1. (b) A principal is liable for all torts of their agents if the agent was acting in the scope of their agency.
A misrepresentation is a tort and employees are agents. Thus, a principal is usually liable for misrepresentations of employees. An independent contractor is not an agent because they are not subject to the same degree of control. A principal is not usually liable for torts of independent contractors because of the lack of control the principal has over their actions. Only answer (b) reflects liability for the employee’s actions, but not for the independent contractor.
2. (c) An agency requires an agreement, a meeting of the minds. The principal gives the agent consent to act.
Answer (a) is incorrect because an agency is not one of the agreements requiring a writing under the statute of frauds (GRIPE + marriage). Answer (b) is incorrect because an agency does not require a power of attorney.
Although a power of attorney is one type of agency, most agencies do not involve a power of attorney. Answer (d) is incorrect because agency does not require consideration. A volunteer is a gratuitous agent who does not receive consideration.
3. (b) The statute of frauds only requires a writing for contracts for sale of goods of $500 or more, real estate, contracts impossible to perform in one year, a promise to answer the debt of another, an executor’s promise to be personally liable for the debt of an estate and contracts where marriage is the consideration (GRIPE + marriage).
An agency to purchase land would require a writing. The remaining answers (a), (c) and (d) do not require a writing under the statute of frauds.
4. (d) The statute of frauds only requires a writing for contracts for sale of goods of $500 or more, real estate, contracts impossible to perform in one year, a promise to answer the debt of another, an executor’s promise to be personally liable for the debt of an estate and contracts where marriage is the consideration (GRIPE + marriage).
An agency entered into in mid-December and to last for the entire next year would be impossible to perform in one year and would require a writing. Answer (a) is incorrect because although the sales contracts of $500 or more would need a writing, the agency would not need to be in writing. Answer (b) is incorrect because an irrevocable agency does not require a writing under the statute of frauds. Answer (c) is incorrect because an agency which is terminable upon one month’s notice is not impossible to perform in one year.
5. (d) A power of attorney usually limits an agent’s authority to specific transactions. Answer (a) is incorrect because a power of attorney need only be signed by the principal, not the principal and the agent. Answer (b) is incorrect because a power of attorney may be for an indefinite period of time. Answer (c) is incorrect because death of the principal terminates most agencies, to specifically include a power of attorney.
6. (b) Because an agent owes a fiduciary duty of loyalty to their principal, they must act solely in the principal’s best interests in matters concerning their business. Answer (a) is incorrect because most agencies are terminable at will and therefore Young does have the power to dismiss Wilson without cause. Answer (c) is incorrect because only an agency to buy land or one impossible to perform in one year would require a writing under the statute of frauds (GRIPE + marriage). Answer (d) is incorrect because with an agency coupled with an interest the principal makes a party their agent solely to pay off a debt that the principal owes the agent. There is no indication that Wilson was hired by Young solely to pay off a debt that Wilson owed Young.
7. (c) Unless otherwise agreed, the principal has a duty to compensate an agent according to the agreement.
Where the agreement calls for compensation by commission a principal would be required to maintain records relating to commissions owed, account to the agent for such commissions and pay the agent. A principal also owes a duty to reimburse an agent for money spent in the principal’s service. Only answer (c) reflects that both duties would be owed.
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8. (a) Most agencies are terminable at will by either party. Although the power exists to terminate the agency at will, if a breach of contract results the breaching party would have to pay damages. Thus Wein, the principal, may terminate this agency without cause but may be held liable for breaching the terms of the contract. Answer (b) is incorrect because an exception to the rule that agencies may be terminated at will by either party is an agency coupled with an interest. A principal may not terminate an agency coupled with an interest. Answer (c) is incorrect because intentional interference with an existing contract is a tort committed by an outside party who interferes with a contract between the two parties who made the contract. Wein is not an outside party, but rather one of the two parties who made the contract. Answer (d) is incorrect because the principal may terminate the agency at will, even if the agent has not breached the fiduciary duties owed.
9. (c) Death or insanity of either the principal or the agent will end an agency immediately. Once Ogden, the principal, was declared insane, the agency relationship between Thorp and Ogden ended. Since the agency was terminated automatically by operation of law, Ogden would not be liable for the contract. Answers (a) and (b) are incorrect because Ogden is not liable. Answer (d) is incorrect because Thorp’s express authority ended when Ogden was declared incompetent, not because Ogden was an undisclosed principal.
