This Document Contains Chapters 16 to 20 Chapter 16—Legality and Public Policy TRUE/FALSE 1. An agreement is illegal when either its formation or performance is a crime or a tort, or it is contrary to public policy. Answer: True 2. When an agreement is illegal, parties are usually not entitled to help from the courts. Answer: True 3. If an illegal agreement has already been performed parties can sue for damages. Answer: False 4. If a contract appears to be legal on its face, it will be enforceable even if it was entered into for an illegal purpose. Answer: False 5. When parties are not equally guilty, the least guilty party is granted relief when it is in the public interest. Answer: True 6. Even if part of a contract is illegal, the court may enforce a divisible, legal part of the contract. Answer: True 7. If a contract can be interpreted in two ways, one legal and the other illegal, the court will assume that the legal meaning was intended unless the contrary is clearly indicated. Answer: True 8. An agreement that calls for the commission of a civil wrong is illegal and void. Answer: True 9. In every contract there exists an expressed covenant of good faith and fair dealing. Answer: False 10. A provision in a contract that gives what the court believes is too much of an advantage over a buyer may be held void as unconscionable. Answer: True 11. Ordinarily, a court will not consider whether a contract is fair or unfair. Answer: True 12. Companywide standardized form contracts imposed on a “take-it-or-leave it” basis by a party with superior bargaining strength are called contracts of collusion. Answer: False 13. Substantive unconscionability has to do with matters of freedom of assent. Answer: False 14. When a court finds a clause of a contract unconscionable at the time it was made, it may enforce the remainder of the contract. Answer: True 15. Agreements that are contrary to public policy are not binding. Answer: True 16. Courts are quick to invalidate contracts on the ground that they are contrary to public policy because such contracts are so offensive to society. Answer: False 17. Legislation commonly requires that an installment-sale contract specify the cash price, down payment, finance charges, and insurance costs. Answer: True 18. An unlicensed doctor can sue a patient for the doctor's fee if the patient in fact recovered because of the doctor's care. Answer: False 19. An unlicensed insurance broker who cannot personally recover a fee because of the absence of a license can effectively circumvent the statutory requirements by having a friend who is a licensed broker bill for the services and collect the payment for him. Answer: False 20. To stabilize the industry, manufacturers of the same or similar products may agree that each will market its product in a specified geographic area of the country and will not market its product in the territory assigned to other manufacturers. Answer: False 21. Agreements not to compete are always void. Answer: False 22. A noncompetition covenant may be held invalid because of vagueness concerning the duration and geographic area of the restriction. Answer: True 23. When a nationally-known neurosurgeon in Chicago, Illinois sells her practice, the contract may specify that the seller will not practice within a 100-mile radius of Chicago for one year. Answer: True 24. Fees charged by a lender for the reasonable expense of making a loan, such as the cost of appraising property, are treated as interest for purposes of the usury law. Answer: False 25. In most states the usury laws apply to loans made to both individuals and corporations. Answer: False MULTIPLE CHOICE 1. In the case of an illegal contract, both parties usually are prohibited from seeking relief in the courts: A. if the illegal contract has not been performed. B. if the contract has been partially performed. C. if the contract has been fully performed. D. all of the above. Answer: D 2. Agreements that are illegal are: A. enforceable if one party acted in good faith. B. voidable by one of the parties. C. void. D. voidable by either party. Answer: C 3. Which party to an illegal agreement may get relief from the court? A. Plaintiff B. Defendant C. the less-guilty party, when public interest is advanced by granting relief D. a doctor who was unlicensed at the time of the making of an agreement for the provision of medical services, but who later obtained a proper license Answer: C 4. An illegal provision in a contract: A. causes the entire contract to be voidable. B. causes the entire contract to be rescinded. C. can be ignored by the parties in their performance of the remaining provisions of the contract, assuming that the remaining portions of the contract can stand on their own. D. can be ignored by the parties, because an illegal provision in a contract is not deemed substantial. Answer: C 5. An agreement to slander a third person would not be enforceable because slander is a(n): A. crime. B. civil wrong. C. infringement of privacy. D. assault. Answer: B 6. Dealing honestly, reasonably, and in good faith: A. is implied in every contract for services. B. is implied in every contract for the sale of goods. C. is an expressed obligation in every contract. D. both a and b. Answer: D 7. A contract that is deemed to be too harsh or oppressive to one of the contracting parties may be unenforceable under the concept of: A. unilateral influence. B. bilateral influence. C. unconscionability. D. conscionability. Answer: C 8. One element involved in the determination of unconscionability is: A. the comparative bargaining power of the parties. B. the opportunity to make a contract for better terms with someone else. C. the course of the economy after the contract is made. D. whether a loss will be sustained by performance of the contract. Answer: A 9. The validity of a contract is not affected by: A. the effect of the contract on the community. B. unconscionability. C. the absence of good faith. D. the fact that the contract turned out to be a bad bargain for one of the parties. Answer: D 10. Today, what is an important element in determining the validity of a contract? A. the Uniform Contract Code B. whether the agreement might harm the public welfare C. whether the contract is wise or foolish D. whether the contract operates unequally between the parties Answer: B 11. Which of the following types of contracts might be unenforceable as contrary to public policy? A. a contract that is contrary to the protection of the public welfare, health, or safety B. a contract that is contrary to the protection of the person C. a contract that is contrary to the protection of recognized social institutions D. all of the above Answer: D 12. Public policy: A. can be precisely defined B. is frequently used by the courts as a reason to invalidate contracts C. is protections from that which violates any established interest of society D. all of the above Answer: C 13. Private lotteries, which generally are held to be illegal, involve three elements: A. prize, chance, and consideration. B. return, skill, and wager. C. prize, skill, and consideration. D. attractive return, minimal involvement, and skill. Answer: A 14. Which of the following is not illegal? A. an office football "pool" with a cash entry fee and cash prize B. a raffle with an entry fee to win a car C. a "giveaway" to every tenth person who buys meat at a butcher shop D. a "giveaway" to every tenth person entering a department store Answer: D 15. The failure to have a license will not render agreements void if the license: A. is based on formal education B. is required for engaging in a particular business or trade C. is a regulatory license D. is readily obtainable by anyone who offers payment of a required fee Answer: D 16. Which of the following agreements represent(s) an unreasonable restraint of trade? A. a combination to create a monopoly B. an agreement to obtain a “corner” on a market C. an association of merchants to increase prices D. all of the above Answer: D 17. An agreement to restrain trade may be void on the grounds that it is: A. fraudulent. B. contrary to public policy. C. illegal lobbying. D. unfair to merchants. Answer: B 18. An agreement not to compete is enforceable: A. in the sale of a business. B. between competitors. C. in contracts for the sale of goods. D. in contracts for the sale of securities. Answer: A 19. In an employment contract, agreements not to compete are: A. illegal B. uniformly held to be in the public interest and therefore legal C. valid only if the restriction protects the employee D. valid, if the restriction is reasonable and necessary for the protection of the former employer Answer: D 20. When money is loaned at a greater rate of interest than is allowed by law, __________ is committed. A. Usury B. credit misfeasance C. petty theft D. credit malfeasance Answer: A 21. Which