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MODULE 29 AGENCY
MULTIPLE-CHOICE ANSWERS

MULTIPLE-CHOICE ANSWER EXPLANATIONS

 Characteristics
1. (d) A power of attorney is written authority con- ferred to an agent. It is conferred in a formal
writing. A power of attorney can be general or it can grant the agent only restricted authority.
Answer (a) is incorrect because the power of attorney must be signed only by, the person
granting such authority. Answer (b) is incorrect because the power of attorney does not have to
be for a definite, specified time period. Answer (c) is incorrect because the death of the
principal constitutes the termination of an agency relationship by operation of law.
2. (c) The relationship between a principal and agent is based upon the consent of both parties, also
involving a meeting of the minds. Answer (d) is incorrect because specified consideration is
not needed to create an agency relationship; the relationship between theprincipal and the
agent need not be contractual. Answer (a) is incorrect be- cause although the principal and
agent relationship may be written, a written agreement is not required. Answer (b) is incorrect
because power of attorney is not needed to create an agency relationship.
3. (c) An employee is generally subject to control as to the methods used to complete the work. An
independent contractor is typically paid for the completion of the project rather than on an
hourly, weekly, or monthly basis. Answer (a) is incorrect because supervision by Sew Corp.
personnel shows an employment relationship. Answer (1;» is incorrect because independent
contractors typically provide their own tools. Answer (d) is incorrect because the work of both
employees and independent contractors can require a high degree of skill. .

 A.2. Employee (Servant)

4. ( c) Since Harris was acting within the scope of his employment when he negligently injured
Wolfe, both Harris and his employer are liable. Wolfe can recover from either one or both.
Answer (a) is incorrect because both are liable since Harris was acting within the scope of the
employment. The ownership of the vehicle does not change this. Answer (b) is incorrect
because Harris is liable for his own tort even though the employer can also be held liable.
Answer (d) is incorrect because Wolfe may recover the full damages from either or may
recover a portion of the dam- ages from both.
S. (d) Because the repairs Sherwin did were within the scope of the employment, the 'employer is
also liable. This is true-even if the employer was diligent in creating excellent rules that were
not followed by an employee. Answer (a) is incorrect because the repairs were within the
scope of the employment. Answer (b) is incorrect because the customer can sue for negligence
and hold both parties liable. Answer (c) is incorrect because the customer may recover from
both under tort law.
6. (d) In general, the employer is not responsible for the crimes of the employee unless the
employer aided or , permitted the illegal activity, even if the activity was within the scope of
the employment. Answer (a) is incorrect because if the employer did nothing to instruct the
employee about the use of the weapon, this could help establish negligence on the part of the
employer and would not prevent the use of the doctrine ofrespondeat superior, which makes
employers liable for the tortious acts of their employees within the scope of the employment.
 Answer (b) is incorrect because the employer is liable for torts of the employee committed
within the course and scope of the employment even if the employee was violating the
employer's instructions. Answer (c) is incorrect because even if the employee's suspicions
were correct, the shooting <'1f an innocent passer-by should establish at least negligence for
which the employer and the employee are liable. ) A.S. Types of Principals
7. (c) A principal, whether disclosed, partially dis- closed, or undisclosed is liable on contracts
where the agent has actual or apparent authority, or where the principal ratifies an agent's
contract. Actual authority includes express or implied authority projected by the principal to
the agent. Apparent authority of an agent is authority perceived by a third party based on the
principal's representations. There-fore, apparent authority can exist only where there is a
disclosed or a partially disclosed principal. It follows, then, that an undisclosed principal will
not be liable to third par-ties if the agent acts outside the grant of actual authority.

