113/4213 MCQ DUTIES & LIAB OF AGENTS AND PRINCIPALS Flashcards
A company instructed Smith, its computer software salesperson, to make presentations to prospective customers. Smith was not supposed to leave the demonstration copy (demo) of the software with customers, but on one occasion a customer insisted on keeping the demo. If this customer were to purchase the software, the sale would be very lucrative for Smith and the company. After Smith’s repeated attempts to reach a supervisor failed, Smith decided to allow the customer to keep the demo. Smith obtained a large deposit from the customer and a written agreement that the customer would not attempt to reproduce the demo. The customer reproduced the demo. The company sued Smith for breach of duty. What is Smith’s best defense to the action?
An agent has discretion in carrying out the duties assigned.
The needs of the customer supersede instructions to an agent when in the best interests of both parties.
The instructions of the principal were not appropriate by industry standards.
The agent acted in good faith and in a reasonable manner.
The agent acted in good faith and in a reasonable manner.
The best defense Smith could provide is that Smith (the agent) acted in good faith and in a reasonable manner to complete the duties as agent and was not negligent. One of the duties and obligations of the agent to the principal is obedience; however, if there are not clear instructions for a discretionary situation, the agent is not disobedient if they use judgment.
The other answer choices are incorrect:
- “An agent has discretion in carrying out the duties assigned” is incorrect as this is only true for discretionary situations where there are not clear rules from the principal.
- “The instructions of the principal were not appropriate by industry standards” is incorrect as this is not an exception to the rule of obedience for a principal-agent relationship.
- “The needs of the customer supersede instructions to an agent when in the best interests of both parties” is incorrect as the agent must follow the principal’s instructions except when there are no instructions or no instructions for a discretionary situation.
Relevant Terms
Agency
Agent
Good Faith
Principal
Reference
4213.01
4213.13
4213.14
4213.15
4213.16
A principal will not be liable to a third party for a tort committed by an agent:
if the tort is also regarded as a criminal act.
if the agency agreement limits the principal’s liability for the agent’s tort.
unless the principal instructed the agent to commit the tort.
unless the tort was committed within the scope of the agency relationship.
unless the tort was committed within the scope of the agency relationship.
A principal will not be liable to a third party for a tort committed by an agent unless the tort was committed within the scope of the agency relationship. For example, if you pay an agent to perform a task and he or she injures an innocent bystander while attempting to complete your project, the injured party could hold you, the principal, liable.
A principal may be held liable even though the principal did not order the agent to commit a tort. And, an agreement between a principal and agent cannot limit the rights of an injured third party to hold the principal liable for torts committed while in the scope of the agency relationship. The fact that a tort is also a criminal act does not relieve the principal of liability.
Agency
Agent
Agreement
Liability
Principal
Scope of Autho
Relevant Terms
Reference
4213.18
Able, as agent for Baker, an undisclosed principal, contracted with Safe to purchase an antique car. In payment, Able issued his personal check to Safe. Able could not cover the check, but expected Baker to give him cash to deposit before the check was presented for payment. Baker did not do so and the check was dishonored. Baker’s identity became known to Safe. Safe may not recover from:
Able individually on the contract.
Baker individually on the check.
Baker individually on the contract.
Able individually on the check.
Baker individually on the check.
Safe may not recover from Baker individually on the check. When an agent writes a personal check to cover a contractual obligation made on behalf of an undisclosed principal and the check bounces, the third party may hold the principal liable on the contract, but may not recover from the principal on the basis of the personal check written by the agent. The agent is not personally liable on the contract as long as the third party knew the agent was acting for an undisclosed party. Since the agent wrote a personal check for the contract, the third party may recover from the agent individually on the check.
CHATGPT4:
In the scenario described, Able acts as an agent for Baker, an undisclosed principal, in contracting with Safe to purchase an car. The payment method used was Able’s personal check, which was eventually dishonored due to insufficient funds. Upon the dishonor of the check, Baker’s identity as the principal becomes known to Safe. The question revolves around whether Safe can recover from Baker individually on the check.
The general rule in agency law is that when an agent acts on behalf of a disclosed principal, the principal is liable for the acts of the agent performed within the scope of their authority. Conversely, the agent is not personally liable for such acts. However, in this case, Baker was an undisclosed principal at the time the transaction was made. The principal (Baker) might still be liable for the obligations incurred by the agent (Able) on their behalf, provided the agent acted within their authority.
However, when it comes to negotiable instruments like checks, the situation can be different. The liability on a negotiable instrument, such as a check, generally rests with the person who signs it. Since Able issued his personal check to Safe, Able is the party primarily liable to Safe for the dishonored check. Baker, as the undisclosed principal, does not have a direct relationship with Safe regarding the check itself because Baker neither signed the check nor was the check made on Baker’s account.
