Agency

Question 1

Which of the following parties must have contractual capacity to enter into an agency relationship?

A. The principal.
B. The agent.
C. The principal and the agent.
D. No party is required to have contractual capacity to enter into an agency relationship.

Answer 1

A. The principal.

Only the principal must have contractual capacity to enter into an agency relationship. To create an agency relationship, the respective parties must have capacity, but the degree of capacity required for a principal differs from that required for an agent. Generally, any person (including entities) having capacity to contract may appoint an agent. Any person may be an agent, even if she has no contractual capacity herself.

Recommended Activity: Read Agency I.B.1. Capacity

Question 2

All of the following are duties owed by an agent to a principal EXCEPT:

A. To carry out the agency with reasonable care.
B. To obey all reasonable directions of the principal.
C. To indemnify the principal for all expenses or losses incurred in discharging any authorized duties.
D. To notify the principal of all matters that come to the agent’s knowledge affecting the subject of the agency.

Answer 2

C. To indemnify the principal for all expenses or losses incurred in discharging any authorized duties.

The duty to indemnify is a duty owed by the principal to the agent (rather than owed by an agent to a principal) for all expenses or losses reasonably incurred by the agent in discharging any authorized duties.

Recommended Activity: Read Agency I.C.1. Duties of Agent to Principal

Question 3

Implied actual authority is the authority:

A. An agent has based on the principal holding the agent out to third parties.
B. An agent believes she has based on her communications and relationship with the principal.
C. A third party believes the agent has based on the principal’s communications with the third party.
D. Granted within the four corners of the agency agreement.

Answer 3

B. An agent believes she has based on her communications and relationship with the principal.

Implied actual authority is the authority that the agent reasonably believes she has as a result of the actions of the principal.

Recommended Activity: Read Agency II.B.1.a.2) Implied Authority

Question 4

What is the primary overriding factor in determining whether a person is an employee?

A. Whether the person was hired to perform a particular job.
B. Whether the person is to be compensated on the basis of time.
C. Whether the principal has the right to control the manner and method of performance.
D. Whether the parties believe they have entered into an employer-employee relationship.

Answer 4

C. Whether the principal has the right to control the manner and method of performance.

The single overriding factor in determining whether a person is an employee is whether the principal (i.e., the employer) has the right to control the manner and method by which the person performs his tasks.

Recommended Activity: Read Agency III.B.1.a. Independent Contractor or Employee?

Question 5

A minor deviation from an employer’s directions, also known as a ____________________, generally falls ____________________ the scope of employment.

A. Detour; within.
B. Detour; outside.
C. Frolic; within.
D. Frolic; outside.

Answer 5

A. Detour; within.

A small or minor deviation from an employer’s directions, also known as a detour, generally falls within the scope of employment.

Recommended Activity: Read Agency III.B.2.b. Frolic and Detour—Time and Space Limitation

Question 6

A major deviation from an employer’s directions, also known as a ____________________, falls ____________________ the scope of employment.

A. Detour; within.
B. Detour; outside.
C. Frolic; within.
D. Frolic; outside.

Answer 6

D. Frolic; outside.

A major deviation from an employer’s directions, also known as a frolic, falls outside the scope of employment.

Recommended Activity: Read Agency III.B.2.b. Frolic and Detour—Time and Space Limitation

Question 7

All of the following are examples of actual authority granted by a principal to an agent EXCEPT:

A. A principal has failed to object to a series of an agent’s unauthorized acts, reasonably leading the agent to believe that she has authority to do those acts in the future.
B. A principal tells a third party that a person is the principal’s agent and has the power to contract on the principal’s behalf, but the person does not know she has this power.
C. An agent employs a subagent to execute ministerial acts.
D. A principal conveys authority to his agent to purchase a piece of property that the principal did not actually intend to purchase.

Answer 7

B. A principal tells a third party that a person is the principal’s agent and has the power to contract on the principal’s behalf, but the person does not know she has this power.

Actual authority arises out of the reasonable belief of agents whereas apparent authority arises out of the reasonable belief of third parties. If a principal tells a third party that a person is the principal’s agent and has the power to contract on the principal’s behalf, but the person does not know she has this power, then the person does not have actual authority to contract for the principal. In such a case, the person has apparent authority to contract for the principal, because the third party reasonably believes that the person has such authority.

Recommended Activity: Read Agency II.B.1. Actual Authority

Question 8

The fact that the agent has possession of the principal’s goods does not entitle the agent to sell them or transfer good title. For the possessor of goods to be able to transfer good title without authority, she must have either ____________________ or ____________________.

A. Some indicia of ownership; be a dealer in the goods.
B. Some indicia of ownership; be a merchant.
C. A preexisting duty; be a dealer in the goods.
D. A preexisting duty; be a merchant.

Answer 8

A. Some indicia of ownership; be a dealer in the goods.

For the possessor of goods to be able to transfer good title without authority, she must either have: (i) some indicia of ownership (e.g., title), or (ii) be a dealer in the goods. Although a dealer in goods will be a merchant, one may be a “merchant” without being a dealer in the goods at issue.

