SU 18

Smith has been engaged as a general sales agent for the Victory Medical Supply Company. Victory, as Smith's principal, owes Smith several duties implied as a matter of law. Which of the following duties is owed by Victory to Smith? A. Not to compete. B. To reimburse Smith for all expenditures as long as they are remotely related to Smith's employment and not specifically prohibited. C. Not to dismiss Smith without cause for one year from the making of the contract if the duration of the contract is indefinite. D. To indemnify Smith for liability for acts done in good faith upon Victory's orders.

D. To indemnify Smith for liability for acts done in good faith upon Victory's orders. Explanation: A principal is under a duty to indemnify the agent for liabilities and to reimburse him or her for expenses incurred while acting in good faith upon the principal's orders. An agent should not suffer loss through his or her actions for the principal. The principal is also under a duty to compensate the agent.

The key characteristic of an employee is that A. His or her physical conduct is controlled or subject to the right of control by the employer. B. (S)he is paid at an hourly rate as contrasted with the payment of a salary. C. (S)he is precluded from making contracts for and on behalf of the employer. D. (S)he lacks apparent authority to bind the employer

A. His or her physical conduct is controlled or subject to the right of control by the employer. Explanation: An employer controls or has the right to control the manner and means of an employee's work.

Eric Farber, a principal, engaged Ethel Waters for 6 months as his exclusive agent to sell specific antiques. A. The creation of such an agency must be in writing. B. If the principal sells the antiques through another agent, he will be liable to Waters for damages. C. The principal does not have the legal power to terminate the agency because it is an agency coupled with an interest. D. Waters has impliedly guaranteed that she will sell the antiques within the 6-month period.

B. If the principal sells the antiques through another agent, he will be liable to Waters for damages. Explanation: Normally, a principal may engage more than one agent to perform any duty. However, when the agreement calls for an exclusive sales agency, that agent has the exclusive right to sell the goods and earn the agreed compensation. If the principal sells through another agent or himself or herself, (s)he will be liable to the original agent for damages.

Under the Restatement of the Law Third, Agency, A. Actual authority does not continue after termination by operation of law. B. Revocation of authorization of the agent must be in writing. C. Apparent authority may still exist after constructive notice of the termination. D. Bankruptcy terminates apparent authority.

C. Apparent authority may still exist after constructive notice of the termination. Explanation: Apparent authority of the agent continues until the third party receives notice. But an effective notification (actual, not constructive) is required if the third party has already dealt with the agent.

Forming an agency relationship requires that A. The agreement between the principal and agent be supported by consideration. B. The principal and agent not be minors. C. Both the principal and agent consent to the agency. D. The agent's authority be limited to the express grant of authority in the agency agreement.

C. Both the principal and agent consent to the agency. Explanation: Agency is an express or implied consensual relationship. Both the principal and agent must manifest consent to the grant of authority. The purpose and subject matter of the agency must be legal. The principal must have legal capacity to perform the act authorized.

Sylvia Sims became an agent for Paul with the power to sell goods furnished by Paul but with the requirement that Sims would guarantee payment to Paul for all credit sales made by Sims. Under the circumstances, A. Sims is an agent coupled with an interest. B. The statute of frauds applies to the above arrangement regardless of the amount of sales Sims makes. C. Sims is a surety with regard to credit sales she makes on Paul's behalf. D. The relationship between Sims and Paul is subject to the federal Fair Labor Standards Act.

C. Sims is a surety with regard to credit sales she makes on Paul's behalf. Explanation: A del credere agent is a sales agent who guarantees his or her customers' obligations. If the customers fail to pay, the sales agent is a surety liable to the principal for their obligations.

Which of the following duties is owed by a principal to an agent? A. Accountability. B. Performance. C. Ratification. D. Indemnification.

D. Indemnification. Explanation: Principals are required to indemnify the agent for losses the agent suffers during the agent's performance of the agency. Also, regardless of whether the agency is gratuitous or contractual, the principal has a duty to indemnify the agent. The indemnity is for losses suffered or expenses incurred while the agent acted (1) as instructed in a legal transaction or (2) in a transaction that the agent did not know to be wrongful.

An agency coupled with an interest will be created by a written agreement providing that A. A borrower will pledge securities to a lender and authorize the lender to sell the securities and apply the proceeds to the loan in the event of default. B. An employee is hired for a period of two years at $40,000 per annum plus 2% of net sales. C. A broker is to receive a 5% sales commission out of the proceeds of the sale of a parcel of land. D. An attorney is to receive 25% of a plaintiff's recovery for personal injuries.

A. A borrower will pledge securities to a lender and authorize the lender to sell the securities and apply the proceeds to the loan in the event of default. Explanation: The lender is an agent with an interest in the subject matter of the agency separate from the principal's and not existing for the principal's benefit. The agent's power to sell the securities is to the agent's but not the principal's advantage because it secures a loan.

ABC Construction decides to use an independent contractor to complete the roof of one of its construction projects. All of the following are true regarding use of the independent contractor except A. ABC can avoid strict liability by engaging a contractor to ensure a safe workplace. B. If ABC negligently selects an independent contractor, ABC is liable for its negligent acts. C. ABC is liable for a contract made by the independent contractor on ABC's behalf if it is ratified by ABC. D. Ultrahazardous activity is usually the subject of strict liability.

A. ABC can avoid strict liability by engaging a contractor to ensure a safe workplace. Explanation: Some duties may not be delegated as a matter of law or public policy, e.g., a duty of an employer to provide employees with a safe workplace. Thus, the employer does not avoid liability by engaging an independent contractor to ensure a safe workplace.

Alice Able, on behalf of Pix Corp., entered into a contract with Sky Corp. by which Sky agreed to sell computer equipment to Pix. Able disclosed to Sky that she was acting on behalf of Pix. However, Able had exceeded her actual authority by entering into the contract with Sky. If Pix does not want to honor the contract, it will nonetheless be held liable if Sky can prove that A. Able had apparent authority to bind Pix. B. Able believed she was acting within the scope of her authority. C. Able was an employee of Pix and not an independent contractor. D. The agency relationship between Pix and Able was formalized in a signed writing.

A. Able had apparent authority to bind Pix. Explanation: Apparent authority results from words or conduct of the principal directed to a third party that reasonably induces the third party to infer that the agent has actual authority. It is a form of estoppel. Express limitations do limit an agent's actual authority. But if they are not known by third parties, they do not affect apparent authority.

The Patient Protection and Affordable Care Act of 2010 (ACA) is intended to increase health insurance coverage by all of the following means except A. Allowing nondependent children up to age 21 to be covered by a parent's policy. B. Expanding Medicaid. C. Creating insurance exchanges and markets in which individuals can buy health insurance. D. Providing insurance premium subsidies for individuals with low- or middle-incomes.

A. Allowing nondependent children up to age 21 to be covered by a parent's policy. Explanation: Among the primary ways by which the ACA increases health insurance coverage are (1) expanding Medicaid, (2) providing insurance premium subsidies for certain low- and middle-income individuals, (3) creating insurance exchanges, (4) allowing nondependent children up to age 26 to be covered by a parent's policy, and (5) mandating that certain employers provide coverage.

Bo Borg is the vice president of purchasing for Crater Corp. He has authority to enter into purchase contracts on behalf of Crater, provided that the price under a contract does not exceed $2 million. Dent, who is the president of Crater, is required to approve any contract that exceeds $2 million. Borg entered into a $2.5 million purchase contract with Shady Corp. without Dent's approval. Shady was unaware that Borg exceeded his authority. Neither party substantially changed its position in reliance on the contract. What is the most likely result of this transaction? A. Crater will be bound because of Borg's apparent authority. B. Crater will not be bound because Borg exceeded his authority. C. Crater will only be bound up to $2 million, the amount of Borg's authority. D. Crater may avoid the contract because Shady has not relied on the contract to its detriment.

A. Crater will be bound because of Borg's apparent authority. Explanation: Apparent authority exists when a third party has reason to believe that an agent has the authority to enter into contracts of the nature involved based upon a principal's representations. Secret limitations placed on the agent's normal authority create apparent authority. In this case, it was reasonable for Shady to believe that Borg had the authority to enter into the contract, given Borg's position in the company as vice president of purchasing. That Dent secretly limited Borg's authority has no effect, and Crater Corp. can be held liable under the contract.

