D216 Business Law for Accountants - Set 4 - Part 1

Correct Answer: Yes, an employee dealing with third parties

The default rule is that employees who deal with third parties on the employer's behalf are agents. Dana quotes prices and completes sales for the bakery, so agency law attaches and she binds the bakery. Option b is incorrect because hourly pay affects only whether she looks like an employee or a contractor. It says nothing about agency, and an hourly worker who transacts with customers plainly acts as the employer's agent. Option c is incorrect because agency is not reserved to managers at all. Any employee who negotiates or transacts business with outsiders for the employer becomes an agent, regardless of rank, and counter staff handling sales clearly qualify. Option d is incorrect because agency generally needs no writing and forms orally or by conduct. Dana's day-to-day counter work for the bakery creates the agency; no signed appointment document is required for her to bind her employer.

Correct Answer: An independent contractor

An independent contractor controls the methods and working conditions of the work while the hirer specifies only the desired result. Rivera dictates the outcome but not the how, and the roofer runs a distinct business, marking independent-contractor status. Option a is incorrect because employee status turns on the employer controlling the details and methods of the work. Rivera controls only the finished result, leaving crew, tools, and scheduling to the roofer, the opposite of close supervision. Option b is incorrect because a partnership requires co-owners sharing a business for profit. The roofer is hired for one job and shares no ownership, profits, or management of Rivera's enterprise, so no partnership relationship exists between them. Option d is incorrect because a gratuitous agent acts for the principal without pay while transacting business. The roofer is paid for the job and does not deal with third parties on Rivera's behalf, so that label does not fit.

Correct Answer: Acme, as a work for hire

A copyrightable work an employee creates within the scope of the job is a work for hire, so the employer owns the copyright automatically. The programmer wrote the code as part of her regular employment, giving Acme ownership. Option a is incorrect because the work-for-hire rule treats the employer as the author for employee-created works. Although she physically wrote the code, ownership vests in Acme by operation of law, not in the employee who produced it. Option c is incorrect because copyright ownership always vests somewhere the moment an original work is fixed. The work-for-hire doctrine assigns that ownership to the employer here, so it is simply wrong to say no party holds it. Option d is incorrect because employee-created work within the scope of employment belongs solely to the employer, not to employer and employee together. Joint ownership would require a different arrangement, which the facts do not describe at all.

Correct Answer: The independent contractor studio

Work created by an independent contractor belongs to the contractor unless an agreement makes it a work for hire or assigns the copyright. With no such agreement, the studio keeps ownership, and Northwind merely paid for a service. Option a is incorrect because paying for a contractor's service does not transfer the underlying copyright. Absent a written work-for-hire or assignment clause, the freelancer retains the rights, so Northwind bought the design but not ownership of it. Option b is incorrect because a state of formation never acquires copyright in a private company's artwork. Copyright vests in the creator, here the contractor, and the state's role in forming the LLC has nothing to do with ownership. Option c is incorrect because contractor-created work defaults entirely to the contractor, not to a shared split with the client. Equal ownership would require an agreement to that effect, and the parties here signed nothing addressing rights.

Correct Answer: A minor can be an agent

Any person, including a minor, can serve as an agent because the agent is not the party bound to the contract. The minor merely acts for the principal, so the resulting contract binds the adult principal. Option b is incorrect because the law imposes no adult-capacity requirement on agents. The principal must have capacity since the principal becomes bound, but the agent can be virtually anyone, and a minor validly fills the role. Option c is incorrect because emancipation is irrelevant to whether someone may act as an agent. A minor need not be emancipated to sign for a principal, since the agent's own capacity is not what makes the contract binding. Option d is incorrect because a minor agent's use does not void the contract. The deal binds the principal, who has capacity; the minor's status affects only contracts made on the minor's own behalf, not this one.

