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Interactive Quiz for Clarkson-12e, Chapter 32

Chapter 32 Agency Formation and Duties
1.

Agency is defined as:

a. the relationship of a child to its parents in terms of duty and obedience.
b. a fiduciary relationship between two parties, in which one party agrees
to represent or act for the other.
c. a relationship in which one works for, and receives payment from, an
employer, but whose working conditions and methods are not
controlled by the employer.
d. a relationship involving a skilled person who controls the manner and
method of his work.

Answers:
a. Incorrect. Although in some cases children may act as agents for
parents, this is not the definition of agency.
b. Correct. Agency is a relationship, based on trust, between two parties.
One party agrees to act on behalf of another; the other party agrees to
employ and control the first.
c. Incorrect. This is the definition of an independent contractor, who may
or may not be an agent.
d. Incorrect. This is a partial definition of an independent contractor, who
may or may not be an agent.
2.

A fiduciary relationship is one that:

a. involves a high degree trust and confidence.
b. arises only between family members.
c. typically exists between employees in government agencies.
d. allows the parties to legally avoid their obligations to one another.

Answers:
a. Correct. This is a defining characteristic of a fiduciary relationship.
b. Incorrect. Fiduciary relationships may exist between family members,
but they commonly exist between other parties as well.
c. Incorrect. Fiduciary relationships typically do not exist between
employees in government agencies.
d. Incorrect. A fiduciary relationship does not allow the parties to legally
avoid their obligations to one another.
3.

When determining whether a worker is an employee or an independent

contractor, the key element to consider is:
a. the length of time necessary to finish a job.
b. the hours worked by the worker.

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c. the degree to which the worker is computer literate.
d. the extent to which the employer controls the actions of the worker.
Answers:
a. Incorrect. This is generally not a key element to consider in such a
determination.
b. Incorrect. This is generally not a key element to consider in such a
determination.
c. Incorrect. This is not really an issue in such a determination.
d. Correct. The key element in determining whether a worker is an
employee or an independent contractor is the degree to which the
employer controls the actions of the worker.
4.

Joe, who owns Joes Construction and Renovation Company, agrees to

renovate Mrs. Simhas bathroom. How would the Internal Revenue
Service be likely to classify Joe?
a. As an independent contractor.
b. As a disclosed principal.
c. As an employee.
d. As a partially disclosed principal.

Answers:
a. Correct. Because Mrs. Simha probably does not control Joes method
of work or the details of that work, Joe would be classified as an
independent contractor, not as an employee.
b. Incorrect. Joe would not be a principal in this relationship.
c. Incorrect. Joe would not be classified as an employee because Mrs.
Simha has too little control over his activities.
d. Incorrect. Joe would not be a principal in this relationship.
5.

Which of the following IS NOT a way for an agency relationship to arise?

a. By rescission.
b. By operation of law.
c. By agreement.
d. By estoppel.

Answers:
a. Correct. Rescission is a contract term that refers to the undoing of a
contract by mutual agreement of the parties.
b. Incorrect. An agency may arise by operation of the law.
c. Incorrect. Most agencies arise by agreement of the parties.
d. Incorrect. In some cases, an agency may arise by estoppel.

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6.

In agency law, the term ratification refers to:

a. the appearance of agency exists when, in fact, no agency does exist.
b. the fiduciary obligations owed by an agent to a principal.
c. a principals approval or affirmation of a contract that was formed by
someone who was not an agent or by an agent who was not
authorized to form the contract.
d. the act of rejecting an obligation of an agent who acted outside the
scope of his or her authority.

Answers:
a. Incorrect. This is not ratification, but rather, agency by estoppel.
b. Incorrect. This is not ratification.
c. Correct. In agency law, ratification refers to a principals approval or
affirmation of a contract made by someone who was not an agent or by
an agent who was not authorized to form the contract.
d. Incorrect. This would be a rejection, not a ratification.
7.

James goes out shopping and, using his wife Marias credit card, he buys
$221.00 worth of groceries. Is Maria liable for the purchase?
a. Yes, based on the doctrine of respondeat superior.
b. Yes, based on the creation of an agency by operation of law.
c. Yes, based on the duty of performance.
d. No, based on the Jamess lack of a power of attorney.

Answers:
a. Incorrect. Respondeat superior (let the master respond) does not apply
in this case.
b. Correct. Because James and Maria are married and because James
purchased necessities, it is most likely that an agency by operation of
the law exists.
c. Incorrect. The reason why Maria is liable is not because James had a
duty to perform, although agents do have this duty.
d. Incorrect. Jamess lack of power of attorney does not relieve Maria of
liability in this case.
8.

Which of the following IS NOT a duty of an agent?

a. Loyalty.
b. Payment.
c. Performance.
d. Notification.

Answers:

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a. Incorrect. An agent has a duty to act solely for the benefit of his
principal.
b. Correct. A principal has a duty to pay the agent, not the other way
around.
c. Incorrect. An agent has a duty to use reasonable diligence and skill in
performing his work.
d. Incorrect. An agent has a duty to notify his principal of all matters that
come to the agents attention concerning the subject matter of the
agency.
9.

Which of the following remedies may an agent seek when the principal
breaches a duty owed to the agent?
a. Withholding further performance and demanding an accounting.
b. Avoidance of the principal.
c. Creation of a deconstructive trust.
d. Indemnification of the principal.

Answers:
a. Correct. An agent may withhold further performance and demand an
accounting as a remedy against a principal.
b. Incorrect. One cannot avoid parties, only obligations.
c. Incorrect. There is no such thing as a deconstructive trust.
d. Incorrect. This is not a remedy for an agent, but it is a remedy for a
principal.
10.

Indemnification means that:

a. the principal is required to continue the agency contract.
b. the agent has taken advantage of the agency relationship to purchase
property or goods.
c. a contract made by an agent is canceled.
d. if a third party sues the principal for damages caused by the agents
negligence or unauthorized actions, the principal may sue the agent to
recover an equal amount of damages.

Answers:
a.
b.
c.
d.

Incorrect. This is not the definition of indemnification.

Incorrect. This is not what indemnification means.
Incorrect. Indemnification is not the cancellation of a contract.
Correct. A principal may sue an agent to recover such damages.