Agency

Question 1

How is apparent authority created?

• By perceptions of third parties that have been created or allowed by the principal.
• By agreement.
• By implication.
• By either agreement or implication.

Answer 1

By perceptions of third parties that have been created or allowed by the principal.

Apparent authority comes from how the agent is viewed by third parties when the principal does nothing to correct the appearance of authority.

Authority by implication stems from express authority and is not created by appearances.

Question 2

Frost’s accountant and business manager has the authority to

• Mortgage Frost’s business property.
• Obtain bank loans for Frost.
• Insure Frost’s property against fire loss.
• Sell Frost’s business.

Answer 2

Insure Frost’s property against fire loss. An agent, such as a business manager, has implied authority to carry on the normal, day-to-day business activities of the firm. He may do things that are REASONABLY necessary to RUN THE BUSINESS, but may not take extraordinary steps without express authority.
Obtaining insurance is something that is likely to fall within this type of authority. Although it may be expensive, it is the kind of thing a prudent person does to protect property. It can be strongly argued that a person who runs a business properly takes out insurance as a matter of course.

Question 3

Which of the following would not have capacity to create an agency relationship?

• An unincorporated association.
• A corporation.
• An individual.
• A government agency.

Answer 3

An unincorporated association.

An unincorporated association does not have capacity, because it is not an individual or an entity and therefore has no contractual capacity.

Question 4

Which of the following conditions must be met to form an agency?

• An agency agreement must be in writing.
• An agency agreement must be signed by both parties.
• The principal must furnish legally adequate consideration for the agent’s services.
• The principal must possess contractual capacity

Answer 4

The principal must possess contractual capacity.

The principal must have the ability to enter into contracts.

Question 5

Trent is retained, in writing, to act as Post’s agent for the sale of Post’s memorabilia collection. Which of the following statements is correct?

I. To be an agent, Trent must be at least 21 years of age.

II. Post would be liable to Trent if the collection was destroyed before Trent found a purchaser.

• I only.
• II only.
• Both I and II.
• Neither I nor II.

Answer 5

Neither I nor II. An agent need only be able to function minimally and complete job tasks. If the purpose of the agency (sale of the collection) has not been accomplished at the time of destruction, the principal will have no further obligation toward the agent.

Question 6

A principal and agent relationship requires a

• Written agreement.
• Power of attorney.
• Meeting of the minds and consent to act.
• Specified consideration.

Answer 6

Meeting of the minds and consent to act.

One cannot become another’s agent unless both sides agree and consent to the arrangement.

Question 7

Under agency law, which of the following statements best describes ratification?

• A principal’s affirmation of an agent’s authorized act.
• A principal’s affirmation of an agent’s unauthorized act.
• A principal’s approval in advance of an agent’s acts.
• A principal’s disavowal of an agent’s unauthorized act.

Answer 7

A principal’s affirmation of an agent’s unauthorized act.

Ratification is required where the agent has acted without authority, either express or implied.

Question 8

Orr gives North power of attorney. In general, the power of attorney

• Will be valid only if North is a licensed attorney at law.
• May continue in existence after Orr’s death.
• May limit North’s authority to specific transactions.
• Must be signed by both Orr and North.

Answer 8

May limit North’s authority to specific transactions.

In general, power of attorney is the power to handle some or all of a person’s affairs, depending on what a person wishes to grant. One may grant to another the power to do a few things, or the power to do everything.

Question 9

Which of the following terms best describes the relationship between a corporation and the CPA it hires to audit corporate books?

• Employer and employee.
• Employer and independent contractor.
• Master and servant.
• Employer and principal.

Answer 9

Employer and independent contractor.

An external auditor is an independent contractor for the audit client.

Question 10

Which of the following actions requires an agent for a corporation to have a written agency agreement?

• Purchasing office supplies for the principal’s business.
• Purchasing an interest in undeveloped land for the principal.
• Hiring an independent general contractor to renovate the principal’s office building.
• Retaining an attorney to collect a business debt owed the principal.

Answer 10

Purchasing an interest in undeveloped land for the principal.

