Tuesday, March 27, 2012

Business Law Texts and Cases 11th Edition Chapter 18 Breach of Contract and Remedies T/F Multiple Choice Essays


Chapter 18


Breach of Contract and Remedies



true/false questions

A1.      If a party breaches a contract, the other party can file a criminal complaint

            answer:    F                              PAGE:     353                          TYPE:      N
                        NAT: AACSB Analytic                     AICPA Legal

B1.      If a party breaches a contract, the other party can only refuse to perform.

            ANSWER:    F                              PAGE:     353                          TYPE:      N
                        NAT: AACSB Analytic                     AICPA Legal

A2.      Damages are designed to punish a breaching party and deter others from similar conduct.

            answer:    F                              PAGE:     353                          TYPE:      N
                        NAT: AACSB Analytic                     AICPA Legal

B2.      Damages compensate a party for harm suffered as a result of another’s wrongful act.

            answer:    T                              PAGE:     353                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Critical Thinking

A3.      A remedy is the relief provided to an innocent contracting party when the other party breaches the contract.

            answer:    T                              PAGE:     353                          TYPE:      N
                        NAT: AACSB Analytic                     AICPA Legal

B3.      The measure of damages on a breach of contract is the amount that will impress on the breaching party the harm that has been done.

            answer:    F                              PAGE:     353                          TYPE:      N
                        NAT: AACSB Analytic                     AICPA Legal

A4.      The four broad types of damages in contract law are conciliatory, consecutive, punctual, and nominative.

            answer:    f                              PAGE:     353                          TYPE:      N
                        NAT: AACSB Analytic                     AICPA Critical Thinking

B4.      The injury suffered by a nonbreaching party due to the breach of a con­tract may be remedied by payment of compensatory damages.

            answer:    t                              PAGE:     353                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

A5.      Compensatory damages are foreseeable damages that arise from a party’s breach of a contract.

            ANSWER:    F                              PAGE:     353                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

B5.      Expenses that are caused directly by a breach of contract—such as those in­curred to obtain performance from another source—are inci­dental dam­ages.

            answer:    t                              PAGE:     353                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

A6.      Compensatory damages compensate the nonbreaching party for injuries or damages sustained by that party.

            ANSWER:    T                              PAGE:     353                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal


B6.      In a contract for a sale of goods, the usual measure of compensatory dam­ages is the difference between the contract price and the market price.

            ANSWER:    T                              PAGE:     353                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

A7.      A party seeking to recover compensatory damages may also be entitled to recover in­cidental damages.

            answer:    t                              PAGE:     353                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

B7.      The measure of damages for the breach of a contract for a sale of land de­pends on which party breaches and when.

            ANSWER:    F                              PAGE:     354                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

A8.      The measure of damages for breach of a construction contract depends on which party breaches and when.

            ANSWER:    T                              PAGE:     354                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

B8.      In a contract for a sale of land, the usual remedy is specific performance.

            ANSWER:    T                              PAGE:     354                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

A9.      On the breach of a contract involving the sale of land, money damages is always the most appro­priate remedy.

            answer:    f                              PAGE:     354                          TYPE:      +
                        NAT: AACSB Reflective                                                   AICPA Legal

B9.      Consequential damages are foreseeable damages that arise from a party’s breach of a contract.

            answer:    t                              PAGE:     355                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

A10.    Consequential damages are awarded to cover all of the remote conse­quences of whatever injury a nonbreaching party suffers.

            answer:    F                              PAGE:     355                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

B10.    Damages are awarded for whatever injury a nonbreaching party suffers, whether or not the breaching party could have foreseen the injury.

            answer:    F                              PAGE:     355                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

A11.    A person’s actions may cause a breach of contract or a tort, but not both.

            ANSWER:    F                              PAGE:     356                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

B11.    Punitive damages are almost never available in contract disputes.