of the following is not an example of a state penalty for violating usury law? A. restricting the lender to the recovery of the loan but no interest whatsoever B. allowing the lender to recover the loan principal and interest up to the maximum contract rate C. restricting the lender to the recovery of the loan plus seventy-fifty percent (75%) of the interest D. requiring the lender to pay, as a penalty, double the interest the borrower paid on a usurious loan Answer: C CASE 1. An agreement between Jim and his 18-year-old daughter, Betty, provides that he will give her $25,000 if she does not marry until after her 22nd birthday. One month after reaching the age of 22, Betty, still unmarried, claims the $25,000. Jim refuses to pay, claiming that the agreement was illegal. Is Jim correct? Answer: No. Judgment will be for Betty. It is the policy of the law to encourage marriage. Thus, a contract that prohibits marriage under all circumstances or places broad or general restrictions on marriage generally would be held void as contrary to public policy. However, contracts that place reasonable restrictions on marriage generally will be held valid. In this case, the restriction that Betty not marry until she is 22 is reasonable and, therefore, is valid. Thus, Betty is entitled to the $25,000 in accordance with the terms of the binding contract between her and her father. 2. Sam Wilson often goes to the horse races, participates in his state’s lottery, and invests heavily in the stock of major U.S. companies. At work, Wilson is approached by his coworkers and asked to participate in a football pool. "It's totally based upon skill," his friends claim. In addition, Wilson's philanthropic club is holding a raffle in which an individual could win a new car. Are these activities gambling and therefore illegal activities? Answer: Events sanctioned by the federal and state governments are not illegal activities and therefore do not constitute gambling, which is an illegal activity. The horse races, the state lottery, and Wall Street investments are such federally and state-sanctioned activities. The element of chance is often the pivotal point between activities of skill and activities deemed to be gambling. A football pool would be considered gambling because it is based on luck or chance and the elements of consideration and a prize are present. Participating in a football pool would be an illegal activity. The same illegality can be found in a raffle situation, in which a person can receive a prize by chance after purchasing a raffle ticket. Wilson would be well-advised to decline to participate in either of his recently-encountered gambling opportunities. 3. Art and Mary were good friends who went through high school and college together. Art eventually became a college philosophy professor and Mary went into the business world. Mary became a senior vice-president of a management firm and learned many of the company's trade secrets. Both Art and Mary signed one-year contracts with their respective employers. The contracts contained clauses that provided that they would not compete against their former employers for a period of one year after leaving their jobs. The area covered by the restrictions for both Art and Mary was a radius of 500 miles from the place of employment. Both Art and Mary resigned and within two months took other jobs. Art went to work for another college 50 miles away, teaching philosophy. Mary took a job 75 miles from her former employment. Her new position was similar to her former job. The former employers sued to enforce the anticompetitive covenants in the original contracts. Discuss the probable outcome of the lawsuits. Answer: The case against Art, the professor, will likely fail because the restrictive covenant is not necessary to protect the interest of the former employer. It is doubtful that a philosophy professor would be inflicting any harm on the former employer by teaching elsewhere. The lawsuit against Mary probably will be successful because she knew trade secrets. She held a high position in her former company, and her competition could cause it harm. The restriction appears reasonable. Chapter 17—Writing, Electronic Forms, and Interpretation of Contracts TRUE/FALSE 1. In the absence of a statute requiring a writing, a contract may be oral or written. Answer: True 2. Because many oral contracts are legally enforceable, it is a good business practice in the preliminary stages of discussions to stipulate that no binding agreement is intended to be formed until a written contract is prepared and signed by the parties. Answer: True 3. Under the statute of frauds, an oral contract must be completed within one year after performance begins. Answer: False 4. An oral agreement to supply a line of credit for two (2) years cannot be enforced because of the statute of frauds. Answer: True 5. A promise to grant a mortgage on real property does not require written proof because it is not a transfer of land. Answer: False 6. No writing is required for a service contract that can be performed within one year after the date of the agreement. Answer: True 7. The statute of frauds applies to promises to answer for another party's debt, but does not apply to a promise to answer for another party's default. Answer: False 8. A promise to pay an attorney a fee owed by a third person can be enforced without a writing. Answer: False 9. When the main purpose of the promisor’s promise to pay the debt of another is to benefit the promisor, the statute of frauds is not applicable, and the oral promise to pay the debt is binding. Answer: True 10. A father's oral promise to his daughter and her fiancée made in consideration of their contemplated marriage is binding when made in the course of a serious discussion. Answer: False 11. A contract for the sale of goods with a price of $500 or more requires written proof to be enforceable. Answer: True 12. A writing required by the statute of frauds may be a signed note or memorandum. Answer: True 13. A note or memorandum does not have to contain all the essential terms of the contract to be valid. Answer: False 14. When a contract falls within the statute of frauds, the signatures of both parties must be shown to the court. Answer: False 15. An insurance company cannot refuse to pay the fire loss of the buyer of a house on the grounds that the sales contract for the house was not binding because it was not properly signed. Answer: True 16. Under the majority view, a contract that does not satisfy the statute of frauds is not enforceable. Answer: True 17. A person who is prevented from enforcing a contract because of the statute of frauds also is prevented from recovering the value of services, property, or money furnished the other party to the oral contract. Answer: False 18. The parol evidence rule generally excludes words spoken before or at the time a written contract was executed from contradicting the terms of the contract. Answer: True 19. The parol evidence rule generally precludes testimony that would contradict a complete written contract. Answer: True 20. Parol evidence is not admissible to show fraud, duress or mistake. Answer: False 21. The parol evidence rule is based on the theory that any oral agreement was abandoned when the contact was written. Answer: True 22. The parol evidence rule does not apply to changes made after the signing of the contract. Answer: True 23. When persons enter into an agreement, it is presumed that they intent the agreement to have some effect. Answer: True 24. Through incorporation by deference, a contract can consist of both the original document and the detailed statement that is incorporated in it. Answer: False 25. Provisions of a contract will be considered separately and not as a whole. Answer: False 26. If words and numbers contradict each other in a contract, the rule of construction favors the words. Answer: True 27. If a contract is unclear, it will be interpreted against the party who drafted it. Answer: True 28. Details of performance of a contract not expressly stated in a contract will often be implied by the court. Answer: True 29. The past performance of the parties under a continuing contract is important in determining what the contract means. Answer: True 30. Customs and trade usage can override the express provisions of a contract. Answer: False MULTIPLE CHOICE 1. An oral contract to sell a house is binding if: A. the agreement is witnessed by a member of the clergy. B. there is a tape recording of the agreement. C. the buyer paid the price and received the deed of conveyance. D. the seller is a merchant. Answer: C 2. An oral understanding is not binding if: A. the services performed were not to the satisfaction of the other party. B. the amount agreed to be paid for services rendered was not a fair and reasonable amount. C. the parties intended to