ACCA F4 - Agency Law Exam Practice Test

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ACCA F4 - Agency Law Exam Practice Test
Most relationships in the business environment are made through the use of agents. It is for this reason why there are some laws governing the agent and client relationship. Take up this revision quiz on agency law and see if you are ready for the test that is around the corner.


Questions and Answers
  • 1. 

    An _______ is a person who is authorised to act for another (the principal) in the making of legal relations with third parties.

    Explanation
    An agent is a person who is authorized to act on behalf of another person, known as the principal, in legal matters with third parties. The agent has the power to make decisions and enter into contracts on behalf of the principal, and any actions taken by the agent are legally binding on the principal. The agent acts as a representative of the principal and is entrusted with the authority to act in their best interests.

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  • 2. 

    Contracts are made between the principal and the third party or directly with the agent. 

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    The resulting contracts are made between the principal and the third party, and not directly with the agent.

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  • 3. 

    An agency relationship can be established in one of five ways: 

    • A.

      Express agreement

    • B.

      Implied agreement

    • C.

      By necessity

    • D.

      By ratification

    • E.

      By estoppel

    • F.

      Implied necessity

    • G.

      Express necessity

    • H.

      Enforced agreement

    Correct Answer(s)
    A. Express agreement
    B. Implied agreement
    C. By necessity
    D. By ratification
    E. By estoppel
    Explanation
    An agency relationship can be established in five ways: express agreement, implied agreement, by necessity, by ratification, and by estoppel. Express agreement refers to a clear and explicit agreement between the principal and the agent. Implied agreement implies that the agency relationship is established through the actions and conduct of the parties involved. By necessity occurs when an emergency or urgent situation requires someone to act on behalf of another. By ratification happens when the principal accepts or approves the actions of someone who acted without prior authorization. By estoppel arises when the principal leads others to believe that someone is their agent, and they are then bound by that representation.

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  • 4. 

    _________ agreement is where P actually appoints A as his agent. The agreement can be made orally or in writing.

    Correct Answer(s)
    Express
    Explanation
    Express agreement refers to a situation where P explicitly appoints A as his agent. This appointment can be done through oral or written communication. In an express agreement, both parties clearly express their intentions and come to a mutual understanding regarding the agency relationship. This type of agreement provides a clear indication of the agent's authority and responsibilities, ensuring transparency and clarity in the relationship between P and A.

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  • 5. 

    ________ agreement is where P has not expressly agreed that A should be his agent. However, the agreement can be ________ from the parties’ conduct or relationship.

    Correct Answer(s)
    implied
    Explanation
    Implied agreement is a type of agreement where the principal (P) has not explicitly agreed that the agent (A) should act on their behalf. However, this agreement can be inferred or deduced from the parties' conduct or relationship. In other words, even though there is no explicit agreement in words, the actions or behavior of the parties involved indicate that there is an understanding or agreement between them.

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  • 6. 

    To become an agent by necessity requires four conditions to be satisfied:

    • A.

      P’s property is entrusted to A

    • B.

      An emergency arises making it necessary for A to act

    • C.

      It is not possible to communicate with P

    • D.

      A acts in the interest of P

    • E.

      A’s property is entrusted to P

    • F.

      An emergency arises making it necessary for P to act

    • G.

      It is not possible to communicate with A

    • H.

      P acts in the interest of A

    Correct Answer(s)
    A. P’s property is entrusted to A
    B. An emergency arises making it necessary for A to act
    C. It is not possible to communicate with P
    D. A acts in the interest of P
    Explanation
    In order for someone to become an agent by necessity, four conditions need to be satisfied. First, P's property must be entrusted to A. Second, an emergency must arise that makes it necessary for A to act. Third, it must not be possible to communicate with P. Lastly, A must act in the interest of P. This answer includes all of these conditions.

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  • 7. 

    Becoming an agent by necessity is shown in -

    • A.

      Great Northern Railway v Swaffield (1874)

    • B.

      Kelner v Baxter (1866)

    • C.

