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SQE1 practice questions

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Question 1Business law and practice

A private limited company has a single shareholder who is also its only director. The company's business fails and it cannot pay its trade debts. Which statement best describes the shareholder's liability for those debts?

  1. The shareholder is liable only for any amount unpaid on their shares. Correct answer.
  2. The shareholder has unlimited liability because the company has only one member.
  3. The shareholder is personally liable for the company's unpaid debts because they controlled the company.
  4. The shareholder must pay the debts up to the value of the company's assets.

Explanation

On incorporation a company becomes a body corporate with legal personality separate from its members, so its debts are its own. A member's liability is limited to any amount unpaid on their shares, and complete control of the company does not create personal liability for its obligations.

Question 2Business law and practice

Which feature distinguishes a general partnership from a private limited company?

  1. A partnership must be registered at Companies House before it can begin trading.
  2. A partnership does not have legal personality separate from its members. Correct answer.
  3. A partnership must have at least three partners before it can be formed.
  4. A partner's liability for the firm's debts is limited to the capital they have contributed.

Explanation

Under the Partnership Act 1890 a partnership is the relation between persons carrying on business in common with a view of profit; it is not a body corporate, and the partners own the business assets jointly. A company, by contrast, is a body corporate with legal personality distinct from its members.

Question 3Business law and practice

Which duty under the Companies Act 2006 requires a director to exercise powers only for the purposes for which they were conferred?

  1. The duty to act within powers. Correct answer.
  2. The duty to exercise reasonable care, skill and diligence.
  3. The duty to promote the success of the company for the benefit of members as a whole.
  4. The duty to exercise independent judgment.

Explanation

Section 171 of the Companies Act 2006 requires a director to act in accordance with the company's constitution and to exercise powers only for the purposes for which they were conferred. The other general duties are contained in separate sections and address different standards of conduct.

Question 4Business law and practice

Which of the following may a private limited company not carry out by written resolution?

  1. Changing the company's name.
  2. Appointing an additional director.
  3. Approving a director's service contract for a fixed term of three years.
  4. Removing a director before the expiry of their term of office. Correct answer.

Explanation

Section 288 of the Companies Act 2006 permits private companies to pass most resolutions in writing, but expressly excludes the removal of a director under section 168 and the removal of an auditor under section 510. Those decisions must be taken at a general meeting.

Question 5Business law and practice

A company has accumulated realised losses of £80,000 carried forward and a realised profit of £50,000 in the current year. The directors wish to pay a dividend of £50,000. Which statement is correct?

  1. A dividend of £40,000 may be paid, being the current year profit after a 20% retention.
  2. The dividend may be paid if the members approve it by special resolution.
  3. No dividend may be paid, because accumulated realised losses exceed accumulated realised profits. Correct answer.
  4. The dividend may be paid because the company has made a realised profit in the current year.

Explanation

Section 830 of the Companies Act 2006 permits a distribution only out of profits available for the purpose, meaning accumulated realised profits not previously distributed less accumulated realised losses not previously written off. Here the losses carried forward exceed the current year profit, so there are no distributable profits and any distribution would be unlawful.

Question 6Business law and practice

A company has adopted the model articles unamended and has three directors. Proper notice of a board meeting is given to all three, but one director is abroad and cannot attend. The other two meet and approve a bank loan. Is the decision valid?

  1. Yes, but only if the absent director later signs a written record approving the loan.
  2. No, because the model articles require a quorum of three directors.
  3. No, because decisions about borrowing must be taken by the members in general meeting.
  4. Yes, because two directors form a quorum under the model articles and the meeting was properly called. Correct answer.

Explanation

The model articles provide that the quorum for directors' decisions is two unless the directors have fixed a different number, and directors may decide by majority at a properly convened meeting. Where notice has been given to all directors and two attend, the board meeting is quorate and the decision is valid.

Question 7Business law and practice

A private company limited by shares with unamended model articles proposes to allot new ordinary shares for cash to an outside investor. Which statement is correct?

  1. The new shares must first be offered to existing shareholders in proportion to their holdings unless pre-emption is validly excluded. Correct answer.
  2. Pre-emption rights can be disapplied only by an application to the court.
  3. Pre-emption rights never apply to private companies.
  4. Any one existing shareholder can veto the allotment.

