- Under the law of agency, which of the following describes how an agency relationship may be terminated?
Answer: An agency relationship may be terminated by: either party revoking or renouncing the relationship, completion of the agency's purpose, expiration of the agreed term, death or incapacity of either party, or certain other events such as bankruptcy.
Agency relationships may be terminated in several ways: (1) by act of the parties - the principal may revoke the agent's authority or the agent may renounce the agency; (2) by operation of law - death or mental incapacity of either party, bankruptcy of either party in some cases, destruction of the subject matter, or a change in law making the agency purpose illegal; and (3) upon completion of the purpose for which the agency was created or expiration of the agreed term. Answer A is incorrect because agents may also terminate by renunciation. Answer B is incorrect because either party may terminate unilaterally (though this may give rise to liability for breach of contract). Answer C is incorrect because there is no automatic one-year termination.
- A corporate officer (CEO) enters into a contract on behalf of the corporation that exceeds the officer's actual authority under the corporate bylaws. Is the corporation bound by this contract?
Answer: Yes, if the third party was unaware of the bylaw limitation and the CEO's position normally carries authority to enter such contracts, the corporation may be bound under the apparent authority doctrine.
Corporate officers, like other agents, may have apparent authority that extends beyond their actual (express or implied) authority. A CEO typically has broad apparent authority to enter contracts on behalf of the corporation, and a third party who deals with the CEO without knowledge of internal bylaw limitations may reasonably rely on that apparent authority. The corporation would be bound. Answer B is incorrect because apparent authority can extend beyond express authority. Answer C is incorrect because there is no 30-day approval requirement under apparent authority. Answer D is incorrect because third parties are generally not charged with constructive knowledge of internal documents like bylaws.
- Which of the following correctly identifies when a principal may be liable for the agent's misrepresentation to a third party?
Answer: The principal may be liable for the agent's misrepresentation if it was made within the scope of authority or within the scope of apparent authority created by the principal, even if the principal did not authorize or know of the specific misrepresentation.
A principal may be vicariously liable for an agent's fraudulent or negligent misrepresentation if the misrepresentation was made within the scope of actual or apparent authority. The principal creates the situation enabling the agent to make representations, and the third party who relies on those representations may hold the principal responsible. Answer A is incorrect because vicarious liability extends to agent misrepresentations within scope. Answer B is incorrect because vicarious liability is a fundamental principle of agency law. Answer D is incorrect because oral misrepresentations within scope can also bind the principal.
- An agent purchases office supplies on behalf of a principal. The agent's purchase contract does not mention that they are acting for anyone else. Is this an example of a disclosed, partially disclosed, or undisclosed principal situation?
Answer: Undisclosed principal, because the third party does not know the agent is acting for a principal.
An undisclosed principal situation arises when a third party does not know that the agent is acting on behalf of any principal - they believe they are dealing with the agent personally. In this scenario, the agent purchased supplies without indicating they were acting for anyone else. The third party assumed they were dealing directly with the agent. Both the agent and the undisclosed principal may be held liable on the contract when the principal's identity is later revealed. Answer B is incorrect because business purpose has no bearing on the disclosure classification. Answer C describes a partially disclosed situation (where the third party knows there is a principal but not the principal's identity). Answer D is incorrect because the principal relationship exists even without disclosure.
- Which of the following circumstances would create an 'agency coupled with an interest,' making the agency irrevocable?
Answer: An agent who has a personal financial interest in the subject matter of the agency itself (not just an interest in receiving compensation for services), such as a lender who is given authority to collect debts on the borrower's behalf to repay the lender's own loan.
An agency coupled with an interest is one where the agent has a property interest in the subject matter of the agency itself (not merely an interest in earning compensation). This makes the agency irrevocable - the principal cannot terminate it without the agent's consent. A classic example is when a creditor is given authority to sell the debtor's property and apply the proceeds to the debt - the creditor has a direct financial interest in the subject matter (the property and the proceeds). Answer B (long service) does not create irrevocability. Answer C (power of attorney) is generally revocable unless it is both durable and coupled with an interest. Answer D (moral interest) does not create an irrevocable agency.
