ACCA LW · Chapter 7
Agency and partnership MCQs with Answers
10 multiple-choice questions on Agency and partnership for ACCA LW Corporate and Business Law. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Which of the following best describes ostensible (apparent) authority in agency?
- A) Authority expressly given by the principal to the agent in writing
- B) Authority arising because the principal has represented to a third party that the agent has authority, and the third party relied on that representation
- C) Authority arising because of an emergency affecting the principal's goods
- D) Authority conferred retrospectively when the principal ratifies an unauthorised contract
Show answer & explanation
Answer: B) Authority arising because the principal has represented to a third party that the agent has authority, and the third party relied on that representation
Apparent authority arises by estoppel: the principal's words or conduct lead the third party to believe the agent has authority, and the third party relies on this, as in Freeman & Lockyer v Buckhurst Park Properties. The principal is then bound even if no actual authority exists. The other options describe express actual authority, agency of necessity and ratification.
Question 2
Promoters entered into a contract on behalf of a company that had not yet been incorporated. After incorporation the company tried to ratify the contract. Following Kelner v Baxter, why could the company not ratify?
- A) A company can never ratify contracts made by agents
- B) Ratification is possible only for contracts worth less than a set amount
- C) The third party had not consented to the ratification
- D) The principal must have been in existence when the agent made the contract
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Answer: D) The principal must have been in existence when the agent made the contract
One condition for ratification is that the principal existed and had capacity at the time the agent acted. A company not yet incorporated cannot satisfy this, so in Kelner v Baxter the promoters were personally liable. This rule is now reflected in s51 Companies Act 2006, under which the person acting for an unformed company is personally liable unless otherwise agreed.
Question 3
Which of the following is NOT a duty owed by an agent to the principal?
- A) To avoid conflicts of interest and not make secret profits
- B) To pay the principal's debts out of the agent's own resources
- C) To act with reasonable care and skill
- D) To account to the principal for money received on the principal's behalf
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Answer: B) To pay the principal's debts out of the agent's own resources
An agent owes duties of performance, obedience, reasonable care and skill, personal performance, accounting, and fiduciary duties such as avoiding conflicts of interest, not taking bribes or secret profits, and confidentiality. There is no duty to discharge the principal's debts from the agent's own funds. Rather, it is the principal who must indemnify the agent for expenses properly incurred.
Question 4
Under s1 of the Partnership Act 1890, how is a partnership defined?
- A) A separate legal person formed by registration with the Registrar of Companies
- B) The relation which subsists between persons carrying on a business in common with a view of profit
- C) Any arrangement under which two or more persons co-own property
- D) An association of persons carrying on a non-profit activity
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Answer: B) The relation which subsists between persons carrying on a business in common with a view of profit
Section 1 defines partnership as the relation between persons carrying on a business in common with a view of profit. An ordinary partnership in English law is not a separate legal person and arises without registration. Mere co-ownership of property does not of itself create a partnership, and there must be a view of profit.
Question 5
Under s5 of the Partnership Act 1890, what is the position when a partner enters into a contract in the usual course of the firm's business but has been forbidden by the other partners to do so?
- A) The firm is never bound because the partner lacked actual authority
- B) The firm is bound unless the third party knew the partner lacked authority or did not know or believe him to be a partner
- C) Only the partner who made the contract is liable, never the firm
- D) The firm is bound only if the contract was made in writing
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Answer: B) The firm is bound unless the third party knew the partner lacked authority or did not know or believe him to be a partner
Every partner is an agent of the firm, and acts done in carrying on the firm's business in the usual way bind the firm. Internal restrictions do not bind a third party who is unaware of them, because the partner has implied usual authority. The firm is not bound if the third party knew the partner had no authority or did not know or believe him to be a partner.
Question 6
Karim retires from a trading partnership. He does not notify any of the firm's customers. One year later, a long-standing customer who had dealt with the firm when Karim was a partner supplies goods on credit and is not paid. What is Karim's position?
- A) Karim cannot be liable for any debt incurred after he ceased to be a partner
- B) Karim is liable only if he signed the order for the goods
- C) Karim is liable only for debts incurred within one month of retirement
- D) Karim may be liable for the debt, because existing customers must be given actual notice of his retirement
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Answer: D) Karim may be liable for the debt, because existing customers must be given actual notice of his retirement
A retiring partner remains liable for debts incurred before retirement, and may also be liable for later debts to persons who dealt with the firm before the change and had no notice of it. Under the Partnership Act 1890 existing customers should receive actual notice, while a notice in the London Gazette is effective against those who had not previously dealt with the firm. Because the customer received no notice, Karim may be liable.
Question 7
Which of the following events dissolves an ordinary partnership automatically under the Partnership Act 1890, unless the partnership agreement provides otherwise?
- A) The admission of a new partner
- B) The death or bankruptcy of a partner
- C) A partner taking a period of unpaid leave
- D) A partner giving notice to retire from a partnership agreed to last for a fixed term
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Answer: B) The death or bankruptcy of a partner
Unless otherwise agreed, a partnership is dissolved by the death or bankruptcy of any partner, by expiry of a fixed term, by completion of the undertaking, or (for a partnership at will) by notice. Admission of a partner or a period of leave does not dissolve the firm. A fixed-term partnership cannot generally be ended early simply by one partner giving notice.
Question 8
Which of the following is a feature of a limited liability partnership (LLP) formed under the Limited Liability Partnerships Act 2000?
- A) Its members have unlimited personal liability for its debts
- B) It does not need to file any information with the Registrar of Companies
- C) It must have at least one general partner with unlimited liability
- D) It is a body corporate with legal personality separate from its members
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Answer: D) It is a body corporate with legal personality separate from its members
An LLP is a separate legal person, so it owns its property and is liable for its own debts, and its members' liability is generally limited to their agreed contribution. It is formed by registration and must file accounts and an annual confirmation statement. The requirement for a general partner with unlimited liability applies to a limited partnership under the Limited Partnerships Act 1907, not to an LLP.
Question 9
In a limited partnership under the Limited Partnerships Act 1907, what happens if a limited partner takes part in managing the partnership business?
- A) Nothing, because limited partners are entitled to manage the business
- B) The limited partnership automatically converts into an LLP
- C) The limited partner becomes liable as a general partner for debts incurred while participating in management
- D) The limited partner automatically ceases to be a partner
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Answer: C) The limited partner becomes liable as a general partner for debts incurred while participating in management
A limited partner's liability is restricted to the amount contributed, provided they do not take part in management. If they do, they lose that protection and become liable as a general partner for debts and obligations incurred during that period. Limited partnerships remain distinct from LLPs, and there is no automatic conversion or expulsion.
Question 10
An agent bought goods for a principal without actual authority, intending to buy them for himself if the principal did not approve. He did not tell the seller he was acting for anyone. In Keighley, Maxsted & Co v Durant, why could the principal not ratify the contract?
- A) The principal did not exist at the time of the contract
- B) Ratification must occur before the contract is made
- C) The agent had not purported to act as agent for a named or identifiable principal when contracting
- D) Contracts for the sale of goods cannot be ratified
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Answer: C) The agent had not purported to act as agent for a named or identifiable principal when contracting
A principal can ratify only a contract that the agent purported to make on its behalf. In Keighley, Maxsted v Durant the agent contracted in his own name without disclosing that he was acting for anyone, so an undisclosed principal could not ratify. Ratification by definition occurs after the contract, and contracts for goods can be ratified where the conditions are met.