Explanation

Section 561 of the Companies Act 2006 gives existing shareholders a right of first refusal, in proportion to their holdings, when equity securities are allotted for cash. The right can be excluded or disapplied in accordance with the Act, for example by provisions in the articles or by the statutory disapplication procedure for private companies.

Question 8Business law and practice

A director of a company has a material interest in a proposed contract between the company and a business owned by her spouse. What does the Companies Act 2006 require her to do?

  1. Obtain the approval of the members in general meeting before the contract is made.
  2. Declare the nature and extent of the interest to the other directors before the contract is entered into. Correct answer.
  3. Resign from office before the board considers the contract.
  4. Disclose the interest only in the company's annual accounts.

Explanation

Section 177 requires a director who is in any way, directly or indirectly, interested in a proposed transaction to declare the nature and extent of that interest to the other directors before the transaction is entered into. An interest of a person connected with the director, such as a spouse, is treated as the director's interest.

Question 9Business law and practice

The board of a company resolved that the managing director may sign contracts worth no more than £25,000. A supplier who had dealt with the managing director before and knew nothing of the restriction signed a £60,000 contract with him. Is the company bound?

  1. Yes, because the managing director had apparent authority and the supplier had no notice of the restriction. Correct answer.
  2. Yes, but only if the managing director in fact had actual authority to sign.
  3. No, because the board's resolution removed the managing director's authority altogether.
  4. No, unless the members ratify the contract at a general meeting.

Explanation

A board restriction operates on the managing director's actual authority but does not affect a third party who deals with him in good faith without notice of the restriction, because he continues to have apparent authority. Section 40 of the Companies Act 2006 reinforces this protection for persons dealing with the company in good faith.

Question 10Business law and practice

At a general meeting of a private company, 95 members vote on a resolution proposed as a special resolution: 70 vote in favour and 25 against, with 5 members abstaining. Is the resolution passed?

  1. Yes, because more than half of those voting were in favour.
  2. Yes, because the abstentions are disregarded and 70 out of 95 is a sufficient majority.
  3. No, because fewer than 75% of the votes cast were in favour. Correct answer.
  4. No, because a special resolution requires the agreement of every member entitled to vote.

Explanation

A special resolution requires a majority of at least 75% of the votes cast by members voting on it. Here 70 of the 95 votes cast were in favour, approximately 73.7%, which falls short of the required majority, so the resolution is not passed.

Question 11Business law and practice

A company with unamended model articles has 1,000 shares in issue. The directors recommend a final dividend of 5p per share. At the general meeting a member proposes a resolution declaring 8p per share, which is passed by a large majority. What is the legal effect?

  1. The resolution has no effect until it is approved by the company's auditors.
  2. The 8p dividend is validly declared because the members passed the resolution.
  3. The dividend is limited to 5p per share, the amount recommended by the directors. Correct answer.
  4. No dividend may be paid at all because the members exceeded the directors' recommendation.

Explanation

Under the model articles the members may declare dividends by ordinary resolution, but a dividend declared by the members may not exceed the amount recommended by the directors. The resolution is effective only to the extent of the recommended 5p per share, and the excess cannot be paid.

Question 12Business law and practice

Which statement about a limited liability partnership is correct?

  1. It must have its accounts audited every year regardless of its size.
  2. Its members are jointly and severally liable for its debts.
  3. It is treated as a partnership for tax purposes only and has no separate legal personality.
  4. It is a body corporate whose legal personality is separate from that of its members. Correct answer.

Explanation

A limited liability partnership is incorporated as a body corporate with legal personality separate from its members, so its debts are its own. Members' liability is limited, although members remain liable for their own wrongful acts and the firm is taxed on a transparent basis.

Question 13Business law and practice

A company continues to trade for several months when its directors know, or ought to conclude, that there is no reasonable prospect of avoiding insolvent liquidation. It then enters insolvent liquidation. Which statement is correct?

  1. The court may order the directors to contribute to the company's assets if they failed to take every step to minimise the potential loss to creditors. Correct answer.
  2. The directors are liable only if they acted dishonestly.
  3. Only the company can be liable, because it has legal personality separate from the directors.
  4. The directors are automatically disqualified from acting as directors for two years.

