midterm review Final review Questions

Question 1

Question FR-00503

The president of Deal Corporation wrote to Boyd, offering to sell the Deal factory for $300,000. The offer was sent by Deal on June 5 and was received by Boyd on June 9. The offer stated it would remain open until December 20. The offer:

1. Is a firm offer under the UCC but will be irrev0cable for only three months.
2. May be rev0ked by Deal any time prior to Boyds acceptance.
3. Is a firm offer under the UCC because it is in writing.
4. Constitutes an enforceable option.

Answer 1

Explanation

Choice ‘‘2’’ is correct.

Most offers can be rev0ked anytime prior to acceptance. This is true even if the offer states it will be held open.

Choice ‘‘4’’ is incorrect because an option contract requires consideration to support the promise to keep the offer open and none was given here.

Choices ‘‘1’’ and ‘‘3’’ are incorrect because the firm offer rule applies only to the sale of goods by a merchant, not to the sale of real estate.

Question 2

Question FR-00504

Elrod is attempting to introduce evidence in court to modify a written contract he made with Weaver. Weaver has pleaded the parol evidence rule. In which of the following circumstances will Elrod not be able to introduce the oral evidence:

1. The modification asserted was made several days after the written contract had been executed.
2. The contract contains an obvious ambiguity on the point at issue.
3. There was a mutual mistake of fact by the parties regarding the subject matter of the contract.
4. The contract indicates that it was intended as “the entire contract” between the parties, the oral conversation occurred before the contract was written, and the point is covered in detail.

Answer 2

Explanation

Choice ‘‘4’’ is correct.

Oral and written evidence of communications made before a contract is reduced to writing that contradicts the written contract is inadmissible in court. Since Elrod is attempting to modify a point that was covered in detail in the written contract, the evidence is inadmissible.

Choice 11111 is incorrect because subsequent modifications are admissible. Choice 11311 is incorrect because evidence of mistakes is admissible.

Choice 11211 is incorrect because you can always explain or clear up ambiguities.

Question 3

Question FR-00519

The mailbox rule generally makes acceptance of an offer effective at the time the acceptance is dispatched. The mailbox rule does not apply if:

1. The offer provides that an acceptance will not be effective until actually received.
2. The duration of the offer is not in excess of three months.
3. The offer proposes a sale of real estate.
4. Both the offerer and offeree are merchants.

Answer 3

Explanation

Choice ‘‘1’’ is correct.

If the offer states that an acceptance must be received to be effective, then the mailbox rule does not apply. Choice ‘‘4’’ is incorrect because the mailbox rule applies to merchants and nonmerchants alike.

Choice ‘‘3’’ is incorrect because the mailbox rule applies to all contracts; there is no exception to contracts for real estate.

Choice ‘‘2’’ is incorrect because there is no time limit restriction on the mailbox rule; although there is a three month outer limit on the duration of a merchant’s firm offer.

Question 4

Question FR-00520

Kent Construction Company contracted to construct four garages for Magnum, Inc., according to specifications provided by Magnum. Kent deliberately substituted 2x4s for the more expensive 2x6s called for in the contract in all places where the 2x4s would not be readily detected. Magnums inspection revealed the variance and Magnum is now withholding the final payment on the contract. The contract was for $300,000 and the final payment would be $100,000. Damages were estimated at $55,000. In a lawsuit for the balance due, Kent will:

1. Prevail on the contract, less damages of $55,000, because it has substantially performed.
2. Prevail because the damages in question were not substantial in relation to the contract amount.
3. Lose because the law requires a perfect tender of performance.
4. Lose because its breach was intentional.

Answer 4

Explanation

Choice ‘‘4’’ is correct.

A material breach by one party discharges or releases the other. Here, Kent intentionally breached. The breach also was material ($55,000 damages in a $300,000 contract).

Choices ‘‘1’’ and ‘‘2’’ are incorrect. A party who has substantially performed the contract but committed a minor breach may recover under the contract. Damages are subtracted for the minor breach. Here the breach was not minor and Kent had not substantially performed.

Choice ‘‘3’’ is incorrect because the law does not require perfect tender except under contracts for the sale of goods.

Question 5

Question FR-00535

In deciding whether consideration necessary to form a contract exists, a court must determine whether:

1. The consideration has sufficient monetary value.
2. The consideration given by each party is of roughly equal value.
3. There is mutuality of consideration.
4. The consideration conforms to the subjective intent of the parties.

Answer 5

Explanation

Choice ‘‘3’’ is correct.

Consideration must be mutually bargained for and legally sufficient. Drafters of exam questions like to use those words.

Choice ‘‘2’’ is incorrect because consideration need not be of equal value. Let the two parties make their own deal. Choice ‘‘1’’ is incorrect because consideration need not have monetary value.

Choice ‘‘4’’ is incorrect. Contract law generally follows an objective theory. That is, things are based on what a reasonable person under the circumstances would believe. Subjective intent generally is not relevant.

