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BUSINESS LAW 2026–2027 COMPLETE STUDY GUIDE:
AGENCY PRACTICE EXAM BANK: 100 QUESTIONS WITH
DETAILED RATIONALES
Agency Law / Business Law / Business / Management
Exam coverage:
❖ Section 1 (Q1–20): Nature and creation of agency, types of
agency, rights and duties of principal and agent.
❖ Section 2 (Q21–40): Authority of the agent, including actual,
apparent, implied, and inherent authority, and liability to third
parties.
❖ Section 3 (Q41–60): Duties of agent and principal, including
loyalty, care, obedience, accounting, and remedies for
breach.
❖ Section 4 (Q61–75): Liability for torts and crimes, including
respondeat superior and independent contractor rules.
❖ Section 5 (Q76–100): Termination of agency, ratification, and
recent developments in agency law
Section 1: Nature and Creation of Agency (Questions 1–20)
Question 1
A business owner is considering entering into an agency
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relationship to expand their operations. The owner must
understand the fundamental nature of agency before
proceeding. Which of the following best describes an agency
relationship?
A. A relationship where one person acts as an independent
contractor for another
B. A consensual relationship where one person (the agent) acts
on behalf of another (the principal) and is subject to the
principal's control
C. A relationship where two parties share profits equally
D. A relationship where one person sells goods to another
CORRECT ANSWER: B
RATIONALE: Agency is a consensual relationship in which one
person (the principal) manifests assent that another person (the
agent) shall act on the principal's behalf and subject to the
principal's control, and the agent consents to so act. Option A
describes an independent contractor relationship, which may or
may not be agency. Option C describes a partnership. Option D
describes a sale.
Question 2
A principal and an agent are discussing the creation of their
agency relationship. The principal asks what elements are
required to form a valid agency. Which of the following is NOT
required to create an agency relationship?
A. Mutual assent between the principal and agent
B. The agent's power to affect the principal's legal relations
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C. A written contract
D. The principal's right to control the agent's conduct
CORRECT ANSWER: C
RATIONALE: Agency requires mutual assent, the agent's power
to affect the principal's legal relations, and the principal's right
of control. A written contract is not required for an agency
relationship to exist, except where the Statute of Frauds requires
it (e.g., for real estate transactions or contracts that cannot be
performed within one year).
Question 3
A business owner appoints a manager to handle day-to-day
operations. The manager is given specific instructions about
pricing and hiring. Which of the following best describes the
type of agency created when the principal explicitly grants
authority through written or spoken words?
A. Implied agency
B. Express agency
C. Apparent agency
D. Agency by estoppel
CORRECT ANSWER: B
RATIONALE: Express agency is created when the principal
explicitly grants authority to the agent through written or spoken
words. Implied agency (A) arises from the conduct of the
parties. Apparent agency (C) and agency by estoppel (D) are
based on the principal's manifestations to third parties.
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Question 4
A company hires a salesperson and gives them a company car,
business cards, and the authority to negotiate sales. Although
not explicitly stated, the salesperson reasonably believes they
have authority to finalize sales. Which type of authority does this
represent?
A. Express authority
B. Implied authority
C. Apparent authority
D. Inherent authority
CORRECT ANSWER: B
RATIONALE: Implied authority is authority that is not expressly
granted but is reasonably necessary to carry out the express
authority. A salesperson with authority to negotiate sales has
implied authority to finalize sales as a necessary part of the job.
Express authority (A) must be explicitly stated. Apparent
authority (C) is based on the principal's manifestations to third
parties. Inherent authority (D) is derived from the agent's
position.
Question 5
A principal tells a third party that an individual is their agent and
has authority to make purchases on their behalf. The third party
reasonably relies on this representation and sells goods to the
agent on credit. The principal later claims the agent had no
actual authority. Which type of authority binds the principal?
A. Actual authority
BUSINESS LAW 2026–2027 COMPLETE STUDY GUIDE:
AGENCY PRACTICE EXAM BANK: 100 QUESTIONS WITH
DETAILED RATIONALES
Agency Law / Business Law / Business / Management
Exam coverage:
❖ Section 1 (Q1–20): Nature and creation of agency, types of
agency, rights and duties of principal and agent.
❖ Section 2 (Q21–40): Authority of the agent, including actual,
apparent, implied, and inherent authority, and liability to third
parties.
❖ Section 3 (Q41–60): Duties of agent and principal, including
loyalty, care, obedience, accounting, and remedies for
breach.
❖ Section 4 (Q61–75): Liability for torts and crimes, including
respondeat superior and independent contractor rules.
❖ Section 5 (Q76–100): Termination of agency, ratification, and
recent developments in agency law
Section 1: Nature and Creation of Agency (Questions 1–20)
Question 1
A business owner is considering entering into an agency
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relationship to expand their operations. The owner must
understand the fundamental nature of agency before
proceeding. Which of the following best describes an agency
relationship?
A. A relationship where one person acts as an independent
contractor for another
B. A consensual relationship where one person (the agent) acts
on behalf of another (the principal) and is subject to the
principal's control
C. A relationship where two parties share profits equally
D. A relationship where one person sells goods to another
CORRECT ANSWER: B
RATIONALE: Agency is a consensual relationship in which one
person (the principal) manifests assent that another person (the
agent) shall act on the principal's behalf and subject to the
principal's control, and the agent consents to so act. Option A
describes an independent contractor relationship, which may or
may not be agency. Option C describes a partnership. Option D
describes a sale.
Question 2
A principal and an agent are discussing the creation of their
agency relationship. The principal asks what elements are
required to form a valid agency. Which of the following is NOT
required to create an agency relationship?
A. Mutual assent between the principal and agent
B. The agent's power to affect the principal's legal relations
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C. A written contract
D. The principal's right to control the agent's conduct
CORRECT ANSWER: C
RATIONALE: Agency requires mutual assent, the agent's power
to affect the principal's legal relations, and the principal's right
of control. A written contract is not required for an agency
relationship to exist, except where the Statute of Frauds requires
it (e.g., for real estate transactions or contracts that cannot be
performed within one year).
Question 3
A business owner appoints a manager to handle day-to-day
operations. The manager is given specific instructions about
pricing and hiring. Which of the following best describes the
type of agency created when the principal explicitly grants
authority through written or spoken words?
A. Implied agency
B. Express agency
C. Apparent agency
D. Agency by estoppel
CORRECT ANSWER: B
RATIONALE: Express agency is created when the principal
explicitly grants authority to the agent through written or spoken
words. Implied agency (A) arises from the conduct of the
parties. Apparent agency (C) and agency by estoppel (D) are
based on the principal's manifestations to third parties.
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Question 4
A company hires a salesperson and gives them a company car,
business cards, and the authority to negotiate sales. Although
not explicitly stated, the salesperson reasonably believes they
have authority to finalize sales. Which type of authority does this
represent?
A. Express authority
B. Implied authority
C. Apparent authority
D. Inherent authority
CORRECT ANSWER: B
RATIONALE: Implied authority is authority that is not expressly
granted but is reasonably necessary to carry out the express
authority. A salesperson with authority to negotiate sales has
implied authority to finalize sales as a necessary part of the job.
Express authority (A) must be explicitly stated. Apparent
authority (C) is based on the principal's manifestations to third
parties. Inherent authority (D) is derived from the agent's
position.
Question 5
A principal tells a third party that an individual is their agent and
has authority to make purchases on their behalf. The third party
reasonably relies on this representation and sells goods to the
agent on credit. The principal later claims the agent had no
actual authority. Which type of authority binds the principal?
A. Actual authority
