Overview
Agency is a relationship in which one party (agent) is authorized to act on behalf of another party (principal). The law of agency is concerned with the rights, duties, and liabilities of the parties in an agency relationship. Important to this relationship is the fact that the agent has a fiduciary duty to act in the best interest of the principal. A good understanding of this module is important because business structures (Module 25) apply the concepts of agency frequently.
A. Characteristics
B. Examples of Principals and Agents
C. Methods of Creation
D. Duties (Obligations) and Rights
E. Liability to Third Parties
F. Termination of Principal-Agent Relationship
Key Terms
Multiple-Choice Questions
Multiple-Choice Answers and Explanations
Simulation
Simulation Solution
The CPA exam emphasizes the creation and termination of the agency relationship, the fiduciary duties that the agent owes to the principal, the undisclosed as well as the disclosed principal relationship, unauthorized acts or torts committed by the agent within the course and scope of the agency relationship and principal’s liability for agent’s unauthorized contracts. Before beginning the reading you should review the key terms at the end of the module.
Actual authority. The power given by a principal to an agent that allows the agent to enter into contracts upon the principal’s behalf.
Agent. A party who works on behalf of another party known as the principal.
Apparent authority. When a third party reasonably believes that an agent has actual authority even though the agent lacks actual authority.
Disclosed principal. A principal who is known by the third party.
Fiduciary duties. The obligations that an agent owes to a principal that require the agent to act in the best interests of the principal.
Independent contractor. A party who works for another party, but is not subject to the control of the other party; therefore an independent contractor generally does not create liability for the other party.
Joint and several liability. When a principal and agent can both be held liable by the third party or the third party may choose to sever liability and only hold either the principal or the agent liable.
Partially disclosed principal. When the third party knows of the existence of the principal, but does not know the principal’s identity.
Principal. The party for whom the agent acts.
Ratification. When a principal approves of a contract that was entered into by an agent lacking authority. Ratification means that the principal is now liable for the contract.
Respondeat superior (Latin). Literally means that the superior should be held responsible. When an agent commits a tort in the scope of employment, then the principal is liable for the agent’s tort.
Scope of employment. Agent’s actions that occur substantially in the work environment.
Third party. Term in principal/agent law that applies to a party who is interacting with either the principal or the agent. The principal and agent are the first two parties.
Undisclosed principal. When the third party to a contract does not know that a principal exists.
1. Noll gives Carr a written power of attorney. Which of the following statements is correct regarding this power of attorney?
a. It must be signed by both Noll and Carr.
b. It must be for a definite period of time.
c. It may continue in existence after Noll’s death.
d. It may limit Carr’s authority to specific transactions.
2. A principal and agent relationship requires a
a. Written agreement.
b. Power of attorney.
c. Meeting of the minds and consent to act.
d. Specified consideration.
3. Lee repairs high-speed looms for Sew Corp., a clothing manufacturer. Which of the following circumstances best indicates that Lee is an employee of Sew and not an independent contractor?
a. Lee’s work is not supervised by Sew personnel.
b. Lee’s tools are owned by Lee.
c. Lee is paid weekly by Sew.
d. Lee’s work requires a high degree of technical skill.
4. Generally, a disclosed principal will be liable to third parties for its agent’s unauthorized misrepresentations if the agent is an
Employee | Independent Contractor | |
a. | Yes | Yes |
b. | Yes | No |
c. | No | Yes |
d. | No | No |
5. Which of the following terms best describes the relationship between a corporation and the CPA it hires to audit corporate books?
a. Employer and employee.
b. Employer and independent contractor.
c. Master and servant.
d. Employer and principal.
6. Harris, while delivering parts to a customer for his employer, negligently ran into and injured Wolfe. Harris had been asked by his employer to make these deliveries even though Harris was using his personal pickup truck. Neither Harris nor the employer had insurance to cover this injury. Which of the following is correct?
a. Wolfe can hold Harris liable but not the employer because Harris was driving his own vehicle.
b. Wolfe can hold the employer liable but not Harris because the employer had asked Harris to make the deliveries.
c. Wolfe can hold either Harris or the employer or both liable.
d. Wolfe can hold either Harris or the employer liable but not both.