Correct Answer: No, the principal did nothing

Agency by estoppel arises from the principal's own conduct, not the purported agent's bare claim. Northwind did or said nothing to create an appearance of authority, so no estoppel forms and it is not bound to the supplier. Option a is incorrect because reasonable reliance must rest on conduct by the principal, not a stranger's self-declaration. The supplier relied only on the man's own words, and reliance built on that is not the reasonable reliance estoppel requires. Option b is incorrect because mere delivery of goods does not bind a principal who created no appearance of agency. The supplier's performance cannot manufacture authority that Northwind never conveyed through any word or action of its own. Option d is incorrect because whether the stranger profits has no bearing on estoppel. The doctrine turns on the principal's appearance-creating conduct and the third party's reliance, neither of which depends on any gain to the purported agent.

Correct Answer: Ratification of the unauthorized act

Ratification is the principal's after-the-fact affirmation of an unauthorized act, which binds the principal as if authorized from the start. Acme's owner accepted the van deal before the seller withdrew, so Acme is bound by ratification. Option a is incorrect because apparent authority requires the principal's prior conduct leading the third party to believe the worker was authorized. No such pattern existed; Acme became bound only through its later approval, which is ratification instead. Option b is incorrect because agency by operation of law arises from necessity or emergency without any agreement. Buying a van in normal business is neither, and Acme is bound because its owner affirmed the deal, not by forced circumstances. Option c is incorrect because the Equal Dignity Rule governs when an agent's authority must be written to match a written contract. It does not create binding effect from an owner's approval; ratification is what binds Acme here.

Correct Answer: Revocation of the agency

Revocation is termination of the agency by the principal, who revokes the agent's authority. Because the principal is the one ending the relationship here, the correct label for this act is revocation rather than any agent-side term. Option a is incorrect because renunciation is termination of the agency by the agent, not the principal. The facts have the principal ending things, so the matching term for the principal's act is revocation, not the agent-side label. Option c is incorrect because ratification is a principal's affirmation of an unauthorized act, a binding concept, not a way to end an agency. It has nothing to do with terminating a relationship the principal already established with the agent. Option d is incorrect because dissociation describes a partner or member severing from an entity, not a principal ending an agency. Termination by the principal uses the term revocation, the precise label these facts require.

Correct Answer: Yes, apparent authority lingered without notice

After termination by the parties, apparent authority continues until the third party receives notice from any source. Because Acme never notified its longtime customer, the agent still had apparent authority as to that customer, so Acme can be bound. Option b is incorrect because the end of actual authority does not by itself protect the principal from an uninformed third party. Apparent authority survives termination until the customer learns of it, and here no notice was ever given. Option c is incorrect because firing ends actual authority but not the apparent authority a longtime customer reasonably relies on. Termination by the parties leaves apparent authority alive until notice reaches that customer, which never happened in these facts. Option d is incorrect because the principal's liability on the order does not hinge on whether Acme profits. It turns on the surviving apparent authority created by the prior dealings and the missing notice, not on any benefit to Acme.

Correct Answer: No, death terminated the agency automatically

Death of either party terminates an agency by operation of law automatically and immediately, with no duty to notify third parties. The agency ended the moment the principal died, so the later lease does not bind the estate. Option a is incorrect because operation-of-law terminations like death do not wait for notice to the agent. Unlike termination by the parties, death ends the agency instantly, so the agent's ignorance cannot keep authority alive against the estate. Option b is incorrect because the routine nature of leasing does not preserve authority after the principal dies. Death automatically ends the agency regardless of how ordinary the transaction is, so a routine lease signed afterward still fails to bind. Option d is incorrect because the lease does not bind the estate as surviving authority, and the question asks whether the agency survived, which it did not. The estate might choose to act, but the agency itself ended at death.