Syl Corp. does not withhold FICA taxes from its employees' compensation. Syl voluntarily pays the entire FICA tax for its share and the amounts that it could have withheld from the employees. The employees' share of FICA taxes paid by Syl to the IRS is A. Deductible by Syl as additional compensation that is includible in the employees' taxable income. B. Not deductible by Syl because it does not meet the deductibility requirement as an ordinary and necessary business expense. C. A nontaxable gift to each employee, provided that the amount is less than $1,000 annually to each employee. D. Subject to prescribed penalties imposed on Syl for its failure to withhold required payroll taxes.

A. Deductible by Syl as additional compensation that is includible in the employees' taxable income. Explanation: The employer is required to withhold the employees' share of FICA taxes from its employees' wages. However, on these facts, the employer is treated as having paid additional compensation to the employees in the amount of the employees' share. This additional compensation is a deductible ordinary and necessary business expense.

Dave Bing was employed as a taxi driver by Speedy, Inc. While acting in the scope and course of his employment with Speedy, Bing collided with a van driven by Hart. Hart was an independent contractor making a delivery for Troy Corp. The collision was caused solely by Bing's negligence. As a result of the collision, both Bing and Hart suffered permanent injuries. Speedy and Troy were both in compliance with the state's workers' compensation statute. If Hart commences an action against Bing and Speedy for negligence, which of the following statements is true? A. Hart is entitled to recover damages from Bing or Speedy. B. Bing will either be denied workers' compensation benefits or have his benefits reduced because of his negligence. C. Hart's action for negligence will be dismissed because Hart is an independent contractor. D. Hart is entitled to recover damages from Speedy's workers' compensation carrier to the extent no duplicate payment has been received by Hart.

A. Hart is entitled to recover damages from Bing or Speedy. Explanation: A person is always responsible for his or her negligent acts. Thus, Bing is liable. An employer is vicariously liable in tort for acts of employees or agents in the course and scope of employment. Accordingly, Speedy is also liable.

Which of the following is not an essential element of an agency relationship? A. It must be created by contract. B. The agent must be subject to the principal's control. C. The agent is a fiduciary in respect to the principal. D. The agent acts on behalf of another and not himself or herself.

A. It must be created by contract. Explanation: The agency relationship may be implied based on duties assigned to the agent. It also may arise from the principal's conduct with third parties (such as remaining silent when another purports to be his or her agent or representing to third parties that another is his or her agent). The agency relationship may also arise in an emergency.

William Wallace, an agent for Lux, made a contract with Doolittle that exceeded Wallace's authority. If Lux wishes to hold Doolittle to the contract, Lux must prove that A. Lux ratified the contract before withdrawal from the contract by Doolittle. B. Wallace was acting in the capacity of an agent for an undisclosed principal. C. Wallace believed he was acting within the scope of his authority. D. Wallace was Lux's general agent even though Wallace exceeded his authority.

A. Lux ratified the contract before withdrawal from the contract by Doolittle. Explanation: If the agent lacked authority, no contract existed between the third party and the principal. Ratification would validate a contract assuming that the third party did not withdraw prior to ratification or that the situation did not change so markedly that holding the third party to the bargain would be inequitable.

Anker wishes to give Mix power of attorney. In general, the power of attorney A. May limit Mix's authority to specific transactions. B. Must be signed by both Anker and Mix. C. Will be valid only if Mix is a licensed attorney at law. D. May continue in existence after Anker's death.

A. May limit Mix's authority to specific transactions. Explanation: A power of attorney is a written authorization for the agent to act on behalf of the principal. A power of attorney can be general, or it can grant the agent specific and restricted authority.

A principal and agent relationship requires a A. Meeting of the minds and consent to act. B. Specified consideration. C. Written agreement. D. Power of attorney.

A. Meeting of the minds and consent to act. Explanation: The requirements to form an agency relationship are (1) an agreement between principal and agent on the relationship and subject matter, (2) legality of the subject matter, and (3) capacity of the principal. But a contract is not required.

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 had 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.

A. The broker will have the same actual authority as if Easy's identity had been disclosed. Explanation: Actual authority is conveyed by the principal's giving express or implied consent to the agent to bind the principal to third parties. Actual authority is not affected by failure to disclose the principal.

A principal is most likely to be held criminally liable for the crime of an agent who A. Violated a regulatory statute. B. Committed the crime without the approval of the principal. C. Committed the crime without the participation of the principal. D. Acted within the course and scope of employment.

A. Violated a regulatory statute. Explanation: A principal is liable for his or her own criminal conduct but is generally not liable for a crime committed by the agent. A principal may be held criminally liable for a crime of the agent if (1) the principal approves or directs the crime, (2) the principal participates or assists in the crime, or (3) violation of a regulatory statute constituted the crime. A regulatory statute in this context is one that imposes strict liability, for example, a law that prohibits sales of liquor to minors.

William Gladstone has been engaged as sales agent for the Doremus Corporation. Under which of the following circumstances may Gladstone delegate his duties to another? A. When an emergency arises and the delegation is necessary to meet the emergency. B. When it is convenient for Gladstone to do so. C. Only with the express consent of Doremus. D. If Doremus sells its business to another.

A. When an emergency arises and the delegation is necessary to meet the emergency. Explanation: As a general rule, an agent may not delegate his or her duties without the consent of the principal. However, an agent may delegate his or her duties when an emergency arises, and the delegation is necessary to meet the emergency. This emergency exception applies to most contractual duties.

Part agreed to act as Young's agent to sell Young's land. Part was instructed to disclose that Part was acting as an agent but not to disclose Young's identity. Part contracted with Rice for Rice to purchase the land. After Rice discovered Young's identity, Young refused to fulfill the contract. Whom does Rice have a cause of action against? Part Young A. Yes Yes B. Yes No C. No Yes D. No No

A. Yes Yes Explanation: A partially disclosed principal is liable on a simple contract made by an authorized agent. The third person may recover from either the agent or the principal. The liability is joint and several. Thus, the plaintiff may proceed against either or both and collect any amount from either until the judgment is satisfied. In this case, Rice (third party) may recover from either Part (the agent) or Young (the principal).

Under the Federal Insurance Contributions Act (FICA), which of the following acts will cause an employer to be liable for penalties? I. Failure to Supply Taxpayer Identification Numbers II. Failure to Make Timely FICA Deposits A. Yes Yes B. Yes No C. No Yes D. No No

A. Yes Yes Explanation: An employer subject to FICA taxes must file quarterly returns and deposit appropriate amounts on a monthly or semiweekly basis with an authorized depository institution. For example, a monthly depositor must deposit each month's taxes on or before the 15th day of the following month. Failure to deposit appropriate amounts results in penalties. Penalties are also imposed on persons who file returns and other documents without supplying taxpayer identification numbers.

Which of the following remedies is available to a principal when an agent fraudulently breaches a fiduciary duty? Termination Constructive of the Agency Trust A. Yes Yes B. Yes No C. No Yes D. No No

A. Yes Yes Explanation: Most agency relationships are contractual, and the parties must perform according to the terms of the agreement. In addition, various duties of the agent to the principal arise by operation of law. They include the fiduciary duty, which requires an agent (1) to act with utmost loyalty and good faith solely in the principal's interest, (2) not to compete with the principal, (3) not to buy from himself or herself for the principal without permission, (4) not to make a secret profit in transactions made for the principal, and (5) not to represent the principal if (s)he has a conflict of interest without permission. When an agent fails to perform a duty, the principal may (1) terminate the agency, (2) withhold the agent's compensation, (3) recover secret profits, (4) impose a constructive trust on resources in the agent's possession, (5) seek an injunction against breach, (6) obtain damages for breach of the agency contract, (7) seek reimbursement for liability to third persons caused by the agent's misconduct, and (8) rescind certain contracts. A constructive trust arises by operation of law even though no actual trust agreement exists. For example, the principal might be able to obtain a court order requiring the agent to hold resources for the benefit of the principal even though the agent holds legal title.

Under agency law, which of the following statements best describes ratification? A. A principal's affirmation of an agent's authorized act. B. A principal's affirmation of an agent's unauthorized act. C. A principal's approval in advance of an agent's acts. D. A principal's disavowal of an agent's unauthorized act.