7. Chiron employed Sherwin as a mechanic. Chiron has various rules that all employed mechanics must follow. One day a customer was injured severely when her car’s brakes failed. It was shown that her car’s brakes failed because Sherwin did not follow one of the specific rules of Chiron. Which of the following is correct?
a. Sherwin is liable to the customer but Chiron is not because the accident was caused by Sherwin breaking one of Chiron’s specific rules.
b. The customer should sue Sherwin for fraud, not negligence, because Sherwin broke a rule of the employer.
c. The customer can hold Chiron liable but not Sherwin, because her contract to get the car repaired was with Chiron.
d. The customer may choose to recover damages from both Chiron and Sherwin.
8. Pine, an employee of Global Messenger Co., was hired to deliver highly secret corporate documents for Global’s clients throughout the world. Unknown to Global, Pine carried a concealed pistol. While Pine was making a delivery, he suspected an attempt was being made to steal the package, drew his gun and shot Kent, an innocent passerby. Kent will not recover damages from Global if
a. Global discovered that Pine carried a weapon and did nothing about it.
b. Global instructed its messengers not to carry weapons.
c. Pine was correct and an attempt was being made to steal the package.
d. Pine’s weapon was unlicensed and illegal.
9. When an agent acts for an undisclosed principal, the principal will not be liable to third parties if the
a. Principal ratifies a contract entered into by the agent.
b. Agent acts within an implied grant of authority.
c. Agent acts outside the grant of actual authority.
d. Principal seeks to conceal the agency relationship.
10. Trent was 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 twenty-one years of age.
II. Post would be liable to Trent if the collection was destroyed before Trent found a purchaser.
a. I only.
b. II only.
c. Both I and II.
d. Neither I nor II.
11. Blue, a used car dealer, appointed Gage as an agent to sell Blue’s cars. Gage was authorized by Blue to appoint subagents to assist in the sale of the cars. Vond was appointed as a subagent. To whom does Vond owe a fiduciary duty?
a. Gage only.
b. Blue only.
c. Both Blue and Gage.
d. Neither Blue nor Gage.
12. Which of the following under agency law is not a type of authority that an agent might have?
a. Actual express.
b. Actual implied.
c. Resulting.
d. Apparent.
13. Which of the following actions requires an agent for a corporation to have a written agency agreement?
a. Purchasing office supplies for the principal’s business.
b. Purchasing an interest in undeveloped land for the principal.
c. Hiring an independent general contractor to renovate the principal’s office building.
d. Retaining an attorney to collect a business debt owed the principal.
14. Frost’s accountant and business manager has the authority to
a. Mortgage Frost’s business property.
b. Obtain bank loans for Frost.
c. Insure Frost’s property against fire loss.
d. Sell Frost’s business.
15. Ames, claiming to be an agent of Clar Corporation, makes a contract with Trimon in the name of Clar Corporation. Later, Clar Corporation, for the first time, learns what Ames has done and notifies Trimon of the truth that Ames was not an agent of Clar Corporation. Which of the following statements is incorrect?
a. Clar Corporation may ratify this contract if it does so with the entire contract.
b. Trimon may withdraw from the contract before Clar attempts to ratify it.
c. Clar Corporation may ratify this contract by performing under the contract without stating that it is ratifying.
d. Trimon may enforce this contract even if Clar Corporation does not wish to be bound.
16. Which of the following generally may ratify a contract that was agreed to by his/her agent without authority from the principal?
17. Beele authorized McDonald to be his agent to go to Denver and purchase some real estate that would be suitable to open up a branch office for Beele’s business. He tells McDonald not to pay more than $125,000 for the real estate. McDonald contacts York to buy some real estate she owns. York calls Beele and Beele tells York that McDonald is his agent to buy the real estate. Nothing is mentioned about the $125,000 limitation. After negotiations between McDonald and York, McDonald signs a contract purchasing the real estate for $140,000. McDonald signed it indicating on the contract that he was signing as agent for Beele.
Further facts show that the real estate is worth $140,000. Which of the following is correct?
a. There is a fully enforceable contract between Beele and York for $140,000.
b. Beele may enforce the contract with York for $125,000.
c. There is no contract between Beele and York because McDonald did not have authority to purchase the real estate for $140,000.
d. York may require that Beele pay $140,000 because the real estate was worth $140,000 not $125,000.
18. Young Corp. hired 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?
a. Young does not have the power to dismiss Wilson during the six-month period without cause.
b. Wilson is obligated to act solely in Young’s interest in matters concerning Young’s business.
c. The agreement between Young and Wilson is not enforceable unless it is in writing and signed by Wilson.
d. The agreement between Young and Wilson formed an agency coupled with an interest.