Question 6

Question FR-00536

Nagel and Fields entered into a contract in which Nagel was obligated to deliver certain goods to Fields by September 10. On September 3, Nagel told Fields that Nagel had no intention of delivering the goods required by the contract. Prior to September 10, Fields may successfully sue Nagel under the doctrine of:

1. Promissory estoppel.
2. Anticipatory repudiation.
3. Accord and satisfaction.
4. Substantial performance.

Answer 6

Explanation

Choice ‘‘2’’ is correct.

With an anticipatory repudiation one party states or otherwise indicates in advance that he will not perform contractual duties. Nagel told Fields 7 days prior to performance that Nagel was not going to perform. Thus there was an anticipatory repudiation.

Choice 11111 is incorrect because the answer does not inv0lve promissory estoppel. Promissory estoppel makes an otherwise unenforceable promise binding because a person relies on the promise to his or her detriment.

Choice 11311 is incorrect because the answer does not inv0lve an accord and satisfaction. An accord and satisfaction is an agreement to substitute a different performance for the one required under an existing contract. There was no agreement to substitute performance here.

Choice 11411 is incorrect because the answer does not inv0lve the doctrine of substantial performance. The doctrine of substantial performance inv0lves an unintentional breach of the contract in a minor area. Absent the doctrine of anticipatory repudiation, Nagel has not yet breached because his performance is not yet due. Moreover, because he indicated that he would not perform at all, his breach would not be minor.

Question 7

Question FR-00551

To establish the defense of fraud in the inducement, one of the elements the party must generally prove is that:

1. The other party made a false representation of a material fact.
2. The contract is unconscionable.
3. It is impossible for the party to perform the terms of the contract.
4. There has been a mutual mistake of a material fact by the parties.

Answer 7

Explanation

Choice ‘‘1’’ is correct.

Fraud has 5 elements: a material misrepresentation of fact, scienter (an intent to deceive), actual and justifiable reliance, an intent to induce reliance, and damages. The only answer that supplies one of the required elements is choice ‘‘1’’: that the defendant made a false misrepresentation of a material fact.

Choice ‘‘3’’ is incorrect, as it includes an element of the defense of impossibility. Choice ‘‘2’’ is incorrect, as it inv0lves an element of the defense of unconscionability. Choice ‘‘4’’ is incorrect, as it inv0lves an element of the defense of mutual mistake.

Question 8

Question FR-00552

Dell owed Stark $9,000. As the result of an unrelated transaction, Stark owed Ball that same amount. The three parties signed an agreement that Dell would pay Ball instead of Stark, and Stark would be discharged from all liability. The agreement among the parties is:

1. A novation.
2. Unenforceable for lack of consideration.
3. An executed accord and satisfaction.
4. Voidable at Ball’s option.

Answer 8

Explanation

Choice ‘‘1’’ is correct.

This is a novation because Ball agreed to accept payment from Dell of Stark’s debt and also agreed to discharge Stark.

Choice ‘‘3’’ is incorrect. In an accord and satisfaction, the parties agree that one of the parties may substitute a different performance than the one due under the contract. Here, performance remained the same payment of

$9,000.

Choice ‘‘4’’ is incorrect. Nothing in the facts provides a basis for finding the contract v0idable.

Choice ‘‘2’’ is incorrect because there was sufficient consideration from all parties: Dell agreed to pay Ball, Ball agreed to discharge Stark, and Stark agreed to give up his right to receive $9,000 from Dell.

Question 9

Question FR-00567

Kent, a 16-year old minor, purchased a used car from Mint Motors Inc. Ten months later, the car was stolen and never recovered. Which of the following statements is correct?

1. Kent effectively ratified the purchase because Kent used the car for an unreasonable period of time.
2. Kent may disaffirm the purchase because Mint, a merchant, is subject to the UCC.
3. The car’s theft is a de facto ratification of the purchase because it is impossible to return the car.
4. Kent may disaffirm the purchase because Kent is a minor.

Answer 9

Explanation

Choice ‘‘4’’ is correct.

A minor can disaffirm (rescind) any time while a minor, or even within a reasonable time thereafter. Note that the fact that the car had been stolen and never recovered is irrelevant. To disaffirm a minor need only return what is possessed or controlled at the time of disaffirmance.

Choices 11311 and 11111 are incorrect because they state that ratification occurred. A minor can ratify only after becoming an adult. Since Kent was still a minor (i.e., under age 18), no ratification could occur.

Choice 11211 is also incorrect. Kent’s right to disaffirm is a common law right and does not depend on the UCC.

Question 10

Question FR-00568

Diel entered into a written contract to sell a building to Stone. The contract was properly recorded. Stone breached the contract and Diel has brought an action for breach of contract. Stone pleads the statute of limitations as a defense. Which of the following statements is correct?