            ANSWER:    T                              PAGE:     356                          TYPE:      N
                        NAT: AACSB Analytic                     AICPA Legal

A12.    Punitive damages are never awarded in breach of contract actions.

            answer:    f                              PAGE:     356                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

B12.    Nominal damages normally establish that the defendant acted wrongly.

            answer:    T                              PAGE:     357                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

A13.    The duty owed under the mitigation of damages doctrine depends on the situation.

            answer:    t                              PAGE:     357                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

B13.    Normally, when a nonbreaching party has been damaged by a breach of contract, he or she has a duty to mitigate those damages.

            answer:    t                              PAGE:     357                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

A14.    A breach of contract may entitle the innocent party to rescind the contract.

            answer:    t                              PAGE:     359                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal


B14.    Liquidated damage clauses typically require a party who breaches a con­tract to pay a certain amount to the nonbreaching party.

            answer:    t                              PAGE:     359                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

A15.    Liquidated damages are damages that are certain in amount.

            answer:    F                              PAGE:     359                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

B15.    To rescind a contract, each party essentially advances to the position he or she would have been in if the contract had been fully executed.

            ANSWER:    F                              PAGE:     359                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

A16.    Specific performance is the remedy customarily used when one party has breached a contract for the sale of goods.

            answer:    f                              PAGE:     360                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

B16.    Restitution involves one party’s recapture of a benefit through which another party has been unjustly enriched.

            ANSWER:    T                              PAGE:     360                          TYPE:      N
                        NAT: AACSB Analytic                     AICPA Legal

A17.    The purpose of the doctrine of election of remedies is to permit a double recovery.

            ANSWER:    F                              PAGE:     363                          TYPE:      N
                        NAT: AACSB Reflective                                                   AICPA Legal

B17.    Reformation allows a court to rewrite a contract to reflect the parties’ true intentions.

            answer:    T                              PAGE:     362                          TYPE:      N
                        NAT: AACSB Analytic                     AICPA Critical Thinking

A18.    a party seeking to recover in quasi contract must show that he or she acted without reasonably expecting to be paid.

            answer:    F                              PAGE:     363                          TYPE:      N
                        NAT: AACSB Analytic                     AICPA Legal

B18.    A party seeking to recover in quasi contract must show that he or she has been unjustly enriched.

            ANSWER:    F                              PAGE:     363                          TYPE:      N
                        NAT: AACSB Reflective                                                   AICPA Legal

A19.    A contract may include a clause stating that no damages can be recovered for a certain type of breach.

            answer:    T                              PAGE:     365                          TYPE:      N
                        NAT: AACSB Analytic                     AICPA Legal

B19.    Whether a contract’s limitation-of-liability clause will be enforced depends on the type of breach that the clause excuses.

            answer:    T                              PAGE:     365                          TYPE:      N
                        NAT: AACSB Analytic                     AICPA Legal

A20.    A party who knowingly accepts defective performance of a contract waives the breach.

            answer:    T                              PAGE:     365                          TYPE:      N
                        NAT: AACSB Analytic                     AICPA Legal

B20.    A party who knowingly accepts defective performance of a contract thereby acknowledges the breach and can take later action on it.

            answer:    F                              PAGE:     365                          TYPE:      N
                        NAT: AACSB Analytic                     AICPA Legal


multiple choice questions

A1.      Even-Flo Hydraulics enters into a contract to repair valves and fittings in Fiesta Company’s plant. If Even-Flo breaches the contract, Fiesta can

a.         do nothing but make a deal with .a different service provider.
b.         do nothing but temporarily suspend operations and wait.
c.         file a criminal complaint against Even-Flo.
d.         sue Even-Flo for damages.

            ANSWER:    D                        PAGE:           353                          TYPE:      N
                        NAT: AACSB Reflective                                                   AICPA Legal


B1.      Handy Hardware Store agrees to hire Ilsa for one year at a salary of $500 per week. When Handy cancels the contract, Ilsa spends $100 to obtain a similar job that pays $450 per week for a year. Ilsa is entitled to recover

a.         the amount of the wages that Handy promised only.
b.         the difference between the wages at the two jobs only.
c.         the difference between the wages at the two jobs plus $100.
d.         $100 only.

            ANSWER:    C                              PAGE:     353                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

A2.      Carol pays Dick $10,000 to design an ad campaign for Carol’s Coffee Stand chain. The next day, Dick tells Carol that he has accepted a job in New York and cannot design her campaign. Carol files a suit against Dick. As compensatory damages, Carol can recover

            a.         $100,000.
            b.         $10,000.
            c.         $1,000.
d.         $0.

            answer:    B                              PAGE:     353                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

B2.      Beachside Pools, Inc., agrees to build a swimming pool for Candy, but fails to build it according to the contract specifications. Candy hires Do-We Fix-It Company to finish the project. Candy may recover from Beachside

a.         the contract price less costs of materials and labor.
b.         the contract price.
c.         the costs needed to complete construction.
d.         profits plus the costs incurred up to the time of the breach.

