Ch.14 Agency Law

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

• Employee: Yes

• Independent Contractor: Yes

• Independent Contractor: No

• Employee: No

Answer explanation

An employee's actions are typically within the scope of their employment, making the disclosed principal liable for unauthorized misrepresentations. In contrast, independent contractors operate independently, so the principal is not liable.

The Silvas wish to sell their house and they talk to Bisbee, a real estate agent. Bisbee convinces the Silvas to form a joint venture with him. He would take responsibility for selling the property in exchange for 10% of the proceeds. The Silvas want at least $80,000. Bisbee tells the Silvas that he has sold the property for $100,000 and delivers to them a check for $90,000. The Silvas are pleased until they learn that Bisbee was an owner of the corporation that bought the property and that Bisbee thought it was worth more than $100,000. The Silvas wish to sue Bisbee. Which of the following is true?

• Since the Silvas got more than they were expecting, they have no valid lawsuit.

• Because Bisbee had an undisclosed conflict of interest, the Silvas can win.

Answer explanation

Bisbee's undisclosed ownership in the buying corporation creates a conflict of interest. This lack of transparency can lead to a valid lawsuit for the Silvas, as they were misled about the true nature of the transaction.

Under the agent's duty to account, which of the following acts must a gratuitous agent perform?

• Commingle Funds: No

• Account for the principal’s property: Yes

• Commingle Funds: Yes

• Account for the principal’s property: No

Answer explanation

A gratuitous agent must account for the principal's property, ensuring transparency and proper management. However, they should not commingle funds, as this could lead to confusion and mismanagement of the principal's assets.

Which of the following statements represent(s) a principal's duty to an agent who works on a commission basis?

I. The principal is required to maintain pertinent records, account to the agent, and pay the agent according to the terms of their agreement.

II. The principal is required to reimburse the agent for all authorized expenses incurred, unless the agreement calls for the agent to pay expenses out of the commission.

• I only.

• II only.

• Both I and II.

• Neither I nor II.

Answer explanation

Both statements I and II accurately reflect a principal's duties to an agent on commission. The principal must maintain records and pay the agent as agreed, and reimburse authorized expenses unless stated otherwise.

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 explanation

For Ace to ratify the contract, it must know all material facts about it. This ensures that Ace makes an informed decision regarding the contract, which is essential for valid ratification.

TUV Company owns a tall office building. For many years, the Quixotic Washing Co. (QW) has sent its workers to the building bi-monthly to wash TUV's windows using QW’s equipment. In return, TUV pays QW $1,000 bi-monthly. Today, one of QW’s employees carelessly dropped a squeegee which landed on a pedestrian below, injuring him. The employee was not following QW’s safety protocols. The pedestrian sued TUV in negligence. Which of the following is true?

• The pedestrian can probably recover from TUV because the QW employee, it is specified in the facts, dropped the squeegee carelessly.

• The QW worker is probably an independent contractor of TUV’s and of QW.

• TUV is probably liable because its relationship with QW has lasted many years.

• TUV is probably not liable because too many other factors point toward QW being an independent contractor.

Answer explanation

TUV is likely not liable because the QW employee is considered an independent contractor. Factors such as the nature of the work and the lack of control by TUV over QW's employees support this conclusion.

Bob entered a contract with from Autos-R-Us to buy a car in exchange for ten installment payments secured by the car itself. In that written contract, A-R-U reserved the right to repossess the car if Bob failed to make any payment. A few months later, A-R-U instructed its employee, Fred, to repossess the automobile on the ground that Brian had defaulted in making the third payment. Fred took possession of the car and delivered it to A-R-U. It was then discovered that Brian was NOT in default. Which of the following is incorrect?

• Bob has the right to both a) regain possession of car and
  b) collect damages.

• Bob may sue and collect from either A-R-U or Fred.

• If Fred must pay in damages to Bob, he will be entitled to indemnification from A-R-U.

• Fred is not liable for the wrongful repossession of the car since he was an agent obeying the direct order of A-R-U.

Answer explanation

Fred is not liable for the wrongful repossession because he was acting as an agent of A-R-U, following their direct order. This means he cannot be held personally responsible for the actions taken in the course of his employment.

Mickey Maus Corp. wants to develop a new theme park, so it engages real estate brokers to act on its behalf to acquire land parcels. The brokers are authorized to enter such contracts but are instructed to do so in their names without disclosing Mickey Maus’s identity or relationship to the transaction, i.e., the principal is undisclosed. If a broker enters a contract with a parcel seller on Mickey Maus’s behalf:

• Mickey will be bound by the contract because of the broker’s apparent authority.

• The broker will not be personally bound by the contract because the broker has express authority to act.

• Mickey will not be liable for any negligent acts of the broker committed while acting on Mickey's behalf.

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

Answer explanation

The broker's authority remains the same as if Mickey's identity had been disclosed, allowing the broker to bind Mickey to the contract despite the undisclosed principal status.

Andrea, an agent for Frumpy Frocks, Ltd., made a contract on behalf of Frumpy Frocks with Swaggy Fabrics, which Frumpy did not authorize. Frumpy disclaimed liability on the contract. Swaggy sued Frumpy nonetheless, asserting that Andrea had apparent authority to enter it. Which of the following factors would be UNIMPORTANT to a court determining the scope of Andrea’s apparent authority?

• The customs and usages in the fabric business.

• Previous acquiescence by the principal, Frumpy, in similar contracts that Andrea entered.

• That the express limitations placed upon Andrea’s authority were not known by Swaggy.

• The status of Andrea's position in Frumpy Frocks.

Answer explanation

The express limitations on Andrea's authority are irrelevant to Swaggy's claim of apparent authority. Apparent authority is based on what the third party perceives, not on their knowledge of internal limitations.

Jason Co., a well-regarded manufacturing company, wished to acquire a warehouse site. Jason, the company's namesake, primary shareholder, and CEO, suspected that if Jason Co. negotiated directly to acquire land, any seller would substantially increase the price. So, Jason employed Kent, an agent, to secure lots without disclosing that he was acting for Jason. Jason's officers set down Kent’s authority in writing. Kent entered a contract with Peter to purchase Peter’s lot. Kent also gave Peter a promissory note for $1,000, signed by Kent, as the first payment. Jason then wrote Kent acknowledging the purchase. Jason also disclosed to Peter his identity as Kent’s principal. Which of the following statements about Jason's, Kent's, and Peter's liabilities is CORRECT?

• Peter is not bound on the contract since Kent’s failure to disclose he was Jason Co.’s agent was fraudulent.

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

• Unless Peter formally ratifies the substitution of Jason Co. for Kent, he is not liable.

• Kent has no liability since he was acting expressly on principal Jason's behalf.

Answer explanation

Jason Co., Kent, and Peter are all potentially liable on the contract because Kent acted as an agent, and Jason's later disclosure does not negate the initial contract's validity. Thus, all parties have potential liability.