Section 2 - Contracts

Question 1

Which of the following penalties is usually imposed against an accountant who, in the course of performing professional services, breaches contract duties owed to a client?

Answer 1

Money damages

The client can sue the accountant for monetary damages if the accountant breaches contract duties

Question 2

What law governs the sale of real estate?

Answer 2

Common Law

Question 3

On May 25, Year 1, Smith contracted with Jackson to repair Smith’s cabin cruiser. The work was to begin on May 31, Year 1. On May 26, Year 1, the boat, while docked at Smith’s pier, was destroyed by arson. Which of the following statements is correct with regard to the contract?

Answer 3

Jackson would not be liable to Smith because performance by the parties would be impossible.

When an event occurs that makes it impossible to carry out the terms of the contract, the contract is discharged

Question 4

A substituted contract involves the original parties to an agreement whereby all parties agree to ____of a new or amended contract in the place of the original contract. As such, the parties are released from their duties to abide by and act upon the original contract, but continue ____relationship with each other in the substituted contract.

Answer 4

substitute the terms and conditions

in a contractual

Question 5

A novation, by definition, requires at least one party of the original contract be ____by a new party, and the new party assumes all of the ____of the original party as if that original party was never part of the contract (i.e., a discharge of that original party).

Answer 5

substituted

responsibilities

Question 6

On December 1, Gem orally contracted with Mason for Mason to manage Gem’s restaurant for one year starting the following January 1. They agreed that Gem would pay Mason $40,000 and that Mason would be allowed to continue to work for Gem if “everything worked out.” On June 1, Mason quit to take a better-paying job, alleging that the contract violated the statute of frauds. What will be the outcome of a suit by Gem for breach of contract?

Answer 6

Gem will lose because the contract could not be performed within one year.

Since the contract could not be performed within one year, the oral contract would not be enforceable in court.

Question 7

A contract for the sale of goods for a price of $___ or more must be in ___to be enforceable.

4 exceptions

Answer 7

500, writing

1. Oral contract is enforceable if other merchant sends written confirmation wthin 10 days
2. Goods pecially manufactures and manufacturer has made substantial progress
3. Goods paid for and receiced
4. Other person admits in court the oral contract

Question 8

Any contract for the sale of ____must be in writing to be enforceable.

Answer 8

securities

Question 9

Sale of intangible personal property (e.g., _____) for more than $5,000 must be in writing.

Answer 9

a patent, copyright, or royalty right

Question 10

The concept of ____of damages generally requires that compensation for damages is given only in those situations where the breaching party could reasonably have foreseen the probable result of their breach.

____of damages is a concept that imposes a duty upon the innocent injured party to reduce (___) their damages resulting from a breach of contract.

Answer 10

foreseeability

Mitigation, (mitigate)

Question 11

Yost contracted with Egan for Yost to buy certain real property. If the contract is otherwise silent, Yost’s rights under the contract are:

assignable only with Egan’s consent.
nonassignable because they are personal to Yost.
nonassignable as a matter of law.
generally assignable.

Answer 11

Generally Assignable.

Rights (legal ability to get something from the other party) are almost always assignable.

Question 12

NONASSIGNABLE CONTRACTS
1; Nonassignable contracts generally involve ___
2; Contracts that involve the ____of one of the parties.

Answer 12

personal service

personal satisfaction

Question 13

____is a required element of a contract.
___ is an element of the contract that supports the promise given, causing the promise to be enforceable
____must be mutual for a valid contract

Answer 13

Consideration

Question 14

____is a legal rule of contract interpretation that states that extrinsic (oral or written) evidence (i.e., outside the contract) is not admissible to add to, alter, or vary the terms of a written contract.

Answer 14

Parol evidence

Question 15

Despite the parol evidence rule, oral evidence may be admitted as proof: (4)

Answer 15

Fraud
Oral condition or failure of oral condition(NOT PRIOR WRITTEN AGREEMENTS) to enter contract (must do something first before entering contract)
Explain omission/contractual capacities
Subsequent Modification

Question 16

Which of the following statements is correct regarding the effect of the expiration of the period of the statute of limitations on a contract?

Once the period of the statute of limitations has expired, the contract is void.
The expiration of the period of the statute of limitations extinguishes the contract’s underlying obligation.
A course of action barred by the statute of limitations may not be revived.
The running of the statute of limitations bars access to judicial remedies.

Answer 16

The running of the statute of limitations bans/bars access to judicial remedies.

The statute of limitations is a statute that provides certain specified periods of time within which matured claims may be asserted by legal action.

Contract ISNT voided - but it’s not enforceable. Same with obligation.