Explanation

Wrongful trading under section 214 of the Insolvency Act 1986 applies where a director knew or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation and did not take every step to minimise the potential loss to creditors. The court may then declare the director liable to make a contribution to the company's assets.

Question 14Business law and practice

What is required for the legal transfer of shares in a private company limited by shares from one person to another?

  1. A written contract of sale signed by both the transferor and the transferee.
  2. A resolution of the board approving the transfer, without any further document.
  3. The transferor's endorsement of the share certificate in favour of the transferee.
  4. A properly executed instrument of transfer delivered to the company with the share certificate, followed by registration of the transferee. Correct answer.

Explanation

Section 770 of the Companies Act 2006 requires a proper instrument of transfer to be executed and delivered to the company, and legal title passes only when the directors register the transferee as a member. In practice the share certificate is also delivered, or an indemnity given if it is lost.

Question 15Business law and practice

Which statement about the prohibition on financial assistance for the acquisition of shares is correct?

  1. It applies to public companies but may be disapplied by a special resolution of the members.
  2. It applies to every company, public or private, without exception.
  3. It applies to public companies and to private companies that are subsidiaries of public companies, subject to limited exceptions. Correct answer.
  4. It applies only where the assistance is given to a director of the company.

Explanation

Sections 677 to 678 of the Companies Act 2006 prohibit a public company, and a private company that is a subsidiary of a public company, from giving financial assistance for the acquisition of its shares or those of its public holding company, subject to a narrow set of exceptions. Since October 2008 the prohibition has not applied to standalone private companies.

Question 16Business law and practice

In the winding up of an insolvent company, which claims rank ahead of ordinary unsecured creditors but behind the expenses of the liquidation?

  1. Dividends declared but not yet paid to preference shareholders.
  2. The claims of ordinary trade creditors for goods supplied.
  3. Preferential debts such as certain employee arrears and occupational pension contributions. Correct answer.
  4. The repayment of a loan made to the company by one of its shareholders.

Explanation

In a winding up the expenses of the liquidation are paid first, followed by preferential debts, which include certain arrears of remuneration and holiday pay and certain contributions to occupational pension schemes. Ordinary unsecured creditors, including lenders without security, rank after the preferential debts.

Question 17Business law and practice

A company creates a fixed charge over its factory on 1 March. The charge is not delivered to the registrar until 1 April. What is the consequence?

  1. The charge remains fully effective and the only consequence is a late filing penalty.
  2. The charge remains valid for 21 days from creation and then lapses automatically.
  3. The charge is void against the company itself as well as against its creditors.
  4. The charge is void against the liquidator, administrator and any creditor, and the secured debt becomes immediately repayable. Correct answer.

Explanation

Under section 859A of the Companies Act 2006 a charge must be delivered to the registrar within 21 days beginning with the day after the day of its creation. If it is not, section 859H makes the charge void against the liquidator, administrator and any creditor, and the secured debt becomes immediately payable.

Question 18Business law and practice

A private company proposes to give one of its directors a service contract for a fixed term of four years. What approval is required?

  1. Written confirmation from the company's auditors that the length of the term is reasonable.
  2. An ordinary resolution of the members approving the contract, which may be passed at a general meeting or by written resolution. Correct answer.
  3. No approval is needed provided the director abstains from voting at the board meeting that approves the contract.
  4. A special resolution of the members together with the consent of the Secretary of State.

Explanation

Section 188 of the Companies Act 2006 requires member approval by ordinary resolution before a company enters into an employment contract with a director for a guaranteed term exceeding two years. In a private company the ordinary resolution may be passed as a written resolution.

Question 19Dispute resolution

A company wishes to bring a claim in tort for property damage caused when a contractor's machinery damaged a warehouse. The damage was discovered on the day it happened. What is the limitation period for bringing the claim?

  1. Six years from the date the damage was suffered Correct answer.
  2. Twelve years from the date of the act complained of
  3. Three years from the date the damage was suffered
  4. Six years from the date the claimant discovered the damage

Explanation

A claim in tort must generally be brought within six years of the date on which the damage was suffered (Limitation Act 1980, s 2). The shorter three-year period applies to personal injury claims, and the postponement for latent damage has its own special regime, so neither applies here.