            ANSWER:    C                              PAGE:     354                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

A3.      Development Associates (DA) agrees to buy five acres of land from Eastside Properties for $15,000. Eastside fails to go through with the deal on the agreed date, when the market price of the land is $17,000. DA may recover

a.         $17,000.
b.         $15,000.
c.         $2,000.
d.         $0.

            ANSWER:    C                              PAGE:     354                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

Fact Pattern 18-B1 (Questions B3–B4 apply)
A enters into a contract to buy 132 acres from B to subdivide and sell in quarter-acre lots for C Acres, a residential development.

B3.      Refer to Fact Pattern 18-B1. If A breaches the contract, B’s remedy would most likely be

a.         a certain ratio of the amount that A has in liquid funds.
b.         a percentage of A’s unrealized profit.
c.         the difference between the land’s contract and market prices.
d.         specific performance.

            ANSWER:    C                        PAGE:           354                          TYPE:      N
                        NAT: AACSB Reflective                                                   AICPA Legal

A4.      Pam contracts to buy a Quotient-brand computer set-up from Regal Systems for $5,000, but Regal fails to deliver. Pam buys the computer else­where for $6,500. Pam’s measure of damages is

a.         $1,500 only.
b.         $1,500 plus incidental damages.
c.         incidental damages only.
d.         $0.

            ANSWER:    B                              PAGE:     354                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

Fact Pattern 18-B1 (Questions B3–B4 apply)
A enters into a contract to buy 132 acres from B to subdivide and sell in quarter-acre lots for C Acres, a residential development.

B4.      Refer to Fact Pattern 18-B1. If B breaches the contract, A’s remedy would most likely be

a.         a certain ratio of the amount that A has in liquid funds.
b.         a percentage of A’s unrealized profit.
c.         the difference between the land’s contract and market prices.
d.         specific performance.

            ANSWER:    D                        PAGE:           354                          TYPE:      N
                        NAT: AACSB Reflective                                                   AICPA Legal

A5.      Rite Contractors, Inc., agrees to build a motel for Sleep Inn Corporation. The project proceeds according to plan, but before it is done, Sleep tells Rite to quit. Rite may recover

a.         the contract price less costs of materials and labor.
b.         the contract price.
c.         the costs needed to complete construction.
d.         profits plus the costs incurred up to the time of the breach.

            ANSWER:    D                              PAGE:     354                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal


B5.      A, Inc., enters into a contract with B Service to fix A’s precisely engineered molding equipment. If B delays the repair for five days, knowing that A will lose a certain percentage of profit for the delay, A might be awarded consequential damages to

a.         establish, as a matter of principle, that B acted wrongfully.
b.         provide A with funds for a foreseeable loss beyond the contract.
c.         provide A with funds for its loss of the bargain.
d.         punish B and set an example to deter others from similar acts.

            ANSWER:    B                        PAGE:           355                          TYPE:      N
                        NAT: AACSB Reflective                                                   AICPA Legal

A6.      Hybrid Corporation enters into a contract with Insure Service, Inc. (ISI), to obtain health insurance for Hybrid employees. If ISI breaches the contract and Hybrid is awarded compensatory damages, the purpose would be to

a.         establish, as a matter of principle, that ISI acted wrongfully.
b.         provide Hybrid with funds for a foreseeable loss beyond the contract.
c.         provide Hybrid with funds for its loss of the bargain.
d.         punish ISI and set an example to deter others from similar acts.

            ANSWER:    C                        PAGE:           354                          TYPE:      N
                        NAT: AACSB Reflective                                                   AICPA Legal

B6.      Lava Excavators, Inc., needs a drill to continue its operations and orders one for $3,000 from Mining Supplies Company. Lava tells Mining that it must receive the drill by Tuesday or it will lose $10,000. Mining ships the drill late. Lava can recover

a.         $13,000.
b.         $10,000.
c.         $3,000.
d.         $0.

            ANSWER:    B                              PAGE:     356                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

A7.      Mona contracts to repair a computer for NuData, Inc. (NDI). Mona knows that without the computer, NDI will lose a sale. Mona does not perform as promised. NDI files a suit against Mona. As consequential damages, NDI can recover

a.         the cost of a new computer.
b.         the difference between Mona’s price and the actual cost of repair.
c.         the loss of profit from the lost sale.
d.         nothing.