Question 17

Green was adjudicated incompetent by a court having proper jurisdiction. Which of the following is correct regarding contracts subsequently entered into by Green?

All contracts are voidable.
All contracts are valid.
All contracts are void.
All contracts are enforceable.

Answer 17

All contracts are void.

Question 18

A ___contract is one that never had any legal status.

Answer 18

void

Question 19

A ____contract is valid only until one party exercises a right to avoid the contract.

____ contracts can be made valid by (1) ___or (2) ___by the party with the right to avoid the contract.

Answer 19

voidable, voidable, ratification(signing), silence

Question 20

STATUTE OF FRAUDS
It specifies that certain contracts must be in ____and signed by the party to be charged in order to be enforceable.

Applies in only 4 scenarios

1. Sale of goods exeeding $___
2. Contracts that take longer ___
3. Sale of ___or ___
4. Promise to ___the debt of another

Answer 20

writing

The statute applies only to the following:

1. $500
2. Longer than a year
3. Real property or securities
4. Answer/Pay the debt of another

Question 21

If the problems don’t fall under the statute of frauds, then it falls under ____

Answer 21

common law

Question 22

In the law of real property, ____describes a situation in which a landlord either does something or fails to do something that the landlord has a legal duty to provide

Answer 22

constructive eviction

Question 23

The guarantee must be in writing, oral, or doesnt matter?

Answer 23

Writing

Question 24

If the contractual obligations to be performed are ____, the contractual obligations are automatically discharged.

Contractual obligations for the personal services of one person are not affected by the ___of the other person to receive, increased cost of performance, or bankruptcy of the party who is to ____the performance.

Answer 24

illegal

death

receive

Question 25

When there has been no performance by either party, which of the following events generally will result in the discharge of a party’s obligation to perform as required under the original contract?

Accord and satisfaction
Mutual rescission

Answer 25

Both

Mutual rescission is a joint agreement to call off the contract and/or replace w/ new one.

Accord&Satisfaction - they’re mutually satisfied that the contract hasn’t been performed.

Question 26

A contract between a minor and an adult is ___only by the ___. The adult is bound by the contract.

Answer 26

voidable,minor.

Question 27

On May 25, Fresno sold Bronson, a minor, a used computer. On June 1, Bronson reached the age of majority. On June 10, Fresno wanted to rescind the sale. Fresno offered to return Bronson’s money and demanded that Bronson return the computer. Bronson refused, claiming that a binding contract existed.

When could bronson disffirm(reaffirm)
What would happen if Bronson ratified(changed terms) of the contract after being 18?

Answer 27

Anytime while being a minor OR a reasonable time after turning 18

Ratifying after turning 18, he would be bound by the contract as an adult.

Question 28

Insurable interest is any legally recognized or substantial economic interest in the safety and preservation of the insured property; the right to collect on ____

Answer 28

insurance;

Question 29

Title passes from the seller to the buyer only if the goods are ____in the sales contract. A buyer has an ____ interest from the time the goods are identified in the contract.

Answer 29

identified

insurable interest

Question 30

Define:

unjust enrichment.
public policy.
quasi contract.

Answer 30

Unjust Enrichment: court readdresses a situation where one party has performed some act for the benefit of another person and should receive compensation in the name of justice.

Public Policy - No specific law or prior case dealt with same facts, but action can be taken with a basis of common sense

Quasi Contract - Courts apply contractual remedy when no legal contract exists, but is enforced in law.

Question 31

Under contract law, one of the parties can sometimes have a third party perform the contracting party’s obligations under the contract; this is called a ___

Can all duties be delegated?

Answer 31

delegation of duties

NO -performance by the delegate would vary materially from performance by the delegator.
((((For example, if the contract is based on the artistic skill or unique ability of the delegator, the duty to perform is nondelegable.))))

Question 32

___ is a significant change in a contract that changes its interpretation or effect

Answer 32

Material alteration

Question 33

____is an agreement between two contracting parties where some different performance will replace the original performance; __is the carrying out of the accord.

Answer 33

Accord
satisfaction

An accord and satisfaction discharges the contractual obligation.

Question 34

Agreements made in consideration of marriage, is this enforceable under the statute of frauds?

Answer 34

Yep

Question 35

If it is possible to perform a contract within one year, then an oral contract is ____

Answer 35

enforceable and is not required to be written.

Question 36

Pierce owed Duke $3,000. Pierce contracted with Lodge to paint Lodge’s house and Lodge agreed to pay Duke $3,000 to satisfy Pierce’s debt. Pierce painted Lodge’s house, but Lodge did not pay Duke the $3,000. In a lawsuit by Duke against Pierce and Lodge, who will be liable to Duke?