19. Which of the following statement(s) concerning agency law is (are) true?
I. A contract is needed to have an agency relationship.
II. The agent owes a fiduciary duty to the principal.
III. The principal owes a fiduciary duty to the agent.
a. I and II only.
b. I and III only.
c. II only.
d. I, II, and III.
20. 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,
a. The broker will have the same actual authority as if Easy’s identity has been disclosed.
b. Easy will be bound by the contract because of the broker’s apparent authority.
c. Easy will not be liable for any negligent acts committed by the broker while acting on Easy’s behalf.
d. The broker will not be personally bound by the contract because the broker has express authority to act.
21. An agent will usually be liable under a contract made with a third party when the agent is acting on behalf of a(n)
Disclosed principal | Undisclosed principal | |
a. | Yes | Yes |
b. | Yes | No |
c. | No | Yes |
d. | No | No |
22. When a valid contract is entered into by an agent on the principal’s behalf, in a nondisclosed principal situation, which of the following statements concerning the principal’s liability is correct?
The principal may be held liable once disclosed | The principal must ratify the contract to be held liable | |
a. | Yes | Yes |
b. | Yes | No |
c. | No | Yes |
d. | No | No |
23. Which of the following rights will a third party be entitled to after validly contracting with an agent representing an undisclosed principal?
a. Disclosure of the principal by the agent.
b. Ratification of the contract by the principal.
c. Performance of the contract by the agent.
d. Election to void the contract after disclosure of the principal.
24. Able, as agent for Baker, an undisclosed principal, contracted with Safe to purchase an antique car. In payment, Able issued his personal check to Safe. Able could not cover the check but expected Baker to give him cash to deposit before the check was presented for payment. Baker did not do so and the check was dishonored. Baker’s identity became known to Safe. Safe may not recover from
a. Baker individually on the contract.
b. Able individually on the contract.
c. Baker individually on the check.
d. Able individually on the check.
25. Thorp was a purchasing agent for Ogden, a sole proprietor, and had the express authority to place purchase orders with Ogden’s suppliers. Thorp placed 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?
a. Ogden will be liable because Datz was not informed of Ogden’s incapacity.
b. Ogden will be liable because Thorp acted with express authority.
c. Ogden will not be liable because Thorp’s agency ended when Ogden was declared incompetent.
d. Ogden will not be liable because Ogden was a nondisclosed principal.
26. Generally, an agency relationship is terminated by operation of law in all of the following situations except the
a. Principal’s death.
b. Principal’s incapacity.
c. Agent’s renunciation of the agency.
d. Agent’s failure to acquire a necessary business license.
27. Bolt Corp. dismissed Ace as its general sales agent and notified 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 was 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
a. Lose, because Ace lacked any implied authority to make the contract.
b. Lose, because Ace lacked any express authority to make the contract.
c. Win, because Bolt’s notice was inadequate to terminate Ace’s apparent authority.
d. Win, because a principal is an insurer of an agent’s acts.
1. (d) A power of attorney is written authority conferred 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 the principal and the agent need not be contractual. Answer (a) is incorrect because 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 (b) 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.
4. (b) Generally, principals are liable for the unauthorized misrepresentations of employees because the employees are subject to the control or supervision of the principal. Principals are not responsible for the misrepresentations of an independent contractor since the principal does not control the independent contractor’s actions.
5. (b) The main factors that are used to determine whether a party is an independent contractor or an agents are the amount of control that the principal exercises over the party; an auditor is not subject to the control of the corporation. The auditor is probably paid by the job; this is another characteristic of an independent contractor relationship. Besides the legal reasoning provided above, answers (a) and (c) are virtually the same, and they cannot both be correct. Answer (d) does not make sense since an employer and a principal are the same entity.
6. (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 damages from both.
7. (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 failure to properly repair the vehicle is a negligent act that was in the scope of employment. In such situations, both the principal and agent can be held liable. Answer (b) is incorrect because there was no fraud present here. Fraud requires an intentional misrepresentation of material facts. There is no evidence of such conduct present here. Answer (c) is incorrect because the customer may recover from both under tort law. Additionally, the contract has no bearing on a matter involving a tort.