The fact that Baker’s identity was disclosed after the check was dishonored does not automatically make Baker liable on the check. Liability on a check typically arises from the check’s signature and the agreements associated with the negotiable instrument, not from the underlying transaction that the check was intended to settle.
For Safe to recover from Baker, the recovery would more likely need to be based on the underlying contract for the purchase of the antique car, rather than the instrument (the check) used for payment. If Safe seeks to recover from Baker, it would be under the principles of contract law, possibly arguing that Baker, as the principal for whom the agent was acting, is responsible for fulfilling the contract’s obligations, including payment. However, under the law of negotiable instruments, Baker is not individually liable on the check itself because Baker did not sign or issue the check.
In summary, Safe may not recover from Baker individually on the check because Baker was not the signer of the check, and liability on a check is primarily based on signature and agreement related to the negotiable instrument itself, rather than the underlying transaction or contract.
Reference
4213.13
4213.16
Ace Corporation engaged Kosier, CPA, to perform a consulting engagement. While driving to Ace’s office, Kosier was involved in an automobile accident in which Norton was injured. The accident was solely Kosier’s fault. If Norton sues both Ace and Kosier for the injuries Norton sustained, what will be the result?
Both Kosier and Ace will be liable.
Ace will be liable because of Kosier’s actual authority, and Kosier will not be liable.
Ace will be liable under the principle of respondeat superior, and Kosier will not be liable.
Kosier will be liable, and Ace will not be liable because Kosier is an independent contractor.
Kosier will be liable, and Ace will not be liable because Kosier is an independent contractor.
Under the workers’ compensation rules, Ace would not be liable as Kosier is not an employee but rather an independent contractor. Kosier is fully liable. Note that, although it is not applicable here, a corporation is liable under the doctrine of respondeat superior for the torts of its employees committed within the course of employment. This is true even if the activity is beyond the powers of the corporation.
Reference
4213.15
After the termination of the agency, does the agent have any obligation to the principal?
Yes, the agent must still transmit important information to the principal.
Yes, the agent cannot compete with the business activity of the principal.
Yes; the fiduciary relationship continues for 1 year after termination.
Yes, the agent has a duty not to disclose any confidential information regarding the agency.
Yes, the agent has a duty not to disclose any confidential information regarding the agency.
After the agency relationship is terminated, the duty not to disclose confidential information regarding the agency still continues. All other agent duties and obligations terminate when the agency itself terminates.
4213.01
An agent will usually be liable under a contract made with a third party when the agent is acting on behalf of:
a disclosed principal.
an undisclosed principal.
either a disclosed or an undisclosed principal.
neither a disclosed nor undisclosed principal.
an undisclosed principal.
If an agent fails to make a full disclosure of the existence and identity of the principal at the time the contract is made (i.e., the principal is undisclosed), the agent has potential contractual liability to the third person. There is no such contractual liability on the agent’s part in the event of a full disclosure of the agency relationship.
Relevant Terms
Agency
Agent
Apparent Authority
Liability
Principal
Scope of Authority
Undisclosed Principal
Reference
4213.13
Baker sold an automobile to Bob’s Old Autos, where Fuller is a manager. Fuller took $100 from Baker for encouraging the sale. What duty to Bob’s Old Autos did Fuller violate?
Loyalty
Reasonable care
Reimbursement
Obedience
Loyalty
Fuller violated the duty of loyalty. Managers are hired by the company’s officers and serve at the pleasure of the officers unless they have negotiated an employment contract. The managers owe a fiduciary duty to the corporation. A fiduciary relationship requires trust and confidence, and undivided loyalty; the manager (i.e., Fuller) should act only in the company’s best interest, and not for personal gain.
Fiduciary
4213.01
Blue, a used car dealer, appointed Gage as an agent to sell Blue’s cars. Gage was authorized by Blue to appoint subagents to assist in the sale of the cars. Vond was appointed as a subagent. To whom does Vond owe a fiduciary duty?
Blue only
Gage only
Both Blue and Gage
Neither Blue nor Gage
Both Blue and Gage
This question is testing your knowledge of principals and agents. Blue is the principal and Gage is an agent authorized by Blue to engage subagents (Vond) to sell cars for the benefit of Blue. Notice in this situation that the principal authorized the agent to appoint subagents, which means (but which was not asked in the question) that Blue is responsible for the subagent’s actions.
Reference
4212.01
Brasher, who owns an office building, hires a real estate agent to find a buyer for the building. Shortly thereafter, Jaxson hires the same real estate agent to find an office building for purchase. If the agent sells Brasher’s office building to Jaxson without disclosing the agency relationship with Brasher, the real estate agent has breached which of the following duties?