Oral agency agreements are generally valid, unless the agent’s activities are covered by certain parts of the Statute of Frauds. When an interest in real property is transferred, the Statute of Frauds requires a writing. Therefore, an agent who will transfer interests in real property must also have a written agency agreement.

Question 11

Thorp is a purchasing agent for Ogden, a sole proprietor, and has the express authority to place purchase orders with Ogden’s suppliers.
Thorp places an order with Datz, Inc. on Ogden’s behalf, after Ogden was declared incompetent in a judicial proceeding. Thorp was aware of Ogden’s incapacity.

Which of the following statements is correct concerning Ogden’s liability to Datz?

• Ogden will be liable, because Datz was not informed of Ogden’s incapacity.
• Ogden will be liable because Thorp acted with express authority.
• Ogden will not be liable, because Thorp’s agency ended when Ogden was declared incompetent.
• Ogden will not be liable because Ogden was a non-disclosed principal.

Answer 11

Ogden will not be liable, because Thorp’s agency ended when Ogden was declared incompetent.

An agency relationship terminates as a matter of law as soon as one is adjudicated incompetent. Note that a person simply acting irrationally or “crazy” does not automatically end the relationship; it is the court proceeding that is important.

Question 12

Young Corp. hires Wilson as a sales representative for six months at a salary of $5,000 per month, plus 6% of sales.

Which of the following statements is correct?

• Young does not have the power to dismiss Wilson during the six-month period without cause.
• Wilson is obligated to act solely in Young’s interest in matters concerning Young’s business.
• The agreement between Young and Wilson is not enforceable, unless it is in writing and signed by Wilson.
• The agreement between Young and Wilson formed an agency coupled with an interest.

Answer 12

Wilson is obligated to act solely in Young’s interest in matters concerning Young’s business.

Agents such as Wilson have a fiduciary duty of the utmost good faith and loyalty toward their principals. Failing to act in Young’s interest is a clear violation of this duty.

Question 13

Generally, an agency relationship is terminated by operation of law in all of the following situations, except the

• Principal’s death.
• Principal’s incapacity.
• Agent’s renunciation of the agency.
• Agent’s failure to acquire a necessary business license.

Answer 13

Agent’s renunciation of the agency.

Except for an agency for a specific term and an agency coupled with an interest, either side may terminate the agency arrangement at will. Therefore, no operation of law is needed when an agent desires to renounce his authority.

Question 14

When a valid contract is entered into by an agent on the principal’s behalf, in a non-disclosed principal situation, which of the following statements concerning the principal’s liability is correct?

• I. The principal may be held liable once disclosed
• II. The principal must ratify the contract to be held liable

Answer 14

I but NOT II. When such an occurrence takes place, the principal may be held liable for the contract without ratification. The third party, under the election doctrine, may choose to recover damages from either the principal or the agent if the contract is breached.

Question 15

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,

• The broker will have the same actual authority as if Easy’s identity had been disclosed.
• 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.

Answer 15

The broker will have the same actual authority as if Easy’s identity had been disclosed. The fact that the principal remains hidden does not affect the type of authority granted. If a principal hires an agent, as is the case here, and specifically authorizes a certain type of activity, then the agent has express authority, period.

Question 16

Part agrees to act as Young’s agent to sell Young’s land. Part is instructed to disclose that he is acting as an agent but not to disclose Young’s identity. Part contracts with Rice for Rice to purchase the land. After Rice discovers Young’s identity, Young refuses to fulfill the contract.

Against whom does Rice have a cause of action?

• Part
• Young

Answer 16

BOTH. In the case of a partially-disclosed agency relationship, as is the case here, the third party (Rice) has the right to sue the only person whose identity he knew at the time of the transaction (the agent, Part), and can also sue the principal (Young) if Rice later learns Young’s identity.

Question 17

Which of the following rights will a third party be entitled to after validly contracting with an agent representing an undisclosed principal?

• Disclosure of the principal by the agent.
• Ratification of the contract by the principal.
• Performance of the contract by the agent.
• Election to void the contract after disclosure of the principal.

Answer 17

Performance of the contract by the agent. Normally, an agent is not bound by a contract signed on behalf of his principal. However, this question illustrates the exception to the rule, because the principal is UNDISCLOSED. In such a situation, the agent can be made to honor the agreement.

