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
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
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 Roy Roy
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
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 Overland
ANSWER: Yes and no. National will succeed in
recovering damages, but not all of the damages that it seeks. Overland Overland Overland Overland
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: =
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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
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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: =
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AACSB Reflective AICPA
Decision Modeling
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