formalize their understanding with a written agreement. D. the understanding may be terminated at will by either party. Answer: C 3. An oral contract can be enforced when it relates to: A. the purchase of a television set for $200. B. the sale of an interest in land for $400. C. managing a factory for five years. D. a promise to answer for the debt of another. Answer: A 4. The one-year performance requirement for an oral contract begins: A. on the day of the agreement. B. on the first day of performance. C. on the day following the agreement. D. the day on which the agreement was placed in writing. Answer: C 5. The standard statute of frauds: A. requires full disclosure in the case of consumer sales on credit. B. requires a seller of real estate to obtain a broker's license. C. specifies the punishment of perjury. D. requires that a contract for the sale of land be evidenced by a writing. Answer: D 6. The statute of frauds applies to: A. the lease of an apartment on a month-to-month basis. B. the cancellation of a written agreement for the sale and purchase of land. C. an employment agreement. D. the sale of goods priced at less than $500. Answer: B 7. A promise to pay a debt must be in writing if: A. the debt is for more than $500. B. the debt is now due and payable. C. the promise is to pay the debt of another. D. the debt owed is the promisor's. Answer: C 8. An oral contract containing a promise by an executor to pay estate debts from estate funds is: A. binding. B. voidable by the executor or administrator. C. enforceable against the executor only if the executor signs written proof of the agreement. D. enforceable against the other contracting party only if that party signs a written agreement. Answer: A 9. When there is full disclosure and representation, promises made in consideration of marriage: A. can be written or oral. B. generally cannot be set aside unless they are unconscionable. C. are only valid if they are signed after the marriage actually takes place.. D. all of the above. Answer: C 10. The Uniform Commercial Code contains a statute of frauds rule relating to sales of personal property, specifically: A. goods. B. chattel paper. C. real property. D. none of the above. Answer: A 11. A writing that satisfies the requirement of a writing under the statute of frauds could be evidenced by: A. a note. B. a memorandum. C. a contract. D. all of the above. Answer: D 12. The writing required by the statute of frauds in the case of a contract for the sale of land must: A. be addressed to the other party to the contract. B. be made with the intent to create a writing to satisfy the statute of frauds. C. be signed at the end of the writing. D. describe the land to be sold. Answer: D 13. When the statute of frauds applies and there is no written proof of the contract, the contract is: A. void. B. enforceable if there are two credible witnesses. C. voidable by a party who has not signed. D. illegal. Answer: C 14. When a person has performed services under an oral contract that cannot be enforced because of the statute of frauds, such person: A. can recover the agreed payment for the services because a refusal to make payment would be a breach of the contract. B. can recover the reasonable value of the services because there is a quasi-contractual duty to pay for the benefit received from such services. C. cannot recover the value of the services because they were rendered under a unilateral mistake of law. D. can have the party receiving the services arrested for obtaining property by false pretenses. Answer: B 15. The defense of noncompliance may be raised: A. by the parties to the oral contract. B. by third parties such as an insurance company or the IRS. C. both a. and b. D. neither a. nor b. Answer: A 16. The parol evidence rule: A. applies to complete written contracts. B. prevents proof of fraud. C. applies to incomplete contracts. D. is not designed to preserve the integrity of written contracts. Answer: A 17. The parol evidence rule does not prohibit proof that: A. the contract was thereafter modified. B. conduct exists that violates the law. C. the written contract is not a binding agreement. D. all of the above. Answer: D 18. Parol evidence generally is admissible to explain: A. ambiguous terms. B. why signatures are missing. C. why a contract was not performed. D. implied terms. Answer: A 19. Parol evidence may be admitted to show that a provision was omitted as the result of: A. fraud. B. accident. C. mistake. D. all of the above. Answer: D 20. Parol evidence may be admissible to: A. contradict a complete written contract. B. prove the modification or termination of a contract. C. replace the statute of frauds. D. create a contract. Answer: B 21. The parol evidence rule may not apply if: A. the contract is materially incomplete. B. the parties disagree on the meaning of the contract. C. there is no ambiguity regarding the terms of the contract. D. one party is unable to perform the contractual obligations. Answer: A 22. A contract is interpreted to give effect to: A. the intent of the parties. B. what the court believes is a fair contract. C. what the defendant thought the contract meant. D. what will be best for the economic life of the community. Answer: A 23. In interpreting an ambiguous contract, one part of the contract: A. must be viewed in isolation. B. must be viewed as a condition. C. must be viewed in connection with the rest of the contract. D. must be viewed as indicating joint and several liability. Answer: C 24. A contract is created by which the terms are stated to be for consideration in the amount of $3,000. If typewritten in the contract is the term "four thousand dollars," while the amount of $3,000 is printed within the form: A. the contract will be interpreted to be for $3,000. B. the contract will be interpreted to be for $4,000. C. there is a contract but the courts will not specify the dollar amount, as a conflict exists. D. a compromise settlement amount of $3,500 will be used. Answer: B 25. When an insurance policy is ambiguous, the policy is interpreted: A. against the insurer. B. in favor of the insurer. C. according to the dictionary meaning of the words. D. according to the meaning of the words in the insurance industry. Answer: A 26. When a contract proves to be a bad bargain: A. the injured party is never bound by the terms of the contract. B. courts will always imply terms that are necessary to avoid hardship. C. parties are generally still bound by the terms of the contract. D. the contract must be rewritten. Answer: C CASE 1. Bart was a self-made millionaire who had earned his fortune by dedicated hard work. Bart had worked so hard that he never had developed much of a social life. Bart met Linda and fell in love with her. When Bart proposed to Linda, she told him that she needed time before making such an important decision. Pressing her for a favorable response, Bart telephoned Linda and promised her $100,000 if she would marry him. Linda then accepted the proposal. Bart contracted with Quick Builders for the construction of a home Bart intended to move into with Linda after their marriage. Construction by Quick was not very quick because Quick was not paying subcontractors the sums that they were owed. They, in turn, were not completing their work. To expedite matters, Bart called the subcontractors and assured them that Bart would pay any sums that Quick Builders did not pay if they would complete the construction. Bart and Linda married and the subcontractors completed the work. Quick Builders did not pay the subcontractors in full. Bart failed to pay Linda the $100,000. Both Linda and the subcontractors sued Bart. Discuss the probable outcome of the lawsuits. Answer: Linda's lawsuit will be unsuccessful because contracts made in consideration of marriage must be evidenced in writing and signed by the party disputing the contract (Bart). The subcontractors will win their lawsuit. Although the promise to answer for someone else's debt generally must be evidenced in writing, when the promise is made primarily to benefit the promisor, proof of the oral promise is permissible. Here, Bart made the promise for Bart's own benefit. 