Question 18

When an agent acts for an undisclosed principal, the principal will not be liable to third parties if the

• Principal ratifies a contract entered into by the agent.
• Agent acts within an implied grant of authority.
• Agent acts outside the grant of actual authority.
• Principal seeks to conceal the agency relationship.

Answer 18

Agent acts outside the grant of actual authority. The only other type of authority an agent may have is apparent authority, and this type CANNOT exist if the principal is undisclosed. Apparent authority exists when a third party reasonably believes, based on a principal’s actions, that an agent has authority to do something. If the third party does not know who the principal is, this cannot happen. Therefore, the only authority an agent may have in this situation is actual authority. If the agent exceeds all authority given to him, then the principal is not bound to the contract.

Question 19

Able, as agent for Baker, an undisclosed principal, contracts with Safe to purchase an antique car. In payment, Able issues a personal check to Safe. Able cannot cover the check, but expects Baker to give him cash to deposit before the check is 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

• Baker, individually, on the contract.
• Able, individually, on the contract.
• Baker, individually, on the check.
• Able, individually, on the check.

Answer 19

Baker, individually, on the check.

The relationship between a drawer of a check and a payee is unrelated to that between an agent and principal. A principal is not responsible for the payment of an agent’s personal checks.

Question 20

Kent, without authority, contracts to buy computer equipment from Fox Corp. for Ace Corp. Kent tells Fox that Kent was acting on Ace’s behalf.

For Ace to ratify the contract with Fox,

• Kent must be a general agent for Ace.
• Ace must know all material facts relating to the contract at the time it is ratified.
• Ace must notify Fox that Ace intends to ratify the contract.
• Kent must have acted reasonably and in Ace’s best interest.

Answer 20

Ace must know all material facts relating to the contract at the time it is ratified.

To ratify such a contract, the principal must know all material facts, affirm the entire contract, have capacity to ratify the contract, act within certain time constraints, and follow the same formalities (as far as a writing requirement) that the original contract had to follow.

Question 21

Bolt Corp. dismisses Ace as its general sales agent and notifies 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 is 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.

Answer 21

Win, because Bolt’s notice was inadequate to terminate Ace’s apparent authority. If an agent has authority of some kind, he can bind a company to contracts he makes on their behalf. This is true even if the professional relationship has been terminated. Apparent authority may remain effective after a termination. To end all authority, a company must give appropriate notice to EVERYONE, not just to existing customers. The company must give PUBLICATION notice to all businesses of the termination. Otherwise, the dismissed agent retains the power to bind his ex-employer to contracts.

Question 22

North, Inc. hires Sutter as a purchasing agent.

North gives Sutter written authorization to purchase, without limit, electronic appliances. Later, Sutter is told not to purchase more than 300 of each appliance.
Sutter contracts with Orr Corp. to purchase 500 tape recorders. Orr had been shown Sutter’s written authorization.

Which of the following statements is correct?

• Sutter will be liable to Orr, because Sutter’s actual authority was exceeded.
• Sutter will not be liable to reimburse North if North is liable to Orr.
• North will be liable to Orr, because of Sutter’s actual and apparent authority.
• North will not be liable to Orr, because Sutter’s actual authority was exceeded.

Answer 22

North will be liable to Orr, because of Sutter’s actual and apparent authority. The written authorization given to Sutter constitutes actual authority. Actual authority exists whenever an agent acts under direct orders, or takes steps reasonably necessary to complete specific directives. For the first 300 of the 500 recorders, Sutter has actual authority. Further, he has apparent authority to buy the other 200, because Orr can reasonably believe that Sutter is authorized to make such a purchase after seeing his authorization.
An agent has apparent authority to act whenever a third party reasonably believes the agent has authority to act.

Question 23

Baker (P) leaves her two-month-old daughter, Summer, at the Ave Maria Child Care Center (D). Because Summer will not stop crying, one of D’s employees, Davis, hits Summer’s head against the corner of a shelf, causing major brain injury. Davis later pleads guilty to injury to a child and goes to jail. P sues D for Davis’s tort. Which of the following is true?

