without supervision
C. Whether the worker is paid hourly or by the job
D. The degree of skill the work requires
19. Which of the following is true regarding whether an independent contractor is an agent of a
principal?
A. An independent contractor is always an agent of the principal.
B. An independent contractor, by definition, is not an agent of the principal.
C. An independent contractor may or may not be an agent generally depending on whether the
independent contractor has authority to enter into contracts on behalf of the hiring party.
D. An independent contractor is an agent only if the hiring party is a merchant.
20. Which of the following terms refers to a slight deviation from the employer’s business that is still
within the scope of employment?
A. Frolic
B. Detour
C. Errand
D. Chore
21. An agency by ________ occurs when a person leads another to believe that someone else is his or
her agent and is thereafter prevented from denying it.
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A. ratification
B. conduct
C. agreement
D. estoppel
22. As referenced in the case in the text involving Hewlett–Packard in the text, what is “pretexting”?
A. A practice whereby a person pretends to be someone else, typically over the telephone, in order
to obtain information.
B. A practice whereby a person pretends to be someone else, typically through a personal visit, in
order to obtain information.
C. A practice whereby a person induces someone, often an elderly person, to sign a contract
purchasing unneeded services.
D. A practice whereby a person induces someone, often an elderly person, to sign a contract
purchasing unneeded goods.
23. Apparent authority may be based on which of the following?
A. Only words of the principal or acts of the principal.
B. Only words of the principal or knowledge that the principal has allowed its agent to engage in
certain activities on its behalf over an extended period of time.
C. Words of the principal, acts of the principal, or knowledge that the principal has allowed its agent
to engage in certain activities on its behalf over an extended period of time.
D. Express contractual authority only.
24. A principal may be held liable for the torts of a(n) ________ only in extraordinary circumstances,
usually involving highly dangerous acts or nondelegable duties.
A. agent
B. servant
C. employee
D. independent contractor
25. When would the “aided–in-the-agency” theory likely be asserted?
A. By a defending employer in an attempt to show that although an employee was acting within the
scope of employment, the employer should not be held responsible for the employee’s actions
because the employee was aided by a non-employee.
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B. By a plaintiff in an attempt to show that even if an employee was acting outside the scope of
employment, the employer may be liable for the employee’s action because the employee was aided
by the agency relationship.
C. By a defending employer in an attempt to show that an employee was acting outside the scope of
employment and that the employer should not, therefore, be held liable for the employee’s actions.
D. By a plaintiff in an attempt to show that an employee was acting within the scope of employment
and that the employer should, therefore, be held liable for the employee’s actions.
26. Which of the following was the result in EBC I, Inc. v. Goldman, Sachs, & Co., the case in the text
in which it was claimed that Goldman Sachs breached a fiduciary duty in acting as an underwriter
and in providing advice to eToys, the plaintiff’s predecessor, in regard to an initial public offering of
stock?
A. The court dismissed the case on the basis that Goldman Sachs as an underwriter could not be
considered a fiduciary based on its role in the transactions at issue.
B. The court refused to order a dismissal of the plaintiff’s claim and found that Goldman Sachs’
failure to disclose a material conflict of interest established a claim for breach of fiduciary duty.
C. The court dismissed the case because Goldman Sachs had every right to make a profit out of the
transaction so long as no actual misrepresentations were made to the plaintiffs.
D. The court refused to order a dismissal of the plaintiff’s claim and found that Goldman Sachs’
could be held liable based on material misrepresentations made to the plaintiffs regarding the value
of the stock involved in the initial public offering.
27. Under the Uniform Computer Information Transactions Act, what would be the result if an
electronic agent agrees to a click-wrap agreement?
A. The user of the electronic agent would not be liable for the agreement.
B. The user of the electronic agent would be liable for the agreement only if the evidence
established that the user had an opportunity to look over the agreement and cancel it within a
reasonable length of time.
C. The use of the electronic agent would be liable for the agreement.
D. The user of the electronic agent would be liable for the agreement only if the user was a
merchant in respect to goods or services of the type purchased by the agreement.
28. Which of the following was the result in O’Shea v. Welch, the case in the text involving whether an
employee was acting within the scope of his employment when, while driving to deliver a vendor’s
gift (football tickets) to his employer’s office, he turned into a service station to obtain an estimate
regarding nonemergency maintenance on his car?
A. The court found that as a matter of law the employee was not acting within the scope of his
employment because he was involved in a frolic of his own.
B. The court found that as a matter of law the employee was not acting within the scope of his
employment because he was involved in a detour.
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C. The court found that as a matter of law the employee was acting within the scope of his
employment because he was involved in only a detour, not a frolic on his own.
D. The court found that the jury should determine whether the employee was acting within the
scope of his employment during the time period at issue.
29. Which of the following are autonomous computer programs that can be dispatched by the user to
execute certain tasks?
A. Electronic agents
B. Software identifiers
C. Click programs
D. Fortran identifiers
30. Which of the following is true regarding respondeat superior?
A. Under that theory, a principal may be liable for not only the contracts but also the torts of its
agents.
B. Under that theory, a principal may be liable for only the contracts of its agents, not the torts.
C. Under that theory, a principal may be liable for only the torts of its agents, not the contracts.
D. Under that theory, a principal may not be held liable for either the contracts or torts of its agent
unless the principal expressly authorize the agent’s actions.
31. Maureen owns a business that makes kites. Maureen’s agent Bob entered into an agreement with
Alice to purchase some land for a new kite factory. Maureen’s agency relationship with Bob was
not memorialized by any writing. The day after Bob signs the papers finalizing the sale, Maureen
learned of the purchase, was furious with Bob, and said that she wanted out of the deal. Assuming
that Bob was legally considered the agent of Maureen in making the purchase, which of the
following is Maureen’s best argument?
