MBE Practice Exam 1 - Contracts and Sales

Question 1

What is a reserved auction?

Answer 1

It’s an auction where the auctioneer may withdraw the goods prior to the conclusion of the auction.

This is the default assumed, and you would need an announcement that auction isn’t this style

Question 2

What happens if a higher bid retracts their bid in an auction, does the lower bid get reinstated?

Answer 2

No.

In either type of auction, a bidder has the right to retract (i.e., withdraw) a bid until the auctioneer announces the completion of the sale (e.g., at the fall of the auctioneer’s hammer). However, the bidder’s retraction will NOT REVIVE any prior bids. That is because the auctioneer’s acknowledgment of a subsequent bid acts as a rejection of a prior bid.

Question 3

What are the requirements of a firm offer?

Answer 3

Under the UCC firm-offer rule, an offer is irrevocable if the offeror is a (1) merchant who provides a (2) signed, written (3) assurance that the offer will remain open.

Oral offers can’t be firm offers.

Question 4

How is a contract terminated via lapse or revocation?

Answer 4

Contract formation requires acceptance of a valid offer (i.e., mutual assent). An offer can be accepted at any time before it is terminated—e.g., by lapse or revocation.

An offer will terminate by lapse if it is not accepted by the time stated in the offer or, if no time is stated, within a reasonable time.

A revocable offer will terminate by revocation if the offeror revokes the offer prior to acceptance.

Question 5

When does a person lack the capacity to enter into a contract due to intoxication?

Answer 5

A person lacks the capacity to enter into a contract if

(1) that person was too intoxicated to reasonably understand the nature or consequences of the contract

AND

(2) the OTHER PARTY had REASON to KNOW of the intoxication.

Question 6

Under the UCC is a “no-oral modification” clause enforceable?

Answer 6

Under the UCC, no-oral-modification clauses are generally enforceable WHEN contained in a written, signed contract. As a result, any attempt by the parties to modify the contract orally in violation of a no-oral-modification clause is unenforceable.

Question 7

Under promissory estoppel, what can a person recover?

Answer 7

Under the doctrine of promissory estoppel, a party that reasonably and detrimentally relies on another party’s promise may recover the costs of relying on that promise—but not the value of the promise itself.

Question 8

How is a gift not considered to be a contract?

What’s the missing link that is commonly found in these types of questions to make it a gift and not a valid K?

Answer 8

To form a K you need there to be valuable consideration which is a bargained-for exchange of promises (bilateral K) or performance (unilateral K).

The bargained-for exchange requirement is not met unless each party’s willingness to enter into the contract was induced by the other party’s act or promise.

Missing Link:
-> The person receiving the gift will likely be induced into entering into this K because of the promise to get the gift. However, the person giving the gift is likely not giving the gift under the inducement by the other party’s act or promise.

Question 9

Can the defense of duress be used by a party if they’re being threatened with criminal prosecution and they’ve actually committed the crime?

Answer 9

Yes.

A contract is voidable due to duress if either party’s assent was induced by an improper threat (e.g., threat of criminal prosecution) that left the recipient with no reasonable alternative but to assent.

Question 10

Is an express warranty created when a person gives their opinion or praises an item?

Answer 10

No.

Under the UCC, a seller creates an express warranty in a contract for the sale of goods when the seller makes an affirmation of fact or promise about the goods that becomes part of the basis of the bargain. But a seller’s mere opinion or commendation about the value or quality of the goods does not create an express warranty.

Question 11

Can an incidental beneficiary enforce a contract?

Answer 11

No, under no circumstances can it.

An incidental beneficiary is a third party who benefits from a contract, even though the contracting parties did not intend to benefit the third party. As a result, an incidental beneficiary cannot enforce a contract under any circumstances.

Question 12

Can an intended beneficiary enforce a contract?

Answer 12

Yes.

An assignment occurs when a contracting party (assignor) transfers its rights under a contract to a third party (assignee). The assignee then steps into the shoes of the assignor and assumes all of the assignor’s contractual rights to the obligor’s performance as they stand at the time of the assignment.

Question 13

Does assignment require consideration? If consideration is provided, what happens to the assignment?

Answer 13

Assignment does not require consideration.

If consideration is given, then the assignment cannot be revoked.

Question 14

When does the death of a contracting party terminate the contract?

Answer 14

The death of a contracting party (e.g., the wife) does not terminate that party’s contractual obligations unless (1) the contract specifies otherwise or (2) the party’s obligation involved the performance of personal services that only the party could have rendered.