• A principal is never liable for an agent’s intentional tort.
• D is not liable, because Davis was not acting within the scope of employment - she was hired to help children, not to injure them.
• P will probably recover.
• Because Davis is only an employee, she cannot be liable.

Answer 23

P will probably recover.

Because Davis was attempting to advance her employer’s interest by maintaining order in the day-care center, even though she did so in a wrongful manner, her employer is liable. Therefore, this is the best answer.

Question 24

Generally, a disclosed principal will be liable to third parties for its agent’s unauthorized misrepresentations, if the agent is an

• Employee
• Independent Contractor

Answer 24

• Employee - YES
• Independent Contractor = NO

A principal is liable for ALL AUTHORIZED misrepresentations, but not for all UNauthorized misrepresentations. In such a case, the principal is liable only if an employee makes the misrepresentation. For the record, an employee is a worker who tends to be paid wages or salary, has a long-term relationship with the principal, and is supervised by the principal.

Question 25

Cade Corporation hired Brenner to sell computer service contracts to businesses. Brenner goes into Apex Corporation and makes what he thought was a successful presentation. Unknown to Brenner, it was a file clerk who signed the service contract. A few days later, a high-level manager and agent of Apex learns of the facts and tells Cade Corporation that Apex wishes to ratify the service contract for certain beneficial terms but not for other major terms. Cade Corporation maintains it will only sell the service contract in its entirety. Which of the following is correct?

1. Apex must ratify the contract in its entirety or not at all.
2. Apex must accept this contract since it was signed by an agent of Apex.
3. Cade is liable on this contract because its authorized agent, Brenner, signed it.
4. Brenner is liable for breach of his fiduciary duty.

Answer 25

Apex must ratify the contract in its entirety or not at all. Apex may ratify this contract that was not made by any authorized agent. The facts do not give enough to establish an apparent or implied agency. Ratification of the contract by an agent of Apex will cause the contract to be binding; however, the contract must be ratified in its entirety so that a party is not able to pick and choose only the beneficial portions.

Question 26

Pell is the principal and Astor is the agent in an agency coupled with an interest. In the absence of a contractual provision relating to the duration of the agency, who has the right to terminate the agency before the interest has expired?

1. Pell?
2. Astor?

Answer 26

1. Pell = NO
2. Astor = YES

An agency coupled with an interest arises when an agent acquires from the principal an interest in the subject matter of the agency. In the absence of a contractual provision relating to the term of the agency, the authority of the agent (Astor) is irrevocable by the principal (Pell). If there is no time period specified for the agency, then the agent (Astor) may terminate at any time without liability, regardless of the type of agency.

Question 27

Which of the following statements concerning agency law is not true?

1. The agent owes a fiduciary duty to the principal.
2. The agent’s duties are by necessity based on contract law.
3. The principal does not owe his/her agent fiduciary duties.
4. The agent does not owe third parties with which the principal asks the agent to deal fiduciary duties.

Answer 27

The agent’s duties are by necessity based on contract law.

Although there is typically a contract between the principal and agent in an agency relationship, this is not required. For example, a principal may authorize a friend to act as his/her agent, and the agent might consent to do it as a favor. Additionally, the agent owes the principal fiduciary duties regardless of what duties are imposed by an employment contract.

Question 28

Ace engages Butler to manage Ace’s retail business. Butler has the implied authority to do all of the following except

1. Purchase inventory for Ace’s business.
2. Sell Ace’s business fixtures.
3. Pay Ace’s business debts.
4. Hire or discharge Ace’s business employees.

Answer 28

Sell Ace’s business fixtures. While Ace is acting as Butler’s agent, Ace has implied authority to the extent reasonably necessary or usual to carry out the express authority of the principal (Butler). Selling business fixtures would not be considered an implied or normal duty of a business manager.

EXAMPLE: A has been engaged by P to be the general manager of P’s retail store. A may buy and sell inventory in the business. She may also hire and fire the business employees. A may not, however, do such things as selling the business itself, selling the fixtures or the building, or advertising for the company to go into a complete new line or service.