- In which of the following situations is an agency relationship most likely to exist?
Answer: A sales manager directs their sales team on which customers to call, what products to promote, and how to conduct sales calls.
An agency relationship (employment relationship) is most likely to exist when the principal controls not only the result but also the manner and means by which the work is performed. A sales manager who directs the sales team on methods, targets, and conduct is exercising the right to control the manner of work, which indicates an employer-employee (agency) relationship. Answer A describes an independent contractor relationship (no control over delivery methods). Answer B also describes independent contractor-like characteristics (control of result only). Answer D is a landlord-tenant relationship, not an agency.
- Which of the following best describes the relationship between an employer and an employee under agency law?
Answer: An employee is a type of agent whose principal is the employer; the employer has the right to control not only the result of the employee's work but also the manner and means of performance.
Under agency law, an employee is a type of agent. The employer-employee relationship satisfies the agency elements: the employee acts on behalf of the employer (principal), and the employer has the right to control not only the result of the work but also how the work is performed. This control over manner and means distinguishes employees from independent contractors. As agents, employees can bind the employer within the scope of their authority. Answer A is incorrect because employees are not independent contractors. Answer B is incorrect because signing authority is not required for agency. Answer C is incorrect because salary is irrelevant to agency classification.
- Which of the following correctly identifies when the death of the principal terminates an agency relationship?
Answer: The death of the principal terminates the agent's actual authority immediately (under common law), even if the agent does not know of the death; however, some jurisdictions and the Restatement protect third parties who deal with the agent in good faith without knowledge of the principal's death.
Under traditional common law, the death of the principal immediately terminates the agent's actual authority, even if the agent is unaware of the death. However, the modern trend (including the Restatement Third of Agency) and many statutes protect third parties who deal with the agent without knowledge of the principal's death, treating the agent's authority as surviving for purposes of protecting innocent third parties. A durable power of attorney is specifically designed to survive the principal's incapacity (but not death). Answer B is incorrect because under traditional law, actual authority terminates at death regardless of notice. Answer C is incorrect because the agent's willingness is irrelevant. Answer D incorrectly limits the rule to real estate.
- Which of the following correctly identifies a 'special agent' as opposed to a 'general agent' in agency law?
Answer: A special agent is authorized to perform only a specific act or a limited category of acts on behalf of the principal, while a general agent has authority to conduct a series of transactions and manage a broader range of the principal's affairs.
A general agent is authorized to conduct a series of transactions involving a continuity of service, such as a manager who runs a business on behalf of an absent owner. A special agent is authorized to perform only a specific transaction or a limited set of acts, such as a real estate agent retained only to sell a specific property. The scope of the special agent's authority is narrowly defined. Answer A reverses the comparison (special agents have narrower, not broader, authority). Answer B incorrectly describes the general agent. Answer D incorrectly requires licensing for special agents.
- Under agency law, what are the principal's duties to the agent?
Answer: The principal owes the agent duties including: to compensate the agent as agreed (if compensation was promised), to reimburse the agent for authorized expenses incurred on the principal's behalf, and to indemnify the agent for losses suffered while acting within authority.
The agency relationship creates obligations that run both ways. The principal owes the agent: (1) to pay agreed compensation; (2) to reimburse reasonable expenses incurred in conducting the agency business; (3) to indemnify the agent against losses suffered or liability incurred while acting within authority; and (4) not to interfere with the agent's performance. Answer A is incorrect because the relationship creates mutual duties. Answer C is incorrect because instructions alone are not the only duty. Answer D is incorrect because the principal defines the scope of authority and is not required to provide unlimited authority.
- A power of attorney is a written instrument by which a principal appoints an agent. What is a 'durable' power of attorney?
Answer: A power of attorney that remains effective even if the principal subsequently becomes incapacitated or incompetent, because it contains language specifically stating that it survives the principal's incapacity.