Question 20Dispute resolution

A claim form is issued in the County Court against a defendant who lives in England. No extension has been sought from the court. Within what period must the claim form be served on the defendant?

  1. Four months from the date of issue Correct answer.
  2. Six months from the date of issue
  3. Four months from the date the cause of action arose
  4. Twelve months from the date of issue

Explanation

CPR r 7.5(1) requires the claim form to be served within four months of the date of issue where it is to be served within the jurisdiction. The period is six months where the claim form is to be served out of the jurisdiction.

Question 21Dispute resolution

A claimant issues a claim for an unpaid invoice of £18,000. The particulars of claim are served with the claim form. The defendant does not file an acknowledgment of service within 14 days and files no defence. What is the most appropriate step for the claimant to take?

  1. File a request for default judgment, because the claim is for a specified sum of money Correct answer.
  2. Take no further step until the defendant files an acknowledgment of service
  3. Serve an unless order requiring the defendant to respond within seven days
  4. Apply to the court for summary judgment on the basis that the defence has no real prospect of success

Explanation

Where a claim is for a specified sum and the defendant has neither acknowledged service nor filed a defence within the time allowed, the claimant may request default judgment under CPR Part 12 without a hearing. This is a simpler and cheaper route than an application for summary judgment.

Question 22Dispute resolution

A defendant receives a properly formulated Part 36 offer from the claimant. Within what period must the defendant accept the offer in order to avoid the usual costs consequences of late acceptance?

  1. Seven days from the date the offer is made
  2. At any time up to the start of the trial
  3. 21 days from the date the offer is made Correct answer.
  4. 28 days from the date the offer is made

Explanation

Under CPR r 36.10 the offeree has 21 days from the date the Part 36 offer is made to accept it without attracting the costs consequences that follow late acceptance. The offer remains open afterwards, but the costs protection does not.

Question 23Dispute resolution

A claimant succeeds at trial on a claim for breach of contract and the court makes an order for costs. What is the general rule the court will apply?

  1. Each party bears its own costs
  2. Costs are decided by reference to the track to which the claim was allocated
  3. Costs are awarded to the party who made the first offer to settle
  4. The unsuccessful party pays the successful party's costs Correct answer.

Explanation

CPR r 44.2(2)(a) provides that the general rule is that the unsuccessful party will be ordered to pay the costs of the successful party. The court retains a discretion to make a different order, for example where a party has succeeded on only some issues.

Question 24Dispute resolution

A claimant brings a claim that depends entirely on the oral evidence of a witness whose statement has been lost and cannot be reconstructed, and the defendant has a properly arguable defence. The defendant applies for summary judgment. Which test will the court apply?

  1. The claim is bound to fail unless further documentary evidence is served before the hearing
  2. The defendant's case is more probable than not on the balance of probabilities
  3. The parties have failed to comply with the relevant pre-action protocol
  4. No real prospect of defending and no other compelling reason for trial Correct answer.

Explanation

CPR r 24.2 permits summary judgment where the claimant has no real prospect of succeeding on the claim or the defendant has no real prospect of defending it, and there is no other compelling reason why the case should be disposed of at trial. The court does not conduct a mini-trial on the balance of probabilities.

Question 25Dispute resolution

A personal injury claim has been allocated to the multi-track. Which of the following best describes the scope of standard disclosure?

  1. Documents in the party's control that adversely affect its own case or support another party's case Correct answer.
  2. Only documents specifically requested by the other party
  3. Only the documents that the disclosing party intends to rely on at trial
  4. All documents in the party's possession, including privileged documents

Explanation

Standard disclosure under CPR r 31.6 covers documents on which a party relies, documents that adversely affect its own case or support another party's case, and documents that a practice direction requires. It is therefore wider than reliance documents alone.

Question 26Dispute resolution

At trial, counsel for the claimant seeks to call a witness of fact whose witness statement was never served on the defendant, although the witness was mentioned in the case management directions. Counsel for the defendant objects. What is the correct position?