Question 29

An agency coupled with an interest will be created by a written agreement which provides that a (n)

1. Borrower shall pledge securities to a lender which authorizes the lender to sell the securities and apply the proceeds to the loan in the event of default.
2. Employee is hired for a period of 2 years at $40,000 per annum plus 2% of net sales.
3. Broker is to receive a 5% sales commission out of the proceeds of the sale of a parcel of land.
4. Attorney is to receive 25% of a plaintiff’s recovery for personal injuries.

Answer 29

Borrower shall pledge securities to a lender which authorizes the lender to sell the securities and apply the proceeds to the loan in the event of default.

An agency coupled with an interest will be created any time the agent has either a property interest or a security interest in the subject matter of the agency. If a lender obtains authorization to sell pledged securities and applies the proceeds to the loan in the event of the borrower’s default, that lender becomes an agent with a security interest in the subject matter of the agency relationship, and the agency is irrevocable.

Question 30

Harp entered into a contract with Rex on behalf of Gold. By doing so, Harp acted outside the scope of his authority as Gold’s agent. Gold may be held liable on the contract if

1. Gold retains the benefits of the contract.
2. Gold ratifies the entire contract after Rex withdraws from the contract.
3. Rex elects to hold Gold liable on the contract.
4. Rex was aware of the limitation on Harp’s authority.

Answer 30

Gold retains the benefits of the contract. Although the agent’s act was outside the scope of his authority, the principal may, nevertheless, ratify the contract. Retention of the benefits of the contract constitutes implied ratification.

Question 31

Lund Pizza Company gave specific rules to employees including obeying all traffic laws while delivering pizzas. An employee, while delivering pizzas one day, negligently went through a red light and injured the driver of another car. Which of the following is correct?

1. The injured driver can recover from either Lund or the employee or both.
2. The injured driver can recover from the employee but not Lund because the employee caused the accident while breaking one of Lund’s rules.
3. If the injured driver chooses to hold the employee liable, the employee can require that he first seek recovery from Lund.
4. If a lawsuit is filed against both Lund and the employee, Lund can require that the injured party first exhaust all remedies against the employee before Lund need pay.

Answer 31

The injured driver can recover from either Lund or the employee or both. Even though the employee was breaking one of Lund’s rules, they can both be held liable, either individually or together.

Question 32

Brian purchased an automobile from Robinson Auto Sales under a written contract by which Robinson obtained a security interest to secure payment of the purchase price. Robinson reserved the right to repossess the automobile if Brian failed to make any of the required ten payments. Ambrose, an employee of Robinson, was instructed to repossess the automobile on the ground that Brian had defaulted in making the third payment. Ambrose took possession of the automobile and delivered it to Robinson. It was then discovered that Brian was not in default. Which of the following is incorrect?

1. Brian has the right to regain possession of the automobile and to collect damages.
2. Brian may sue and collect from either Robinson or Ambrose.
3. If Ambrose must pay in damages, he will be entitled to indemnification from Robinson.
4. Ambrose is not liable for the wrongful repossession of the automobile since he was obeying the direct order of Robinson.

Answer 32

Ambrose is not liable for the wrongful repossession of the automobile since he was obeying the direct order of Robinson.

Ambrose’s act of repossessing the car constituted the tort of conversion. An agent or employee is always liable for his own torts, even if committed in the course of discharging his duties.

Question 33

Jim, an undisclosed principal, authorized Rick to act as his agent in securing a contract for the purchase of some plain white paper. Rick, without informing Sam that he was acting on behalf of a principal, entered into a contract with Sam to purchase the paper. If Jim repudiates the contract with Sam, which of the following is correct?

1. Rick will be released from his contractual obligations to Sam if he discloses Jim’s identity.
2. Upon learning that Jim is the principal, Sam may elect to hold either Jim or Rick liable on the contract.
3. Rick may not enforce the contract against Sam.
4. Sam may obtain specific performance, compelling Jim to perform on the contract.

Answer 33

Upon learning that Jim is the principal, Sam may elect to hold either Jim or Rick liable on the contract.

Once the third party learns the identity of an undisclosed principal, the third party may elect to hold either the agent or the principal liable on the contract.

Question 34

Which of the following is(are) available to a principal when an agent fraudulently breaches a fiduciary duty?