10. (d) An agent is anyone authorized to act on behalf of another. Minors may be agents, making statement (I) incorrect. An agency relationship is terminated by operation of law if a subject matter that directly relates to the agent’s authority is destroyed. Statement (II) is incorrect because destruction of the collection directly related to the agent’s authority to sell and therefore terminated the agency. Post would not be liable because the agency was terminated by operation of law.
11. (b) An agency coupled with an interest cannot be terminated by the principal, but it can be terminated by the agent. Thus, only answer (b) can be correct.
12. (c) If an agent is terminated, a principal must give actual notice to old customers and published notice to new ones. Failure of the principal to give proper notice gives an agent apparent authority to make contracts with customers and subjects the principal to liability. Bolt failed to give published notice of Ace’s termination, although they did give notice to old customers. Thus, Ace had apparent authority to make contracts with new customers who were aware that Ace was Bolt’s agent. Young (a new customer) knew of Ace, and thus Bolt is liable because their notice was inadequate. Answers (a) and (b) are incorrect because Young will win not lose. Additionally, although Ace had no implied or express authority, Ace did have apparent authority. Answer (d) is incorrect because a principal is not an insurer of an agent’s acts.
13. (c) Answers (a), (b) and (d) are incorrect because death or insanity of either party and loss of a license required for the agency ends the agency immediately by operation of law. Answer (c) is correct because when an agent terminates the relationship (in this case by renunciation), the agent still has apparent authority to act on the principal’s behalf. This apparent authority would continue until the principal gave actual notice to old customers and published notice to new ones.
14. (c) An agent has implied authority to do what is necessary to accomplish assigned tasks. An accountant and business manager would have the implied authority to insure property against fire loss. Answers (a), (b) and (d) are incorrect because mortgaging the principal’s business property, obtaining loans for the principal and selling the principal’s business would all exceed the implied authority of an accountant and business manager.
15. (a) Apparent authority depends on how things appear to a third party dealing with the agent. Usually if it appears the agent was authorized, apparent authority will exist. If a partner’s authority was expressly limited by a resolution and the third party knew of the resolution, apparent authority would not exist. The third party would know that the partner’s authority was limited. Answer (b) is incorrect because if the third party was unaware of the resolution, it would still appear that the partner was authorized. This is why secret instructions should be disregarded in apparent authority cases unless the instructions are known to the third party. Answer (c) is incorrect because partnership law requires unanimous consent of all partners to submit a claim to arbitration. Answer (d) is incorrect because apparent authority depends on how things appear to third parties, not on the express provisions of the partnership agreement. The express provisions would be express authority.
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16. (a) A principal is liable for contracts made by an agent on behalf of the principal if the agent had actual authority or apparent authority. Although Able exceeded her actual authority, Pix can still be liable if Able had apparent authority. Answer (b) is incorrect because a principal’s liability for contracts made by an agent depends on the agent having some type of authority to make the contract or on the principal ratifying the unauthorized contract.
Even if Able believed she had authority, if this belief was incorrect and no apparent or actual authority existed and Pix did not ratify, Pix would not be liable. Answer (c) is incorrect because a principal would not be liable for an employee’s contract if the employee had no authority and the principal did not ratify. Answer (d) is incorrect because Pix can be held liable if Able had apparent authority, regardless of whether the agency is in writing or not.
17. (d) In order for a principal to effectively ratify an agent’s unauthorized contract, the principal must have knowledge of all material facts. Answer (a) is incorrect because ratification does not require notification of the third party by the principal. Answer (b) is incorrect because a principal can ratify an unauthorized contract even if the agent acted unreasonably and not in the principal’s best interest. Answer (c) is incorrect because a principal can ratify the actions of one who was not an agent at all.
18. (c) An agent is not usually liable for authorized contracts unless acting for an undisclosed or partially disclosed principal. Only answer (c) reflects that an agent for an undisclosed principal would be liable for an authorized contract, but an agent for an disclosed principal would not be liable.
19. (d) A principal is liable for contracts made by an agent in their behalf if the agent had some type of authority (actual or apparent). If the contract was unauthorized the principal will only be liable if the principal ratifies.