            ANSWER:    C                              PAGE:     355                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

B7.      Earl holds 1,000 pounds of perishable fruit in storage for Fresh Food Corpo­ration. Fresh Food does not pay for the storage. Earl sells the fruit to Green Grocers, Inc. This sale represents

a.         a breach of contract.
b.         a mitigation of damages.
c.         rescission and restitution.
d.         specific performance.

            ANSWER:    B                              PAGE:     357                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

A8.      Pure Oil Company enters into a contract with QuikBilt, Inc., to construct an oil pipeline to withstand specific conditions. If QuikBilt fails to meet this standard, which is construed as a breach of contract and a breach of a duty of care, Pure might be awarded punitive damages to

a.         establish, as a matter of principle, that QuikBilt acted wrongfully.
b.         provide Pure with funds for a foreseeable loss beyond the contract.
c.         provide Pure with funds for its loss of the bargain.
d.         punish QuikBilt and deter others from similar acts.

            ANSWER:    D                        PAGE:           356                          TYPE:      N
                        NAT: AACSB Reflective                                                   AICPA Legal


B8.      Bret contracts to work for City Construction Corporation (CCC) dur­ing July for $4,500. On June 30, CCC cancels the contract. Bret declines a similar job with Downtown Builders, Inc., which would have paid $4,000. Bret files a suit against CCC. As compensatory damages, Bret can recover

a.         $4,500.
b.         $4,000.
c.         $500.
d.         $0.

            ANSWER:    C                              PAGE:     357                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

A9.      Fashion Retail Center enters into a contract with Great Promotions, Inc., to provide Fashion with a plan to retool its merchandising strategy. If Great Promotions breaches the contract, Fashion has a duty to

a.         reduce the damages that Fashion might otherwise suffer.
b.         reduce the loss that Great Promotions might otherwise suffer.
c.         punish Great Promotions and deter others from similar acts.
d.         take no action.

            ANSWER:    A                        PAGE:           357                          TYPE:      N
                        NAT: AACSB Reflective                                                   AICPA Legal

B9.      Kris contracts to work exclusively for Little Manufacturing Company during May for $5,000. On April 30, Little cancels the contract. Kris finds another job dur­ing May but earns only $3,000. Kris files a suit against Little. As compen­satory damages, Kris can recover

a.         $3,000.
b.         $2,000.
c.         $1,000.
d.         $0.

            ANSWER:    B                              PAGE:     357                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

A10.    Office Accounting, Inc., hires Perry to repair a computer on site for $400, but Perry does not show up as agreed. Office Accounting hires Raul to do the job for $350. Office Accounting may recover from Perry

a.         compensatory damages.
b.         consequential damages.
c.         nominal damages.
d.         punitive damages.

            ANSWER:    C                              PAGE:     357                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

B10.    A enters into a contract with B Fitness Club for discounted memberships for A’s employees. If B breaches the contract and A enters into a contract with D Sports for the same service at a lower price, A might be awarded nominal damages to

a.         establish, as a matter of principle, that B acted wrongfully.
b.         provide A with funds for a foreseeable loss beyond the contract.
c.         provide A with funds for its loss of the bargain.
d.         punish B and set an example to deter others from similar acts.

            ANSWER:    A                        PAGE:           357                          TYPE:      N
                        NAT: AACSB Reflective                                                   AICPA Legal

A11.    Ray breaches his lease with Sunny Properties and vacates the premises six months before the end of the term. In some states, Sunny would have to

a.         avoid reletting the premises to recover damages from Ray.
b.         make reasonable efforts to relet the premises to mitigate dam­ages.
c.         relet the premises to recover damages from Ray.
d.         sell the premises to recover damages from Ray.

            ANSWER:    B                              PAGE:     357                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

B11.    Rig Heli-Pads, Inc., enters into a contract to employ Scott as an on-site project manager for two years. If Rig breaches the contract, Scott has a duty to

a.         do nothing.
b.         reduce the damages that Scott might otherwise suffer.
c.         rescind the contract with Rig.
d.         punish Rig and set an example to deter others from similar acts.

            ANSWER:    B                        PAGE:           357                          TYPE:      N
                        NAT: AACSB Reflective                                                   AICPA Legal

A12.    Home Delivery Corporation and Interstate Transport, Inc., sign an agree­ment that provides for the payment of “$1,000 by whichever party commits a material breach of the contract that creates damages difficult to esti­mate but approximately $1,000.” This is

a.         a liquidated damages clause.
b.         a mitigation of damages clause.
c.         a nominal damages clause.
d.         a penalty clause.