A durable power of attorney (DPOA) is a power of attorney that contains specific language (such as 'this power of attorney shall not be affected by my subsequent disability or incapacity') that allows the agent's authority to survive the principal's later incapacity. Under common law, a principal's incapacity would automatically terminate the agency; the DPOA is an exception created by statute in all states. Answer A is incorrect because a DPOA is still revocable by a competent principal. Answer C is incorrect because DPOAs do not automatically renew. Answer D is incorrect because the scope of authority granted is separate from the durability feature.
- A principal hires an agent to negotiate a lease for office space. The agent's actual authority is to lease space at no more than $5,000 per month. The agent, holding themselves out as having broader authority, leases space at $7,000 per month. The landlord has no knowledge of any restriction. Under which doctrine would the principal most likely be bound?
Answer: The principal would most likely be bound under apparent authority, since the agent was authorized to negotiate leases (which creates apparent authority to do so) and the landlord had no notice of the internal restriction.
The agent was given actual authority to negotiate leases, which creates apparent authority to enter into leases on standard commercial terms. The $5,000 limitation was an internal restriction unknown to the landlord. Under apparent authority, the principal is bound by the agent's contract because the landlord reasonably believed the agent had authority to negotiate the lease. The principal's remedy is against the agent for breaching actual authority. Answer A is incorrect because ratification applies to unauthorized acts adopted after the fact, not to apparent authority situations. Answer B ignores apparent authority. Answer C describes tort liability, not contract authority.
- Which of the following scenarios most clearly illustrates the creation of an agency by necessity?
Answer: A cargo ship's captain, unable to reach the ship's owners, sells perishable cargo to prevent total loss when the refrigeration system fails at sea.
Agency by necessity arises in emergency situations where a person must act on another's behalf to prevent harm or loss, and there is no opportunity to consult with the actual principal. A ship's captain who sells perishable cargo to prevent total loss when unable to reach the owners is acting under necessity to protect the owner's interests. The authority arises from the emergency, not from any express or implied grant. Answer A describes a failed attempt to create express authority. Answer B describes implied authority or a belief-based action. Answer C is express authority.
- Which of the following correctly identifies the essential elements that must exist for an agency relationship to be created?
Answer: Consent of both the principal and the agent, the agent's agreement to act on behalf of the principal, and the principal's right to control the agent's conduct.
An agency relationship requires three core elements: (1) mutual consent - both the principal and agent must agree to the relationship; (2) the agent acts on behalf of the principal - the agent represents the principal's interests; and (3) the principal has the right to control the agent's conduct. No written agreement, formal document, or compensation is required. Agency may be created by informal oral agreement. Answer A is incorrect because writing and compensation are not required. Answer C is incorrect because a power of attorney and consideration are not mandatory. Answer D is incorrect because no court approval or state registration is required.
- Which of the following correctly describes the concept of 'agency by estoppel'?
Answer: Agency by estoppel (also called apparent authority or ostensible agency) arises when a principal's conduct causes a third party to reasonably believe that an agent has authority, and the third party relies on that belief to their detriment; the principal is estopped from denying the agency.
Agency by estoppel is closely related to apparent authority. It arises when a principal's words or conduct reasonably lead a third party to believe that an agent has authority, and the third party relies on this belief to their detriment. The principal is then estopped (barred) from denying that an agency existed. This prevents principals from benefiting from third parties' reasonable reliance while disclaiming the agency relationship. Answer A incorrectly describes a modification scenario. Answer C is incorrect because gratuitous services do not automatically create agency by estoppel. Answer D is incorrect because this is a civil, not criminal, doctrine.
- Under agency law, which of the following describes the agent's duty to obey the principal's instructions?
Answer: An agent must follow all reasonable, lawful instructions from the principal; the agent need not and must not follow instructions that require illegal or unethical conduct.