      Freeman & Lockyer v Buckhurst Park Properties Ltd (1964)

    Correct Answer
    A. Great Northern Railway v Swaffield (1874)
    Explanation
    In Great Northern Railway v Swaffield (1874), the concept of becoming an agent by necessity is demonstrated. This means that a person can become an agent for another party out of necessity, even without their explicit consent or appointment. The case likely provides an example of a situation where someone had to act as an agent due to unforeseen circumstances or emergencies, and their actions were later recognized as valid and binding.

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  • 8. 

    If a properly appointed agent exceeds his authority, or a person having no authority purports to act as an agent, the principal has no liability on that contract unless the principal _______ the contract. 

    Correct Answer
    ratifies
    Explanation
    If a properly appointed agent exceeds his authority, or a person having no authority purports to act as an agent, the principal has no liability on that contract unless the principal ratifies the contract. Ratification refers to the act of confirming or accepting a contract that was made without proper authority. By ratifying the contract, the principal essentially agrees to be bound by its terms and assumes liability for it. Without ratification, the principal is not legally obligated to honor the contract or be held responsible for its terms.

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  • 9. 

    The effect of ratification is to backdate A’s authority to act as agent. This requires P to:

    • A.

      Have the contractual capacity to make the contract

    • B.

      Have been in existence both when the contract was made and at the date of ratification

    • C.

      Be identified when the contract is made

    • D.

      Be aware of all the material facts

    • E.

      Clearly signify his intention to ratify the whole contract within a reasonable time

    • F.

      Be aware of the main material facts

    • G.

      Clearly signify his intention to ratify the all/some of the contract within a reasonable time

    • H.

      Have the legal capacity to make the contract

    Correct Answer(s)
    A. Have the contractual capacity to make the contract
    B. Have been in existence both when the contract was made and at the date of ratification
    C. Be identified when the contract is made
    D. Be aware of all the material facts
    Explanation
    The correct answer includes the requirements for P (the principal) to ratify a contract. P must have the contractual capacity to make the contract, meaning they have the legal ability to enter into a contract. P must also have been in existence both when the contract was made and at the date of ratification. P must be identified when the contract is made, meaning they must be clearly identified as the principal in the contract. P must be aware of all the material facts, meaning they must have knowledge of all the important information related to the contract. Finally, P must clearly signify their intention to ratify the whole contract within a reasonable time.

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  • 10. 

    Note that a void or illegal contract may still be ratified.

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    Note that a void or illegal contract cannot be ratified.

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  • 11. 

    In order for the principal to ratify a contract P must have been in existence both when the contract was made and at the date of ratification.  As shown in -

    • A.

      Kelner v Baxter (1866)

    • B.

      Great Northern Railway v Swaffield (1874)

    • C.

      Freeman & Lockyer v Buckhurst Park Properties Ltd (1964)

    Correct Answer
    A. Kelner v Baxter (1866)
    Explanation
    The correct answer is "Kelner v Baxter (1866)". This case is significant because it established the principle that for a principal to ratify a contract, they must have been in existence both when the contract was made and at the date of ratification. This means that if the principal did not exist at either of these times, they cannot ratify the contract. This case serves as a precedent for future cases involving the ratification of contracts by principals.

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  • 12. 

    _______ arises where P implies that A is his agent even though he is not. He is then prevented or 'stopped' from denying A’s authority.

    Correct Answer
    Estopple
    Explanation
    Estopple arises when someone is prevented from denying the authority of another person, even if that person is not actually their agent. This could occur when someone's actions or statements lead others to believe that they have given authority to another person, and they are then legally bound by that belief. In other words, estopple prevents someone from going back on their word or actions and denying the authority they appeared to have given.

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  • 13. 

    Agent by estoppel can be shown in -

    • A.

      Freeman & Lockyer v Buckhurst Park Properties Ltd (1964)

    • B.

      Kelner v Baxter (1866)

    • C.

      Great Northern Railway v Swaffield (1874)

    Correct Answer
    A. Freeman & Lockyer v Buckhurst Park Properties Ltd (1964)
    Explanation
    Freeman & Lockyer v Buckhurst Park Properties Ltd (1964) is the correct answer because it is a famous English case that established the principle of agent by estoppel. In this case, the court held that a company can be bound by the acts of its directors, even if they exceed their authority, if the company has represented to a third party that the director has the authority to act on its behalf. This case is significant because it expanded the scope of agency law and protects innocent third parties who rely on the representations made by a company or its agents.