The principal must ratify prior to the third party’s withdrawal from the contract. Thus, if May ratifies prior to Simon’s withdrawal, Simon will be bound by the contract. Answers (a), (b) and (c) are incorrect because either authority or ratification is required for there to be a valid contract. The mere fact that Sol was a general agent does not necessarily give Sol apparent or implied authority. Thus answer (a) is incorrect. Equally, the mere fact that Sol believed he was acting with authority does not necessarily give Sol apparent or implied authority. Thus answer (b) is incorrect. An agent for an undisclosed principal who exceeds his authority does not have actual authority or implied authority. He cannot have apparent authority because it doesn’t appear that he was acting for another. Since there is no authority, answer (c) is incorrect.
20. (c) A principal is liable for acts done by an agent on their behalf if the agent had some type of authority (actual or apparent). An agent for an undisclosed principal can only have actual authority and cannot have apparent authority. There can be no apparent authority because it does not appear that the agent was acting for another.
Thus, the principal will not be liable if the agent acted outside the grant of actual authority. Answers (a) is incorrect because an undisclosed cannot ratify. Answer (b) is incorrect because an agent acting with implied authority has actual authority. Answer (d) is incorrect because an undisclosed principal is liable for authorized acts, even if they seek to conceal the agency relationship.
21. (b) In an undisclosed principal situation, the 3rd party may elect to hold either the principal or the agent liable on the contract. Since an undisclosed principal cannot ratify, ratification is not required (or even possible) to hold the principal liable. Only answer (b) states the principal may be liable once disclosed, but does not have to ratify.
22. (a) An agent for an undisclosed principal has the same actual authority as an agent for a disclosed principal (the authority they were expressly given by the principal). The brokers were agents for an undisclosed principal and thus had the same actual authority they would have had if Easy’s authority had been disclosed.
Answer (b) is incorrect because an agent for an undisclosed principal cannot have apparent authority. It does not appear that they were authorized to act on behalf of another. Answer (c) is incorrect because a principal is liable for all torts committed by their agents while the agents were acting in the scope of their agency (respondeat superior).
Answer (d) is incorrect because both the agent for an undisclosed principal and the principal are liable if there is a breach.
23. (c) If an agent for an undisclosed principal makes an authorized contract, both the agent and the principal are liable if there is a breach. The principal is liable because the contract is authorized. The agent is liable because they made the contract in their own name without disclosing they were acting for another. Only (c) states that both are liable.
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24. (c) If an agent for an undisclosed principal makes an authorized contract, both the agent and the principal are liable if there is a breach. Thus, the third party may require performance by either the agent or the principal. Answer (a) is incorrect because the third party is not entitled to disclosure of the principal. The agent would violate the terms of the agency if they disclosed the principal. Answer (b) is incorrect because the third party is not entitled to ratification by the principal. With an authorized contract, there is no need for ratification because the principal is liable. Additionally, an undisclosed principal cannot ratify. Answer (d) is incorrect because a third party cannot disaffirm a contract just because there is an undisclosed principal.
25. (a) A principal is liable for all torts committed by their agents while the agent is acting within the scope of their agency. Even if an agent does an unauthorized act, they can be doing something in connection with their job and thus be acting within the scope of their agency. Answer (b) is incorrect because a written disclaimer would not prevent the principal from being liable to third parties for an agent’s tort committed while the agent was acting within the scope of the agency. Answer (c) is incorrect because a principal is liable for an agent’s negligent act that results in harm if done within the scope of the agency. Answer (d) is incorrect because a principal may be liable for an agent’s criminal act if it was done within the scope of the agency, even without the active participation of the principal. For example, a bouncer at a bar who used excessive force in removing a customer would have committed a criminal act (a battery) and acted within the scope of the agency (done something in connection with their job).
26. (b) A principal is liable for all torts committed by their agents while the agent is acting within the scope of their agency. Jordan is liable for the negligence of Neal, the agent, because Neal was delivering Jordan’s merchandise and was therefore acting within the scope of the agency. Neal is also liable for his negligence. The only answer that states both are liable is (b).
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Chapter Six: Agency
Other Objective Format Answers
ANSWER 1
1. (B) Statement I is incorrect because only agencies to buy land and those impossible to perform in one year require a writing under the statute of frauds. Statement II is correct because an agent is anyone authorized to act on behalf of another. Banks was authorized by Lace to make service calls and to customize Lace's software for Lace customers. Thus, Banks was empowered to act as Lace’s agent.
2. (A) Statement I is correct because implied authority is the authority necessary to accomplish assigned tasks.