An agent owes the principal a duty to obey reasonable and lawful instructions. The agent is obligated to act in accordance with the principal's direction within the scope of the agency. However, this duty does not require the agent to perform illegal acts or acts that violate professional ethics. An agent must refuse instructions that are illegal or unethical. Answer A is incorrect because illegal or unethical instructions need not be followed. Answer C is incorrect because personal disagreement with a lawful instruction does not justify non-compliance. Answer D is incorrect because the duty to obey applies to oral instructions as well.
- Under agency law, a 'gratuitous agent' is one who acts without compensation. Which of the following correctly describes the legal status of a gratuitous agent?
Answer: A gratuitous agent has the same authority to bind the principal and owes the same fiduciary duties as a compensated agent; no consideration is required for an agency relationship.
Agency does not require compensation (consideration). A gratuitous agent is legally recognized as an agent and has the same power to bind the principal within the scope of their authority. The gratuitous agent also owes the same fiduciary duties (loyalty, care, obedience) as a compensated agent. However, a gratuitous agent may have a lower standard of care in some jurisdictions because they are performing services as a favor. Answer A is incorrect because authority is not contingent on compensation. Answer B is incorrect because fiduciary duties exist regardless of compensation. Answer C is incorrect because agency does not require consideration.
- An agent is authorized to sell property for the principal for no less than $200,000. The agent instead sells the property for $180,000 without the principal's knowledge. Which of the following correctly describes the legal consequences?
Answer: The sale may be binding on the principal if the buyer had no notice of the price restriction (apparent authority), but the agent is liable to the principal for breaching their actual authority and any resulting loss.
Even though the agent exceeded their actual authority (sell for no less than $200,000) by accepting $180,000, if the third party (buyer) was unaware of the price restriction, the principal may be bound under apparent authority principles. The agent had apparent authority to sell based on their role. However, the agent has breached their duty to the principal by violating the express restriction, and the principal may recover damages from the agent for the $20,000 shortfall. Answer A is incorrect because the contract is not automatically void if apparent authority existed. Answer B is incorrect because the agent breached their duty. Answer C is the right outcome (the sale may bind) but doesn't address the agent's breach.
- Which of the following correctly describes the duties an agent owes to the principal in an agency relationship?
Answer: The agent owes fiduciary duties including: loyalty (acting in the principal's best interests), care (performing competently), obedience (following lawful instructions), and accounting (maintaining accurate records of the principal's property).
An agent owes the principal several fiduciary duties: (1) duty of loyalty - to act solely in the principal's best interests and avoid conflicts; (2) duty of care - to act with reasonable skill and competence; (3) duty to obey - to follow lawful and reasonable instructions; (4) duty of accounting - to account for all money or property belonging to the principal; and (5) duty to inform - to communicate information relevant to the agency. Answer A is incorrect because loyalty is just one of several duties. Answer C is incorrect because agents owe primary fiduciary duties to the principal. Answer D incorrectly limits the duties to task completion only.
- A principal appoints an agent and expressly limits the agent's authority to make purchases under $5,000. The agent purchases equipment for $8,000 on credit from a vendor who has no knowledge of the limitation. Is the principal bound?
Answer: Yes, the principal is bound under apparent authority because the vendor had no notice of the restriction, and the agent's position normally carries authority to make such purchases.
Secret limitations on an agent's authority do not bind third parties who have no notice of those limitations. The vendor dealt with the agent without knowledge of the $5,000 cap, and the agent's general role would normally carry authority to make equipment purchases. Under apparent authority, the principal is bound because the principal's conduct (appointing the agent to a role that normally includes such purchases) led the vendor to reasonably believe the agent had authority. The principal's remedy is against the agent for exceeding actual authority. Answer A is correct. Answer B addresses only the exceeded actual authority and ignores apparent authority; actual authority and apparent authority are independent bases for binding the principal, and exceeding actual authority does not defeat apparent authority when the third party had no notice of the restriction. Answer C is incorrect because secret restrictions do not bind innocent third parties who had no knowledge of the limitation. Answer D is incorrect because prior course of dealing is one factor supporting apparent authority but is not the only basis for it; apparent authority arises from the principal's overall conduct and the agent's position.