2. Suzy Anders enters into an oral contract to purchase a tract of land from Bill Hermes. The land is considered worthless, but Anders feels that she has discovered a possible usage that would drastically increase the value of the land. To assure herself of the potential value of the land, Anders orally hires an attorney to investigate the title and records associated with the land in question. Before gaining any information from her attorney, Anders orally contracts with a builder to construct a huge building on the site. Because of the size of the project, a completion time is difficult to predict. Anders now discovers that the land is indeed useless, a fact that she obtains through information from her attorney. Anders now refuses to honor her contracts with Hermes, her attorney, and the builder. Must Anders honor her contractual agreements? Answer: All contracts concerning the sale of land must be evidenced by a writing to be enforceable. The purchase agreement that Anders made with Hermes was oral, and it concerned the purchase of land. The initial oral contract is, therefore, unenforceable under the statute of frauds. When Anders hired an attorney to investigate the property, it was a collateral agreement not directly concerned with real property per se and thus not subject to a statute of frauds application. A construction project concerning the completion of a building must be evidenced by a writing under the statute of frauds because real property is involved. If this hurdle could be overcome, the length of time to conclude the project is only an issue if it would be impossible to complete within a year. 3. Jones and Clark entered into a written contract for the purchase of an apartment building by Clark. The contract was carefully drafted to set forth the agreement of the parties. It was signed by both parties. Clark subsequently claimed that the contract did not cover all the terms included in the written and oral agreements that the parties had made during their prior negotiations. Jones claimed that the parol evidence rule barred proof of all of their prior agreements. Which claim would be upheld in court? Answer: Judgment would be for Jones. The parol evidence rule applies to both oral and written agreements or other statements made prior to the execution of the written contract. It provides that such agreements may not be admitted to modify or contradict the terms of a written contract that is complete on its face. The contract was carefully drafted in an attempt to set forth the agreement between Jones and Clark and appeared to cover all of the essential terms of the transaction. Thus, the contract is complete on its face, and the parol evidence rule bars proof of all prior agreements, both written and oral. 4. Franklin, a hobby-shop supplier, and Gordon, a hobby-shop owner, entered into a contract that provided that Franklin would sell Gordon fifty World War II battleship models at Franklin's cost of $2.95 each, plus a reasonable profit. Gordon brought suit to enforce the contract against Franklin, who refused to deliver the models. Franklin claimed that there was no contract because of indefiniteness. Is Franklin correct? Answer: Yes. The price of the models is indefinite. There is no objective measure of "reasonable profit." Thus, the intent of the parties regarding price cannot be ascertained. The court will have to conclude that there is no valid and enforceable contract, and Gordon's action will be dismissed. Chapter 18—Third Persons and Contracts TRUE/FALSE 1. Generally, only the parties to a contract may sue on it. Answer: True 2. Persons who are not a party to a contract can never sue on the contract. Answer: False 3. Whenever a contract is intended to benefit a third person, this person is referred to as a delegator. Answer: False 4. An incidental beneficiary is the same thing as a third-party beneficiary. Answer: False 5. It is necessary that a third-party beneficiary be identified by name. Answer: False 6. A third person does not have the status of an intended third-party beneficiary unless it is clear at the time the contract was formed that the parties intended to impose a direct obligation with respect to the third person. Answer: True 7. The rights of a third-party beneficiary always can be destroyed without that beneficiary's consent. Answer: False 8. The beneficiary of a life insurance policy is not subject to any policy restrictions that had been agreed to between the insured and the insurance company. Answer: False 9. When a municipality contracts with a contractor to pave a street, homeowners on that block are third-party beneficiaries of the contract. Answer: False 10. An assignment is a transfer of rights, and a delegation is a transfer of duties. Answer: True 11. An assignee of a contract can bring suit on the contract only in the name of the assignor. Answer: False 12. Generally, an assignment may be in any form. Answer: True 13. Only written words that show an intention to transfer or assign will be given the effect of an assignment. Answer: False 14. An assignment, if otherwise valid, takes effect the moment it is made. Answer: True 15. If the obligor is notified in any manner that there has been an assignment and that any money due must be paid to the assignee, the obligor’s obligation can be discharged only by making payment to the assignee. Answer: True 16. A person entitled to receive money may generally assign that right to another person. Answer: True 17. A cause of action may not be assigned. Answer: False 18. The assignments of the right to money always gives the assignee the right to collect and keep the funds. Answer: False 19. When work is guaranteed by one who repairs a building, the owner, on selling the building, may assign the guarantee to the buyer. Answer: True 20. In general, one may assign rights if that does not cause the obligor's duties to increase or change materially. Answer: True 21. An employer can assign to another employer the right to have an employee work. Answer: False 22. A person who has a right to buy on credit can transfer that right to a close relative. Answer: False 23. An assignee's rights are the same as those that had been possessed by the assignor. Answer: True 24. The making of an assignment relieves the assignor of any and all obligations existing under the original contract. Answer: False 25. When a lease is assigned, the assignee becomes the sole obligor for rent payments, and the original lessee is discharged from the lease. Answer: False 26. An obligor required to render a performance under a contract can transfer the duty to perform to another person whenever desired. Answer: False 27. Under the UCC, an assignment of all the assignor's rights under a contract generally is held to be both an assignment of rights and a delegation of duties. Answer: True 28. When duties under a contract are delegated, the party making the delegation remains responsible for the performance of the contract just as though no delegation had been made. Answer: True MULTIPLE CHOICE 1. A third-party beneficiary: A. may be obligated to pay for services rendered. B. may bring suit on and enforce the contract. C. must consent to the contract. D. must be identified by name. Answer: B 2. A life insurance contract is a third-party: A. beneficiary contract. B. assignment contract. C. payment contract. D. performance contract. Answer: A 3. If there is a time limitation or any other restriction in a contract, a third-party beneficiary: A. may ignore it. B. may void it. C. is bound thereby. D. must consent to be bound thereby before it is effective. Answer: C 4. A third-party beneficiary contract may be amended: A. with the consent of the beneficiary. B. by operation of law. C. if the contract allows modifications without the beneficiary's consent. D. all of the above. Answer: D 5. Which of the following is not a third-party beneficiary contract? A. a contract in which A hires B to give A's niece piano lessons B. a contract to repair sewers in front of Macy's Department Store C. a life insurance contract with a named beneficiary D. a contract between X and Y for Y to install a new door on Z's home Answer: B 6. In a contract in which a tenant borrowed money from a bank for the purpose of adding a bathroom to her apartment, the landlord is: A. a direct beneficiary. B. in privity of contract with the tenant. C. a third-party beneficiary. D. an incidental beneficiary. Answer: D 7. An incidental beneficiary of a contract: A. can sue to enforce the contract. B. cannot sue to enforce the contract. C. is a beneficiary specifically named in the contract. D. is an assignee of the direct beneficiary. Answer: B 8. The party making an assignment is called the: A. assignee. B. assignor. C. obligor. D. successor. Answer: B 9. An assignment: A. is a contract. B. requires consideration. C. is a transfer of rights. D. is not enforceable. Answer: C 10. When a buyer assigns the right to goods under a contract, the buyer's liability to make payment to the seller is: A. transferred to the third party. B. terminated. C. still in effect. D. shared equally with the third party. Answer: C 11. An assignment is valid only if: A. it is in a particular form. B. it is written. C. there is a manifestation of the intent to assign. D. the assignment is paid for by the assignee. Answer: C 12. Generally, it is easiest to assign: A. credit. B. personal services. C. money. D. all of the above. Answer: C 13. The right to performance under a contract can be assigned: A. if the burden of performance is not materially