Recommended Activity: Read Agency II.B.2.c. Improper Disposition of Goods—Apparent Ownership

Question 9

In a few jurisdictions, where a general agent exceeds her actual authority (i.e., violates orders) but the act performed is similar to the act authorized, the principal will be held liable. This is an example of:

A. Apparent authority.
B. Authority by proxy.
C. Ratification.
D. Inherent authority.

Answer 9

D. Inherent authority.

This is an example of inherent authority. A few courts recognize the concept of inherent authority, which is derived solely from the agency relationship. It results in a principal being bound by his agent’s acts in certain situations even though the agent has no actual or apparent authority.

Recommended Activity: Read Agency II.B.2.b.3) Inherent Authority (Inherent Agency Power)

Question 10

Who can be bound to a contract when the principal’s identity is disclosed to the third party and the agent had authority to enter the contract?

A. Both the principal and the agent, regardless of whether the parties intended the agent to be a party to the contract.
B. Only the principal.
C. Only the agent.
D. The principal and, if the parties intended the agent to be a party to the contract, the agent.

Answer 10

D. The principal and, if the parties intended the agent to be a party to the contract, the agent.

A disclosed principal is one whose existence and identity are known to the third party. A disclosed principal is always liable on a contract entered into by an authorized agent. The agent generally is not bound unless the parties intended that the agent would be a party.

Recommended Activity: Read Agency II.D.2.a. Disclosed Principal Situation

Question 11

A principal gives his agent authority to enter a contract with a third party. The agent discloses to the third party that a principal exists, but does not disclose the principal’s identity. Who can be bound to the contract?

A. Both the principal and the agent.
B. Only the principal.
C. Only the agent.
D. Neither the principal nor the agent, because the identity of the principal has not been disclosed.

Answer 11

A. Both the principal and the agent.

Where the third party knows of the principal’s existence but does not know his identity, both the authorized agent and the principal are liable on the contract.

Recommended Activity: Read Agency II.D.2.b. Unidentified and Undisclosed Principal Situations

Question 12

If a principal negligently selects an incompetent independent contractor, the principal will be liable to the injured third party for:

A. Her own negligence in selection.
B. The independent contractor’s negligence.
C. Both her own negligence in selection and the independent contractor’s negligence.
D. The independent contractor’s negligence and intentional torts.

Answer 12

A. Her own negligence in selection.

If a principal negligently selects an incompetent independent contractor, she will be liable to the injured third party for her own negligence in selection. A principal will be liable for the independent contractor’s negligence if the principal hired the incompetent contractor with knowledge of the contractor’s incompetence.

Recommended Activity: Read Agency III.B.1.e.2) Selection of an Incompetent Independent Contractor

Question 13

A person is disqualified from being an agent in which of the following situations?

A. The person is a minor.
B. The person has minimal mental competency.
C. The person does not have contractual capacity.
D. The person is an insurance agent and her license has been suspended.

Answer 13

D. The person is an insurance agent and her license has been suspended.

(D) is correct. If the law requires an agent to have a license (e.g., brokers, insurance agents), she cannot act without one. Any person may be an agent, even a minor or a person with minimal mental competency. A person is not required to have contractual capacity to act as an agent.

Recommended Activity: Read Agency I.B.1.c. Disqualification of Agents

Question 14

Which of the following is NOT a duty implied by law that an agent owes to a principal?

A. Duty of loyalty.
B. Duty of obedience.
C. Duty to indemnify.
D. Duty of reasonable care.

Answer 14

C. Duty to indemnify.

The duty to indemnify is a duty owed by a principal to an agent, not an agent to a principal. In the absence of anything contrary in an agreement, the agent has three major duties implied by law: loyalty, obedience, and reasonable care.

Recommended Activity: Read Agency I.C.1. Duties of Agent to Principal

Question 15

Which of the following is true of the agent-subagent relationship?

A. The subagent owes duties to the principal even if appointed by the agent without authority.
B. An agent will be held liable to the principal for breaches of the subagent.
C. A subagent is appointed by the principal.
D. A subagent is another agent of the principal.

Answer 15

B. An agent will be held liable to the principal for breaches of the subagent.

(B) is correct. A subagent is a person appointed by the agent to perform functions assigned to the agent by the principal. The agent will be held liable to the principal for breaches of the subagent. This is so even though the agent exercised diligence and good faith in appointing the subagent. Where the subagent has been appointed without authority, the subagent owes no duties to the principal. The agent alone will be responsible to the principal for performance of the agency duties and for any loss sustained because of the subagent’s conduct, with the agent’s only recourse being against the subagent. A subagent is not to be confused with a co-agent, who is another agent of the principal.