• Termination of the agency
• Constructive Trust

Answer 34

BOTH. An agent owes a fiduciary duty to his/her principal. If the agent breaches this important duty, the principal may terminate the agency relationship. A constructive trust may be used as a remedial device. Constructive trust arises when person who takes legal interest in property cannot enjoy beneficial interest without violating some established (legal) principle

Question 35

Ritz hired West for 6 months as an assistant sales manager at $4,000 a month plus 3% of sales.
Which of the following is correct?

1. The employment agreement must be in writing and signed by the party to be charged.
2. The agreement between Ritz and West formed an agency coupled with an interest.
3. West must disclose any interests he has which are adverse to Ritz in matters concerning Ritz’s business.
4. West can be dismissed by Ritz during the 6 months only for cause.

Answer 35

West must disclose any interests he has which are adverse to Ritz in matters concerning Ritz’s business.

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 approves of such activity.

Question 36

Harris is a purchasing agent for Elkin, a sole proprietor. Harris has the express authority to place purchase orders with Elkin’s suppliers. Harris typically conducts business through the mail and has very little contact with Elkin. Elkin was incapacitated by a stroke and was declared incompetent in a judicial proceeding. Subsequently, Harris placed an order with Ajax, Inc. on behalf of Elkin. Neither Ajax nor Harris were aware of Elkin’s incapacity. With regard to the contract with Ajax, Elkin (or Elkin’s legal representative) will

1. Not be liable because Harris was without authority to enter into the contract.
2. Not be liable provided that Harris had placed orders with Ajax in the past.
3. Be liable because Harris was acting within the scope of Harris’ authority.
4. Be liable because Ajax was unaware of Elkin’s incapacity.

Answer 36

Not be liable because Harris was without authority to enter into the contract.

The declaration of Elkin’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 Elkin will not be liable to Ajax, regardless of the fact that Ajax was not given notice of the termination of the agency relationship, because Harris was without authority to enter into the contract.

Termination by operation of law:

1. If subject of agreement becomes illegal or impossible
2. Death, insanity, or court determined incompetence of either party
   
   1. Exception is an agency coupled with an interest
      EXAMPLE: If mortgagee has power to sell the property to recover his loan, this authority to sell as mortgagor’s agent is not terminated by mortgagor’s death.
3. Bankruptcy of principal terminates the relationship
   1. (1)Bankruptcy of agent does not affect unless agent’s solvency is needed for performance
      
      • If terminated by operation of law, no notice need be given

Question 37

Sly was a general agent of the Cute Cosmetics Company with authority to sell, make collections, and adjust disputes. Sly was caught padding his monthly expense account by substantial amounts and was dismissed. Cute hired another general agent, Ready, to replace Sly. Ready was slowly but steadily calling upon Sly’s accounts to make sales and was informing them that Sly’s services had been terminated. Cute also published a notice in the appropriate trade journals and the local newspaper announcing the replacement of Sly with Ready. Sly, after he was let go, called on all the customers who had outstanding accounts payable and quickly made whatever collections he could in cash and absconded. Which of the following statements is correct regarding Cute’s legal right against the customers?

1. Cute can regain possession of the goods since title did not pass because Sly’s actions constituted a fraud.
2. Cute can obtain payment from the customers despite Sly’s wrongful acts since it had published a notice of Sly’s dismissal.
3. Cute will have to absorb the loss since Sly had continuing implied authority to make collections.
4. Cute will have to absorb the loss unless Cute can prove the customers had actual notice of Sly’s dismissal.

Answer 37

Cute will have to absorb the loss unless Cute can prove the customers had actual notice of Sly’s dismissal.

Cute was required to give actual notice of the termination to all customers who had previously dealt with Sly. Consequently, Cute will have to bear the loss unless it is proven that the customers learned of Sly’s termination from another source and did have actual notice.

Question 38

Steel has been engaged by Lux to act as the agent for Lux, an undisclosed principal. As a result of this relationship

1. Steel has the same implied powers as an agent engaged by a disclosed principal.
2. Lux cannot be held liable for any torts committed by Steel in the course of carrying out the engagement.
3. Steel will be free from personal liability on authorized contracts for Lux when it is revealed that Steel was acting as an agent.
4. Lux must file the appropriate form in the proper state office under the fictitious business name statute.