Duty to inform
Duty of loyalty
Duty of obedience
Duty of due diligence
Duty of loyalty
Duty of loyalty requires the agent to burnish undivided loyalty to the principal with no conflicts of interest. Clearly, acting on behalf of the seller and buyer simultaneously reflects a conflict of interest as the real estate agent is working both sides of the transaction.
Duty of obedience relates to the real estate agent following instructions and does not relate to the agent’s conflicts of interests or primary responsibilities. Duty to inform and duty of due diligence are not legal duties and obligations in an agent-principal relationship.
Reference
4213.01
Work on this one
Easy Corp. is a real estate developer and regularly engages real estate brokers to act on its behalf in acquiring parcels of land. The brokers are authorized to enter into such contracts, but are instructed to do so in their own names without disclosing Easy’s identity or relationship to the transaction. If a broker enters into a contract with a seller on Easy’s behalf:
Easy will be bound by the contract because of the broker’s apparent authority.
Easy will not be liable for any negligent acts committed by the broker while acting on Easy’s behalf.
the broker will not be personally bound by the contract because the broker has express authority to act.
the broker will have the same actual authority as if Easy’s identity had been disclosed.
the broker will have the same actual authority as if Easy’s identity had been disclosed.
In some instances, the principal directs the agent not to disclose the existence of the agency (undisclosed principal). In such a case, the agent has exactly the same actual (i.e., express) authority as if the agency were disclosed. However, the broker has no apparent authority (i.e., the appearance of authority resulting from the words or actions of the principal) because the agency is undisclosed. As a result, Easy will be bound by the contract because of the broker’s actual authority, not because of any apparent authority.
Since there was not full disclosure at the time the contract was made, the agent (broker) may also be held personally liable on the contract to the third party.
Easy, as the principal, even though undisclosed, will be liable for any negligent acts committed by the broker while acting on Easy’s behalf (i.e., within the scope of the broker’s authority and in the course of the agency). This is the doctrine of respondeat superior.
CHATGPT4:
In the context of agency law, when Easy Corp., a real estate developer, engages real estate brokers to act on its behalf to acquire parcels of land and instructs them to enter contracts in their own names without disclosing Easy’s identity, this creates a situation where the brokers are acting as agents for an undisclosed principal. Despite the non-disclosure of the principal’s (Easy Corp.’s) identity, the brokers still possess actual authority to act on behalf of Easy Corp. This is because actual authority derives from the instructions and authorization given by the principal (Easy Corp.) to the agent (the brokers), rather than from the disclosure of the principal’s identity to third parties.
Actual authority can be either express or implied. Express authority is granted by the principal to the agent in clear, direct terms, typically through verbal or written instructions specifying what the agent is authorized to do. Implied authority, on the other hand, encompasses all the powers reasonably necessary to carry out the express authority granted.
In this scenario, the actual authority of the brokers includes:
Authority to Act on Behalf of Easy Corp.: Even though the brokers are instructed to act in their own names, they are effectively acting on Easy Corp.’s behalf based on the authorization provided by Easy Corp. This means that Easy Corp. has given the brokers specific or general instructions to engage in transactions related to acquiring land.
Authority to Enter Contracts: The brokers’ authority includes entering into contracts with sellers for the acquisition of land. This authority is actual and direct, stemming from Easy Corp.’s instructions to engage in such transactions, even if Easy Corp.’s identity is not disclosed to the sellers.
Undisclosed Principal Scenario: In the context of an undisclosed principal, the agent (broker) possesses the same level of actual authority as they would if the principal’s identity were disclosed. The key factor is the principal’s (Easy Corp.’s) instructions and authorization, not the disclosure of the principal’s identity to the third party (seller). The law recognizes that agents can act on behalf of undisclosed principals, provided they have been given the authority to do so by the principal.
The reason the broker has the same actual authority whether or not Easy’s identity is disclosed is because this authority is derived from Easy Corp.’s instructions and not from the disclosure to the seller. As long as the brokers are acting within the scope of the authority granted by Easy Corp., they can bind Easy Corp. to contracts entered into with sellers, even without disclosing Easy Corp.’s involvement. The brokers’ actions, within the scope of their actual authority, obligate Easy Corp. under the principle of agency law, where a principal is bound by the acts of their agent when the agent acts within their authority.
Relevant Terms
Agency
Agent
Apparent Authority
Liability
Principal
Scope
Reference
4213.13
Generally, a disclosed principal will be liable to third parties for its agent’s unauthorized misrepresentations if the agent is:
either an employee or an independent contractor.
an independent contractor.
an employee.
None of the answer choices are correct.
an employee.