B. A principal's affirmation of an agent's unauthorized act. Explanation: After an unauthorized act by the agent, the principal can assent to the agent's act if the principal is aware of all material facts. Ratification can be expressed or may be implied by the principal's words or conduct that reasonably indicates intent to ratify.

Under the Restatement of the Law Third, Agency, which of the following does not terminate an agency relationship? A. War between the principal and agent's countries. B. An agent's act of filing a bankruptcy petition. C. Changing circumstances that make it unreasonable to believe the agent has actual authority. D. Agent fails to obtain a required license.

B. An agent's act of filing a bankruptcy petition. Explanation: A principal's act of filing a voluntary petition in bankruptcy, not an agent's, terminates an existing agency.

In general, which of the following statements is true with respect to unemployment compensation? A. An employee who is unable to work because of a disability is entitled to unemployment compensation. B. An individual who has been discharged from employment because of work-connected misconduct is ineligible for unemployment compensation. C. The maximum period during which unemployment compensation may be collected is uniform throughout the United States. D. The maximum amount of weekly unemployment compensation payments made by a state is determined by federal law.

B. An individual who has been discharged from employment because of work-connected misconduct is ineligible for unemployment compensation. Explanation: Three conditions ordinarily must be met to to collect unemployment compensation: (1) The worker was employed and laid off through no fault of the worker; (2) the worker filed a claim for the benefits; and (3) the worker is able, available, and willing to work but cannot find employment.

Which of the following statements is correct regarding the taxes payable under the Federal Unemployment Tax Act (FUTA)? A. Liability arises only when wages are actually, not constructively, paid to employees. B. Credits for this tax are allowed to employers for certain state unemployment taxes paid by the employer. C. The amount is withheld from the wages of all employees. D. The amount is determined as a percentage of all compensation paid to an employee.

B. Credits for this tax are allowed to employers for certain state unemployment taxes paid by the employer. Explanation: A credit against FUTA tax liability is provided to an employer who pays state unemployment tax. The credit cannot exceed 5.4% of the first $7,000 of wages.

Taxes payable under the Federal Unemployment Tax Act (FUTA) are A. Calculated as a fixed percentage of all compensation paid to an employee. B. Deductible by the employer as a business expense for federal income tax purposes. C. Payable by employers for all employees. D. Withheld from the wages of all covered employees.

B. Deductible by the employer as a business expense for federal income tax purposes. Explanation: Federal unemployment tax must be paid by an employer who (1) employs one or more persons covered under the federal Social Security Act in each of 20 days in a year (each day in a different week), (2) pays wages of $1,500 or more during any calendar quarter in the current or preceding calendar year, or (3) pays at least $1,000 to a household employee in any calendar quarter in the current or preceding calendar year. These payments are deductible as a business expense for tax purposes.

Dora Dolby was employed as an agent for Ace Used Car Company to purchase newer-model used cars. Her authority was limited by a $3,000 maximum price for any car. A wholesaler showed her a 1938 classic car that was selling for $5,000. The wholesaler knew that Ace only dealt in newer-model cars and that Dolby had never paid more than $3,000 for any car. Dolby bought the car for Ace, convinced that it was worth at least $7,000. When she reported this to Ted Williams, Ace's owner, Williams was furious but nevertheless authorized processing of the automobile for resale. Williams also began pricing the car with antique car dealers who indicated that the current value of the car was $4,800. Williams called the wholesaler to state that Dolby had exceeded her authority, that he was returning the car, and that he was demanding repayment of the purchase price. What is the wholesaler's best defense in the event of a lawsuit? A. Dolby had apparent authority to purchase the car. B. Dolby's purchase was effectively ratified by Ace. C. Dolby had express authority to purchase the car. D. Dolby had implied authority to purchase the car.

B. Dolby's purchase was effectively ratified by Ace. Explanation: Dolby's authority was expressly limited by Ace. The wholesaler knew that Dolby had never paid more than $3,000 for a car, so Dolby did not have apparent authority with regard to the wholesaler. Because Dolby did not have any authority, the wholesaler can rely only on ratification by the principal to retain the benefits of the contract. Ace's owner, Williams, ratified the contract by authorizing processing of the automobile for resale. To avoid liability on the contract, Williams should have returned the car to the wholesaler and demanded the return of the purchase price.

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.

B. Employer and independent contractor. Explanation: An employer does not control or have the right to control the manner and means of an independent contractor's work. Because a CPA must remain independent to perform an audit, an employer-independent contractor relationship exists.

The Affordable Care Act (ACA) sets a 60% minimum actuarial value for an eligible employer plan. All of the following statements are true except that A. Actuarial value indicates what percentage of covered expense the health plan will pay. B. Employer contributions to health-savings accounts may decrease the minimum actuarial value. C. An employee would not pay more than 40% of the covered expenses excluding the premium contribution. D. The lowest tier of plan allowed by the ACA is bronze.

B. Employer contributions to health-savings accounts may decrease the minimum actuarial value. Explanation: According to the ACA, actuarial value is the expected percentage of covered expenses that the plan will pay. The minimum actuarial value allowed for an eligible employer plan is 60%. The minimum actuarial value is set by the ACA and will not be reduced by employer contributions.

Green entered into an oral agency agreement to purchase real estate on behalf of Smith. Subsequently, Green entered into a written contract to buy land from Davis without disclosing the relationship with Smith. Which of the following is Smith's best legal defense if Smith does not want the land? A. Green failed to disclose Smith's relationship as principal. B. Green failed to get the agency agreement in writing. C. Green's act was a misrepresentation of Green's express authority. D. Green failed to get Smith's consent before entering into the contract with Davis.

B. Green failed to get the agency agreement in writing. Explanation: Formalities, such as a writing, are not required to form an agency relationship. But some states require an agency to be in writing if the contract involves a sale of land. Also, many states apply the equal dignity rule. In these states, an agency must be in writing if the agent is to enter into a contract required to be in writing. Accordingly, the agency agreement most likely needs to be in writing because an agreement to transfer an interest in land is required to be in writing.

Tower drives a truck for Musgrove Produce, Inc. The truck is owned by Musgrove. Tower is paid on the basis of a formula that takes into consideration the length of the trip, cargo, and fuel consumed. Tower is responsible for repairing or replacing all flat tires. Musgrove is responsible for all other truck maintenance. Tower drives only for Musgrove. If Tower is a common-law employee and not an independent contractor, which of the following statements is true? A. All Social Security retirement benefits are fully includible in the determination of Tower's federal taxable income if certain gross income limitations are exceeded. B. Musgrove remains primarily liable for Tower's share of FICA taxes if it fails to withhold and pay the taxes on Tower's wages. C. Musgrove would not have to withhold FICA taxes if Tower elected to make FICA contributions as a self-employed person. D. Bonuses or vacation pay that are paid to Tower by Musgrove are not subject to FICA taxes because they are not regarded as regular compensation.

B. Musgrove remains primarily liable for Tower's share of FICA taxes if it fails to withhold and pay the taxes on Tower's wages. Explanation: Under the Federal Insurance Contribution Act (FICA), the employer is required to withhold the employee's share of Social Security taxes from the employee's wages and remit that amount, along with the employer's own equal share, to the government. An employer that underwithholds and underpays is liable for the unpaid balance of the employee's share.

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? Pell Astor A. Yes Yes B. No Yes C. No No D. Yes No

B. No Yes Explanation: In an agency coupled with an interest, the agent has a specific, current, beneficial interest in property that is the subject matter of the agency. A principal does not have the right or power to terminate an agency coupled with an interest. In any agency, the agent may terminate at any time without liability if no specific period for the agency has been established.

Young was a purchasing agent for Wilson, a sole proprietor. Young had the express authority to place purchase orders with Wilson's suppliers. Young conducted business through the mail and had little contact with Wilson. Young placed an order with Vanguard, Inc., on Wilson's behalf after Wilson was declared incompetent in a judicial proceeding. Young was aware of Wilson's incapacity. The applicable law is based on the Restatement (Second) of the Law of Agency. With regard to the contract with Vanguard, Wilson (or Wilson's legal representative) will A. Not be liable because Vanguard dealt only with Young. B. Not be liable because Young did not have authority to enter into the contract. C. Be liable because Vanguard was unaware of Wilson's incapacity. D. Be liable because Young acted with express authority.