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  • 14. 

    The authority of an agent is a central issue in the concept of agency. It determines:

    • A.

      The powers that the agent has on behalf of the principal

    • B.

      For which acts the principal is liable

    • C.

      For which acts the third party is liable

    • D.

      The powers that the principal has on behalf of the agent

    Correct Answer(s)
    A. The powers that the agent has on behalf of the principal
    B. For which acts the principal is liable
    Explanation
    The authority of an agent refers to the powers that the agent has on behalf of the principal. This means that the agent has the ability to make decisions and take actions on behalf of the principal, within the scope of their authority. The principal is liable for the acts of the agent, meaning that they are legally responsible for any actions or decisions made by the agent within their authorized powers.

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  • 15. 

    If the agent exceeds his powers the principal may still be liable to the third party, but he may have rights against the agent for breach of contract

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    If the agent exceeds his powers, it means that the agent goes beyond the authority given to him by the principal. In such a situation, the principal may still be held liable to the third party because the third party may have reasonably relied on the agent's actions or representations. However, the principal may have rights against the agent for breach of contract because the agent acted outside the scope of his authority. Therefore, the statement is true.

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  • 16. 

    _______ authority is authority that P has explicitly given to A.

    Correct Answer
    express
    Explanation
    Express authority refers to authority that has been explicitly given or stated by P (the principal) to A (the agent). This means that P has clearly communicated or expressed their authorization for A to act on their behalf. It is the opposite of implied authority, which is authority that is inferred or understood based on the circumstances or the nature of the relationship between P and A. In the context of this question, the correct answer is "express" because it directly aligns with the definition provided.

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  • 17. 

    An agent has _______ authority to do things which: - are reasonably incidental to the performance of an expressly authorised act - an agent occupying that position would usually have authority to do - have not been expressly prohibited by P  

    Correct Answer
    implied
    Explanation
    The correct answer is "implied". This means that the agent has the authority to do things that are reasonably incidental to the performance of an expressly authorized act, that an agent in that position would usually have authority to do, and that have not been expressly prohibited by the principal.

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  • 18. 

    _______ authority arises where A is held out by P as having authority. The representation by P may arise from: - the appointment of A to an office or position (in which case A has authority to do those things which are usually done by a person occupying that position) - previous dealings (allowing A to make contracts in the past is a representation that A has authority to continue to do so in the future)  

    Correct Answer
    apparent
    Explanation
    Apparent authority arises where A is held out by P as having authority. This can occur through the appointment of A to an office or position, where A has authority to do things typically done by someone in that position. It can also arise from previous dealings, where A has been allowed to make contracts in the past, creating a representation that A has authority to continue doing so in the future. Therefore, the correct answer is "apparent."

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  • 19. 

    A third party cannot rely on apparent authority when he knows of the lack of actual authority. 

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    When a third party is aware that someone does not have actual authority, they cannot rely on apparent authority. This means that even if someone appears to have authority to act on behalf of another person or organization, if the third party knows that the person does not actually have that authority, they cannot hold the person or organization liable for any actions or agreements made. Therefore, the statement is true.

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  • 20. 

    A principal is ______ where the existence of the principal has been made known to the third party. It is not necessary for the principal to be identified to the third party.

    Correct Answer
    disclosed
    Explanation
    The correct answer is "disclosed." In this context, "disclosed" means that the existence of the principal has been made known to a third party. It is not necessary for the principal to be identified to the third party, but the fact that the principal exists has been revealed.

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  • 21. 

    As a general rule, the contract is between the principal and the third party. The agent is neither liable nor entitled under the contract. However, the agent will be personally liable in the following exceptional circumstances:

    • A.

      Where the agent showed an intention to undertake personal liability, e.g. by signing a written contract in his own name

    • B.

      Trade usage or custom

    • C.

      Where the agent refuses to identify the principal

    • D.

      Where the agent is acting on behalf of a fictitious principal

    • E.