Question 15

What types of contracts are covered under the statute of frauds and what do they require?

Answer 15

-> Marriage – promise in consideration of marriage
-> Year – contract cannot be completed within one year
-> Land – sale or other transfer of real property
-> Executor – promise to pay estate’s debt from executor’s personal funds
-> Goods – sale of goods for $500 or more
-> Suretyship – promise to pay another’s debt

Contracts for the sale or transfer of any interest in real property (e.g., a house) are subject to the statute of frauds. Contracts subject to the statute of frauds are enforceable only when they:

-> are in writing
-> are signed by the party against whom enforcement is sought
AND
-> contain all essential terms.

Question 16

What is the parol evidence rule?

Answer 16

The parol evidence rule generally bars the admission of extrinsic evidence of a prior or contemporaneous agreement that supplements or contradicts the terms of a completely integrated written contract.

Question 17

When does the parol evidence rule not apply?

Answer 17

Evidence of prior or contemporaneous oral or written agreement is admissible to establish:

whether writing is integrated and, if so, completely or partially

meaning of ambiguous term

defense to formation or enforcement (eg, fraud, duress, mistake)

ground for granting or denying remedy (eg, rescission, reformation)

subsequent contract modifications

condition precedent to effectiveness

Question 18

What kind of damages is a breaching party able to get when they’ve only committed a minor breach compared to if they’ve committed a major breach?

Answer 18

A party who substantially, but not fully, performed his/her contractual obligations has committed a MINOR BREACH. That party can nevertheless recover on the contract under the following theories of damages:

-> Expectancy damages are designed to place to place the parties in the same position as if the contract had been fully performed.

-> Reliance damages are designed to put the parties in the same position as if the contract had never been formed (e.g., by paying out-of-pocket expenses) and are used when expectancy damages are too speculative.

However, a party who commits a MATERIAL BREACH by failing to substantially perform is limited to

-> restitution damages and cannot recover on the contract.

Restitution damages are designed to ensure that the nonbreaching party is not unjustly enriched by the breaching party’s work. As a result, the breaching party is entitled to recover the reasonable value of the benefit conferred less any damages suffered by the nonbreaching party due to the breach.

Question 19

What can the non breaching party when the breaching party anticipatory repudiates?

Answer 19

Anticipatory repudiation occurs when a party clearly and unequivocally communicates that it does not intend to perform.

A nonrepudiating party can (1) ignore the repudiation and demand performance or (2) treat the repudiation as a breach and seek remedies.

The non breaching party does not have to wait for time to pass but can sue immediately.

Question 20

Under the UCC, when can a seller reclaim goods?

Answer 20

Contracts for the sale of goods (e.g., tools) are governed by the Uniform Commercial Code (UCC). Under the UCC, a nonbreaching seller may reclaim goods from a buyer when the seller:

-> discovers that the buyer received the goods on credit while insolvent—i.e., the buyer could not pay debts when they became due—AND

-> demands the goods’ return within 10 days after the buyer received them.

However, this 10-day limitation does not apply when the buyer misrepresented its solvency (e.g., by providing false assurances) in WRITING within three months before the goods’ delivery.

Question 21

Who does the risk of loss pass to when the buyer repudiates or breaches a K that deals with identified goods?

Must insurance coverage be calculated into the damages a party can receive?

Answer 21

Under the UCC, which governs contracts for the sale of goods, the risk of loss generally remains with the seller until the buyer receives the goods. BUT the risk of loss immediately passes from the seller to the buyer when the buyer repudiates or breaches a contract that deals with identified goods (e.g., the sports legend’s memorabilia).

Yes. When this occurs, the seller can recover any deficiency between the seller’s insurance coverage and the contract price within a commercially reasonable time.

Question 22

Under the UCC what are the buyer’s remedies and how do they work with regards to the goods?

Answer 22

Contracts for the sale of goods (e.g., science equipment) are governed by the Uniform Commercial Code (UCC). Under the UCC, a buyer’s PRIMARY REMEDY for a seller’s breach is DAMAGES.

However, in certain circumstances, the buyer can compel the seller to supply the goods to the buyer through the following remedies:
-> Replevin – which applies when the contract deals with IDENTIFIED goods

-> Specific performance – which applies when the contract deals with UNIQUE goods or other proper circumstances exist—e.g., the buyer is unable to cover by replacing the goods from another seller