B. Not be liable because Young did not have authority to enter into the contract. Explanation: An agency relationship is terminated by operation of law if the principal becomes legally incompetent. Under the Second Restatement, apparent authority ceases upon termination that occurs by the principal's incapacity. However, under the Restatement of the Law, Third, Agency, the principal's incapacity does not automatically terminate actual or apparent authority.

According to the Restatement (Second) of the Law of Agency, the apparent authority of a general agent for a disclosed principal will terminate without notice to third parties when the A. Principal dismisses the agent. B. Principal or agent dies. C. Purpose of the agency relationship has been fulfilled. D. Time period set forth in the agency agreement has expired.

B. Principal or agent dies. Explanation: According to the Restatement (Second) of the Law of Agency, an agency and the agent's power to bind the principal terminate instantly upon the death of the principal because the principal must exist at the time the agent acts. NOTE: According to the Restatement of the Law, Third, Agency, the principal's death does not automatically terminate actual or apparent authority. Continuation of actual and apparent authority protects from liability the agent and the parties who do business with the agent, respectively.

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 to the principal.

B. Purchasing an interest in undeveloped land for the principal. Explanation: Oral agreement usually suffices to form an agency, but a contract involving a sale of land is required to be in writing in some states. Furthermore, the equal dignity rule applies in many states. In these states, the agency must be in writing if the authority granted to the agent is to enter into a contract required to be in writing. For example, an agreement to transfer an interest in land is subject to the statute of frauds and therefore must be in writing.

For the entire year, Ral Supermarket, Inc., conducted its business operations without any permanent or full-time employees. Ral employed temporary and part-time workers during each of the 52 weeks in the year. Under the provisions of the Federal Unemployment Tax Act (FUTA), which of the following statements is true regarding Ral's obligation to file a federal unemployment tax return for the year? A. Ral must file a FUTA return only if aggregate wages exceeded $100,000 during the year. B. Ral must file a FUTA return because it had at least one employee during at least 20 weeks of the year. C. Ral is obligated to file a FUTA return only if at least one worker earned $50 or more in any calendar quarter of the year. D. Ral does not have to file a FUTA return because it had no permanent or full-time employees during the year.

B. Ral must file a FUTA return because it had at least one employee during at least 20 weeks of the year. Explanation: Under FUTA, an employer must file a return if it employs at least one person for some portion of the day during at least 20 weeks in the current or preceding calendar year. Although Ral Supermarket did not have any full-time employees, it must file a FUTA return because it employed temporary and part-time workers for more than 20 weeks.

Under the Federal Insurance Contributions Act (FICA), all of the following are considered wages except A. Contingent fees. B. Reimbursed travel expenses. C. Bonuses. D. Commissions.

B. Reimbursed travel expenses. Explanation: The Social Security tax imposed by the FICA applies to virtually all compensation received for employment, including money or other forms of wages, bonuses, commissions, vacation pay, severance allowances, and tips. Reimbursed travel expenses are not included as wages to the extent a corresponding deduction is allowable.

After serving as an active director of Lee Corp. for 20 years, Ryan was appointed an honorary director with the obligation to attend directors' meetings with no voting power. In the current year, Ryan received an honorary director's fee of $5,000. This fee is A. Reportable by Lee as employee compensation subject to Social Security tax. B. Reportable by Ryan as self-employment income subject to Social Security self-employment tax. C. Taxable as "other income" by Ryan, not subject to any Social Security tax. D. Considered to be a gift not subject to Social Security self-employment or income tax.

B. Reportable by Ryan as self-employment income subject to Social Security self-employment tax. Explanation: A person is not an employee of a corporation when acting as a director. However, fees for acting as a director are treated as earnings from self-employment, subject to both income tax and Social Security self-employment tax.

Ace engages Butler to manage Ace's retail business. Butler has no implied authority to A. Purchase inventory for Ace's business. B. Sell Ace's business fixtures. C. Pay Ace's business debts. D. Hire or discharge Ace's business employees.

B. Sell Ace's business fixtures. Explanation: An agent's actual authority is conveyed by communication to the agent from the principal. It is not feasible to state expressly each act an agent is authorized to perform. Thus, an agent may have express and implied actual authority. Implied actual authority is for acts reasonably necessary to execute express authority. Selling the business fixtures is not necessary to manage a retail business.

An agent who acts within the scope of actual or apparent authority most likely is contractually liable to a third party when A. The agent commits a tort. B. The agent guaranteed the principal's performance. C. The principal is liable to the third party. D. The principal is disclosed.

B. The agent guaranteed the principal's performance. Explanation: The agent may assume liability on any contract by (1) making the contract in his or her own name, (2) co-making the contract with the principal, or (3) guaranteeing the principal's performance. The agent also is liable for his or her torts and crimes.

Under the Restatement (Second) of the Law of Agency, after which of the following situations would it usually not be necessary to notify third parties of the termination of an agency's existence? A. The achieving of the agency's purpose. B. The destruction of the subject matter of the agency. C. A termination by mutual agreement. D. A termination by the principal.

B. The destruction of the subject matter of the agency. Explanation: Under the Second Restatement, destruction of the subject matter of the agency makes fulfilling the purpose of the agency impossible. Thus, it terminates the agency by operation of law. Because most terminations by operation of law terminate apparent authority under the Second Restatement, notice to third parties of termination of the agency's existence is usually not necessary.

An agent appoints a subagent. According to the law of agency, A. An agent has inherent authority to appoint subagents. B. The principal's intention to permit an agent to delegate authority may be indicated by the character of the business. C. A subagent may bind the principal even if his or her appointment was not authorized. D. If appointment of the subagent was authorized, the subagent owes a fiduciary duty to the agent but not the principal.

B. The principal's intention to permit an agent to delegate authority may be indicated by the character of the business. Explanation: Evidence that the principal intends that the agent be permitted to delegate authority may include (1) an express authorization, (2) the character of the business, (3) usage of trade, or (4) prior conduct of the principal and agent.

A principal will not be liable to a third party for a tort committed by an agent A. Unless the principal instructed the agent to commit the tort. B. Unless the tort was committed within the scope of the agency relationship. C. If the agency agreement limits the principal's liability for the agent's tort. D. If the tort is also regarded as a criminal act.

B. Unless the tort was committed within the scope of the agency relationship. Explanation: A principal is strictly liable for the torts of an agent committed within the scope of the agent's employment. An act is within the scope of employment when it is work assigned by the employer or a course of conduct subject to the employer's control. The principal's liability to the third party is for acts of the agent within the scope of the agent's actual or apparent authority.

When a valid contract is entered into by an agent on the principal's behalf in an undisclosed principal situation, which of the following statements concerning the principal's liability is true? I. The Principal May Be Held Liable Once Disclosed II. The Principal Must Ratify the Contract to Be Held Liable A. Yes Yes B. Yes No C. No Yes D. No No

B. Yes No Explanation: A third party may elect to hold an undisclosed principal liable once the principal is disclosed. A principal, whether undisclosed or not, can always be held liable for a valid contract entered into by an agent acting within the scope of actual authority, regardless of whether the principal ratifies the contract.

Meen Co. has 40 full-time employees and 20 full-time equivalent employees. Meen does not offer its employees affordable essential health insurance coverage. Furthermore, its employees received tax credits to buy coverage for this fiscal year. According to the Affordable Care Act (ACA), what amount must Meen pay as an annual penalty? A. $0 B. $45,200 C. $67,800 D. $135,600

C. $67,800 Explanation: If any employee receives a tax credit to buy coverage, the annual penalty paid by an employer with at least 50 full-time or full-time equivalent employees (FTEs) is determined as follows: Annual penalty = $2,260 × (total FTEs - first 30 FTEs) The employer has 60 FTEs and must pay a penalty for not providing coverage. Accordingly, the amount paid is $67,800 [$2,260 × (60 - 30)].