Pierce only
Lodge only
Both Pierce and Lodge
Neither Pierce nor Lodge

Answer 36

Both

Pierce is still liable to Duke for $3,000. Since Lodge agreed to pay Duke $3,000 if Pierce would paint Lodge’s house, Lodge is now also liable to Duke for $3,000

Question 37

Either accord or satisfaction by itself will discharge the contractual obligation.

t/f

Answer 37

FALSE – NEED BOTH

Question 38

Fraud in the inducement is a false representation of a ____intentionally made, justifiably relied upon, and resulting in injury

Answer 38

material fact

Question 39

Omega Corp. owned a factory that was encumbered by a mortgage securing Omega’s note to Eagle Bank. Omega sold the factory to Spear, Inc., which assumed the mortgage note. Later, Spear defaulted on the note, which had an outstanding balance of $15, 000. To recover the outstanding balance, Eagle:

Who do you sue?

Answer 39

Either spear or omega

There does not appear to be a novation (substituted contract that dissolves a previous contractual duty) of the original contract in this problem. The creditor has not agreed to release Omega from the contract, so both Spear and Omega continue to be liable for debt.

Question 40

For Duress, a purchaser of land to avoid a contract with the seller based on duress, it must be shown that the seller’s improper threats actually ____

Answer 40

induced the purchaser to assent to the contract.

Note: Important to prove the threats actually caused, rather than the threats would have caused.

Question 41

An act of God will only terminate the offer if the subject matter of the contract was ___.

Answer 41

actually destroyed

Question 42

A discharge is the end of a contractual obligation. Which of the following is not a discharge of a contractual obligation?

Complete performance
Partial performance
Condition precedent not happening
Condition subsequent happening

Answer 42

Complete Performance - contract is completed and exactly as agreed upon

Partial Performance - Contract is not complete. Therefore NOT A DISCHARGE

Condition Precedent not happening - Need a condition precedent to happen for a contract to happen. If this doesn’t happen, then no contract, then no contract obligation

Condition Subsequent - Ends existing contract obligation

Question 43

Wilcox Co. contracted with Ace Painters, Inc., for Ace to paint Wilcox’s warehouse. Ace, without advising Wilcox, assigned the contract to Pure Painting Corp. Pure failed to paint Wilcox’s warehouse in accordance with the contract specifications. The contract between Ace and Wilcox was silent with regard to a party’s right to assign it. Which of the following statements is correct?

Ace remained liable to Wilcox despite the fact that Ace assigned the contract to Pure….WHY?

Answer 43

Contracts are ordinarily assignable. Nonassignable contracts generally involve personal service, personal satisfaction of one of the parties, contracts that state that the contract is not assignable, or contracts that would treat the nonassigning party unfairly. Since this contract involves personal services, it is not assignable and Ace remains liable.

Question 44

A person’s promise to pay a real estate agent $1,000 in return for the real estate agent’s earlier act of not charging commission for selling the person’s house

Is this enforceable?

Answer 44

No - past consideration is NO consideration.

No consideration was from the real estate agent.

Question 45

Breach by one party discharges the duty of performance by the other party….T/F

Answer 45

True

Question 46

Ames Construction Co. contracted to build a warehouse for White Corp. The construction specifications required Ames to use Ace lighting fixtures. Inadvertently, Ames installed Perfection lighting fixtures which are of slightly lesser quality than Ace fixtures, but in all other respects meet White’s needs. Which of the following statements is correct?

White’s recovery will be limited to monetary damages because Ames’ breach of the construction contract was not material…. WHY?

Answer 46

Since Ames’ breach of contract was inadvertent (a mistake), a remedy of compensatory monetary damages (i.e., the difference in cost between the two fixtures) is appropriate because the breach is not material.

Requiring Ames to replace the fixtures per the contract would be the remedy of specific performance. This remedy is awarded only if monetary damages would be inadequate. In this case, since the Perfection fixtures were substantially as good as the required Ace fixtures, specific performance would not be required.

Question 47

In the case of substantial performance, remedy is limited to the damages caused by the ___.

Answer 47

reduced performance

Required performance - Actual Performance = Compensation damage

Question 48

To cancel a contract and to restore the parties to their original positions before the contract, the parties should execute a:

Answer 48

Rescission

Question 49

A revocation occurs when a party informs the other party that their offer is ____

Answer 49

no longer valid

Question 50

Johns leased an apartment from Olsen. Shortly before the lease expired, Olsen threatened Johns with eviction and physical harm if Johns did not sign a new lease for twice the old rent. Johns, unable to afford the expense to fight eviction, and in fear of physical harm, signed the new lease. Three months later, Johns moved and sued to void the lease claiming duress. The lease will be held:

void because of the unreasonable increase in rent.
voidable because of Olsen’s threat to bring eviction proceedings.
void because of Johns’ financial condition.
voidable because of Olsen’s threat of physical harm.