8. (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 of respondeat 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 of an innocent passerby should establish at least negligence for which the employer and the employee are liable.
9. (c) A principal, whether disclosed, partially disclosed, 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. Therefore, 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 parties if the agent acts outside the grant of actual authority. Answer (a) is incorrect because when a principal ratifies a contract it is liable for the terms of the contract. Answer (b) is incorrect because when agents act with any type of authority, then the principal is liable. Answer (d) is incorrect because whether the principal tried to hide the agency relationship is irrelevant to determine the principal’s liability. The critical issue is did the agent act with some type of authority.
10. (d) An agent must merely have sufficient mental and physical ability to carry out instructions of his/her 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.
11. (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 Vond as a subagent, legally Bond is an agent both of Blue and Gage. Therefore, Vond owes a fiduciary duty to both Blue and Gage making (a), (b), and (d) all incorrect.
12. (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 authority 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.
13. (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.
14. (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.
15. (d) Since Ames had no express, implied, or actual authority, Trimon cannot enforce the contract. Apparent authority is not present either; there are no facts present to show that Trimon was reasonable to believe Ames’ unsubstantiated claim. 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.
16. (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. Since a third party would not know of the existence of an undisclosed principal, ratification is not possible in that circumstance.
17. (a) Since Beele 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 Beele 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 Beele’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 Beele, it is because Beele gave authority to McDonald rather than how much the real estate is worth.
18. (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 approves 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 dismiss the agent. However, the principal does not necessarily have the right to terminate the relationship. In certain situations the dismissed agent could sue for breach of contract.
19. (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.
20. (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.
21. (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.
22. (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.
23. (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 because the third party generally is not allowed the option of voiding the contract after disclosure of the principal.
24. (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.
25. (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.
26. (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 insane, 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 (c), agent’s renunciation of the agency, will not cause the termination of an agency relationship.
27. (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.
Lace Computer Sales Corp. orally contracted with Banks, an independent consultant, for Banks to work part time as Lace’s agent to perform Lace’s customers’ service calls. Banks, a computer programmer and software designer, was authorized to customize Lace’s software to the customers’ needs, on a commission basis, but was specifically told not to sell Lace’s computers.
On March 15, Banks made a service call on Clear Co. to repair Clear’s computer. Banks had previously called on Clear, customized Lace’s software for Clear, and collected cash payments for the work performed. During the call, Banks convinced Clear to buy an upgraded Lace computer for a price much lower than Lace would normally charge. Clear had previously purchased computers from other Lace agents and had made substantial cash down payments to the agents. Clear had no knowledge that the price was lower than normal. Banks received a $1,000 cash down payment and promised to deliver the computer the next week. Banks never turned in the down payment and left town. When Clear called the following week to have the computer delivered, Lace refused to honor Clear’s order.
Items 1 through 5 relate to the relationships between the parties. For each item, select from List I whether only statement I is correct, whether only statement II is correct, whether both statements I and II are correct, or whether neither statement I nor II is correct.
List I |
|
A. | I only |
B. | II only |
C. | Both I and II |
D. | Neither I nor II |
1. (B) Statement I is incorrect because normally an agency agreement need not be in writing unless the agency contract cannot be completed in one year. Statement II is correct because Lace authorized Banks to be Lace’s agent.
2. (A) Statement I is correct because Banks was given actual, express authority by Lace to perform Lace’s customers’ service calls and to customize Lace’s software to the customer’s needs. As an extension to this actual, express authority, Clear can also rely on what is customary and ordinary for such an agent to be able to do under implied authority. Statement II is incorrect because Banks did not have express authority to sell the computer. In fact, Banks was told not to sell Lace’s computers.
3. (B) Banks breached his/her fiduciary duty to Lace and breached his/her duty to follow instructions when s/he sold the computer. This, however, does not automatically terminate their agreement. Statement II is correct because Banks had dealt with Clear before as Lace’s agent. Therefore, Clear must receive actual notice to terminate the apparent authority.
4. (D) Statement I is incorrect because Banks had apparent authority to sell the computer even though Banks did not have actual authority to do so. Statement II is incorrect because Lace is bound by the contract with Clear. Any modification of the contract must be made by both parties to the contract, not just one.
5. (A) Statement I is correct because since Lace was a disclosed principal, only Lace, the principal, is liable under the contract to Clear, the third party. Banks, the agent, is not. For the same reason, statement II is incorrect.
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