An employer having an experience-based unemployment tax rate of 3.2% in a state having a standard unemployment tax rate of 5.4% may take a credit against a 6.0% federal unemployment tax rate of A. 0% B. 3.2% C. 5.4% D. 6.0%

C. 5.4% Explanation: An employer is allowed a credit against FUTA tax for unemployment tax paid to a state. The credit is the tax paid to the state but is limited to 5.4% of the first $7,000 of wages paid. Because the state taxes 5.4% of wages, that is the amount of the credit. The credit has two components. The normal credit is for actual contributions to a state fund. The additional credit is for the excess of the taxes payable at the highest state rate or 5.4%, whichever is lower, over the actual state contributions. This provision rewards employers with a stable employment experience and therefore lower state rates.

Under the Restatement (Second) of the Law of Agency, an agency relationship generally 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.

C. Agent's renunciation of the agency. Explanation: Under the Second Restatement, an agency is based on the consent of both principal and agent and may be terminated by an act of either party. Thus, it may be terminated by the agent's giving notice of renunciation to the principal. This intentional form of termination is in contrast with the automatic termination by operation of law that results from the occurrence of certain events.

Which act, if committed by an agent, will cause a principal to be liable to a third party? A. A negligent act committed by an independent contractor in performance of the contract that results in injury to a third party. B. An intentional tort committed by an employee outside the scope of employment that results in injury to a third party. C. An employee's failure to notify the employer of a dangerous condition that results in injury to a third party. D. A negligent act committed by an employee outside the scope of employment that results in injury to a third party.

C. An employee's failure to notify the employer of a dangerous condition that results in injury to a third party. Explanation: An agent, such as an employee, has a duty to give notice to the principal of all information relevant to the agency. Thus, an agent's knowledge of a relevant, dangerous condition is assumed to be known by the principal. The principal is then liable to an injured third party to the same extent as if the principal had actual knowledge of the condition.

Walter 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.

C. Baker individually on the check. Explanation: The third party may recover for breach of contract from the agent of an undisclosed principal and from the undisclosed principal when the third party discovers the principal and elects to hold him or her liable. The drawer (Able) is individually liable on the check because the check is a negotiable instrument that has been negotiated. Safe has no recourse on the check against a person who has not endorsed it.

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.

C. Both Blue and Gage. Explanation: If the agent is authorized to appoint a subagent, the subagent (1) is an agent of both the principal and the agent, (2) binds the principal as if (s)he were the agent, and (3) owes a fiduciary duty to both the principal and the agent.

Which of the following statements is (are) true regarding the relationship between an agent and an undisclosed principal? I. The principal is required to indemnify the agent for any contract entered into by the agent within the scope of the agency agreement. The agent has the same actual authority as if the principal had been disclosed. II. The agent has the same actual authority as if the principal had been disclosed. A. I only. B. II only. C. Both I and II. D. Neither I nor II.

C. Both I and II. Explanation: An agent can legally bind the principal only when the agent has authority. An agent's authority is either actual (express or implied) or apparent. Actual authority is the principal's giving express or implied consent for the agent to bind the principal to third parties. It is not affected by nondisclosure of the principal's identity. An agent acting for an undisclosed principal cannot have apparent authority, which derives from the principal's action or inaction or from the agent's position. An agent who contracts within the scope of the agency for an undisclosed principal binds the agent and the undisclosed principal. Furthermore, one of the principal's fundamental duties is to reimburse the agent for any payments or expenses incurred in any contract entered into by the agent within the scope of the agency agreement.

Which of the following statements, if any, represent a principal's duty to an agent who works on a commission basis? I. The principal is required to maintain pertinent records 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. A. I only. B. II only. C. Both I and II. D. Neither I nor II.

C. Both I and II. Explanation: Two implied fundamental duties of a principal to an agent are to compensate the agent for his or her services and to indemnify or reimburse the agent for authorized expenses incurred on behalf of the principal. Any renunciation of these duties requires an express agreement.

An agency relationship A. Must be in writing if it is to be legally enforceable. B. Creates a fiduciary duty on the principal's part. C. Can be created by estoppel, i.e., implied as a matter of law. D. Is normally delegable as a matter of law.

C. Can be created by estoppel, i.e., implied as a matter of law. Explanation: An agency relationship may arise by estoppel when a person represents himself or herself as an agent, the alleged principal knows of the representation and does not deny it, and a third person reasonably but detrimentally relies on the existence of an agency. The "principal" is then prevented (estopped) from asserting the nonexistence of the agency relationship.

Other than the net investment income (NII) tax, which of the following types of income is subject to taxation under the provisions of the Federal Insurance Contributions Act (FICA)? A. Interest earned on municipal bonds. B. Capital gains of $3,000. C. Car received as a productivity award. D. Dividends of $2,500.

C. Car received as a productivity award. Explanation: The Social Security tax imposed by the FICA applies to virtually all compensation received for employment, including money or other forms of wages, bonuses, commissions, vacation pay, severance allowances, and tips. A car received as a productivity award is a form of compensation for employment. It is not excepted from application of FICA tax. Income derived from an investment, as opposed to compensation for employment, is not subject to FICA tax. But the NII tax applies to

An employer who fails to withhold Federal Insurance Contributions Act (FICA) taxes from covered employees' wages, but who pays both the employer and employee shares, will A. Be entitled to a refund from the IRS for the employees' share. B. Be allowed no federal tax deduction for any payments. C. Have a right to be reimbursed by the employees for the employees' share. D. Owe penalties and interest for failure to collect the tax.

C. Have a right to be reimbursed by the employees for the employees' share. Explanation: An employer is primarily liable to pay an employee's share of FICA tax if the employer fails to pay and remit it. The employer then has a right to reimbursement of the amount paid.

Direct liability results if the principal does which of the following? I. Fails to supervise the agent II. Negligently selects an agent III. Fails to give proper orders A. I only. B. I and II. C. I, II, and III. D. II and III.

C. I, II, and III. Explanation: Direct liability results from the principal's own negligent or reckless action or failure to act in conducting business through agents if the principal (1) negligently selects an agent, (2) fails to give proper orders or make proper regulations, (3) fails to employ the proper person or machinery given risk of harm, (4) fails to supervise the agent, or (5) allows wrongful conduct by others on or with his or her property.

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.

C. Insure Frost's property against fire loss. Explanation: An agent has express and implied actual authority that is conveyed by manifestations of the principal to the agent. Authority is implied to do what is reasonably necessary to accomplish the expressly authorized action. Obtaining insurance against fire loss would be implied.

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.

C. Lee is paid weekly by Sew. Explanation: An employee is any person who is hired by another person or business for a wage or fixed payment in exchange for personal services and who does not provide these services as part of an independent business. Additional characteristics of employment are determined on a case-by-case basis. Thus, weekly payment is the best indicator that Lee is an employee.

Under the agent's duty to account, which of the following acts must a gratuitous agent perform? Commingle Account for the Funds Principal's Property A. Yes Yes B. Yes No C. No Yes D. No No

C. No Yes Explanation: An agency relationship may be created without consideration. Thus, even a gratuitous agent owes certain duties to the principal. Under the agent's duty to account, the agent must account for money or property received or expended on behalf of the principal and not commingle his or her money or property with that of the principal.

An agent will usually be liable under a contract made with a third party when the agent is acting on behalf of a Undisclosed Disclosed Principal Principal A. Yes Yes B. Yes No C. No Yes D. No No

C. No Yes Explanation: When a principal is undisclosed, the third party believes (s)he is dealing directly with the agent. Thus, under general contract law, an agent is liable to the third party because the third party intended to deal only with the agent. An agent who discloses the principal and acts within actual or apparent authority ordinarily binds only the principal.

North, Inc., hired Sutter as a purchasing agent. North gave Sutter written authorization to purchase, without limit, electronic appliances. Later, Sutter was told not to purchase more than 300 of each appliance. Sutter contracted with Orr Corp. to purchase 500 tape recorders. Orr had been shown Sutter's written authorization. Which of the following statements is true? A. Sutter will be liable to Orr because Sutter's actual authority was exceeded. B. Sutter will not be liable to reimburse North if North is liable to Orr. C. North will be liable to Orr because of Sutter's actual and apparent authority. D. North will not be liable to Orr because Sutter's actual authority was exceeded.

C. North will be liable to Orr because of Sutter's actual and apparent authority. Explanation: A principal is liable on contracts made by an agent who has actual or apparent authority. Sutter had apparent authority to make the contract because of the principal's communication (letter) shown to the third party. Moreover, the third party's rights against the principal are not affected by the secret limits placed on actual authority. Sutter had actual authority to buy up to 300 units and apparent authority to buy the rest.