A disclosed principal is one known to a third party dealing with an agent. The third party may hold the principal liable for unauthorized misstatements of the agent when said agent is an employee because the principal/employer exercises control over an employee.
An independent contractor acts under little or no control by the principal and is generally personally responsible for his mistakes or misrepresentations; the principal (the person he contracted with) is not liable.
Relevant Terms
Agency
Agent
Disclosed Principal
Independent Contractor
Reference
4213.13
Ogden Corp. hired Thorp as a sales representative for nine months at a salary of $3,000 per month plus 4% of sales. Which of the following statements is correct?
Ogden does not have the power to dismiss Thorp during the 9-month period without cause.
The agreement between Ogden and Thorp formed an agency coupled with an interest.
The agreement between Ogden and Thorp is not enforceable unless it is in writing and signed by Thorp.
Thorp is obligated to act solely in Ogden’s interest in matters concerning Ogden’s business.
Thorp is obligated to act solely in Ogden’s interest in matters concerning Ogden’s business.
Thorp is obligated to act solely in Ogden Corp.’s interest in matters concerning Ogden’s business. An agent has a duty of loyalty toward their employer/principal.
The suggestion that the agreement between Ogden and Thorp formed an agency coupled with an interest is wrong because it suggests that a sales representative’s commission is equivalent to an interest. Hiring and paying a sales representative a commission does not create an agency coupled with an interest because the agent (sales representative) does not own the business.
A principal may terminate an agency. Employers still have the power to terminate at will regardless of any discussions over the length of employment absent a written agreement to the contrary or an oral promise of lifetime employment. Under the statute of frauds, an agreement which can be performed within one year does not have to be in writing to be enforced.
Relevant Terms
Agency
Agency Coupled with an Interest
Agent
Commissions
4213.01
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:
Pine was correct and an attempt was being made to steal the package.
Pine’s weapon was unlicensed and illegal.
Global instructed its messengers not to carry weapons.
Global discovered that Pine carried a weapon and did nothing about it.
Pine’s weapon was unlicensed and illegal.
Kent will not recover damages from Global if Pine’s weapon was unlicensed and illegal. This question tests your knowledge of respondeat superior—a legal theory whereby an employer is liable to third parties for the acts of an employee. Pine is an employee of Global Messenger Service. In the course of delivering corporate documents, he shot an innocent third party. While this act was done in the scope of employment, if the weapon was unlicensed and illegal, Kent (the injured party) would not be able to recover from Pine’s employer. The reason is that doing an illegal act would not be considered acting within the scope of his employment. The other alternatives would not prevent Kent from recovering damages from Global.
Relevant Terms
Liability
Noncompliance with Laws and Regulations by Client
Reference
4213.15
Under the agent’s duty to account, which of the following acts must a gratuitous agent perform?
Commingle funds
Account for the principal’s property
II only
Neither I nor II
I only
Both I and II
II only
A gratuitous agent acts for the benefit and under the control of another and does not receive any compensation for the action (contrast this with a compensated agent, who does receive payment for services). Remember, a gratuitous agent is acting without a right to compensation. An agent’s duties and obligations are to:
be loyal and obedient,
keep an accounting for the principal,
use reasonable due care in actions,
give important information to the principal,
indemnify the principal,
refrain from competing with the principal, and
discontinue acting as the agent when the agency is terminated.
An agent must never commingle the principal’s property or funds with her own.
What contractual duty does a principal owe to a gratuitous agent?
Duty to compensate
Duty of obedience
Duty of diligence
Duty to indemnify
Duty to indemnify
A gratuitous agent is a person who agrees to act as an agent without expectation of compensation. The relationship is generally the same as in the case of a compensated agent, except that a gratuitous agent has no obligation to act for the principal unless the gratuitous agent has caused the principal to reasonably rely on the agent to perform the act. The principal must indemnify the agent if the agent suffers expenses from a legal action (i.e., pays for damages) resulting from carrying out the agency.
Relevant Terms
Indemnify
Principal
Reference
4211.23
4213.04
Which of the following is not one of the duties or relationships of the principal to the agent?
Fiduciary: The principal has a fiduciary duty to the agent.
Compensation: The agent must be paid.
Indemnity: The agent must be indemnified for expenses suffered from a legal action resulting from carrying out the agency.
Reimbursement: The agent must be reimbursed if they spend their own funds to carry out the agency.
Fiduciary: The principal has a fiduciary duty to the agent.
While the agent has a fiduciary relationship to the principal, meaning a high level of care to the principal, the opposite is not true. The principal has no fiduciary relationship to the agent, but there are contractual duties as set out in the other answer choices—compensation, reimbursement, and indemnification.
Reference
4213.04
Authorities
Restatement of Agency, 3rd ed.
