Chapter 24: Principal-Agent Relationship 1

Chapter 24: Principal-Agent Relationship 1

CHAPTER 24

Principal-Agent Relationship

KEY POINTS IN THE CHAPTER

An agent enters into transactions with third parties in place of and at the request of a principal.
A principal-agent relationship may be created by oral or written contract, by appearance, by ratification by the principal, or by necessity.
The difference between an agent and an employee is the amount of control and supervision involved.
Agents having broad authority are called general agents; agents having narrow authority are known as special agents.
Agents and principals owe each other certain duties and have certain obligations, including obedience, loyalty, compensation, and safe working conditions.
A principal-agent relationship may be terminated by agreement, by fulfillment of the purpose of the agency, by revocation of the agent’s authority, or by operation of law.

MULTIPLE-CHOICE QUESTIONS

Circle the letter of the best answer.

1.The right of an agent to require the principal to pay for personal losses incurred by the agent while the agent is performing business for the principal is called

a.rebate.

b.reimbursement.

c.indemnification.

d.recovery.

2.Browning hired Barrett to paint her house for the sum of $2,500. Barrett would be classified as a(n)

a.general agent.

b.special agent.

c.independent contractor.

d.employee.

3.All profits that result from an agency

a.belong solely to the agent.

b.belong solely to the principal.

c.are divided equally between the principal and the agent.

d.are divided according to the agreement between the principal and the agent.

4.A real estate agent hired to sell a house is considered a(n)

a.independent contractor.

b.employee.

c.general agent.

d.special agent.

5.A principal legally can appoint an agent by

a.a written contract only.

b.an oral contract only.

c.putting a notice in a newspaper.

d.either a written or an oral contract.

6.A person can act as

a.both an employee and an independent contractor.

b.both an employee and an agent.

c.both an employer and an employee.

d.all of the above.

7.Agents who do not receive compensation are called

a.free agents.

b.special agents.

c.gratuitous agents.

d.general agents.

8.In an emergency, an agency relationship can be created by

a.ratification.

b.appearance.

c.duress.

d.necessity.

9.The major difference between a special agent and a general agent is

a.the amount of compensation paid.

b.the way the agency is created.

c.the authority given to the agent.

d.the type of work the principal does.

10.A formal written document authorizing one person to act for another is called a(n)

a.appointment.

b.power of attorney.

c.employment contract.

d.bailment agreement.

11.When an agent makes a contract for a deceased principal, the contract is

a.binding on the agent.

b.binding on the principal’s estate.

c.voidable.

d.void.

12.Doan authorized Marple to sell Doan’s car for not less than $2,000 for a commission of 10%. Marple sold the car for $2,400. How much must Marple give Doan?

a.$2,000.

b.$2,000 less the commission.

c.$2,200.

d.$2,400 less the commission.

13.An agent is given formal written authority to sign checks for her principal. This formal written authorization is called a(n)

a.affidavit.

b.power of attorney.

c.notary.

d.certification.

14.Morales, a general agent for the Kincaid Manufacturing Company, was notified of the company’s bankruptcy. Which of the following statements about the principal-agent relationship is true?

a.Contracts made by an agent after the bankruptcy of the principal are binding on the principal.

b.A general agent is liable as a guarantor of the bankrupt principal’s unpaid accounts.

c.The principal’s bankruptcy has no effect on the principal-agent agreement.

d.The bankruptcy of the principal terminates the agency agreement.

15.A principal-agent relationship can be terminated by

a.the death of a third party.

b.the request of a third party.

c.mutual agreement between principal and agent.

d.the bankruptcy of a third party.

MATCHING QUESTIONS

Use the following terms to indicate the way in which the agency relationship was created. On the line next to each description, write the letter of the term that is most closely related to it.

1._____ Arlis left Marvin, a friend, at her fruit and vegetable stand with instructions only to tell customers that the stand would open two hours late because of an emergency. While Arlis was gone, Marvin sold fruit and vegetables to several customers.
2._____ Calkins used Green’s car to drive Green’s parents to a family reunion 50 miles away. The car developed engine trouble, and Calkins had to have it repaired in order to reach the destination. Calkins presented the repair bill to Green.
3._____ Beaty signed a three-year written contract to manage Richard’s Tour Guide Agency in New York City.
4._____ Downs asked Erlman to purchase a stereo and charge it to her (Downs’s) account with her credit card. She asked Erlman to pay no more than $750. Erlman charged a stereo that cost $1,000. When the bill arrived, Downs paid it in full.
5._____ Count is employed under a five-year contract as a sales representative for Arnold’s Clothes Unlimited. Count sold merchandise on credit to Barnes’s Department Store, which must pay the bill in thirty days. / a.Agency created by contract
b.Agency created by appearance
c.Agency created by ratification
d.Agency created by necessity

CASE PROBLEMS

Read the case problems below. For each problem, answer yes or no, and then explain your answer in the space provided.

1.Todd was a salesperson for the Marcum Textbook Company. The company provided her with a car to travel to various high schools within a specific territory in Wyoming. While she was driving within the speed limit on a highway, the car was struck by a hit-and-run driver, causing $200 in damages. Todd paid for the repairs out of her own pocket, but Marcum refused to repay Todd, claiming it had no legal obligation to do so. Was the company correct?

______

2.O’Brien, a retiree, decided to invest in a fast-growing company that was selling its stock for $20 a share. He appointed Walford, a person with a good business background, as his agent to buy fifty shares of Xeon stock. Unknown to O’Brien, Walford already had purchased one hundred shares of Xeon stock for himself when it was being offered at $10 a share. Walford then sold fifty of his shares to O’Brien for $20 a share and kept the profit. When O’Brien found this out, he demanded that Walford take the stock back, stating that what Walford did was a breach of trust. Did Walford have to comply?

______

3.DiFabio, an adult, hired Nichols, a minor, as general manager of a service station and authorized him to buy supplies. Nichols contracted to buy some supplies that were not needed. DiFabio claimed that the contract was not valid because Nichols was a minor and therefore could not act as an agent. Was DiFabio legally correct in claiming that he was not bound by Nichols’s contract?

______

4.As purchasing agent for the Delton Company, Millson often bought materials from the Howard Supply Company. After Delton discharged him, Millson bought something for himself from Howard Supply but charged it to Delton. Howard Supply knew nothing about Millson’s dismissal. Was Howard Supply able to hold the Delton Company liable for Millson’s purchase?

______

5.Fox, who was going into the army, contracted with Scutti Auto Sales to sell his car for a commission. Scutti Auto Sales advanced $500 to Fox, with the understanding that the advance would be paid back out of the proceeds of the sale. Three weeks later, before the car was sold, Fox changed his mind and tried to terminate the agency. Was Fox legally able to terminate the agency?

______