Recommended Activity: Read Agency I.C.3. Duties of Subagent to Principal and Agent

Question 16

Unless otherwise agreed, a principal owes an agent a duty of:

A. Compensation.
B. Obedience.
C. Reasonable care.
D. Loyalty.

Answer 16

A. Compensation.

The principal owes the agent a duty to compensate her reasonably for her services. The principal also owes the agent a duty to indemnify her for all expenses or losses reasonably incurred in discharging any authorized duties, a duty to cooperate, and whatever duties may be imposed by a contract with an agent. Obedience, reasonable care, and loyalty are all duties owed by the agent to the principal.

Recommended Activity: Read Agency I.C.4. Duties of Principal to Agent

Question 17

An agency relationship may NOT be unilaterally terminated by the principal where:

A. Ending the agency relationship would cause a breach of contract.
B. A third party would be adversely affected by the termination.
C. The agent has an interest in the subject matter of the agency.
D. The purpose of the agency has not been completed.

Answer 17

C. The agent has an interest in the subject matter of the agency.

(C) is correct. There are two types of agency relationships that may not be unilaterally terminated by the principal (and that generally are not terminated by operation of law): where (i) the agent has an interest in the subject matter of the agency, or (ii) a power is given for security.

Recommended Activity: Read Agency II.B.1.b. Termination of Actual Authority

Question 18

A principal may hold out another as possessing authority, inducing a third party to reasonably believe authority exists, by all the following means EXCEPT:

A. Words stated by the principal.
B. Conduct on the part of the principal.
C. Another’s assertion of authority to act for the principal.
D. Inaction on the part of the principal.

Answer 18

C. Another’s assertion of authority to act for the principal.

(C) is correct. The mere assertion of authority by one other than the principal is not sufficient to bind the principal. An agent cannot bootstrap her own authority; the principal must have done or failed to do something that causes the third party’s belief. The holding out may be by word or conduct on the part of the principal, and may also be by inaction on the part of the principal where there is some duty to act (i.e., disclose). For example, if a person, in a principal’s presence, tells a third party that she is the principal’s agent when in fact she is not, the principal has a duty to correct the person’s representation. If the principal does not, then the person will have apparent authority to act on the principal’s behalf.

Recommended Activity: Read Agency III.C. Apparent Authority

Question 19

Which of the following is true of an employer’s liability for an employee’s intentional torts?

A. If the employee intentionally chooses a wrongful means to promote the employer’s business, the employer will not be held liable for any torts that result.
B. An employer will be liable for the misrepresentations of her employee only if the employee had actual authority to make statements concerning the subject matter involved.
C. An employer usually is liable for the intentional torts of an employee committed during regular work hours.
D. An employer will be liable for torts that result from friction naturally engendered by the employer’s business.

Answer 19

D. An employer will be liable for torts that result from friction naturally engendered by the employer’s business.

(D) is correct. An employer will be liable for torts that result from friction naturally engendered by the employer’s business, such as the friction inherent in a bill collection business. An employer usually is not liable for the intentional torts of her employee on the simple ground that an intentional tort is clearly outside the scope of employment. However, where the intentional tort occurs as a natural incident to the carrying out of the employer’s business, or if any benefit may be found running to the employer, courts tend to hold the employer liable. If an employee intentionally chooses a wrongful means to promote the employer’s business, the employer will be held liable for any torts that result. An employer will be held liable for the misrepresentations of her employee if the employee had any authority (actual, apparent, or inherent) to make statements concerning the subject matter involved.

Recommended Activity: Read Agency III.B.2.d. Intentional Torts

Question 20

If an employer lends the services of her employee to another and the employee commits a tort while performing in his loaned role, who is liable?

A. The loaning employer, if the employee remains under the right of control of the loaning employer.
B. The loaning employer, even if the borrowing employer directs the actions of the employee.
C. The borrowing employer.
D. The loaning employer and the borrowing employer usually are jointly and severally liable for the employee’s tort.

Answer 20

A. The loaning employer, if the employee remains under the right of control of the loaning employer.

(A) is correct. In most situations, the employee remains under the right of control of the loaning employer, and thus the loaning employer is the only one liable for the employee’s torts. If the borrowing employer directs the actions of the employee, and so assumes the right of control of the employee, she will be liable for those actions if they are performed tortiously.

Recommended Activity: Read Agency III.B.1.d. Liability for Acts of Borrowed Employees

Question 21

Which of the following is true of an agent with the authority to sell a principal’s property?

A. An agent may have authority to sell real property, but may not grant the customary covenants.
B. An agent with authority to sell personal property may give general warranties for quality.
C. The agent generally may accept a check or extend credit as payment for property sold.
D. An agent who has the authority to deliver possession of sold property may only do so upon receipt of payment by the principal and notification from the principal.

Answer 21

B. An agent with authority to sell personal property may give general warranties for quality.

(B) is correct. An agent with authority to sell personal property may give general warranties for quality. Likewise, an agent with authority to sell real property may grant the customary covenants. Payment for property sold must be in cash; the agent may not accept a check or extend credit (unless implied consent in the form of custom, past practices between the parties, etc., can be found). An agent generally has the authority to deliver possession of the property upon receipt of payment.

Recommended Activity: Read Agency II.B.1.a.2)e)(3) Authority to Sell