Answer 38

Steel has the same implied powers as an agent engaged by a disclosed principal.

Classification of a principal as disclosed, undisclosed, or partially disclosed affects the contractual liability of the agent toward third parties. The authority given the agent, however, is not affected. An agent representing an undisclosed principal has the same implied authority as an agent representing a disclosed principal.

Question 39

Which of the following principals may normally ratify an unauthorized contract made by an agent?

• I.Fully disclosed principal.
• II.Partially disclosed principal.
• III.Undisclosed principal.

1. I only.
2. I and II only.
3. II and III only.
4. I, II, and III.

Answer 39

I and II only. both partially disclosed and fully disclosed principals can ratify an unauthorized contact.

In general, an undisclosed principal may not ratify unauthorized contracts.

Question 40

Agents sometimes have liability to third parties for their actions taken for and on behalf of the principal. An agent will not be personally liable in which of the following circumstances?

1. If he makes a contract which he had no authority to make but which the principal ratifies.
2. If he commits a tort while engaged in the principal’s business.
3. If he acts for a principal which he knows is nonexistent and the third party is unaware of this.
4. If he acts for an undisclosed principal as long as the principal is subsequently disclosed.

Answer 40

If he makes a contract which he had no authority to make but which the principal ratifies.

An agent, after the principal ratifies an unauthorized act, is acting within his authority and is free of any liability on the contract.

Question 41

Magnus Real Estate Developers, Inc. wanted to acquire certain tracts of land in Marshall Township in order to build a shopping center complex. To accomplish this goal, Magnus engaged Dexter, a sophisticated real estate dealer, to represent them in the purchase of the necessary land without revealing the existence of the agency. Dexter began to slowly but steadily acquire the requisite land. Which of the following is correct under these circumstances?

1. The use of an agent by Magnus, an undisclosed principal, is manifestly illegal.
2. Either Magnus or Dexter may be held liable on the contracts for the land.
3. An undisclosed principal such as Magnus can have no liability under the contract since the third party believed he was dealing with Dexter as a principal.
4. An agent for an undisclosed principal assumes no liability as long as he registers his relationship to the principal with the clerk of the proper county having jurisdiction.

Answer 41

Either Magnus or Dexter may be held liable on the contracts for the land.

This answer is correct because either Magnus (the undisclosed principal) or Dexter (the agent) may be held liable on the contract for all land entered into by Dexter on Magnus’ behalf. Dexter executed the contract within the scope of the agency relationship and thus Dexter’s actions are binding on Magnus. Also, Dexter is liable on each of the contracts because he failed to disclose that he was acting as agent for Magnus Corporation.

Question 42

Wok Corp. has decided to expand the scope of its business. In this connection, it contemplates engaging several agents. Which of the following agency relationships is within the Statute of Frauds and thus should be contained in a signed writing?

1. A sales agency where the agent normally will sell goods which have a value in excess of $500.
2. An irrevocable agency.
3. An agency which is of indefinite duration but which is terminable upon 1 months’ notice.
4. An agency for the forthcoming calendar year which is entered into in mid-December of the prior year.

Answer 42

An agency for the forthcoming calendar year which is entered into in mid-December of the prior year.

Under the Statute of Frauds, certain contracts must be contained in a signed writing to be enforceable. Among these is a contract that cannot be performed within 1 year. In a personal service contract, the 1-year period begins running at the time that the contract is formed, not at the time the service is to commence. A contract creating an agency relationship for the forthcoming year which is entered into in mid-December of the prior year could not possibly be performed within 1 year and, therefore, must be contained in a signed writing in order to be in compliance with the Statute of Frauds.

Question 43

Wallace, an agent for Lux, made a contract with Doolittle which exceeded Wallace’s authority. If Lux wishes to hold Doolittle to the contract, Lux must prove that

1. Lux ratified the contract before withdrawal from the contract by Doolittle.
2. Wallace was acting in the capacity of an agent for an undisclosed principal.
3. Wallace believed he was acting within the scope of his authority.
4. Wallace was Lux’s general agent even though Wallace exceeded his authority.

Answer 43

Lux ratified the contract before withdrawal from the contract by Doolittle.