            ANSWER:    A                              PAGE:     359                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal


B12.    A enters into a contract with B to provide surface material for A’s tennis courts by April 1 for a tournament to begin May 1. The contract specifies an amount to be paid if the contract is breached. This is a liquidated damages clause if the amount is

a.         an excessive estimate of the loss on a breach.
b.         a reasonable estimate of the loss on a breach.
c.         designed to penalize the breaching party.
d.         intended to quickly provide cash to the nonbreaching party.

            ANSWER:    B                        PAGE:           359                          TYPE:      N
                        NAT: AACSB Reflective                                                   AICPA Legal

A13.    Rural Utility, Inc., enters into a contract with Shovel Excavation Service to dig up, replace, and rebury Rural’s cables in a certain location. Rural advances Shovel 10 percent of its cost. If the parties rescind the contract, Shovel’s refund of the payment would be

a.         a penalty.
b.         liquidated damages.
c.         restitution.
d.         specific performance.

            ANSWER:    B                        PAGE:           359                          TYPE:      N
                        NAT: AACSB Reflective                                                   AICPA Legal

B13.    Drew contracts to sell a residential duplex to Evan. The contract pro­vides that if Drew does not close the deal by September 15, he must pay Evan one-half of the contract price. This provision is not enforceable be­cause it is

a.         a liquidated damages clause.
b.         a mitigation clause.
c.         a nominal damages clause.
d.         a penalty clause.

            ANSWER:    D                              PAGE:     359                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

A14.    Lou and Mira want to rescind their contract under which Lou sold an MP3 player to Mira for $50. To rescind the contract

a.         Lou must return the $50 and Mira must return the player.
b.         Lou must return the $50 only.
c.         Mira must return the player only.
d.         the parties can keep the “benefits” of their bargain.

            ANSWER:    A                              PAGE:     359                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

B14.    Roy contracts to sell his Double-R Ranch to Sam on May 1. On April 20, Roy tells Sam that he will not go through with the deal. Sam files a suit against Roy. Sam can recover

a.         the cost of any ranch that would suit him.
b.         the cost of a similar, nearby ranch.
c.         the Double-R Ranch.
d.         nothing.

            ANSWER:    C                              PAGE:     360                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

A15.    Ira orally agrees to buy a unique collection of sports memorabilia for $1,000 from Jane and sends her $250 as a down payment. When Ira sends her the rest of the price, Jane refuses to ship Ira the collection. Ira should seek

a.         damages.
b.         reformation.
c.         rescission.
d.         specific performance.

            ANSWER:    D                              PAGE:     360                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

B15.    For Petra to recover the benefit of her bargain from a breached real estate contract with Quality Properties, Inc., the most appropriate remedy is

a.         damages.
b.         quasi-contractual recovery.
c.         rescission.
d.         specific performance.

            ANSWER:    D                              PAGE:     360                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

A16.    Grady enters into a contract to buy 440 acres from Hollis to expand Grady’s ranch. If Hollis breaches the contract, Grady’s normal remedy would be

a.         damages.
b.         quasi contract.
c.         reformation.
d.         specific performance.

            ANSWER:    D                        PAGE:           360                          TYPE:      N
                        NAT: AACSB Reflective                                                   AICPA Legal


B16.    A orally agrees to pay B to plant and harvest a quarter of A’s farm acreage for four corn-planting seasons. After B prepares the land and plants the first crop, A says that their deal is off. B can most likely recover

a.         in quasi contract.
b.         in reformation.
c.         in restitution.
d.         on the parties’ existing contract.

            ANSWER:    A                        PAGE:           362                          TYPE:      N
                        NAT: AACSB Reflective                                                   AICPA Legal

A17.    Refined Commodities, Inc., agrees to deliver ten tons of sheet metal to Select Builders Corporation. The agreement states that delivery is to be within “3” days, although the parties intend “30” days. Refined cannot convince Select to amend the contract. Refined should seek

a.         damages.
b.         reformation.
c.         rescission.
d.         specific performance.