 B. Methods of Creation
8. (d) An agent must merely have sufficient mental and physical ability 'to carry out instructions of
hislher principal. An agent can bind the principal even if the agent is a minor. If the
memorabilia collection was destroyed before Trent found a purchaser, Post would not be liable
to Trent. Upon the loss or destruction of the subject matter on which the agency relationship is
based, the agency relationship is terminated.
9. (c) The fiduciary duty is an important duty owed by agents to their principals. Gage as Blue's
agent was authorized by Blue to appoint subagents to assist in the sales transactions. Since
Gage did appoint Vonda as a subagent, legally Bond is an agent both of Blue and Gage.
Therefore, Vonda owes a fiduciary duty to both Blue and Gage making (a), (b), and (d) all
incorrect.
10. (c) Resulting authority is not one of the types of authority that an agent might have. Answer (a)
is not chosen because actual express authority is a common type of au- throaty and consists of
all authority expressly given by the principal to his/her agent. Answer (b) includes the
authority that can be reasonably implied from the express authority and the conduct of the
principal. Answer (d) is not chosen because even though a party was never authorized by a
principal to be an agent, if the principal leads a third party to believe that the party did have
authority, this is apparent agency.
11. (b) An agency agreement normally does not need to be in writing. Exceptions to this general
rule include agency contracts that cannot be completed within one year and agreements
whereby the agent is to buy specific real estate for the principal. This question incorporates the
latter. Typical agency agreements need not be in writing; these would include purchasing
office supplies, retaining an independent contractor to do renovation work, or hiring an
attorney to collect a business debt.
12. (c) An agent has implied authority to do what is customary for agents of that type to do under
the circumstances. It would be customary for one who is a principal's accountant and business
manager to have authority to insure the principal's property against fire loss. Answers (a), (b),
and (d) are incorrect because they involve authority that is beyond customary, ordinary
authority.

 B.S. Ratification
13. (d) Since Ames had no express, implied, or actual authority, Trimon cannot enforce the
contract. Answer (a) is not chosen because ratifications under agency law require that the
contract be ratified in its entirety or not at all. Answer (b) is not chosen because until Clar
ratifies the contract in its entirety, Trimon may withdraw from the contract since Ames had no
authority to make the contract. Answer (c) is not chosen because ratification can be
accomplished by actions as well as words.
 14. (b) When the third party is aware that there is a principal, that principal, fully disclosed or
partially disclosed, may generally ratify the contract when he or she is aware of all material
facts and if ratification of the entire contract takes place.

 C. Authority
15. (a) Since Beetle authorized McDonald to be his agent, the secret limitation has no effect on
York. York may enforce the contract for the full $140,000. Answer (b) is incorrect because
Beetle authorized McDonald to be his agent. Even though his agent was instructed to pay at
most $125,000 in the contract, this was a secret limitation that did not limit York who was
unaware of it. Answer (c) is incorrect because McDonald was given authority to purchase real
estate on Bee1e's behalf. The limitation on the dollar amount was not known by York and
therefore does not limit her. Answer (d) is incorrect because although York can enforce the
contract against Beetle, it is because Beele gave authority to McDonald rather than how much
the real estate is worth.

 E. Obligations and Rights

16. (b) As a fiduciary to the principal, an agent must act in the best interest of the principal.
Therefore, the agent has an obligation to refrain from competing with or acting adversely to
the principal, unless the principal knows and ap- proves of such activity. Answer (c) is
incorrect because the Statute of Frauds would not require that the described agency
relationship be contained in a signed writing since it is possible for the contract to be
performed within one year. Answer (d) is incorrect because the mere right of the agent to
receive a percentage of proceeds is not sufficient to constitute an agency coupled with an
interest. In order to have an agency coupled with an interest, the agent must have either a
property interest or a security interest in the subject matter of the agency relationship. Answer
(a) is incorrect because in all agency relationships, except agencies coupled with an interest,
the principal always has the power to dis-miss the agent. However, the principal does not
necessarily have the right to terminate the relationship. In certain situations the dismissed
agent could ~use for breach of contract.
17. (c) In an agency relationship, the agent owes a fiduciary duty to the principal but the principal
does not owe a fiduciary duty to the agent. Also, even though there is often a contract between
the principal and agent, this is not a requirement, for example, when the agent consents to act
for the principal as a friend.