  1. The witness may be called only if the other party agrees to the late evidence
  2. The witness may be called if the statement is served on the first day of trial
  3. The witness cannot be called without the court's permission Correct answer.
  4. The witness may be called because the evidence is relevant to the issues

Explanation

CPR r 32.10 provides that a party may not call a witness to give oral evidence at trial unless the witness statement has been served, and the court's permission is required to call a witness whose statement has not been served. Relevance alone does not override this rule.

Question 27Dispute resolution

The court gives permission for expert evidence on the cause of a building's structural failure and directs that a single joint expert be appointed. Which statement best describes the expert's duty?

  1. The expert owes no duty to the court until permission is given for oral evidence
  2. The expert's duty is to the court, not to the instructing party Correct answer.
  3. The expert owes a joint duty to both parties to act in their best interests
  4. The expert owes a duty to the party who pays the largest share of the fee

Explanation

CPR r 35.3 states that an expert's duty is to help the court on matters within their expertise, and that this overriding duty supersedes any obligation to the person instructing or paying the expert. The duty applies from the moment the expert is instructed.

Question 28Dispute resolution

A claimant sends a detailed letter of claim in accordance with the relevant pre-action protocol. The defendant ignores it and does not respond within the period set by the protocol. The claimant then issues proceedings. What is the most likely consequence of the defendant's conduct?

  1. The court may take the non-compliance into account in directions and costs Correct answer.
  2. The claim will be automatically struck out for failure to comply with the protocol
  3. The defendant will be ordered to pay indemnity costs in every case
  4. The claim cannot proceed until the protocol has been complied with in full

Explanation

Where a party fails to comply with a pre-action protocol, the court may order a stay so that steps can be taken, may make costs orders reflecting the failure, and may take the failure into account when giving case management directions. Non-compliance does not automatically invalidate the claim.

Question 29Dispute resolution

A defendant fails to serve its witness statements by the date set in a case management order. When considering whether to grant relief from the sanction, which approach will the court take?

  1. The applicant must first show that the breach was trivial before the court will consider any other factor at all
  2. The court must grant relief if the other party has suffered no prejudice from the delay
  3. The court must refuse relief whenever a deadline in a court order has been missed
  4. The court weighs the seriousness of the breach, the reason for it and all the circumstances Correct answer.

Explanation

The three-stage approach in Denton v TH White requires the court to assess the seriousness and significance of the breach, consider why it occurred, and then evaluate all the circumstances so as to deal justly, including the need for litigation to be conducted efficiently and at proportionate cost.

Question 30Dispute resolution

Shortly before trial, a defendant sends the claimant a letter marked 'without prejudice save as to costs' offering £50,000 to settle. The claimant does not accept it and obtains judgment for £45,000. What is the status of the letter?

  1. It must be accepted within 21 days if it is to have any effect on costs
  2. It may be shown to the court on costs after judgment, but Part 36 does not apply Correct answer.
  3. It cannot be referred to at any stage because it is protected by privilege
  4. It is binding on the court on the question of costs once judgment has been given in the case

Explanation

A without prejudice save as to costs (Calderbank) offer is privileged until the substantive issues are decided, after which it may be put before the court when costs are considered. It does not carry the automatic costs consequences that attach to a Part 36 offer.

Question 31Dispute resolution

A party wishes to appeal a final decision made by a High Court master. Within what period must the appellant's notice be filed?

  1. Three months from the date of the decision
  2. 28 days from the date of the decision
  3. 21 days from the date of the decision Correct answer.
  4. 14 days from the date of the decision

Explanation

CPR r 52.12 requires the appellant to file the appellant's notice within 21 days of the date of the decision being appealed. In most appeals permission to appeal is also required, usually sought in the notice itself.

Question 32Dispute resolution

Default judgment was regularly entered against a defendant who failed to acknowledge service. The defendant now applies to set it aside and can show a real prospect of successfully defending the claim. Which statement is correct?

  1. The court must set aside the judgment only if the defendant pays the sum into court
  2. The court cannot set aside a judgment that was regularly entered
  3. The court must set aside the judgment because the defendant has a real prospect of defending the claim
  4. The court may set aside the judgment, considering whether the application was prompt Correct answer.

Explanation

Where a default judgment has been regularly entered, CPR r 13.3 gives the court a discretion to set it aside where the defendant has a real prospect of successfully defending or there is some other good reason. The court must also consider whether the application was made promptly.