One of Banks’ assigned tasks was to customize software for customers. Clear could rely on Bank’s implied authority to customize software. Statement II is incorrect because express authority occurs when the principal expressly tells the agent they are authorized. Banks was told not to sell computers. Thus, there was no express authority.
3. (B) An agency will terminate automatically by operation of law upon the death or insanity of the principal or agent, upon the bankruptcy of the principal, upon loss or destruction of a subject matter directly related to the agent’s authority and upon loss of a license required for the agency. An agency is not terminated automatically by the commission of an unauthorized act by the agent. Thus, statement I is incorrect. Statement II is correct because notice is required to terminate an agent’s apparent authority. Actual notice is required for old customers (like Clear). Thus, Lace must notify Clear before Banks apparent authority to bind Lace will cease.
4. (D) Statement I is incorrect because Banks had apparent authority to sell the computer. It was reasonable for Clear to believe Banks was authorized in that Clear had previously dealt with Banks as an agent of Lace and Clear had previously bought computers from other Lace agents by making cash deposits. Lace will be bound by Banks’
agreement with Clear because of apparent authority. Statement II is incorrect because a party that is liable on a contract may not unilaterally amend it.
5. (A) Statement I is correct and statement II is incorrect because the contract was authorized due to Banks’
apparent authority. Principals are liable for contracts made with apparent authority. Agents are not liable to 3rd parties for authorized contracts unless acting for an undisclosed principal. Although Banks would be liable to Lace for breach of his contractual duty, Banks is not contractually liable to Clear.
ANSWER 2
(a) Peterson was acting for an undisclosed principal (Prime) with regard to the contract with Hallow. Peterson was acting with actual authority; therefore, Prime is liable to Hallow. Peterson is also liable to Hallow because agents acting on behalf of undisclosed principals are liable to the third parties on the contracts they enter into with such third parties on behalf of the principal. Hallow, however, cannot collect damages from both Peterson and Prime and must make an election between them.
(b) At the time of the accident, Peterson was acting within the scope of employment because the conduct engaged in (that is, entering into a contract with Hallow) was authorized by Prime. Prime, therefore, will be liable to Mathews because the accident occurred within the scope of Peterson's employment.
Peterson will also be liable to Mathews because all persons are liable for their own negligence.
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(c) Peterson's actual authority to enter into contracts on Prime's behalf ceased on termination of employment by Prime. Peterson, however, continued to have apparent authority to bind Prime because:
x Peterson was acting ostensibly within the scope of authority as evidenced by past transactions with Bagley;
x Bagley was unaware of Peterson's termination.
The trade journal announcement was not effective notice to terminate Peterson's apparent authority in relation to Bagley because:
x Prime was obligated to give actual notice to Bagley that Peterson was no longer employed;
x Actual notice is required because of Bagley's past contact with Peterson while Peterson was employed by Prime.
ANSWER 3
(a) Exotic's first position is incorrect. Although Peterson lacked actual authority to bind Exotic to the Creatures contract, from Creatures' perspective Peterson did have apparent authority to do so. Peterson was a store manager and had previously contracted with Creatures on Exotic's behalf. Creatures would not be bound by the limitation on Peterson's authority unless Creatures was aware of it.
Exotic's second position is incorrect. Although Peterson did not have express authority to charge purchases at Handy Hardware. Peterson had the implied authority as store manager to enter into contracts incidental to the express grant of authority to act as manager. Buying paint and brushes to improve Exotic's store would fall within Peterson's implied grant of authority.
Exotic's third position is correct. An agent owes a duty of loyalty to his or her principal. An agent may not benefit directly or indirectly from an agency relationship at the principal's expense. If an agent receives any profits from the principal/agent relationship without the consent of the principal, the agent must pay the profits to the principal.
In this case, Peterson's incentive payments constituted a violation of Peterson's fiduciary duty to Exotic. Peterson must turn over all incentive payments to Exotic.
(b) Peterson was negligent by allowing Mathews to handle a ferret that Peterson knew was dangerous. An employer is held liable for the torts of its employees if the tort occurs within the scope of employment and if the employee is subject to the employer's control. At the time of the accident, Peterson was acting within the scope of employment and subject to Exotic's control because this conduct occurred while on the job, during normal working hours, and with the intention of benefiting Exotic. Exotic, therefore, will be liable to Mathews because the accident occurred within the scope of Peterson's employment.
Peterson also will be liable to Mathews because all persons are liable for their own negligence.