Answer 50

voidable because of Olsen’s threat of physical harm. ————The lease will be held voidable because of Olsen’s threat of physical harm. Duress is a defense to a contract that may be held voidable.

Courts do not attempt to measure the value of consideration and will not hold the lease void because of the “unreasonable increase in rent.” Olsen’s threat to evict the tenants if they do not sign a new lease is perfectly legal

Question 51

Long purchased a life insurance policy with Tempo Life Insurance Co. The policy named Long’s daughter as beneficiary. Six months after the policy was issued, Long died of a heart attack. Long had failed to disclose on the insurance application a known preexisting heart condition that caused the heart attack. Tempo refused to pay the death benefit to Long’s daughter. If Long’s daughter sues, Tempo will:
win, because of Long’s failure to disclose the preexisting heart condition….WHY?

Answer 51

Failing to disclose the preexisting condition would be considered fraud in the execution of the life insurance contract. Even if the misrepresentation is innocent, the life insurance may rescind the contract.

Question 52

Minors cannot ratify contracts until ____

Answer 52

they reach a majority age, which is usually 18.

Question 53

All of the following are effective methods of ratifying a contract entered into by a minor, except:

expressly ratifying the contract after reaching the age of majority.
failing to disaffirm the contract within a reasonable time after reaching the age of majority.
ratifying the contract before reaching the age of majority.
impliedly ratifying the contract after reaching the age of majority.

Answer 53

ratifying the contract before reaching the age of majority.

Minors cannot ratify contracts until they reach a majority age, which is usually 18.

Question 54

On February 12, Harris sent Fresno a written offer to purchase Fresno’s land. The offer included the following provision: “Acceptance of this offer must be by registered or certified mail, received by Harris no later than February 18 by 5:00 p.m. CST.” On February 18, Fresno sent Harris a letter accepting the offer by private overnight delivery service. Harris received the letter on February 19. Which of the following statements is correct? Fresno’s letter constituted a counteroffer….WHY?

Answer 54

Fresno’s letter constituted a counteroffer because it was received after the deadline imposed by the terms of the offer. Recall that Harris’ offer required receipt by February 18. Under common law contract law, Fresno’s failure to ensure receipt on or before February 18 meant that a late acceptance could only be a counteroffer. The “mailbox” rule which states that an acceptance is effective when mailed does not apply because the offeror placed specific terms on proper acceptance.

Question 55

What is the mailbox rule?

Answer 55

The “mailbox” rule which states that an acceptance is effective when mailed does not apply because the offeror placed specific terms on proper acceptance.

Question 56

A tenant renting an apartment under a 3-year written lease that does not contain any specific restrictions may be evicted for:

counterfeiting money in the apartment.
keeping a dog in the apartment.
failing to maintain a liability insurance policy on the apartment.
making structural repairs to the apartment.

Answer 56

counterfeiting money in the apartment.

A tenant may not use the leased property for unlawful purposes. If the tenant does so, the landlord may terminate the lease, evict the tenant, and sue for damages.

Question 57

Master Mfg., Inc., contracted with Accur Computer Repair Corp. to maintain Master’s computer system. Master’s manufacturing process depends on its computer system operating properly at all times. A liquidated damages clause in the contract provided that Accur pay $1,000 to Master for each day that Accur was late responding to a service request. On January 12, Accur was notified that Master’s computer system failed. Accur did not respond to Master’s service request until January 15. If Master sues Accur under the liquidated damage provision of the contract, Master will: win unless the liquidated damage provision is detremined to be a

Answer 57

penalty

Question 58

Excessive liquidated damages are void (because

If the courts find the liquidated damage provision to be a ____, they will disregard the provision and make the party try to prove ____ damages.

Answer 58

because they are seen to represent a penalty

penalty, compensatory damages

Question 59

Which of the following, if intentionally misstated by a seller to a buyer, would be considered a fraudulent inducement to make a contract?

Nonexpert opinion
Appraised value
Prediction
Immaterial fact

Answer 59

Appraised Value.

fraudulent inducement must be factual and material. Opinions and predictions are not facts. Immaterial facts cannot affect an inducement. An intentionally misstated appraised value is a material fact

Question 60

Which one of the following is not consideration for purposes of contract law?