Correct Answer: The Equal Dignity Rule requires written authority

Under the Equal Dignity Rule, an agent's authority must be written when the contract to be made must be written. A land sale falls under the Statute of Frauds, so the agent's oral authority was insufficient absent an exception. Option a is incorrect because agency requires no consideration at all, and a gratuitous agency is valid. The flaw here is the missing writing for authority to sell land, not any absence of a bargained-for exchange between the parties. Option b is incorrect because apparent authority is not an automatic override for land sales. Nothing shows the principal created any appearance toward the buyer, and the governing problem is the writing requirement the Equal Dignity Rule imposes. Option c is incorrect because a gratuitous, unpaid agency is perfectly enforceable. Whether the agent was paid is beside the point; the land-sale contract triggers the Equal Dignity Rule, which demanded that the agent's authority be written.

Correct Answer: Special power of attorney, express authority

A power of attorney is a written, usually notarized document conferring express authority, and a special power of attorney grants it for specified, limited circumstances. Authorizing the sale of one particular parcel is exactly such a limited, express grant. Option b is incorrect because a general power of attorney confers broad authority for all situations, not a single defined act. Limiting the grant to one specific parcel makes it special rather than general, so this label misstates the scope. Option c is incorrect because apparent authority arises from the principal's conduct toward third parties, not a notarized grant to the agent. A power of attorney creates actual, express authority, which is different from the appearance-based idea named here. Option d is incorrect because a power of attorney confers express, not implied, authority, and implied authority arises by inference from position or custom. The notarized document directly states the agent's power, so it is an express grant.

Correct Answer: Yes, apparent authority reached ten thousand

Acme's two-year pattern of honoring contracts up to ten thousand created apparent authority at that level toward suppliers. The supplier reasonably relied on that appearance, so Acme is bound to the nine-thousand-dollar deal despite the secret internal cut. Option a is incorrect because the reduced actual authority does not control against a supplier who never learned of it. Apparent authority built by Acme's long pattern still reached ten thousand, so the private two-thousand limit does not shield Acme. Option b is incorrect because a supplier who reasonably relies on an established pattern has no duty to hunt for secret limits. Acme created the appearance and never gave notice, so the risk of the undisclosed cut falls on Acme. Option d is incorrect because Acme is bound for the full nine thousand, not merely the secret two-thousand cap. Apparent authority measured by the two-year pattern reached ten thousand, so the deal within that appearance binds Acme entirely.

Correct Answer: No, the buyer withdrew before ratification

Ratification must occur before the third party withdraws from the unauthorized deal. The buyer withdrew first, so nothing remained for the principal to affirm, and a later attempt to ratify cannot bind the buyer to the contract. Option a is incorrect because relation-back applies only to a valid ratification, and none is possible after the third party withdraws. The buyer's earlier withdrawal left no offer to affirm, so the relating-back idea never engages here. Option b is incorrect because knowing all material facts is only one requirement and cannot revive a deal the buyer already exited. Once the buyer withdrew before any affirmation, full knowledge still leaves nothing available to ratify. Option c is incorrect because the barrier here is the buyer's prior withdrawal, not any capacity timing. The principal presumably had capacity throughout; ratification fails because affirmation did not occur before the third party pulled out.

Correct Answer: The principal, a disclosed principal

When an authorized agent contracts for a disclosed principal, the principal is the contracting party and is liable, while the agent generally drops out. The supplier knew it was dealing with Acme, so it sues Acme, the disclosed principal. Option a is incorrect because the authorized agent of a disclosed principal is not personally liable on the contract. Since the supplier knew it was dealing with Acme, the principal is the proper defendant and the agent generally drops out. Option c is incorrect because the modest value of the supplies has no effect on liability. A valid contract with a disclosed principal binds that principal regardless of amount, so the supplier may pursue Acme for payment. Option d is incorrect because the supplier is the plaintiff, not a co-defendant, and the authorized agent is not jointly liable with anyone. A disclosed principal alone answers on the contract, so the correct target of suit is Acme.