If an agent acts without authority, neither the principal nor the third party is bound to perform the contract. However, if Lux ratified Wallace’s unauthorized act before Doolittle withdrew from the contract, Doolittle would be bound by the agreement.

Question 44

Jason Manufacturing Company wished to acquire a site for a warehouse. Knowing that if it negotiated directly for the purchase of the property the price would be substantially increased, it employed Kent, an agent, to secure lots without disclosing that he was acting for Jason. Kent’s authority was evidenced by a writing signed by the proper officers of Jason. Kent entered into a contract in his own name to purchase Peter’s lot, giving Peter a negotiable note for $1,000 signed by Kent as first payment. Jason wrote Kent acknowledging the purchase. Jason also disclosed its identity as Kent’s principal to Peter. In respect to the rights and liabilities of the parties, which of the following is a correct statement?

1. Peter is not bound on the contract since Kent’s failure to disclose he was Jason’s agent was fraudulent.
2. Jason, Kent, and Peter are potentially liable on the contract.
3. Unless Peter formally ratifies the substitution of Jason for Kent, he is not liable.
4. Kent has no liability since he was acting for and on behalf of an existing principal.

Answer 44

Jason, Kent, and Peter are potentially liable on the contract.

All three parties are potentially liable on the contract. A principal, whether disclosed, undisclosed, or partially disclosed, will be liable for the contracts of his agent if these agreements are within the scope of the agent’s express, implied, or apparent authority.

Also, an agent, acting on behalf of an undisclosed principal, remains personally liable for performance of the contract even though the agreement was within the agent’s scope of authority.

Question 45

Ozgood is a principal and Flood is his agent. Ozgood is totally dissatisfied with the agency relationship and wishes to terminate it. In which of the following situations does Ozgood not have the power to terminate the relationship?

1. Ozgood and Flood have agreed that their agency is irrevocable.
2. Flood has been appointed as Ozgood’s agent pursuant to a power of attorney.
3. Flood is an agent coupled with an interest.
4. The agency agreement is in writing and provides for a specific duration which has not elapsed.

Answer 45

Flood is an agent coupled with an interest.

Normally a principal has the power to terminate an agency relationship even though it would constitute a breach to do so. However, where the agency is an agency coupled with an interest (i.e., where the agent owns part of the subject matter, the principal does not have the power to terminate the relationship).

Note: Principal or agent may terminate agency

• Party that terminates is liable for breach of contract if termination is before specified period of time

Question 46

Forming an agency relationship requires that

1. The agreement between the principal and agent be supported by consideration.
2. The principal and agent not be minors.
3. Both the principal and agent consent to the agency.
4. The agent’s authority be limited to the express grant of authority in the agency agreement.

Answer 46

Both the principal and agent consent to the agency.

Agency is a relationship between two parties, whereby one party (agent) agrees to act on behalf of the other party (principal). A contract is not required but is frequently present.

• Agent is subject to control of principal
• Agent is a fiduciary and must act for the benefit of principal
• Agent can be used for other purposes, but we are primarily concerned with agents that agree to act for the principal in business transactions with third parties
• Agent’s specific authority is determined by the principal but generally agent has authority to bind the principal contractually with third parties

Question 47

Marcross is an agent for Fashion Frocks, Ltd. As such, Marcross made a contract for and on behalf of Fashion Frocks with Sowinski Fabrics which was not authorized and upon which Fashion has disclaimed liability. Sowinski has sued Fashion on the contract asserting that Marcross had the apparent authority to make it. In considering the factors which will determine the scope of Marcross’ apparent authority, which of the following would not be important?

1. The custom and usages of the business.
2. Previous acquiescence by the principal in similar contracts made by Marcross.
3. The express limitations placed upon Marcross’ authority which were not known by Sowinski.
4. The status of Marcross’ position in Fashion Frocks.

Answer 47

The express limitations placed upon Marcross’ authority which were not known by Sowinski.

Because a third person’s reasonable interpretation of a principal’s representations measures apparent authority. Express limitations on Marcross’ authority, which were not known by Sowinski, are called secret limitations. These limitations do not alter an agent’s apparent authority since the third party can assume there are no limits on the agent’s normal authority unless informed to the contrary.