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. Under the Restatement (Second) of the Law of Agency, which of the following statements is true 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 an undisclosed principal.

C. Ogden will not be liable because Thorp's agency ended when Ogden was declared incompetent. Explanation: Under the Second Restatement, an agency is terminated automatically by operation of law when the principal is declared incompetent in a judicial proceeding. The agent's actual authority and apparent authority are terminated. Thus, the principal is not bound by the contract for supplies entered into by the agent after the principal is declared incompetent.

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.

C. Performance of the contract by the agent. Explanation: The third party is entitled to enforce a contract against the agent of an undisclosed principal and against the undisclosed principal when the third party discovers the principal and elects to hold him or her liable.

Simpson, Ogden Corp.'s agent, most likely needs a written agency agreement to A. Enter into a series of sales contracts on Ogden's behalf. B. Hire an attorney to collect a business debt owed to Ogden. C. Purchase an interest in undeveloped land for Ogden. D. Retain an independent general contractor to renovate Ogden's office building.

C. Purchase an interest in undeveloped land for Ogden. Explanation: Formalities, such as a writing, are not required to form an agency relationship. But some states require an agency to be in writing if the contract involves a sale of land. Also, many states apply the equal dignity rule. In these states, an agency must be in writing if the agent is to enter into a contract required to be in writing. Accordingly, the agency agreement most likely needs to be in writing because an agreement to transfer an interest in land is required to be in writing.

Under the law of agency, the ratification doctrine A. Is not applicable to situations in which the party claiming to act as the agent for another has no express or implied authority to do so. B. Is designed to apply to situations in which the principal was originally incompetent to have made the contract himself, but who, upon becoming competent, ratifies. C. Requires the principal to ratify the entire act of the agent, and the ratification is retroactive. D. Applies only if the principal expressly ratifies the contract made on his behalf within a reasonable time in writing.

C. Requires the principal to ratify the entire act of the agent, and the ratification is retroactive. Explanation: For a principal to ratify an unauthorized act of an agent, the entire act must be ratified. Otherwise, a principal could pick and choose from unauthorized acts by agents, which would be unfair to the third parties with whom the agent is dealing. Ratification is also retroactive (relates back) to the time the agent entered into the contract.

Ted Simmons, an agent for Jensen, has the express authority to sell Jensen's goods. Simmons also has the express authority to grant discounts of up to 5% of list price. Simmons sold Hemple goods with a list price of $1,000 and granted Hemple a 10% discount. Hemple had not previously dealt with either Simmons or Jensen. Which of the following courses of action may Jensen properly take? A. Seek to void the sale to Hemple only. B. Seek recovery of $50 from Hemple only. C. Seek recovery of $50 from Simmons only. D. Seek recovery of $50 from either Hemple or Simmons.

C. Seek recovery of $50 from Simmons only. Explanation: Simmons had apparent authority to grant a 10% discount to Hemple because Hemple could reasonably rely on the express authority as implicit authority for the discount. Simmons, however, had actual authority to grant only a 5% discount. Simmons has violated his actual authority and is liable to the principal for any loss [(10% - 5%) of $1,000] sustained as a result of his actions.

Jay White, an engineer, entered into a contract with Sky, Inc., agreeing to provide Sky with certain specified consulting services. After performing the services, White was paid pursuant to the contract, but Social Security taxes were not withheld from his check since Sky considered White an independent contractor. The IRS has asserted that White was an employee and claims that a deficiency exists because of Sky's failure to withhold and pay Social Security taxes. Which of the following factors is most likely to support the IRS's position that White is an employee? A. White was paid in one lump sum after all the services were performed. B. White provided his own office and supplies. C. Sky supervised and controlled the manner in which White performed the services. D. Sky reserved the right to inspect White's work.

C. Sky supervised and controlled the manner in which White performed the services. Explanation: An employer controls or has the right to control the manner and means of an employee's work. An employer does not control or have the right to control the manner and means of an independent contractor's work.

In a principal-agent relationship that is not contractual, which of the following remedies is not available to the agent whose principal is guilty of violating a duty owed the agent? A. Recovery for past services. B. Recovery for future damages. C. Specific performance. D. Withholding further performance.

C. Specific performance. Explanation: The principal has duties to (1) compensate the agent for services performed, (2) reimburse the agent for authorized payments made or expenses incurred, and (3) indemnify the agent for losses suffered or expenses incurred while the agent acted in a legal transaction or in a transaction that the agent did not know to be wrongful. An agent also may withhold performance from the principal if the principal violates a duty owed to the agent. However, the contractual remedy of specific performance is rarely granted in contract cases and then only when no other remedy is adequate. Moreover, it is not available when the relationship of the parties is noncontractual.

Edgar Winter is a sales agent for Magnum Enterprises. Winter has assumed an obligation to indemnify Magnum if any of Winter's customers fail to pay. Under these circumstances, which of the following is true? A. Winter's engagement must be in writing regardless of its duration. B. Upon default, Magnum must first proceed against the delinquent purchaser-debtor. C. The above facts describe a del credere agency relationship, and Winter will be liable in the event his customers fail to pay Magnum. D. There is no fiduciary relationship on either Winter's or Magnum's part.

C. The above facts describe a del credere agency relationship, and Winter will be liable in the event his customers fail to pay Magnum. Explanation: A del credere agent is a sales agent who guarantees his or her customers' obligations. If the customers fail to pay, the sales agent is a surety liable to the principal for their obligations.

What fiduciary duty, if any, exists in an agency relationship? A. The agent owes a fiduciary duty to third parties he deals for and on behalf of the principal. B. The principal owes a fiduciary duty to the agent. C. The agent owes a fiduciary duty to the principal. D. There is no fiduciary duty in an agency relationship.

C. The agent owes a fiduciary duty to the principal. Explanation: The agent owes a fiduciary duty to the principal. An agent may not profit at the expense of, or compete with, the principal, and must also disclose material facts and obey reasonable instructions.

Which statement is false regarding the principal's duties to the agent? A. The principal has a duty to provide safe working conditions. B. The principal has a duty to reimburse the agent. C. The principal has a general duty of due care but is not liable for negligence to the agent. D. The principal has a duty to disclose known risks if the principal is aware of the risk.

C. The principal has a general duty of due care but is not liable for negligence to the agent. Explanation: The principal is not relieved of the general duty of care (that of a reasonable person in the circumstances) owed by one person to another because a principal-agent relationship exists. Thus, a principal may be liable for negligence to the agent.

Which of the following is a prerequisite for the creation of an agency relationship? A. Consideration must be given. B. The agent must have capacity. C. The principal must have capacity. D. The consideration must be in writing.

C. The principal must have capacity. Explanation: The principal must have the legal capacity to perform the act authorized. A contract entered into by an agent with a third party on behalf of an incompetent principal, e.g., a minor, is generally voidable by the principal.

Smith entered an oral agreement hiring and authorizing Jones to sell fraudulent identification cards produced by Smith. Smith and Jones orally agreed to share the proceeds from their enterprise. Later, Jones claimed that no enforceable agency relationship was created. Jones is correct because A. Jones did not have authority. B. Jones did not have contractual capacity. C. The purpose of the agency was contrary to public policy. D. The agreement was a partnership.

C. The purpose of the agency was contrary to public policy. Explanation: Agency is an express or implied consensual relationship. Both the principal and agent must manifest consent to the grant of authority. The purpose and subject matter of the agency must be for a legal purpose. Smith and Jones formed an agency for an illegal purpose, the sale of fraudulent identification cards, which automatically voids the agency by operation of law.

Jim entered into an oral agency agreement with Sally in which he authorized Sally to sell his interest in a parcel of real estate, Blueacre. Within 7 days, Sally sold Blueacre to Dan, signing the real estate contract on behalf of Jim. Dan failed to record the real estate contract within a reasonable time. Which of the following most likely is true? A. Dan may enforce the real estate contract against Jim because it satisfied the statute of frauds. B. Dan may enforce the real estate contract against Jim because Sally signed the contract as Jim's agent. C. The real estate contract is unenforceable against Jim because Sally's authority to sell Blueacre was oral. D. The real estate contract is unenforceable against Jim because Dan failed to record the contract within a reasonable time.