 E.3. Principal's Liability to Third Parties

18. (a) When the principal is undisclosed in an agency relationship, the agent generally has the
same authority as if the principal were disclosed. The main difference is in the liability of the
agent to third parties. Answer (b) is incorrect because the principal is liable on the contract
because of the express authority given to the agent to make the contract on behalf of the
principal. Apparent authority exists when the principal represents the agent to third parties to
be his/her agent. In this case, the principal wished to be undisclosed. Answer (c) is incorrect
because principal can be held liable for negligence committed by the agent within the course
and scope of the agency. Answer (d) is incorrect because the agent can be held liable on the
contract by third parties when the principal is undisclosed.
19. (c) An agent is liable to a third party on a contract when the principal is undisclosed or partially
disclosed. If the principal is fully disclosed, the agent is not liable.

 E.4. Agent's Liability to Third Parties

20. (b) When an agent enters into a contract with a third person on behalf of an undisclosed
principal, the agent is personally liable, unless the third person discovers the existence and
 identity of the principal and chooses to hold the principal to the contract instead of the agent.
Ratification is the approval after the fact of an unauthorized act done by an agent or of an act
done by someone who is not yet an agent. Undisclosed principals cannot ratify unauthorized
acts of the agent.
21. (c) When a third party contracts with an agent representing an undisclosed principal, the agent
is liable for performance of the contract. The third party is not entitled to disclosure of the
principal. Answer (b) is incorrect because ratification of a contract by the principal is the
approval required after the fact related to an unauthorized act by the agent or one not yet an
agent. Answer (d) is incorrect be-cause the third party generally is not allowed the option of
voiding the contract after disclosure of the principal.
22. (c) One who issues a personal check is liable on it; however, any party or principal who is not
disclosed on the check is not liable on the negotiable instrument. Answers (a) and (b) are
incorrect because the third party can elect to hold either the agent or the principal liable when
the agent makes a contract for an undisclosed principal. Answer (d) is incorrect because the
party who signs a check is liable on it.

 F. Termination of Principal-Agent Relationship

23. (c) The declaration of Ogden's incapacity constitutes the termination of the agency relationship
by operation of law. When an agency relationship is terminated by operation of law, the
agent's authority to enter into a binding agreement on behalf of the principal ceases. There is
no requirement that notice be given to third parties when the agency relationship is terminated
by operation of law. In this case, Ogden will not be liable to Datz because Thorp was without
authority to enter into the contract. Answer (a) is incorrect because insanity of the principal
terminates the agency relationship even though the third parties are unaware of the principal's
insanity. Answer (b) is incorrect because Thorp's authority terminated upon the declaration of
Ogden' s incapacity. ' Answer (d) is incorrect because an undisclosed principal is liable unless
the third party holds the agent responsible, the agent has fully performed the ' contract, the
undisclosed principal is expressly excluded by contract or the contract is a negotiable
instrument. However, Ogden will not be liable 'as Thorp was without authority to enter into
the agreement.
24., (c) An agency relationship is terminated, by operation of law if the subject of the agreement
becomes illegal or impossible, the principal or the agent dies or becomes in- sane, or the
principal becomes bankrupt. Answers (a), (b), and (d) are incorrect because they will cause the
termination of an agency relationship by operation of law. Answer Cc), agent's renunciation of
the agency, will not cause the termination of an agency relationship. -
25. (c) When the agency relationship is terminated by an act of the principal and/or agent, third
parties are entitled to notice of the termination from the principal. Failure of the principal to
give the required notice gives the agent apparent authority to act on behalf of the principal.
Specifically, the principal must give actual notice to all parties who had prior dealings with the
agent or principal. Constructive or public notice must be given to parties who knew of the
existence of the agency relationship, but did not actually have business dealings with the agent
or principal. Since Bolt Corp. did not give proper constructive notice to Young Corp., Ace had
apparent authority to bind the principal and: therefore, Young Corp. will win. Accordingly,
answer (a) is incorrect. Answer (b) is incorrect because although Ace lacked express authority,
apparent authority was present due to the inadequacy of Bolt's notice. Answer (d) is incorrect
because a principal is not an absolute insurer of his agent's acts. A principal is liable for his
agent's torts only if the , principal expressly authorizes the conduct or the tort is committed
within the scope of the agent's employment.