increased. B. if the contract requires the performance of personal services. C. if the contract provides for the extension of credit. D. all of the above. Answer: A 14. In general, an assignee stands: A. in a position subordinate to the assignor. B. exactly in the position of the assignor. C. in a position superior to the assignor. D. in a position similar to, but not equal to, the assignor. Answer: B 15. The making of an assignment __________ the assignor of any obligation of the contract. A. relieves B. conditionally relieves C. does not relieve D. discharges Answer: C 16. If an obligor could successfully defend against a suit brought by the assignor: A. the obligor will also prevail against the third-party beneficiary. B. the obligor will also prevail against the assignee. C. the obligor will also prevail against the incidental beneficiary. D. none of the above. Answer: B 17. The substitution of an old contract for a new one that replaces an obligation or a party for another is a: A. novation. B. warranty. C. assignment. D. delegation of duties. Answer: A 18. An obligor may delegate his or her duties to perform under a contract when the: A. performance of the duty is standardized and nonpersonal. B. obligor is unable to perform his or her duties. C. contract is silent as to the right of assignment. D. obligor is an expert in his or her specialized duties under the contract. Answer: A 19. Unless language or circumstances indicate the contrary, a general assignment is: A. a transfer of property only. B. both a transfer of rights and a delegation of duties. C. a delegation of duties only. D. a transfer of rights only. Answer: B 20. The delegator of construction duties remains liable if: A. the delegatee performs the work properly, but the obligee did not approve of the delegation. B. the delegatee performs the work improperly. C. the obligee objects in writing to the delegatee’s performance of the work, even if the delegatee performs the work properly. D. the value of the contract is $500 or more and the delegatee performs the work properly. Answer: B CASE 1. A professor owned a home next door to a very dilapidated, neglected home. John Cataldo purchased the home next door and made a contract with Wizard Home Improvements for a complete renovation of the property. The professor was delighted because the improvement of the Cataldo home was upgrading the neighborhood and raising the value of the professor's home. After making the last required payment on the contract, John Cataldo became seriously ill and ultimately was taken to a nursing home for care. When Wizard learned of Cataldo's illness and confinement, Wizard ceased work on the Cataldo home. Because the outside renovation work had not been completed, the premises began to return to its former rundown condition. The professor ultimately sued Wizard as a third-party beneficiary of the contract between Cataldo and Wizard. What is the probable outcome of the lawsuit? Answer: The professor's lawsuit will be dismissed. Although the professor was benefited by the contract between Cataldo and Wizard, the professor was merely an incidental beneficiary. There was no intention to benefit the professor when the contract was made. 2. Walker Meeks is currently a party to two contracts. On the first contract, he has agreed to paint a portrait of a gentleman riding a horse. This portrait is for the wall of the gentleman's study. The gentleman chose Meeks for his realism in portraying the true feelings behind portrait models. Meeks' second contract is to paint the house of Sylvia Sneed. Meeks is offered an employment contract for a large sum of money. He wishes to accept, but this would render him unable to complete the aforementioned contracts. Meeks delegates the painting of the portrait to his friend Bob, an impressionist, and delegates the painting of Sylvia's home to Ted, a professional house painter. Neither the gentleman nor Sylvia intends to allow the delegation to occur. Comment on the probable outcome of the dispute. Answer: In all probability, the contract with the gentleman for the portrait is not delegable, while the painting of Sylvia's home could be delegated. Under certain circumstances, a contracting party may obtain someone else to do the contract work. Provided that the performance is standardized and non-personal, so that it is not material who performs, the law will permit the delegation of the performance of the contract. The house painting certainly is standardized enough for a delegation to be allowed. However, the portrait-painting contract was based on the unique skill of Meeks, creating a situation that probably could not be delegated. The delegation of duties would in no way eliminate Meeks' liability in the case of default. 3. Janet Jones sold the assets and liabilities of her coin-operated laundry to Kevin Katz for $10,000. The assets of the business included all of the washers and dryers. The liabilities included the amounts still owing on seven new dryers, which had been purchased recently from Dryer Company under an installment contract. Katz agreed to make the installment payments on the new dryers as they came due. After Katz failed to make an installment payment when it was due, Dryer Company sued Jones. Jones claimed she no longer was liable. How will the court decide? Answer: Judgment will be for Dryer Company. The sale of the business to Katz involved both an assignment of rights and a delegation of duties. Although Jones delegated to Katz the duty to make payments under the contract with Dryer Company, she remains liable to Dryer Company for Katz's failure to perform and must make the installment payments to Dryer Company if Katz does not do so. Chapter 19—Discharge of Contracts TRUE/FALSE 1. Generally, contracts are discharged by the performance of the terms of the contract. Answer: True 2. A condition precedent must occur before a party to a contract has an obligation to perform. Answer: True 3. A condition subsequent can alter but not terminate a contract. Answer: False 4. In most bilateral contracts, the performances of the parties are concurrent conditions. Answer: True 5. If a debtor with multiple debts specifies the debt to which a payment is to be applied and the creditor accepts the money, the creditor is bound to apply the money as specified. Answer: True 6. Payment by check is a conditional payment. Answer: True 7. An agreement that does not specify the time for performance is not binding because it is too indefinite. Answer: False 8. The time for performance is typically essential in a contract for the sale of perishable property. Answer: True 9. Unless a contract so provides, time is ordinarily not of the essence, and performance within a reasonable time is sufficient. Answer: True 10. In a case of the sale of property, time is not regarded as of the essence when there has not been any appreciable change in the market value or condition of the property and when the person who delayed does not appear to have done so for the purpose of speculating on a change in market price. Answer: True 11. A party who in good faith has provided substandard performance of a contract may sue to recover the payment specified in the contract. Answer: False 12. The doctrine of substantial performance is concerned with the issue of whether an imperfect performance will be considered adequate to discharge one's responsibilities under a contract. Answer: True 13. When a building contractor has substantially performed a contract to construct a building, the contractor is entitled to recover the full contract price. Answer: False 14. A person who substantially performs a contract is liable for damages to the other party. Answer: True 15. There is no exact standard or test by which to determine whether contractual performance is substantial. Answer: True 16. All courts hold that when an agreement requires satisfaction of the other party regarding the acceptance of an act, a reasonable person standard is used. Answer: False 17. A homeowner who supplies the specifications for poured cement walls can hold a contractor liable for damages when the walls that are poured in exact compliance with those specifications prove defective. Answer: False 18. The parties may agree that the adequacy of performance under a contract is to be determined by a third party. Answer: True 19. Contracts may be discharged by the joint action of both contracting parties or, in some cases, by the action of one party alone. Answer: True 20. The federal Consumer Credit Protection Act gives the debtor the right to rescind a credit transaction within three (3) business days when the transaction would impose a lien on the debtor’s home. Answer: True 21. In a mutual rescission, both parties, acting in good faith, renew their commitment to perform all obligations set forth in their original agreement. Answer: False 22. For the parties