C. The real estate contract is unenforceable against Jim because Sally's authority to sell Blueacre was oral. Explanation: Oral agreement usually suffices to form an agency, but a contract involving a sale of land is required to be in writing in some states. Furthermore, the equal dignity rule applies in many states. In these states, the agency must be in writing if the authority granted to the agent is to enter into a contract required to be in writing. For example, an agreement to transfer an interest in land is subject to the statute of frauds and therefore must be in writing. The contract is therefore most likely to be voidable at Jim's option. It was required by the statute of frauds to be written, and Sally's agency was oral. In most other situations, the agent's authority may be oral.

H&M, Inc., owns and operates a fast food restaurant under a franchise agreement with Foodco, Inc., a large national franchisor. Eighty percent of all Foodco Restaurants are owned by franchisees. The Foodco restaurants uniformly use the same name, building design, colors, signs, advertising, promotions, employee work apparel, menus, and prices. The strategy stated in the franchise materials is that the public must believe that Foodco is "a chain that sells a product across the nation." Foodco requires H&M to follow standardized methods of operation, deal exclusively with the franchisor for supplies, and pay a stated percentage of sales for the franchise license. A customer injured on the premises through H&M's negligence discovered that H&M is behind in its debts and carries inadequate liability insurance. Which of the following is a true statement about Foodco's possible liability to the injured customer? A. Foodco, as the franchisor, is not liable in the absence of an actual agency relationship between it and H&M, the franchisee. B. A franchise agreement usually creates a principal-agent relationship, making the franchisor liable for torts of the franchisee that occur in the course of business. C. The theory of agency by estoppel rather than express agency is a plausible basis for finding an agency relationship resulting in liability of the franchisor for the actions of the franchisee. D. If an express, implied, or apparent agency relationship exists between the franchisee and the franchisor, the principal franchisor has a duty to indemnify the agent franchisee for tort liability incurred within the course and scope of the relationship.

C. The theory of agency by estoppel rather than express agency is a plausible basis for finding an agency relationship resulting in liability of the franchisor for the actions of the franchisee. Explanation: Two relationships must be established for the customer to recover from Foodco. First, a principal-agency relationship between Foodco and H&M must have existed at the time the customer was injured. Second, the negligent act that injured the customer must have occurred within the scope and during the course of H&M's franchise agreement with and employment by Foodco. The most likely agency relationship that may be established is an agency by estoppel rather than an actual or express agency. Foodco caused the public (including the injured customer) to have a reasonable belief that each restaurant was part of a chain operated by Foodco, which is a basis for finding an agency by estoppel. Foodco's actions created an appearance of agency that in fact did not exist. Thus, because of its actions, Foodco is estopped (prevented) from denying the existence of an agency relationship. If an agency relationship is established, Foodco, as principal, is liable for any harm caused to a third party by its agent, H&M, within the course and scope of employment.

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.

C. Win because Bolt's notice was inadequate to terminate Ace's apparent authority. Explanation: When a principal discharges an agent, (s)he must give (1) actual notice of the discharge to those the agent had previously dealt with and (2) constructive notice to others who might have known of the agency. Ace continued to have apparent authority because of Bolt's failure to give constructive notice by publication in a newspaper of general circulation in the place where the agency activities occurred. Publication in trade journals of the termination would have provided such notice and effectively terminated Ace's apparent authority.

Parc contracted with Furn Brothers Corp. to buy hotel furniture on behalf of Global Motor House, a motel chain. Global instructed Parc to use Parc's own name and not to disclose to Furn that Parc was acting on Global's behalf. Who is liable to Furn on this contract? Parc Global A. Yes No B. No Yes C. Yes Yes D. No No

C. Yes Yes Explanation: The third party can look to either the agent or the undisclosed principal for performance of the contract.

Unemployment tax payable under the Federal Unemployment Tax Act (FUTA) is A. Payable by all employers. B. Deducted from employee wages. C. Paid to the Social Security Administration. D. A tax-deductible employer's expense.

D. A tax-deductible employer's expense. Explanation: The Internal Revenue Code imposes federal unemployment taxes on certain employers. The tax is a deductible business expense of the employer.

The Federal Unemployment Tax Act (FUTA) A. Requires both the employer and employee to pay FUTA taxes, although the amounts to be paid by each are different. B. Does not apply to businesses with fewer than 35 employees. C. Does not apply to employers that conduct business in only one state and employ only residents of that state. D. Allows the employer to take a credit against the FUTA tax if contributions are made to a state unemployment fund.

D. Allows the employer to take a credit against the FUTA tax if contributions are made to a state unemployment fund. Explanation: FUTA permits an employer who made contributions to a state unemployment fund to take a credit against the federal unemployment tax.

On March 15, Ken Karmel received an oral offer to work as an account executive for Wonder Stock Brokerage Company. Ken orally accepted the offer on April 1, and agreed to begin work on May 1. The duration of the contract was one year from May 1, and provided a $24,000 salary plus a bonus based on commissions earned. Under these circumstances, which of the following is true? A. Ken has an agency coupled with an interest. B. The contract in question is not subject to the statute of frauds. C. Ken is permitted to delegate his performance to another equally competent person. D. Although Ken's contract is silent on the point, Ken has an implied right to reimbursement for the reasonable and necessary expenses incurred on behalf of Wonder.

D. Although Ken's contract is silent on the point, Ken has an implied right to reimbursement for the reasonable and necessary expenses incurred on behalf of Wonder. Explanation: All agents have a right to reimbursement for reasonable and necessary expenses incurred on behalf of their principal. This right is implicit in the agency relationship even if not provided for in the agreement.

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? A. A sales agency. B. An irrevocable agency. C. An agency of indefinite duration but terminable upon 1 months' notice. D. An agency for the forthcoming calendar year entered into in mid-December of the prior year.

D. An agency for the forthcoming calendar year entered into in mid-December of the prior year. Explanation: The statute of frauds requires a contract that cannot be completed within 1 year from its making to be in writing. An agency relationship for the forthcoming calendar year entered into in mid-December cannot be completed for approximately 1 year and 1/2 month from the time the contract was formed. An applicable state statute most likely applies the equal dignity rule. Thus, the agency must be in writing if the agent is to enter into a contract required to be in writing, such as a contract that cannot be completed within 1 year.

Kate, an agent of Gator Supplies, Inc., is responsible for performance of a specified task. However, the instructions are unclear, and Kate must act in a reasonable manner considering the circumstances. This is an example of an exception to which duty owed to the principal? A. Duty of notification. B. Duty to account. C. Fiduciary duty. D. Duty of obedience.

D. Duty of obedience. Explanation: Under the duty of obedience, the agent must follow lawful explicit instructions of the principal. If the instructions are not clear, the agent must act in good faith and in a reasonable manner considering the circumstances. If an emergency arises and the agent cannot reach the principal, the agent may deviate from instructions to the extent warranted.

Which of the following statements is false regarding the formation of a principal-agent relationship? A. An agency must have a legal purpose. B. An agency may be implied in law, even if the principal did not intend to grant authority. C. The test for agency is objective. D. Each element of a contract must be present for the relationship to exist.

D. Each element of a contract must be present for the relationship to exist. Explanation: An agency relationship need not be contractual. But if the agency arises by contract, each element of a contract must be present.

Chester Michaels appointed Regina Fairfax as his agent. The appointment was in writing and clearly indicated the scope of Regina Fairfax's authority and also that Fairfax was not to disclose that she was acting as an agent for Michaels. Under the circumstances, A. Fairfax is an agent coupled with an interest. B. Michaels must ratify any contracts made by Fairfax on behalf of Michaels. C. Fairfax's appointment had to be in writing to be enforceable. D. Fairfax has the implied authority of an agent but not apparent authority.

D. Fairfax has the implied authority of an agent but not apparent authority. Explanation: When an agent has express actual authority, (s)he also has implied actual authority to use reasonable means to accomplish the purposes of the express authority. However, apparent authority is granted to the agent by words or conduct directed by the principal to a third party. Thus, it does not exist when the principal is undisclosed.