A return promise to do something that the promisee isnot legally obligated to do
An act other than a return promise that the promisee is not legally obligated to do
A forbearance—promising not to do something that the promisee has a legal right to do
A moral obligation

Answer 60

Moral Obligation

A moral obligation is not consideration; even though the person may be obligated, that does not make the contract legal.

Question 61

Carson Corp., a retail chain, asked Alto Construction to fix a broken window at one of Carson’s stores. Alto offered to make the repairs within three days at a price to be agreed on after the work was completed. A contract based on Alto’s offer would fail because of indefiniteness as to the: Price involved…..WHY?

Answer 61

valid offer must include agreement (offer and acceptance), consideration, contractual capacity, and legal object. The terms of a valid offer must be definite and certain. The subject matter, parties to the contract, and time for performance are obvious. However, the price in this problem is indefinite.

Question 62

Under the parol evidence rule, oral evidence will be excluded if it relates to:

a contemporaneous oral agreement relating to a term in the contract.
failure of a condition precedent.
lack of contractual capacity.
a modification made several days after the contract was executed.

Answer 62

a contemporaneous oral agreement relating to a term in the contract…..this should be written in the agreement if it is during the writing stage.

Question 63

Which of the following would be unenforceable because the subject matter is illegal?

An employer’s promise not to press embezzlement charges against an employee who agrees to make restitution….WHY?

Answer 63

A contract must have a legal purpose. Since the subject of the contract, embezzlement, is a criminal act, the contract does not have a legal purpose and is not enforceable.

Question 64

Jerry’s House of Jewelry, Inc., took out an insurance policy with the Old Time Insurance Company that covered the stock of jewelry displayed in the store’s windows. Old Time agreed to indemnify Jerry’s House for losses due to window smashing and theft of the jewels displayed. The application contained the following provision: “It is hereby warranted that the maximum value of the jewelry displayed shall not exceed $10,000.” The insurance policy’s coverage was for $8,000. The application was initialed alongside the warranty and attached to the policy. Subsequently, thieves smashed the store window and stole $4,000 worth of jewels. The total value of the display during that week, including the day of the robbery, was $12,000. Which of the following is correct? Jerry’s House will recover nothing…why?

Answer 64

In this case, the contract includes the application along with the policy. Jerry’s House of Jewelry was displaying jewelry in excess of the agreed-upon amount. Since it violated the terms of the contract, no recovery is required.

Question 65

On June 15, Peters orally offered to sell a used lawn mower to Mason for $125. Peters specified that Mason had until June 20 to accept the offer. On June 16, Peters received an offer to purchase the lawn mower for $150 from Bronson, Mason’s neighbor. Peters accepted Bronson’s offer. On June 17, Mason saw Bronson using the lawn mower and was told the mower had been sold to Bronson. Mason immediately wrote to Peters to accept the June 15 offer. Which of the following statements is correct?

Mason’s acceptance would be effective when received by Peters.
Mason’s acceptance would be effective when mailed.
Peters’s offer had been revoked and Mason’s acceptance was ineffective.
Peters was obligated to keep the June 15 offer open until June 20.

Answer 65

Peters’s offer had been revoked and Mason’s acceptance was ineffective.

A sale of the property to another entity would be a termination. An indirect revocation by the offerer, such as Mason being told by Bronson that Bronson bought the mower, is a valid termination.

Question 66

Which of the following offers of proof are inadmissible under the parol evidence rule when a written contract is intended as the complete agreement of the parties?

Proof of the existence of a subsequent oral modification of the contract
Proof of the existence of a prior oral agreement that contradicts the written contract

Answer 66

II only

The parol evidence rule excludes from evidence proof of a prior or contemporaneous statement (written or oral) or agreement that contradicts the final written contract.

Question 67

A building subcontractor submitted a bid for construction of a portion of a high-rise office building. The bid contained material computational errors. The general contractor accepted the bid with knowledge of the errors. Which of the following statements best represents the subcontractor’s liability?

Not liable because the contractor knew of the errors..WHY?

Answer 67

If the other party knows or should reasonably know of the existence of the error, no acceptance is permitted

Question 68

If a unilateral mistake occurs and the offeree isn’t aware of theerror, is the offeror is liable for that amount?

Answer 68

TRUE

Question 69

Long was a purchasing agent for Frost, a sole proprietor. Long had express authority to place purchase orders with Frost’s suppliers. Long conducted business on the Internet and had little contact with Frost. After Frost was declared incompetent in a judicial proceeding, Long placed an order with Grant Corp. on Frost’s behalf. Both Long and Grant were unaware of Frost’s incompetence. Will Frost or Frost’s legal representative be liable to Grant?

Answer 69

No b/c long didn’t have authority to enter into the contract b/c the mental incapacity principal automatically terminates the agency