112/4212 MCQ AUTHORITY OF AGENTS AND PRINCIPALS Flashcards
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Pine, an employee of Global Messenger Co., was hired to deliver highly secret corporate documents for Global’s clients throughout the world. Unknown to Global, Pine carried a concealed pistol. While Pine was making a delivery, he suspected an attempt was being made to steal the package, drew his gun and shot Kent, an innocent passerby. Kent will not recover damages from Global if
A Global discovered that Pine carried a weapon and did nothing about it.
B Global instructed its messengers not to carry weapons.
C Pine was correct and an attempt was being made to steal the package.
D Pine’s weapon was unlicensed and illegal.
Pine’s weapon was unlicensed and illegal.
Tort liability under respondeat superior arises when the agent is acting within the scope of the employment. Conduct was motivated by service to the principal. Thus, only if Pine’s weapon was unlicensed and illegal is Global not liable.
A principal hired an agent to sell several parcels of land. The two signed a document that empowered the agent to enter contracts binding the principal for whatever price the agent thought would be reasonable, as long as sales were in cash. The principal boasted to friends that the agent had complete authority to make all sales. A friend heard the boast and later agreed with the agent to buy a parcel on an installment contract. The principal attempted to void the installment-contract agreement. Which of the following events made the agreement binding?
The principal’s boast to the friends
The written document between the principal and the agent
The continued authority of the agent to act
The disclosure of the principal’s identity
The principal’s boast to the friends
The correct answer is “the principal’s boast to the friends.” This falls under apparent authority as the appearance of authority came from the words or actions of the principal and led the third party to reasonably believe and act upon the belief that actual authority exists in the purported agent.
The other answer choices are incorrect:
- “The written document between the principal and the agent” is incorrect as the written agreement only made reasonable cash sales binding.
- “The continued authority of the agent to act” is incorrect as the authority came from express authority from the written agreement as well as apparent authority through the words and actions of the principal.
- “The disclosure of the principal’s identity” is incorrect as this does not give any authority except to designate who can give authority.
Able authorized Brown to enter contracts with third parties on Able’s behalf. In which of the following situations must Able provide notice to these third parties to effectively terminate Brown’s authority?
When war has broken out between Able’s country and Brown’s country
When Able has revoked Brown’s authority
When it has become impossible for Brown to lawfully perform Brown’s duties
When Brown has been declared insane by a court of law
When Able has revoked Brown’s authority
An agency is a fiduciary relationship between two persons where one person (the agent) acts for the benefit and under the control of the other person (the principal) and has the power to affect the legal relationships of the principal. The agent works for the benefit and under the control of the principal and has the right to represent the principal and make contracts with third parties on behalf of the principal.
The principal can revoke the authority of the agent but can still be liable on the agency relationship because the agent may still have apparent authority from the view of third parties with whom the agent has previously dealt. Generally, the principal should give personal notice of termination of the agency to any third party who has dealt with the agent. This would eliminate any problems with the principal being bound to contracts entered by the former agent under the doctrine of apparent authority.
Barton and Pallack agreed in writing that Barton would act as Pallack’s agent to sell Pallack’s prize-winning poodle. The dog died before the sale could be completed. Which of the following statements is correct regarding termination of the agency relationship?
The relationship terminated at the time of the dog’s death only if Barton had actual knowledge of the death.
The relationship could only be terminated by written notice from Pallack to Barton.
Barton’s written acknowledgement of the dog’s death was necessary to terminate the relationship.
The relationship terminated automatically at the time of the dog’s death.
The relationship terminated automatically at the time of the dog’s death.
The relationship terminates automatically at the time of the dog’s death under operation of law because impossibility of performance occurs when the dog is no longer alive and able to be sold.
Bolt Corp. dismissed Ace as its general sales agent and notified all of Ace’s known customers by letter. Young Corp., a retail outlet located outside of Ace’s previously assigned sales territory, had never dealt with Ace. Young knew of Ace as a result of various business contacts. After his dismissal, Ace sold Young goods, to be delivered by Bolt, and received from Young a cash deposit for 20% of the purchase price. It was not unusual for an agent in Ace’s previous position to receive cash deposits. In an action by Young against Bolt on the sales contract, Young will:
lose, because Ace lacked any implied authority to make the contract.
lose, because Ace lacked any express authority to make the contract.
win, because Bolt’s notice was inadequate to terminate Ace’s apparent authority.
win, because a principal is an insurer of an agent’s acts.
win, because Bolt’s notice was inadequate to terminate Ace’s apparent authority.
My explanation: Young wants his money back that he gave to Ace by suing Bolt, and he should win because he did not receive a letter. He was not properly notified like all the other customers. To Young, Ace had apparent authority.