Correct Answer: The agent, a partially disclosed principal

With a partially disclosed principal, the third party knows a principal exists but not who it is, so the third party may hold the agent liable. Because the supplier never learned the client's identity, it can sue the agent. Option b is incorrect because the supplier may hold the agent liable when the principal is only partially disclosed. Limiting recovery to the unnamed client ignores the rule that a third party ignorant of the principal can pursue the agent. Option c is incorrect because the agent's authority does not erase liability when the principal is partially disclosed. Authorization makes the deal genuine, but the disclosure status still lets the uninformed supplier sue the agent, so someone remains answerable. Option d is incorrect because the supplier's bank is a stranger to this contract and owes nothing on it. Liability rests with the agent under partially disclosed principal rules, so pointing to an unrelated financial institution has no basis.

Correct Answer: Yes, this was a detour within scope

A detour is a slight deviation from the job while the agent is still essentially doing the work, so the principal remains liable. The driver's brief coffee side trip during the delivery is a detour, keeping Acme liable. Option a is incorrect because not every deviation defeats liability. A slight departure is a detour that keeps the agent within the scope of employment, so the employer stays liable; only a substantial personal departure would cut off responsibility. Option b is incorrect because driving on the employer's errand is job conduct, not inherently personal. The driver was completing an assigned delivery, so the trip fell within the scope of employment, and Acme cannot escape by calling driving personal. Option c is incorrect because a frolic is a substantial departure for the agent's own purposes, which this was not. A few blocks off route for coffee while still delivering is a minor detour, so the principal remains liable.

Correct Answer: Not liable, this was a frolic

A frolic is a substantial departure for the agent's own purposes, taking the agent outside the scope of employment, so the principal is not liable. Abandoning the route to drive far for a personal visit is a frolic, relieving Acme. Option a is incorrect because employee status alone does not create liability; the tort must occur within the scope of employment. By abandoning the delivery for a distant personal visit, the driver stepped outside that scope entirely. Option b is incorrect because employers are not liable for all driving their employees ever do. Respondeat superior reaches only conduct within the scope of employment, and a substantial personal detour like this frolic falls outside it, freeing Acme. Option d is incorrect because the facts describe an employee driver, not an independent contractor. Acme escapes liability because the personal trip was a frolic outside the scope of employment, not because of any misclassification of the driver.

Correct Answer: The duty of loyalty

The duty of loyalty requires the agent to act solely for the principal's benefit and forbids secret profit at the principal's expense. Buying materials personally and reselling them to the principal at a hidden markup breaches that loyalty duty. Option b is incorrect because the accounting duty concerns keeping and rendering records of the principal's funds and property. The core wrong here is self-dealing for secret profit, a loyalty breach; a bookkeeping failure does not capture the disloyal conduct. Option c is incorrect because notification concerns telling the principal matters relevant to the agency. While the agent hid the scheme, the fundamental violation is profiting secretly against the principal's interest, which breaches loyalty rather than merely failing to inform. Option d is incorrect because obedience concerns following the principal's lawful, clear instructions. Nothing shows the agent disobeyed a specific order; the agent instead served personal interest through a hidden markup, which is disloyalty, not an obedience violation.

Correct Answer: The principal is charged with that knowledge

Under the duty of notification, the principal is charged with knowledge the agent had a duty to convey, even if the agent never conveyed it. The defect fell within the agency, so the principal is treated as knowing it. Option a is incorrect because the law does the opposite of presuming ignorance. When an agent learns a material fact within the agency, the principal is deemed to know it, so the principal cannot claim ignorance of the reported defect. Option b is incorrect because the agent's knowledge is imputed to the principal, not confined to the agent. Notification's central consequence is that the principal is charged with what the agent should have conveyed, so knowledge does not stay put. Option c is incorrect because imputed knowledge does not depend on any written notice. The rule charges the principal with facts the agent should have conveyed regardless of form, so requiring a writing misstates how notification and imputation operate.