to enter into an accord and satisfaction that discharges the original obligation, there must be a bona fide dispute. Answer: True 23. Impossibility of performance applies when the debtor does not have sufficient funds to pay a debt. Answer: False 24. A seller's inability to obtain from any supplier the goods called for by the contract generally discharges the contract for impossibility of performance. Answer: False 25. To establish impossibility a party must show (1) the unexpected occurrence of an intervening act; (2) that the risk of the unexpected occurrence was not allocated by agreement or custom; and (3) that the occurrence made performance impossible. Answer: True 26. When parties contract expressly for a particular subject matter, the contract is discharged if the subject matter is destroyed through no fault of either party. Answer: True 27. A typical situation where the doctrine of economic frustration applies is when the party suffers a loss when a gain was expected. Answer: False 28. A house-painting contract is discharged if continual rain makes it impossible to complete the painting by the time specified in the contract. Answer: False 29. By operation of law, a party can be discharged in bankruptcy from debts. Answer: True 30. A contract provision requiring that suit be brought within one (1) year does not violate public policy, although the statute of limitations would allow two (2) years in the absence of such a contract limitation. Answer: True MULTIPLE CHOICE 1. A __________ is a condition that must occur before a party to a contract has an obligation to perform under a contract. A. condition precedent B. condition subsequent C. concurrent condition D. none of the above Answer: A 2. In most bilateral contracts, the performances of the parties are __________. A. conditions precedent B. conditions subsequent C. recurrent conditions D. concurrent conditions Answer: D 3. An offer to perform is known as a(n) __________. A. rendering B. offering C. tinder D. tender Answer: D 4. When a debtor makes a payment to a creditor specifying how it should be applied, the creditor must apply the payment: A. as directed by the debtor. B. to the oldest outstanding debt. C. to the most recent outstanding debt. D. to the largest outstanding debt. Answer: A 5. If no time period for performance is specified in a contract: A. the contract is unenforceable. B. time shall be of the essence. C. a reasonable time for performance will be implied. D. the time for performance will be ignored by the courts. Answer: C 6. In which case will performance on the exact date specified in the contract most likely be deemed essential? A. a sale of goods that fluctuate rapidly in value. B. a sale of goods that remain stable in value. C. a sale of real estate. D. a sale of goods where no harm results from a delay in performance. Answer: A 7. The phrase "time is of the essence" means that: A. the court is in a hurry to dispose of the case. B. performance under the contract at the times specified in the contract is vital or essential. C. the contract expressly states that time is of the essence. D. the price stated in the contract is subject to change without notice. Answer: B 8. A contract to build a house is deemed performed when: A. there has been substantial performance of the contract. B. the house is approved by the city housing inspectors. C. the house is approved by the owner's architect. D. the house is approved by the owner. Answer: A 9. A homeowner who refinances her home mortgage may cancel the transaction: A. if the terms of the contract were less favorable than anticipated. B. within three business days. C. only if she was the victim of fraud. D. upon payment of a $1,000 penalty, as required by a Federal Trade Commission rule. Answer: B 10. A Federal Trade Commission regulation gives a buyer three (3) business days in which to cancel a home-solicited sale of goods or services costing more than: A. $25. B. $50. C. $100. D. $500. Answer: A 11. Through which of the following circumstances may a contract be discharged? A. mutual cancellation B. mutual rescission C. accord and satisfaction D. all of the above Answer: D 12. If the parties to a contract agree to undo the agreement and return any consideration involved, the contract is discharged by: A. mutual cancellation B. mutual rescission. C. novation D. accord and satisfaction Answer: B 13. The parties may decide that their contract is not the one they want. They may then replace it with another contract. If they do, the original contract is discharged by __________. A. solution B. elocution C. retribution D. substitution Answer: D 14. Which of the following is not an element of an accord and satisfaction? A. a bona fide dispute B. a proposal to settle the dispute C. performance of the agreement to settle the dispute D. reservation of rights under the federal Consumer Credit Protection Act Answer: D 15. Which of the following events excuses a promisor from performing his or her contractual obligations? A. a riot B. a shortage of materials necessary for production of goods and/or provision of services called for under the contract C. an unanticipated increase in the cost of performance D. destruction of the subject matter through no fault of either party Answer: D 16. A change of law discharges a contract if the new law: A. requires a license and none was required before. B. requires the use of fireproof materials. C. requires the use of antipollution devices. D. prohibits the act called for by the contract. Answer: D 17. The death or disability of a party to a contract discharges the contract when: A. personal services requiring peculiar skill are involved. B. the payment of money is involved. C. a house is to be painted. D. all of the above. Answer: A 18. V3 was a successful singing group that contracted to perform at the “Metal substance” rock concert. V3 was aware that the promoter would sustain a substantial loss if the group failed to perform. The members of the group were stricken with a virus that confined them to their beds. The promoter sued for breach of contract. What is the probable result? A. V3 is liable for damages for breach of contract. B. The contract was discharged by impossibility of performance. C. In order to avoid liability for breach of contract, V3 must arrange for another group of comparable quality and reputation to perform on the scheduled date. D. V3 will be deemed to have substantially performed the contract. Answer: B 19. To avoid litigation over impossibility and impracticability issues, modern contracting parties often contract around the doctrine of impossibility, specifying the failures that will excuse performance in their contracts. The clauses in which they do this are called __________ clauses, and they are generally enforced by courts as written. A. delta force B. force majeure C. magnum force D. force corporeal Answer: B 20. When performance is impeded due to the occurrence of an event whose non occurrence was a basic assumption of the contract, the contract may be discharged on the grounds of: A. commercial impracticability. B. commercial impossibility. C. economic frustration. D. economic stability. Answer: A 21. The frustration of purpose doctrine: A. is based on common law. B. requires that both parties were aware of the purpose. C. temporarily suspends contract performance. D. all of the above. Answer: B 22. Ordinarily, a temporary impossibility __________ the duty to perform. A. suspends B. excuses C. discharges D. none of the above Answer: A 23. Sales of goods transactions are subject to a statute of limitations period of: A. one (1) year. B. two (2) years. C. three (3) years. D. four (4) years. Answer: D 24. Bankruptcy results in a discharge of contractual obligations by __________. A. default B. equity C. operation of law D. oath or affirmation Answer: C CASE 1. An art collector commissioned an artist to create a sculpture for the collector. The artist wanted a substantial amount of money for the sculpture. This caused the collector some worry regarding possible dissatisfaction with the artwork once it was completed. To ensure that payment would be made only if the collector was satisfied with the sculpture, a condition was written into the commission contract. It required that the collector would have to be satisfied with the artwork, relying on the collector's taste and judgment, before an obligation of payment would be created. The artist never imagined that a collector could possibly refuse a creation of his and allowed the condition to be placed within the contract. At the completion of the sculpture, the collector claimed that she did not care for the artwork and therefore refused to pay. Can the artist force payment in this situation? Would it help if the artist could establish that the collector actually approves of the sculpture but has temporarily run short on funds, and that this is the true motivating factor in refusing to accept the sculpture? Answer: An agreement can be made that requires that a performance will be accepted only based on the satisfaction of one of the parties or a designated third party. Courts are tempted to apply a reasonable person standard in instances such as this, but when personal taste is such an important element, as in this case, the courts generally hold that the designated party must be satisfied to allow recovery for the acting party. That being said, if the artist in this case can establish that there is a lack of good faith on the part of the collector, and that the collector is withholding approval of the work merely because of lack of funds, courts would hold that the performance is sufficient. 