Upon the termination of an agent, the agent retains “apparent” authority, and contracts made thereafter by the agent in the name of the principal may be binding upon the principal despite the fact that the agent’s express authority was terminated. In order to eliminate the possibility of apparent authority, the principal should give actual notice to third parties who have previously dealt with the principal through the agent (which Bolt did), and constructive notice (i.e., general public notice through newspaper or trade journal advertisements) to other parties who were merely aware of the existence of the agency. In this case, constructive notice was not given, so the agent continues to have apparent authority as to the third party. Therefore, Young will win against Bolt.
Relevant Terms
Agency
Agent
Apparent Authority
Notice
Principal
Scope of Authority
Reference
4212.12
Clarett, who owned a retail business, left a note on a desk Clarett thought was occupied by Franklen. The note stated, “Please contract to purchase 20,000 widgets at the best possible price from Eisen Corp. for delivery in March.” The desk was actually being used by Saranz, who made a contract for the purchase of the widgets as specified. Saranz had little negotiating experience and contracted for a high price. Which of the following statements is correct regarding the authority held by Saranz?
Saranz had actual authority to make the contract, so the contract is enforceable by Eisen.
Saranz had apparent, but not actual, authority to make the contract, so the contract is not enforceable by Eisen.
Saranz had authority by ratification, so the contract is enforceable by Eisen.
Saranz did not have any authority to make the contract, so the contract is not enforceable by Eisen.
Saranz had actual authority to make the contract, so the contract is enforceable by Eisen.
Saranz has actual authority to make the contract as an agent of the principal, Clarett. The actual authority was express authority through written notification. Although the note was not intended for Saranz, it is reasonable for Saranz to assume so and act on its instructions.
Express authority is actual authority declared in clear, direct, and definite terms. Express authority can be given orally or in writing.
Reference
4212.03
4212.04
4212.06
Food Corp. owned a restaurant called The Ambers. The corporation president, T.J. Jones, hired a contractor to make repairs at the restaurant, signing the contract, “T.J. Jones for The Ambers.” Two invoices for restaurant repairs were paid by Food Corp. with corporate checks. Upon presenting the final invoice, the contractor was told that it would not be paid. The contractor sued Food Corp. Which of the following statements is correct regarding the liability of Food Corp.?
It is not liable because the corporation was an undisclosed principal.
It is liable because Jones is not liable.
It is liable because Jones had authority to make the contract.
It is not liable because Jones is liable.
It is liable because Jones had authority to make the contract.
T.J. Jones, as the president of Food Corp., is considered an agent of the corporation. An agent has the authority to bind the principal (in this case, the corporation) to a contract. The agent is generally not personally liable for the contract.
Frost’s accountant and business manager has the authority to:
mortgage Frost’s business property.
insure Frost’s property against fire loss.
obtain bank loans for Frost.
sell Frost’s business.
insure Frost’s property against fire loss.
Frost’s accountant and business manager has the authority to insure Frost’s property against fire loss. This question is designed to test your understanding of the scope of authority given to an agent. The agent is empowered to do whatever is necessary to fulfill the purpose of the agency “in the ordinary course of business.” Clearly, buying insurance to protect an asset is an act within the normal scope of business.
Mortgaging a property, obtaining loans, and selling the business all require special authorization by a principal since they are activities outside the normal course of business.
Reference
4212.01
Employee Independent Contractor
Generally, a disclosed principal will be liable to third parties for its agent’s unauthorized misrepresentations if the agent is an
A Yes Yes
B Yes No
C No Yes
D No No
4211.21
Yes, No
As a general rule, an independent contractor is hired to accomplish a specific task and is not subject to the supervision and control of the principal. Thus, generally, a principal is not liable for the misrepresentations of the independent contractor. On the other hand, an employee is subject to the supervision and control of the employer. In general, principals are liable for the misrepresentations of their employees. Read further for a better explanation:
A disclosed principal is a principle whose identity is known by the third party at the time the contract is made by the agent.
Agent’s Misrepresentation - A principal is exposed to tort liability whenever a third person sustains a loss due to the agent’s misrepresentation. The principal’s liability depends on whether the agent was actually or apparently authorized to make representations. The key to determining whether a principal may be liable for an agent’s torts under the doctrine of respondeat superior is whether the torts are committed within the scope of employment. An employer is only responsible for wrongful conduct of an employee that occurs in the scope of employment.
ChatGPT4:
Here’s why:
Employee: A disclosed principal is generally liable for the acts of its agents, including employees, when those acts are within the scope of employment or authority. This includes situations where the agent makes misrepresentations while performing duties related to their employment. The rationale behind this is the principle of vicarious liability, where an employer is held responsible for the actions of its employees performed in the course of their employment.