            ANSWER:    B                              PAGE:     362                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

B17.    Dino hires Eve to perform at Dino’s Club, but Eve later breaches the agreement to accept a higher-paying job at First Star Arena. Dino files a suit against Eve. The court will most likely

a.         award damages to Dino.
b.         cancel Dino and Eve’s contract.
c.         order Eve to perform the contract.
d.         reform Dino and Eve’s contract.

            ANSWER:    A                              PAGE:     362                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

A18.    Outdoor Properties, Inc. (OPI), agrees to sell certain acreage to Pia. OPI repudiates the deal. Pia sues OPI and recovers dam­ages. Pia can now obtain

a.         an amount in a quasi-contractual recovery.
b.         damages representing restitution.
c.         specific performance of the deal.
d.         nothing more.

            ANSWER:    D                              PAGE:     363                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

B18.    A contract for a sale of land from United Properties, Inc., to Variety Investments Corporation contains an erroneous legal description. The most appropriate remedy for these parties is

a.         damages.
b.         reformation.
c.         rescission.
d.         specific performance.

            ANSWER:    B                              PAGE:     362                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

A19.    Creekside Property Corporation enters into a contract with Delta Management Associates to manage and maintain Creekside’s apartment complex. Their contract provides that neither party can recover damages for a non-fraudulent or unintentional breach. This is

a.         a limitation-of-liability clause.
b.         an exculpatory clause.
c.         an illegal clause.
d.         a quasi contract.

            ANSWER:    A                        PAGE:           365                          TYPE:      N
                        NAT: AACSB Reflective                                                   AICPA Legal

B19.    Value Acquisitions, Inc., contracts to buy Wobbling Corporation’s as­sets. Wobbling breaches the contract. Value files a suit against Wobbling, seeking various remedies. The doc­trine of election of remedies has been elimi­nated in contracts involving sales of

a.         goods.
b.         intellectual property.
c.         real property.
d.         services.

            ANSWER:    A                              PAGE:     364                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

A20.    To avoid liability for intentional injuries, Vermont Power Corporation in­cludes in its contracts an exculpatory clause. This is

a.         enforceable if the other parties are protected from liability.
b.         enforceable if the other parties consent to it.
c.         enforceable if the other parties have equal bargaining power.
d.         not enforceable.

            ANSWER:    D                              PAGE:     365                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal


B20.    A contract between E-Debits, Inc., and First Credit Corporation includes a provision excluding liability as a result of fraud. This provision is

a.         enforceable because the parties are protected from liability.
b.         enforceable because the parties consented to it.
c.         enforceable if the parties have equal bargaining power.
d.         not enforceable.

            ANSWER:    D                              PAGE:     365                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal


Essay Questions

A1.  National Drilling Company ships its only pump to American Hydraulics Corporation, the manufacturer, for repair. National hires Overland Transport, Inc., to take the pump to American Hydraulics and to return it to National as soon as the repair is complete. National is forced to sus­pend operations without a pump, but Overland does not know this. National expects to be without the pump for five days and to lose profits of $5,000. When the pump is not returned by the end of the fifth day, National rents a pump at a cost of $100 per day. Overland delays five more days before returning the pump. National files a suit against Overland, asking for compensatory, consequential, and punitive damages. Will National recover?

ANSWER:    Yes and no. National will succeed in recovering damages, but not all of the damages that it seeks. Overland’s failure to perform promptly is a breach of contract for which National can recover dam­ages. Because of Overland’s late delivery of the pump, National is enti­tled to re­cover the cost of renting the pump for the five days that Overland delayed. Expenses that are caused directly by a breach of con­tract—such as the cost to rent the replacement pump after Overland breached the con­tract—are recoverable as compensatory damages. These expenses were foreseeable. Consequential damages—damages caused by special cir­cumstances beyond the contract—are recoverable only if the breaching party knew or should have known at the time of contracting of their possi­bility. In this problem, National’s shutdown of its operations is a special circumstance, but Overland did not know of these circumstances so National’s consequent loss of profits is not recov­erable. Also, National can­not recover punitive damages, which are not usually recoverable in breach of contract suits. Punitive damages are in­tended to punish wrongdoing. The purpose of damages in a breach of contract suit is to place the nonbreaching party in the position he or she would have occu­pied if the contract had been performed, not to punish the breaching party.