Question 33Dispute resolution

A claimant issues a claim in breach of contract within the limitation period. After the limitation period has expired, the claimant applies to amend the particulars of claim to add a claim in tort arising from exactly the same events. How should the court approach the application?

  1. It may be allowed because the new claim arises out of substantially the same facts Correct answer.
  2. It must be refused because the limitation period for a claim in tort has already expired
  3. It may be allowed only with the defendant's written consent
  4. It must be allowed because the parties to the claim are unchanged

Explanation

CPR r 17.4(2) allows a new claim to be added after the limitation period has expired only where it arises out of the same facts or substantially the same facts as a claim already pleaded. Because the tort claim rests on the same events as the existing contractual claim, the amendment may be permitted.

Question 34Dispute resolution

A claimant succeeds at trial in a commercial dispute. Earlier in the proceedings the claimant refused an invitation to mediate, giving no reason beyond a belief that it would waste management time. What is the most likely effect on costs?

  1. The court may reduce the claimant's costs to reflect the unreasonable refusal Correct answer.
  2. The claim should have been stayed automatically until mediation had taken place
  3. The refusal is irrelevant once the claimant has succeeded at trial
  4. The claimant's costs will be assessed on the indemnity basis as a reward for perseverance

Explanation

Following Halsey v Milton Keynes General NHS Trust, an unreasonable refusal to engage in alternative dispute resolution is a factor the court may take into account when exercising its costs discretion, even where the refusing party ultimately wins.

Question 35Contract

A supermarket places a bottle of wine in its shop window with a price ticket of £5. The correct price is £15. A customer insists on buying the bottle at £5. Which statement best describes the legal position?

  1. The display is an invitation to treat, so the shop may refuse to sell at £5. Correct answer.
  2. The display is an offer that the customer accepts by tendering £5.
  3. The price ticket is a binding offer to sell at £5 under consumer legislation.
  4. The display is a unilateral offer that cannot be revoked once made.

Explanation

Goods displayed in a shop with a price tag are generally an invitation to treat rather than an offer. The customer makes the offer at the till, and the retailer is free to accept or decline it, so the shop cannot be forced to sell at the marked price.

Question 36Contract

A married couple agree in writing that the husband will pay the wife £200 a month in return for her keeping the household accounts. They later quarrel and he stops paying. She sues him for the money. What is the most likely outcome?

  1. She succeeds, because the agreement was recorded in writing and signed by both of them.
  2. She fails, because domestic agreements are presumed to lack contractual intention. Correct answer.
  3. She succeeds, because the husband received consideration from her.
  4. She fails, because the consideration she gave was past.

Explanation

Agreements between spouses or family members are presumed not to be intended to create legal relations, and that presumption is not displaced simply because the arrangement is written down. The presence of consideration does not cure the absence of contractual intention.

Question 37Contract

An employer promises an employee a bonus for work the employee had already completed before the promise was made. The employee seeks to enforce the promise. Which statement is correct?

  1. The promise is enforceable, because the work benefited the employer.
  2. The promise is enforceable, because the employee had already provided consideration.
  3. The promise is unenforceable, because a bonus promise must be made by deed.
  4. The promise is unenforceable, because the consideration was past. Correct answer.

Explanation

Consideration must be given in exchange for the promise; work performed before the promise was made is past consideration and generally cannot support it. The rule is subject to a narrow exception where the act was done at the promisor's request and payment was implied, which is not the situation described.

Question 38Contract

A 16-year-old signs a contract of apprenticeship with a local firm. Which statement reflects the general legal position?

  1. The contract is binding if, on the whole, it is beneficial to the minor. Correct answer.
  2. The contract is unenforceable unless the minor ratifies it on reaching 18.
  3. The contract is voidable at the minor's election at any time.
  4. The contract is void because a minor lacks capacity to contract.

Explanation

A minor is bound by a contract of employment, apprenticeship or education where the contract, taken as a whole, is for the minor's benefit. The contract is not void, and the other party as well as the minor can enforce it.

Question 39Contract

A offers to sell a car to B for £5,000. B replies that he will pay £4,500. A refuses, and B then says he accepts the price of £5,000. Which statement is correct?