Futterman operated a cotton factory and employed Dana Marra as a general purchasing agent to travel through the southern states to purchase cotton. Futterman telegraphed Marra instructions from day to day as to the price to be paid for cotton. Marra entered a cotton district in which she had not previously done business and represented that she was purchasing cotton for Futterman. Although directed by Futterman to pay no more than $0.25 per pound, Marra bought cotton from Anderson at $0.30 per pound, which was the prevailing offering price at that time. Futterman refused to take the cotton. Under these circumstances, which of the following is true? A. The negation of actual authority to make the purchase effectively eliminates any liability for Futterman. B. Futterman is not liable on the contract. C. Marra has no potential liability. D. Futterman is liable on the contract.

D. Futterman is liable on the contract. Explanation: Futterman is liable on the contract because Marra had apparent authority to enter into the contract. Although Marra was instructed to pay no more than $0.25 per pound, this limitation was not known to the cotton sellers. By allowing Marra to enter into contracts for the purchase of cotton, Futterman gave her apparent authority to pay any reasonable price.

Noll gives Carr a written power of attorney. Which of the following statements is true 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.

D. It may limit Carr's authority to specific transactions. Explanation: A power of attorney is a written authorization for the agent to act on behalf of the principal. It can be general, or it can grant the agent restricted authority, such as for specific transactions.

Stanton exceeded her actual authority when she concluded an agreement with Nilworth Corp. on behalf of Lax Corp. If Lax wishes to ratify the contract with Nilworth, which of the following statements is true? A. Lax must notify Nilworth that Lax intends to ratify the contract. B. Stanton must have acted reasonably and in Lax's best interest. C. Stanton must be a general agent of Lax. D. Lax must have knowledge of all material facts relating to the contract at the time it is ratified.

D. Lax must have knowledge of all material facts relating to the contract at the time it is ratified. Explanation: The person who ratifies becomes legally bound on a contract that was entered into by another who, without authority, purported to act as the principal's agent. To ratify a contract, the principal must have full knowledge of the material facts.

Starr is an agent of a disclosed principal, Maple. On May 1, Starr entered into an agreement with King Corp. on behalf of Maple that exceeded Starr's authority as Maple's agent. On May 5, King learned of Starr's lack of authority and immediately notified Maple and Starr that it was withdrawing from the May 1 agreement. On May 7, Maple ratified the May 1 agreement in its entirety. If King refuses to honor the agreement and Maple brings an action for breach of contract, Maple will A. Prevail. The agreement of May 1 was ratified in its entirety. B. Prevail. Maple's capacity as a principal was known to Starr. C. Lose. The May 1 agreement is void due to Starr's lack of authority. D. Lose. King notified Starr and Maple of its withdrawal prior to Maple's ratification.

D. Lose. King notified Starr and Maple of its withdrawal prior to Maple's ratification. Explanation: When an agent exceeds express, implied, or apparent authority, a principal is not bound until (s)he ratifies. Moreover, certain conditions terminate the power of ratification, such as (1) the third-party's withdrawal, death, or loss of capacity; (2) changed circumstances; or (3) failure to ratify within a reasonable time. Because King withdrew prior to ratification by Maple, no agreement existed for Maple to ratify and no contract to breach.

Vicki 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 true? 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. A. I only. B. II only. C. Both I and II. D. Neither I nor II.

D. Neither I nor II. Explanation: Neither statement is correct because an agent's acts are deemed to be the acts of the principal. Thus, whether Trent lacks capacity to enter into a contract because she is under 21 years old is irrelevant. In addition, the age of majority in most states is 18 years of age. Furthermore, Post is not liable to Trent if the collection is destroyed because the principal is not required to compensate the agent unless the collection is sold. The agency relationship was terminated by operation of law when the subject matter of the agency relationship was destroyed.

Which of the following payments are deducted from an employee's salary? Unemployment Workers' Compensation Compensation Insurance Insurance A. Yes Yes B. Yes No C. No Yes D. No No

D. No No Explanation: Neither unemployment compensation insurance nor workers' compensation insurance is deducted from an employee's salary. The employer is required by law to pay these amounts. Under FUTA, an employer pays a specific amount to the IRS to provide temporary financial assistance to workers who become unemployed as a result of being laid off. Workers' compensation insurance is a state program in which employers must insure employees for losses sustained due to work-related injuries, regardless of fault.

The Affordable Care Act (ACA) requires an employer with at least 50 full-time or full-time equivalent employees (FTEs) to offer them affordable essential health insurance coverage or pay a penalty. In which situation is the penalty not imposed? A. An employer offers coverage to FTEs but the coverage is not affordable. B. Any employee receives a tax credit to buy coverage and the employer does not provide affordable essential coverage. C. An employer offers coverage to FTEs but the coverage does not provide the minimum essential care. D. None of the answers are correct.

D. None of the answers are correct. Explanation: According to the ACA, an employer with at least 50 full-time employees or full-time equivalent employees (FTEs) must offer them affordable essential health insurance coverage or pay a penalty. If any employee receives a tax credit to buy coverage, the annual penalty for choosing not to provide coverage is imposed. An employer offering coverage to FTEs also may be penalized if the coverage (1) is unaffordable or (2) does not meet minimum coverage or actuarial value standards.

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, Pine suspected an attempt was being made to steal the package, drew the gun, and shot Kent, an innocent passerby. Kent most likely 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.

D. Pine's weapon was unlicensed and illegal. Explanation: Under the doctrine of respondeat superior, the employer is vicariously liable for the torts of the employee committed within the scope and during the course of employment. However, the doctrine ordinarily does not apply to crimes committed by the employee. Thus, the employer most likely will not be liable. The employee's possession (and therefore use) of the weapon was criminal. The employer would be liable in exceptional cases, e.g., if it authorized the use of force.

Which of the following conditions must be met to form an agency? A. An agency agreement must be in writing. B. An agency agreement must be signed by both parties. C. The principal must furnish legally adequate consideration for the agent's services. D. The principal must possess contractual capacity.

D. The principal must possess contractual capacity. Explanation: An agency is an express or implied consensual relationship formed when two parties agree that one (the agent) will act on behalf of the other (the principal) in dealing with third parties. To create this relationship, (1) the principal must intend for the agent to act on the principal's behalf, (2) the agent must agree to act as a fiduciary for the principal, (3) the agency must have a legal purpose, and (4) the principal must have the legal capacity to perform the act assigned to the agent. Certain personal acts may never be delegated.

Generally, a disclosed principal will be liable to third parties for its agent's unauthorized misrepresentations if the agent is an Independent Employee Contractor A. Yes Yes B. Yes No C. No Yes D. No No

A. Yes Yes Explanation: The principal is liable for torts involving misrepresentations regardless of whether the agent is an employee or an independent contractor. The agent's misrepresentation must be (1) fraudulent, (2) negligent, or (3) innocent but material and with all of the elements of fraud except intent. A tort involving misrepresentation is an an example of vicarious liability. An example of tortious misrepresentation by an agent-independent contractor is the sale by a homeowner through a real estate broker who made a material misrepresentation to make the sale. But the principal generally is not liable for the tortious acts of an independent contractor that involve physical acts.

Young Corp. hired Joe Wilson as a sales representative for 6 months at a salary of $5,000 per month plus 6% of sales. Which of the following statements is true? A. Young does not have the power to dismiss Wilson during the 6-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.

B. Wilson is obligated to act solely in Young's interest in matters concerning Young's business. Explanation: An agent has a fiduciary duty to act with the utmost loyalty and good faith solely for the benefit of the principal. Wilson may not compete or otherwise harm Young's business while employed by Young.

Neal, an employee of Jordan, was delivering merchandise to a customer. On the way, Neal's negligence caused a traffic accident that resulted in damages to a third party's automobile. Who is liable to the third party? Neal Jordan A. No No B. Yes Yes C. Yes No D. No Yes

B. Yes Yes Explanation: A principal is strictly liable for a tort committed by an agent within the scope of the agent's employment (vicarious liability). This liability is without regard to the fault of the principal. Vicarious liability does not apply when the agent is an independent contractor. A person is liable for his or her own negligent acts even if acting as an agent of another.

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.

C. Agent acts outside the grant of actual authority. Explanation: An undisclosed principal is generally not liable for acts of the agent beyond the scope of actual authority.