      When the third party discovers the existence of the principal

    Correct Answer(s)
    A. Where the agent showed an intention to undertake personal liability, e.g. by signing a written contract in his own name
    B. Trade usage or custom
    C. Where the agent refuses to identify the principal
    D. Where the agent is acting on behalf of a fictitious principal
    Explanation
    The agent will be personally liable in the exceptional circumstances mentioned because in these cases, the agent has either explicitly or implicitly taken on personal responsibility for the contract. By signing a written contract in their own name, the agent is showing an intention to be personally liable. Similarly, if trade usage or custom dictates that the agent should be personally liable, they will be held accountable. Refusing to identify the principal or acting on behalf of a fictitious principal also indicates that the agent is assuming personal liability. In all these situations, the agent cannot rely on the general rule that the contract is between the principal and the third party.

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  • 22. 

    An __________ principal is where the principal’s existence has not been made known to the third party. When the third party discovers the existence of P, he can elect to treat P or A as bound by the transaction.

    Correct Answer(s)
    undisclosed
    Explanation
    An undisclosed principal refers to a situation where the principal's identity has not been revealed to a third party. In this scenario, when the third party becomes aware of the principal's existence, they have the option to consider either the principal or the agent as being obligated by the transaction.

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  • 23. 

    An agent has a fiduciary relationship with his principal. This is a position similar to that of a trustee. It has the following consequences:

    • A.

      A must not allow his personal interests to conflict with those of P

    • B.

      A must always act in the best interests of P

    • C.

      A must not make a secret profit

    • D.

      A has a duty to account to P for all money and property received

    • E.

      P must always act in the best interests of A

    • F.

      P can refuse to pay any money owed to A or recover any money already paid

    Correct Answer(s)
    A. A must not allow his personal interests to conflict with those of P
    B. A must always act in the best interests of P
    C. A must not make a secret profit
    D. A has a duty to account to P for all money and property received
    Explanation
    An agent has a fiduciary relationship with his principal, which means that the agent must prioritize the interests of the principal over his own. This includes not allowing personal interests to conflict with those of the principal, always acting in the best interests of the principal, and not making any secret profits. Additionally, the agent has a duty to account for all money and property received from the principal. On the other hand, the principal must also act in the best interests of the agent and has the right to refuse payment or recover any money already paid to the agent.

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  • 24. 

    Where an agent is in breach of his fiduciary duty, the following remedies are available:

    • A.

      P can repudiate the contract with the third party

    • B.

      A can be dismissed without notice

    • C.

      P can refuse to pay any money owed to A or recover any money already paid

    • D.

      P can recover any secret profit made or any bribe

    • E.

      A can be dismissed following sufficient notice

    • F.

      P can reclaim any fees, commission or pay previously awarded to A

    Correct Answer(s)
    A. P can repudiate the contract with the third party
    B. A can be dismissed without notice
    C. P can refuse to pay any money owed to A or recover any money already paid
    D. P can recover any secret profit made or any bribe
    Explanation
    When an agent breaches their fiduciary duty, the principal (P) has several remedies available to them. Firstly, P can repudiate the contract with the third party, meaning they can cancel the agreement. Secondly, P can dismiss the agent (A) without providing any notice. Thirdly, P can refuse to pay any money owed to A or even recover any money that has already been paid. Additionally, P can also seek to recover any secret profit or bribe that A may have obtained through their breach of duty. Lastly, P can reclaim any fees, commission, or pay that had previously been awarded to A.

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  • 25. 

    Principal’s liability to the agent: 

    • A.

      To claim remuneration or commission for services performed

    • B.

      To claim an indemnity against P for all expenses reasonably incurred in carrying out his obligations

    • C.

      To exercise a lien over P’s property.

    • D.

      To claim an indemnity against P for most expenses reasonably incurred in carrying out his obligations

    • E.

      To request remuneration or commission for services performed

    Correct Answer(s)
    A. To claim remuneration or commission for services performed
    B. To claim an indemnity against P for all expenses reasonably incurred in carrying out his obligations
    C. To exercise a lien over P’s property.
    Explanation
    The principal's liability to the agent includes the right to claim remuneration or commission for services performed by the agent. Additionally, the agent can claim an indemnity against the principal for all expenses reasonably incurred in carrying out their obligations. The agent also has the right to exercise a lien over the principal's property.

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