  1. No contract exists, because the counter-offer destroyed the original offer. Correct answer.
  2. A contract exists, because A's refusal rejected only B's counter-offer, leaving the original offer open.
  3. No contract exists, because the parties never agreed a price.
  4. A contract exists, because B accepted A's original offer at the stated price.

Explanation

A counter-offer operates as a rejection of the original offer and destroys it, so it can no longer be accepted unless the offeror renews it. B's later purported acceptance therefore creates no contract.

Question 40Contract

A posts an offer to B on Monday inviting acceptance by post. B posts an acceptance on Tuesday, which A receives on Thursday. On Wednesday, before receiving the acceptance, A posts a revocation, which B receives on Friday. Which statement is correct?

  1. The contract was formed on Tuesday, when B posted the acceptance. Correct answer.
  2. The contract was formed on Thursday, when A received the acceptance.
  3. The contract was formed on Friday, when B received the revocation.
  4. No contract was formed, because A revoked the offer before learning of the acceptance.

Explanation

Where post is contemplated as the mode of acceptance, the postal rule makes acceptance effective on posting rather than on receipt. The contract was therefore complete on Tuesday, and A's later revocation came too late to be effective.

Question 41Contract

A seller agrees to deliver goods to a buyer on 1 September. On 1 August the seller states clearly that it will not deliver. The buyer does nothing until 1 September, when the goods are not delivered, and then sues. Which statement is correct?

  1. The buyer can sue only if it treated the contract as at an end in August.
  2. The buyer cannot sue, because an anticipatory breach must be accepted at once.
  3. The buyer cannot sue, because the seller may still perform on 1 September and no breach has yet occurred.
  4. The buyer may keep the contract alive and sue for damages when performance falls due. Correct answer.

Explanation

A clear refusal to perform before the due date is an anticipatory repudiatory breach, but the innocent party may affirm the contract and wait for performance rather than accepting the breach. Having done so, the buyer can sue for damages when performance falls due.

Question 42Contract

During negotiations for the sale of a business, the seller knowingly states that annual turnover is £500,000 when it is in fact £300,000. The buyer relies on that statement and completes the purchase. Which remedy is available to the buyer?

  1. Rescission only, since damages are not available for misrepresentation.
  2. Rescission and damages in the tort of deceit. Correct answer.
  3. Damages in lieu of rescission only, under the Misrepresentation Act 1967.
  4. Specific performance of the contract on its stated terms.

Explanation

A statement known to be false, made with the intention that it be relied on and in fact relied on, is fraudulent misrepresentation. The representee may rescind the contract and also recover damages in the tort of deceit, which compensate for losses flowing from the reliance.

Question 43Contract

A haulage company has used the same garage to service its vehicles for five years on the garage's standard terms, which are displayed at the counter and include a clause excluding liability for negligence. On this occasion the company's manager does not read the notice. Which statement is correct?

  1. The term is not incorporated, because the customer did not read the notice.
  2. The term is incorporated by the parties' consistent course of dealings. Correct answer.
  3. The term is void, because liability for negligence can never be excluded.
  4. The term is incorporated only if the customer signed the notice.

Explanation

A term may be incorporated by a consistent course of dealings where the party seeking to rely on it has given reasonable notice over time. Reading the notice on the particular occasion is unnecessary once the course of dealing is established.

Question 44Contract

A courier collects a machine part for a factory and delivers it three days late. The factory claims the profits lost while its entire plant stood idle. The courier knew only that the item was a machine part, not that production would halt without it. Which statement is correct?

  1. The loss is recoverable, because the courier knew the part was needed urgently.
  2. The loss is not recoverable, because the special circumstances were not communicated. Correct answer.
  3. The loss is not recoverable, because lost profits are never recoverable for late delivery.
  4. The loss is recoverable in full, because it arose naturally from the late delivery in the ordinary course.

Explanation

Loss is recoverable if it arises naturally in the ordinary course or if the special circumstances were communicated to the other party at the time of contracting. The factory's particular vulnerability to a full shutdown was a special circumstance of which the courier was unaware, so that loss is too remote.

Question 45Contract

A contracts with B on terms that B will pay £10,000 to C. The contract is governed by English law and expressly provides that C may enforce that term. C is named in the contract. Which statement is correct?