Independent Contractor: Generally, a disclosed principal is not liable for the unauthorized misrepresentations made by an independent contractor. Independent contractors are usually hired to perform specific tasks and have control over how those tasks are executed, without being subject to the same level of control by the principal as an employee would be. Because they operate independently and are not under the direct control of the principal, the liability for their unauthorized acts typically does not extend to the principal, unless the principal has specifically authorized the misrepresentation or it falls within a very narrow set of exceptions.
Therefore, the liability of a disclosed principal for an agent’s unauthorized misrepresentations hinges significantly on the nature of the relationship between the principal and the agent (employee vs. independent contractor), with a general rule being that principals are liable for the misrepresentations of their employees but not for those of independent contractors, barring specific exceptions.
Green entered into an oral agency agreement to purchase real estate on behalf of Smith. Subsequently, Green entered into a written contract to buy land from Davis without disclosing the relationship with Smith. Which of the following is Smith’s best legal defense if Smith does not want the land?
Green failed to disclose Smith’s relationship as principal.
Green failed to get Smith’s consent before entering into the contract with Davis.
Green’s act was a misrepresentation of Green’s express authority.
Green failed to get the agency agreement in writing.
Green failed to get the agency agreement in writing.
Smith’s best legal defense if Smith does not want the land is to show that Green failed to get the agency agreement in writing. An agency is a fiduciary relationship between two persons where one person (the agent: Green) acts for the benefit and under the control of the other person (the principal: Smith) and has the power to affect the legal relationships of the principal. [The word person is used in the legal sense. A corporation, a partnership, or an individual can be a person and can therefore act in the capacity of either a principal or an agent.] An agency can be created by (1) express agreement, whether oral or written, (2) implication, based on the custom or practice of the trade, or (3) conduct of the principal.
Under the legal doctrine of estoppel, the principal (Smith) is prohibited from denying the existence of a properly constituted agency; however, the principal can use the usual defenses to deny liability on a contract. Smith’s best legal defense if Smith does not want the land would be to argue that Green failed to get the agency agreement in writing; certain contracts must be in writing and signed by the party to be charged or the contract is unenforceable if the statute of frauds is raised as a defense.
Relevant Terms
Agency
Contract
Estoppel
Principal
Scope of Authority
Statute of Frauds
Reference
4231.54
4231.55
Kent, without authority, contracted to buy computer equipment from Fox Corp. for Ace Corp. Kent told Fox that Kent was acting on Ace’s behalf. For Ace to ratify the contract with Fox:
Kent must be a general agent of Ace.
Ace must notify Fox that Ace intends to ratify the contract.
Kent must have acted reasonably and in Ace’s best interest.
Ace must know all material facts relating to the contract at the time it is ratified.
Ace must know all material facts relating to the contract at the time it is ratified.
For Ace to ratify the contract with Fox, Ace must know all material facts relating to the contract at the time it is ratified. A principal must know all material facts relating to a contract to have a valid ratification of a contract.
It is not necessary that an agency relationship exist, or that the principal give notification of intent to ratify a contract to the third party, or that the agent acted reasonably in the principal’s best interest for a valid ratification.
The requirements for an enforceable ratification are—the principal must have all the material facts related to the contract and be free from duress and voluntarily accept the benefit of the contract.
BUSINESS LAW TEXTBOOK:
Ratification occurs when the principal affirms an agent’s unauthorized act. When ratification occurs, the principal is bound to the agent’s act, and the act is treated as if it had been authorized by the principal from the outset. Ratification can be either express or implied.
If the principal does not ratify the contract, the principal is not bound, and the third party’s agreement with the agent is viewed as merely an unaccepted offer. Because the third party’s agreement is an unaccepted offer, the third party can revoke the offer at any time, without liability, before the principal ratifies the contract.
The requirements for ratification can be summarized as follows:
1. The agent must have acted on behalf of an identified principal who subsequently ratifies the action.
2. The principal must know of all material facts involved in the transaction. If a principal ratifies a contract without knowing all of the facts, the principal can rescind (cancel) the contract.
3. The principal must affirm the agent’s act in its entirety.
4. The principal must have the legal capacity to authorize the transaction at the time the agent engages in the act and at the time the principal ratifies. The third party must also have the legal capacity to engage in the transaction.
5. The principal’s affirmation (ratification) must occur before the third party withdraws from the transaction.
6. The principal must observe the same formalities when approving the act done by the agent as would have been required to authorize it initially.
Morland told a friend, Syms, that Morland had been looking for a vintage car to restore and was willing to pay $2,000 to $3,000 for one. The next day, Syms saw a vintage car, like Morland had described, for sale by a neighbor. Syms entered into a written contract to purchase the car for $2,500 and signed the contract “Syms, agent for Morland.” Which of the following statements best describes the relationship of Morland and Syms?