A. That the agency agreement with Bob was not in writing and that under the equal dignities rule
she should not be bound.
B. That agency agreements may not extend to the purchase of land.
C. That under the exclusion principle, Bob was not authorized to purchase land unless expressly
authorized by Maureen.
D. That she did not need land and that therefore she should not be bound because Bob was
mistaken.
Fact Pattern 5-1 (Questions 32-33 apply)
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Candy owns a nail and hair salon. She reaches an agreement with Todd, an independent contractor,
allowing him to do nails in her salon three days per week. Todd has a sign on his desk informing his
customers that he is an independent contractor of the shop. After working for a month, Todd asks
Candy if she has been paying appropriate social security taxes for him. He also informs Candy that
Phyllis, a customer, is preparing to sue both Todd and Candy based upon a nasty nail fungus she
developed after having her nails done by Todd.
32. Refer to fact pattern 5-1. Which of the following is true regarding the duty of Candy, if any, to pay
social security taxes for Todd?
A. Candy must pay all of Todd’s social security taxes.
B. Candy is responsible for 50% of Todd’s social security taxes, and he is responsible for 50%.
C. Candy is responsible for all of Todd’s social security taxes only if he works at least 30 hours per
week; otherwise, Todd is responsible for all of the taxes.
D. Candy is not responsible for any of Todd’s social security taxes.
33. Refer to fact pattern 5-1. Which of the following is true regarding legal responsibility to Phyllis
assuming negligence on the part of Todd can be established?
A. Both Candy and Todd are responsible to Phyllis with Candy being primarily responsible meaning
that if Todd pays then he can recover any payments from Candy.
B. Both Candy and Todd are responsible to Phyllis with Todd being primarily responsible meaning
that if Candy pays then she can recover any payments from Todd.
C. Candy owes 50% of any payments due Phyllis, and Todd owes 50%; but neither Candy nor Todd
can recover against the other.
D. Candy does not owe Phyllis any amounts.
Fact Pattern 5-2 (Questions 34-35 apply)
Billy owns a used car lot. Samantha works for Billy selling used cars. Billy fully directs and
controls her work, sets her hours, and pays her an hourly salary as well as a commission. Belinda
comes to the lot to buy a used car. Samantha, however, tells Belinda that she needs to sell her
mother’s used vehicle and that if Belinda will meet her after hours, she will give Belinda an
excellent deal. Belinda meets Samantha after work and ends up buying the car belonging to
Samantha’s mother. The next day, Samantha, acting within the scope of her employment, is moving
a car. She, however, is in a hurry and in a grossly negligently manner backs it over the foot of
Wesley, another customer. While waiting for the ambulance to come for Wesley, Belinda storms
onto the lot complaining about the condition of the vehicle she purchased from Samantha’s mother.
Billy fires Samantha on the spot based on her obviously intoxicated condition and the fact that she
arranged for the sale of her mother’s vehicle. Samantha informs him that she has been an excellent
employee and that he has no reason to be unhappy with her.
34. Refer to fact pattern 5-2. Did Samantha breach any fiduciary duties owed to Billy?
A. Yes, only the duty of loyalty
B. Yes, only the duty of care
C. Yes, both the duty of loyalty and the duty of care
D. No
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35. Refer to fact pattern 5-2. Who is liable for Wesley’s injured foot?
A. Only Billy
B. Only Samantha
C. Both Billy and Samantha with Billy having he right to recover from Samantha any amounts paid
D. Both Billy and Samantha with Samantha having he right to recover from Billy any amounts paid
ESSAY QUESTIONS
1. Agents owe a fiduciary duty to the principal. Describe the specific responsibilities that are generated
by this duty. Discuss fully.
2. Sam is an employee of Binky, Inc. While delivering a truckload of binkies to a local retailer, Sam
decided to stop at his bank to deposit his paycheck. The bank is three blocks from the retailer and it
takes approximately 15 minutes to deposit a check. While Sam is in the bank, the truck rolled down
the street because Sam negligently forgot to set the parking brake. The truck crashed through the
window of Market, killing two people and causing $500,000 in damage. Discuss the issues involved
in determining whether Binky, Inc. is liable for the damages at issue. If Binky, Inc. is liable, can it
recover against Sam for the damages?
3. Carl is a contractor that is building a home for Orel. Pam is one of Orel’s neighbors. One day Pam
was walking in the neighborhood. As she passed the construction site, a piece of lumber fell from the
partially finished garage roof and hit her in the head, injuring her severely. The lumber was left
negligently on the roof by Carl. Pam now wishes to sue Orel. Should Orel be held liable to Pam?
Discuss.
4. Molly wants to buy a vacant lot that is for sale in her neighborhood. The problem is that she had a
skirmish with the current owner, Ben, over his dog barking at all hours of the night. Molly asks Sam
if he will purchase the lot on her behalf without telling Ben that she will be the true owner. Sam
agrees and reaches an agreement with Ben. A few months after the purchase, Molly begins to do
some work on the lot. Ben sees her and asks what she is doing. Molly tells him that she was the true
purchaser. Ben becomes furious and yells at her that he will have the sale rescinded and sue both
Molly and Sam for fraud. What will be the likely result if Ben sues Molly and Sam?
5. Discuss the elements that are considered in determining whether a worker is an employee or an
independent contractor.
6. What factors do courts consider in determining whether an act of an agent was within the scope of
employment?
7. What is considered in determining the scope of an agent’s implied authority?