  1. C cannot enforce the term, because consideration moved only from A.
  2. C may enforce the term only if the contract expressly names C and C signs a separate deed of adherence to it.
  3. C may enforce the term only if C is joined as a party to the contract.
  4. C may enforce the term under the Contracts (Rights of Third Parties) Act 1999. Correct answer.

Explanation

The Contracts (Rights of Third Parties) Act 1999 allows a third party expressly identified in the contract to enforce a term where the contract so provides or the term purports to confer a benefit on that party. C, being named and expressly given enforcement rights, may sue directly.

Question 46Contract

A term in a commercial contract is described by the parties as a 'warranty', but breach of it in fact deprives the innocent party of substantially the whole benefit of the contract. Which statement is correct?

  1. The label is conclusive, but the innocent party may also claim damages measured by its losses.
  2. The label is conclusive, so only damages are available for breach.
  3. The term is void, because the parties mislabelled it.
  4. The label is not conclusive; a breach going to the root may justify termination. Correct answer.

Explanation

Whether a term is a condition, a warranty or an innominate term depends on its substance rather than the label the parties attach to it. Where breach deprives the innocent party of substantially the whole benefit, it goes to the root and justifies termination.

Question 47Contract

A trader's standard terms for a consumer service include a clause allowing the trader to increase its charges by any amount at any time, with no valid reason given and no right for the consumer to cancel. Which statement is correct?

  1. The term is binding, because it appears in the trader's standard written terms.
  2. The term is binding unless the consumer can show it was individually negotiated.
  3. The term is automatically void, because all price variation clauses are prohibited.
  4. The term is not binding, because it is presumed unfair under the 2015 Act. Correct answer.

Explanation

A term permitting the trader to vary the price unilaterally without a valid reason and without allowing the consumer to cancel appears in the list of terms presumed unfair under the Consumer Rights Act 2015. It is not binding on the consumer unless the trader shows it is fair.

Question 48Contract

A landlord agrees to accept half the rent from a tenant for two years because of the tenant's financial difficulty. The tenant pays the reduced rent for the full two years in reliance on the promise. At the end of the two years the landlord demands the shortfall for that period. Which statement is correct?

  1. The landlord can recover all the arrears, because the tenant gave no consideration.
  2. The landlord can recover the arrears, because a promise to accept less is never binding without a deed.
  3. The tenant may insist on the reduced rent permanently, because the promise is binding.
  4. The landlord cannot recover the arrears for the two years, because the tenant relied on the promise. Correct answer.

Explanation

A clear promise intended to be binding, on which the promisee relies, may raise an equitable estoppel preventing the promisor from resiling from it. The effect is generally suspensory, so the landlord cannot claim the shortfall for the period of the promise but may resume charging full rent for the future.

Question 49Contract

A company agrees to stage a concert in a public park. On the day of the concert the local authority, using a statutory power, closes the park for safety reasons. The contract contains no force majeure clause. Which statement is correct?

  1. The contract is not frustrated, because the closure was a foreseeable commercial risk.
  2. The contract is void from the outset, and each party bears its own losses.
  3. The contract is frustrated, and the 1943 Act governs the consequences. Correct answer.
  4. The company is in breach, because it failed to secure the use of the park.

Explanation

Frustration occurs where, after formation, a supervening event outside either party's control makes performance impossible or radically different from what was agreed. A statutory closure of the venue does just that, and the Law Reform (Frustrated Contracts) Act 1943 then governs the adjustment of money and benefits already exchanged.

Question 50Contract

An employee agrees, on leaving her job, not to work for any competing business anywhere in the United Kingdom for five years. Her former employer seeks to enforce the restriction. Which statement is correct?

  1. The restraint is valid, because the parties freely agreed to it.
  2. The restraint is valid, because five years is a standard period for nationwide businesses.
  3. The restraint is void, because all post-employment restraints are unenforceable.
  4. The restraint is void unless it is reasonable and protects a legitimate interest. Correct answer.

Explanation

Covenants in restraint of trade are prima facie void and enforceable only if they protect a legitimate proprietary interest and go no further than is reasonable in scope, duration and area. A nationwide five-year ban on any competing employment is very unlikely to satisfy that test.