Under the statute of frauds, Morland had to personally sign the contract because it was for goods worth more than $500.
Syms was an agent by express agreement because Morland had told Syms that Morland was looking for this type of car.
Syms was an implied agent because Morland had told Syms that Morland was looking for this type of car.
There was no agency agreement, either express or implied, between Morland and Syms.
There was no agency agreement here, either express or implied, between Morland and Syms. There is no formal agreement of agency and apparent authority must come from the words or actions of the principal and not the “agent.”
Noll gives Carr a written power of attorney. Which of the following statements is correct regarding this power of attorney?
It must be signed by both Noll and Carr.
It may continue in existence after Noll’s death.
It must be for a definite period of time.
It may limit Carr’s authority to specific transactions.
It may limit Carr’s authority to specific transactions.
A power of attorney delegates authority from the principal (Noll) to the agent (Carr). This authority may be general or it may be limited or specific. It must be signed only by the principal (the agent need not sign the power of attorney), and it has force and effect for an indefinite time, unless otherwise stated, but will not be effective after the death of the principal. (A Last Will and Testament is required or some other testamentary document such as a trust is required for disposition after death.)
Relevant Terms
Power of Attorney
Trust
Will
Reference
4212.01
North, Inc., hired Sutter as a purchasing agent. North gave Sutter written authorization to purchase, without limit, electronic appliances. Later, Sutter was told not to purchase more than 300 of each appliance. Sutter contracted with Orr Corp. to purchase 500 tape recorders. Orr had been shown Sutter’s written authorization. Which of the following statements is correct?
North will be liable to Orr because of Sutter’s actual and apparent authority.
Sutter will not be liable to reimburse North if North is liable to Orr.
North will not be liable to Orr because Sutter’s actual authority was exceeded.
Sutter will be liable to Orr because Sutter’s actual authority was exceeded.
North will be liable to Orr because of Sutter’s actual and apparent authority.
Although Sutter, the agent, did not have actual (express or implied) authority to exceed 300 items, Sutter could manifest such authority. That is, he had apparent authority in the mind of Orr, the third party. Without actual communication by the principal to the third party of any limitations on actual authority, the principal may be bound by an agent’s unauthorized acts without right of reimbursement from Sutter. The principal must communicate revocation and/or limitation of authority to third parties in order to limit or revoke apparent authority.
Relevant Terms
Agency
Agent
Apparent Authority
Principal
Reference
4212.08
Part agreed to act as Young’s agent to sell Young’s land. Part was instructed to disclose that Part was acting as an agent but not to disclose Young’s identity. Part contracted with Rice for Rice to purchase the land. After Rice discovered Young’s identity, Young refused to fulfill the contract. Who does Rice have a cause of action against?
Young
Part
Both Part and Young
Neither Part nor Young
Both Part and Young
Young is a partially disclosed principal, or a party whose existence, but not specific identity, is known to the third party at the time of contracting. The agent, Part, works for the benefit and under the control of the principal and has the right to contract on behalf of the principal. Normally, the agent is not liable on a contract. However, in most states, when the principal is partially disclosed, the agent is also treated as a party to the contract, and the third party can hold the agent liable for contractual nonperformance. Rice can have a cause of action against Young or Part.
They made it sound like Part and Young would have a cause of action against Rice. Trick.
The principal may be
When a valid contract is entered into by an agent on the principal’s behalf, in a nondisclosed principal situation, which of the following statements concerning the principals liability is correct?
held liable once disclosed The principal must ratify
the contract to be held liable
A Yes Yes
B Yes No
C No Yes
D No No
Yes. No.
When an agent enters into a contract on behalf of a nondisclosed principal, the agent may be held liable on the contract. If the agent acted with authority, the principal also may be held liable upon disclosure. It is not necessary for a principal to ratify a contract in order to be held liable.
Which of the following duties is owed by a principal to an agent?
A Accountability.
B Performance.
C Ratification.
D Indemnification
Indemnification
The correct answer is (D).
Indemnification is one duty owed by a principal to an agent. There are certain duties owed by a principal to an agent including the duty to compensate for work completed and to reimburse for general expenses. Another duty is indemnification, which states that the principal must indemnify an agent for liability incurred in the performance of his/her duties. This happens when there are losses suffered by the agent because of the principal’s actions.
(A) and (B) are incorrect because accountability and performance are duties of the agent to the principal. The agent has an implied duty to account to the principal for all money and property received and paid out in an agency capacity, as well as the performance of duties as per the agency agreement.
(C) is incorrect because ratification is not an implied duty of the principal. The principal can, but is not bound to, ratify the agent’s actions made without actual or apparent authority of the principal.