PAGES:         353–357                    type:   =
                        NAT: AACSB Reflective                                                   AICPA Decision Modeling

B1.  Quicksilver Delivery Service contracts to deliver Pete’s Pizza Parlor’s products to its customers for $5,000, payable in ad­vance. Pete’s pays the money, but Quicksilver fails to perform. Can Pete’s rescind the contract? Can Pete’s also ob­tain restitution? What does it mean to “rescind” a contract? How is a contract rescinded? What is restitution? How is restitution accom­plished? Explain.

ANSWER:    Yes, Pete’s can rescind the contract and obtain restitu­tion. A breach of contract by a failure to perform entitles the nonbreach­ing party to rescind, or cancel, the contract, and the parties must make resti­tution, which is the returning of whatever benefit they conferred on each other. These remedies are particularly available when the breach­ing party would otherwise be unjustly enriched, as in this question. Rescission is an action to cancel a contract—to re­turn the parties to the positions they were in before the transaction. It is also available in cases involving fraud, mistake, duress, or failure of consideration. To rescind, a nonbreaching party must give prompt no­tice to the breaching party. Both parties must then make restitution to each other by returning what­ever was conveyed in execution of their contract. If the goods or property conveyed can be returned, they must be. If the actual items cannot be re­turned, an equivalent amount in money must be paid.

PAGES:         359–360                    type:   =
                        NAT: AACSB Reflective                                                   AICPA Decision Modeling

A2.  Owen buys a used Prius from Quality Motors, Inc., paying $1,000 down and agreeing to pay off the balance in thirty-six monthly payments of $200 each. The terms of the agreement call for Owen to make a payment on or before the first of each month, beginning March 1. During the first six months, Quality receives a $200 payment before the first of each month. Starting in September, however, and continuing for the subsequent five months, Owen’s payment is never made until the fifth of the month. Quality accepts and cashes the payment check each time. Before the next payment is due, Quality decides that it is no longer willing to accept late payments. Can Quality sue Owen immediately for breach? Can Owen continue to make late payments without liability? Explain.

ANSWER:    The dispute between these parties turns on whether Quality’s acceptance of six late payments consti­tutes a waiver of Owen’s agreement to pay on or before the first of each month.  When a nonbreaching party waives the breach, he or she relinquishes the legal right to claim failure of full performance. Quality’s acceptance of six late payments not only consti­tutes a waiver but also constitutes a pattern of conduct of waiver, and thus the waiver ex­tends to the thirteenth and future payments—until such time as Quality gives no­tice to Owen that full compliance with the contract will be required in the fu­ture. Quality cannot immediately hold liable Owen for breach on the late thirteenth payment but can notify Owen that any further tender of late payments will constitute a breach. In other words, on notice from Quality, Owen can no longer make late payments without liability.

PAGES:         364–365                    type:   N
                        NAT: AACSB Reflective                                                   AICPA Decision Modeling

B2.  General Equity Corporation enters into a contract with Honi, who agrees to create artwork for General’s main office building. Honi delays and eventually refuses to perform. Meanwhile, General contracts to sell the building to Ideal Investments, Inc., but before the transaction is complete, Jewel Funds Company offers to pay a higher price. General re­fuses to transfer the building to Ideal. In separate suits by General against Honi and by Ideal against General, each plaintiff seeks specific performance. How might the court rule in each case, and why?

ANSWER:    Generally, the equitable remedy of specific performance will be granted only if two requirements are met: damages (money), under the circumstances, must be inade­quate as a remedy, and the subject matter of the contract must be unique. The basic requirements for spe­cific per­formance are usually not met in cases involving per­sonal ser­vice con­tracts. If the identical service is readily avail­able from others, the service is not unique, and damages for nonper­formance are adequate. If, how­ever, the services are so personal that only the contracting party can per­form, the subject matter of the con­tract satisfies the test of uniqueness; but a court may refuse to grant specific perfor­mance if (1) enforcement of an order of specific performance requires involuntary servitude, which is prohibited by the Thirteenth Amendment to the U.S. Constitution, or (2) it is impracti­cal to impose an order of mean­ingful performance on someone against his or her will. In the case of the artist, specific performance is likely not an appropriate remedy. In a sale of land, the buyer’s contract is for a specific piece of real property. The land under contract is unique, be­cause no two pieces of real prop­erty have the same legal description. In addition, damages would not compensate a buyer ade­quately, as the same land cannot be purchased else­where. In the case of Ideal, specific per­formance would be an appropriate remedy.

PAGES:         360–362                    type:   =
                        NAT: AACSB Reflective                                                   AICPA Decision Modeling


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