2. Kentucky Lumber and Millwork Company contracted to supply Rommell Company millwork for use in the construction of a school building. While the work was in progress, the Kentucky Lumber mill was destroyed by fire. For two months thereafter, Kentucky Lumber and Millwork supplied Rommell with millwork purchased from a third party. Kentucky Lumber and Millwork did not wish to continue this plan and declared that the contract was ended. Rommell brought an action against Kentucky Lumber and Millwork to enforce the contract. How will the court decide? Answer: Judgment will be for Rommell. The contract was to supply millwork without regard to where or by whom it was produced. This was confirmed by the conduct of the parties, because for two months the millwork of a third party had been supplied and accepted. Accordingly, the Kentucky Lumber and Millwork Company was not released from its contract because of the destruction of its mill. 3. Sam Student had borrowed $1,000 from his cousin. Sam and the cousin became involved in a heated disagreement when the cousin began to press Sam for repayment of the loan. Finally, Sam wrote a check for $190 to the cousin and conspicuously wrote on the check in big letters that it was full and final payment of the $1,000 loan. In need of money, the cousin cashed the check and demanded the remaining $810 from Sam. Sam refused to pay, claiming that they had entered into an accord and satisfaction that discharged Sam's obligation to pay anything more. The cousin sued Sam. Discuss the probable outcome. Answer: The cousin will clearly win the lawsuit. For an accord and satisfaction to apply, there must be a good faith dispute between the parties and an agreement to settle the dispute. In this case, there is no good faith dispute that Sam owes his cousin the remaining $810. Chapter 20—Breach of Contract and Remedies TRUE/FALSE 1. When one party breaks the contract, the contract is said to be breached. Answer: True 2. When a party expressly declares before the time for performance arrives that the contract will not be performed, such a declaration is called an anticipatory repudiation. Answer: True 3. An anticipatory repudiation must be clear, absolute, and unequivocal. Answer: True 4. A waiver of a breach may be either express or implied. Answer: True 5. If there is a breach of contract, the law requires that the other party terminate the contract and bring a lawsuit. Answer: False 6. Whether there has been a waiver is a question of fact. Answer: True 7. When a party waives compliance with one provision of a contract, the other party may thereafter ignore other provisions of that contract. Answer: False 8. A reservation of rights is an assertion by a party to a contract that even though a tendered performance is accepted, the right to damages for the nonconformity to the contract is reserved. Answer: True 9. An anti-modification clause specifies that a waiver to any breach automatically modifies the contract. Answer: False 10. A party injured by the other party's anticipatory repudiation of a contract has the right to bring suit at the time of the repudiation without waiting to see if there will be proper performance when due. Answer: True 11. The measure of monetary damages when there has been a breach of contract is the sum of money that will place the injured party in the same position that would have been attained if the contract had been performed. Answer: True 12. In some cases the court may require specific performance when there is a breach of contract. Answer: True 13. The normal remedy for breach of contract where the plaintiff has suffered a loss is compensatory damages. Answer: True 14. An injured party that does not suffer an actual loss from the breach of a contract is entitled to nominal damages. Answer: True 15. Damages in excess of actual loss, imposed for the purpose of punishing or making an example of the defendant, are known as compensatory damages. Answer: False 16. Punitive damages are generally recoverable in contract actions. Answer: False 17. Consequential damages are those that necessarily flow from the breach. Answer: False 18. Consequential damages may not be recovered, even if they were within the contemplation of the parties at the time of contracting. Answer: False 19. Only direct losses from a breach of contract may be recovered by an injured party. Answer: False 20. If one party to a contract breaks the contract, the other party generally is under a duty to stop any further performance to avoid sustaining greater damages. Answer: True 21. A party must mitigate damages at all costs. Answer: False 22. When one party commits a non-material breach of contract, the other party may rescind the contract. Answer: False 23. An injured party who rescinds a contract after having performed services may recover the reasonable value of the performance rendered under restitutionary or quasi-contractual damages. Answer: True 24. Ordinarily contracts for the performance of personal services are specifically ordered. Answer: False 25. When the plaintiff seeks the remedy of specific performance, the plaintiff wants the other party to carry out the terms of the contract and not pay damages. Answer: True 26. If monetary damages would be an adequate remedy, then an action for specific performance is not appropriate. Answer: True 27. When the contract requires that both parties submit disputes to arbitration, this is an example of a limitation-of-remedies clause. Answer: True 28. Contract provisions that limit the remedies of the parties are generally unenforceable. Answer: False 29. If a plaintiff's loss involves damaged property, it is described as liquidated damages. Answer: False 30. The “American rule” states that the losing party in a lawsuit is responsible for all attorney fees. Answer: False MULTIPLE CHOICE 1. The failure to act or perform in the manner called for by a contract is a: A. waiver. B. breach. C. forbearance. D. reservation of right. Answer: B 2. When a party expressly declares that performance will not be made when required, this declaration is a(n): A. anticipatory repudiation. B. injunction. C. negotiating technique. D. waiver of breach. Answer: A 3. A landlord who continuously accepts late rental payments without collecting the late fee provided in the lease: A. waives the late fee. B. will collect the late fee at a later date. C. is ignorant of the late fee. D. allows the tenant to repudiate the lease. Answer: A 4. Repeated breaches and waivers are generally interpreted to indicate: A. poor business practices. B. illegal behavior. C. ignorance of the law. D. modification of contract. Answer: D 5. A contractual provision which states that a waiver of rights will not constitute a modification to the contract is: A. not enforceable as being in bad faith. B. not enforceable as a violation of law. C. enforceable by one party only. D. enforceable. Answer: D 6. If a seller delivers defective goods, the buyer does not lose the right to object to the breach of contract if the buyer: A. accepts the goods. B. accepts the goods with a reservation of right. C. agrees to a modification of the contract. D. accepts the performance without protest. Answer: B 7. When one party has broken a contract, there are several remedies available to the non-breaching party, including: A. bringing an action for money damages. B. rescinding the contract. C. seeking specific performance. D. all of the above. Answer: D 8. When an anticipatory repudiation of a contract occurs, the aggrieved person's option(s) include: A. doing nothing and waiting for performance per the contract. B. immediately declaring a breach of contract. C. considering the contract cancelled. D. all of the above. Answer: D 9. If a plaintiff seeking damages in a breach of contract action receives $1 in damages, the damages would most likely be classified as: A. punitive damages. B. exemplary damages. C. nominal damages. D. compensatory damages. Answer: C 10. Damages in excess of actual loss are called: A. punitive damages. B. compensatory damages. C. restitution. D. nominal damages. Answer: A 11. The damages that are typically recoverable when a contract has been breached and one party has suffered loss are called: A. punitive damages. B. emotional distress damages. C. compensatory damages. D. liquidated damages. Answer: C 12. The party that breaks a contract may be required to pay damages to the other party to compensate for: A. losses that could have been avoided by hiring someone else to perform the contract. B. emotional disturbance caused by the breach of contract. C. a heart attack induced by the emotional disturbance caused by the breach of contract. D. damages resulting necessarily and directly from the breach of contract. Answer: D 13. Consequential damages may be recovered if: A. the damages were not a foreseeable consequence of the breach. B. the damages reasonably flow from the breach as a result of the injured party’s particular circumstances. C. the breach did not cause the damages. D. the loss exceeds $500. Answer: B 14. The rule of mitigation of damages requires that a party injured by a breach of contract must: A. take any and all steps possible to reduce the damages that will be sustained because of the breach. B. discharge the contract before filing suit for breach. C. hire someone else to perform the contract. D. take reasonable steps to reduce the damages that would otherwise be sustained because of the breach. Answer: D 15. Failure to mitigate damages limits recovery to: A. damages that would have been sustained had the plaintiff mitigated the damages where it was possible to do so. B. nominal damages and punitive damages. C. damages for consequential loss. D. exemplary damages. Answer: A 16. Which is not a correct statement concerning rescission of a contract? A. The breach must be material. B. The injured party who rescinds may recover money paid under the contract. C. The contract remains in effect after the rescission. D. Rescission is the undoing of the contract. Answer: C 17. The remedy of specific performance will most likely be granted in the case of a(n): A. employment contract. B. contract to buy shares of publicly-traded stock. C. contract for the sale of a business. D. contract for the sale of Florida oranges. Answer: C 18. Which is not a correct statement concerning the remedy of specific performance? A. The subject matter of the contract must generally be unique. B. An award of monetary damages would be an inadequate remedy. C. The granting of specific performance is discretionary with the court. D. It is generally available in all breach of contract cases. Answer: D 19. An action for injunctive relief may be granted: A. if money is due and payable. B. if the breach consists of doing a prohibited act. C. if the breach would cause nominal damages. D. if the breach would cause consequential damages. Answer: B 20. When a written contract does not correctly state the agreement already made but the parties either party make seek a(n): A. rescission B. injunction C. reformation of the contract D. action for specific performance Answer: C 21. A provision stipulating the amount of money damages to be paid in the event of default or breach of contract is known as a __________ damages clause. A. nominal B. contract C. liquidated D. breach Answer: C 22. Which is NOT a correct statement concerning a liquidated damages clause? A. If the clause is enforced, the injured party can collect no more than the amount specified. B. If the clause is enforced, the injured party has a choice between compensatory damages or liquidated damages. C. It must be possible to determine actual damages. D. The amount of liquidated damages are established by the parties to the contract. Answer: B 23. If a liquidated damages clause demands an unusually large sum that is not related to reasonably-anticipated actual damages, the clause will be held to be void as a(n): A. penalty. B. unliquidated damages clause. C. Extortion D. Blackmail Answer: A 24. A contract provision stating that one of the parties shall not be liable for damages in case of a breach is called a(n) __________ clause. A. liquidated damages B. exculpatory C. waiver. D. due process Answer: B 25. Between experienced businesspersons, exculpatory clauses are generally: A. voidable. B. void. C. valid. D. unenforceable. Answer: C CASE 1. Cyril made two contracts. The first was to have his house painted one month from the date of the written contract. The second was for his neighbor's 1957 Ford Thunderbird. Each contract was definite and clear in all respects. As to the house painting, Cyril inquired with the painter as to when the work could begin. The painter explained that he was extremely busy and was not sure if he could fulfill the contract. Cyril flew into a rage and immediately hired someone else who painted the house, but at a higher price. Cyril then sued the painter, claiming that there was an anticipatory repudiation of the contract by the painter. With regard to the automobile purchase contract, after signing the contract, the neighbor decided that she did not wish to sell her car and refused to complete the transaction. Cyril attempted to purchase a similar car elsewhere, but the car was a vintage automobile which was not available on the open market. Cyril sued the neighbor for specific performance of the contract. Discuss the probable outcomes of the lawsuits. Answer: Cyril will lose the case against the painter because there was no anticipatory repudiation of the contract. An anticipatory repudiation must be clear, positive, and unequivocal. Merely stating that you are not sure if you can complete a contract does not constitute repudiation. Cyril will win the lawsuit for specific performance because the car is unique and no adequate remedy in the form of monetary damages is available to Cyril. Cyril cannot simply go out and purchase a similar car elsewhere. 2. Gregory, a comedy writer, entered into a contract with Wessel, a comedian. The contract provided that Gregory would provide Wessel with a 15-minute monologue for his upcoming appearance on Comedy Hour and that Wessel would pay Gregory $250. All performers on Comedy Hour make $500 per appearance. As Gregory knows, the last time Wessel appeared on Comedy Hour he was asked to make special guest appearances at three local comedy clubs using the same monologue. He earned a total of $750 for the three performances. Shortly before Wessel was scheduled to appear on Comedy Hour, Gregory informed him that he was unable to provide the monologue. As a result, Wessel was forced to cancel his appearance. Wessel sued Gregory for breach of contract and requested damages of $1,250. What will result? Answer: Judgment will be for Wessel for breach of contract. Damages of $1,250 will be awarded. Wessel is entitled to compensatory damages of $500 to compensate him for the actual loss he sustained when he was unable to appear on Comedy Hour because he had no monologue. In addition, Wessel is entitled to recover $750 in consequential damages. Because Wessel had made special guest appearances as the result of his prior appearance on Comedy Hour, of which Gregory was aware, it was reasonably foreseeable by Gregory that this sort of loss could occur if he breached; accordingly, Gregory is liable for consequential damages. 3. Beth Roberts purchased a "new" car from Honest John's Car Lot six months ago. The sales agreement expressly described the vehicle as a new car, and all usual factory papers accompanied the sale. However, Beth discovered that the car actually was acquired by Honest John's from another dealer who had used it as a demonstrator and loaned it to business friends on a regular basis. The car had more than 10,000 miles on it, a fact that had been concealed by turning back the odometer. Beth also discovered that Honest John's apparently had engaged in this practice before. Beth is suing for breach of contract. She is asking for compensatory damages equal to the difference between the new car price she paid and the average price the vehicle would have brought as a used car. In addition, she is asking for damages in the amount of $5,000. Honest John's attorney has told Beth that she will fight both claims and has advised Beth that the court will not award $5,000 as punitive damages for such a suit. What do you think? Answer: Honest John's probably will lose on both counts. Punitive damages are not common in breach-of-contract cases, but there is a trend toward awarding such punishing damages against a seller who has acted wrongfully and stubbornly, to discourage such actions by the seller in the future. In addition, the dealer will face regulatory agency action if it can be proved that he turned back the odometer to defraud. Test Bank for Business Law: Principles for Today's Commercial Environment David P. Twomey, Marianne M. Jennings 9781133588245, 9781305575158, 9780324786699
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