1. The time period fixed by the statute is uniform throughout the states.
2. Recording of the contract stops the running of the statute of limitations.
3. The remedy sought by Diel will be barred when the period of time provided by the statute of limitations has expired.
4. The time period fixed by the statute of limitations begins when the contract is recorded.

Answer 10

Explanation

Choice ‘‘3’’ is correct.

The statute of limitations bars access to court remedies if suit is not brought within 4 to 6 years (in most states) after the date of the breach.

Choice ‘‘1’’ is incorrect because the time period varies from state to state. Four, five or six years is typical. Choice ‘‘2’’ is incorrect because recording of the contract will have no effect on the contract.

Choice ‘‘4’’ is incorrect because the time period is measured from the date of the breach, not from when the contract is recorded.

Question 11

Question FR-00583

Race entered into a written contract to sell a parcel of land to Lark for $150,000. At the time the agreement was executed, Race had consumed a large amount of alcoholic beverages that significantly impaired Races ability to understand the nature and terms of the contract. Lark knew Race was very intoxicated and that the land had been appraised at $280,000. Race wishes to av0id the contract. The contract is:

1. Void.
2. Voidable at Race’s option.
3. Legally binding on both parties in the absence of fraud or undue influence.
4. Voidable at Race’s option only if the intoxication was v0luntary.

Answer 11

Explanation

Choice ‘‘2’’ is correct.

A person can disaffirm or rescind if the person was so intoxicated at the time the contract was made that the person was incapable of understanding what he or she did. Since Race’s ability to understand the nature or terms of the contract was significantly impaired, the contract was v0idable by Race (Race can disaffirm).

Choice 11411 is incorrect because Race can disaffirm whether the intoxication was v0luntary or inv0luntary.

Choice 11111 is incorrect because the contract is v0idable, not v0id. Voidable means the contract can be disaffirmed by one of the parties. Void means there was no contract in the eyes of the law.

Choice 11311 is incorrect because the contract is not legally binding on both. It is legally binding on Lark, but it is not legally binding on Race.

Question 12

Question FR-00584

Union Bank loaned $200,000 to Wagner. Union required Wagner to obtain a life insurance policy naming Union as beneficiary. While the loan was outstanding, Wagner stopped paying the premiums on the policy. Union paid the premiums, adding the amounts to Wagner’s loan. Wagner died and the insurance company refused to pay the policy proceeds to Union. Union may:

1. Recover the policy proceeds because it is a creditor beneficiary.
2. Not recover the policy proceeds because it is not in privity of contract with the insurance company.
3. Not recover the policy proceeds because it is only an incidental beneficiary.
4. Recover the policy proceeds because it is a donee beneficiary.

Answer 12

Explanation

Choice ‘‘1’’ is correct.

A third party creditor beneficiary may sue either of the original parties to the contract if there is a breach. Wagner’s insurance contract was made with the intention of benefiting Union Bank. It was protection for the loan Wagner owed Union. When life insurance is used to protect a loan, the beneficiary is a creditor beneficiary.

Choice ‘‘4’’ is incorrect because Union is a creditor beneficiary because Wagner owed Union money; Union is not a donee beneficiary.

Choice ‘‘2’’ is incorrect. Although Union did not make the contract with the insurance company (i.e., Union was not in privity of contract), Union will prevail because Union is a 3rd party creditor beneficiary.

Choice ‘‘3’’ is incorrect because Union was not an incidental beneficiary. Union was clearly intended to be the beneficiary.

Question 13

Question FR-00599

With regard to an agreement for the sale of real estate, the statute of frauds:

1. Does not require that the agreement be signed by all parties.
2. Requires that the purchase price be fair and adequate in relation to the value of the real estate.
3. Does not apply if the value of the real estate is less than $500.
4. Requires that the entire agreement be in a single writing.

Answer 13

Explanation

Choice ‘‘1’’ is correct.

The statute of frauds does not require that the agreement be signed by all parties. It only requires that there be some writing containing the material terms of the contract that was signed by the party against whom enforcement is sought.

Choice ‘‘4’’ is incorrect because the terms may be in more than one document. Choice ‘‘2’’ is incorrect. The statute of frauds has nothing to do with consideration.

Choice ‘‘3’’ is incorrect because all sales of real estate must be evidenced by a signed writing, not just those of

$500 or more.

Question 14

Question FR-00600

A CPA was engaged by Jackson & Wilcox, a small retail partnership, to examine its financial statements. The CPA discovered that due to other commitments, the engagement could not be completed on time. The CPA, therefore, unilaterally delegated the duty to Vincent, an equally competent CPA. Under the circumstances, which of the following is true?

1. The duty to perform the audit engagement is delegable in that it is determined by an objective standard.
2. The duty to perform the audit engagement is nondelegable and Jackson & Wilcox need not accept Vincent as a substitute if they do not wish to do so.
3. Jackson & Wilcox must accept the delegation in that Vincent is equally competent.
4. If Jackson and Wilcox refuse to accept Vincent because of a personal dislike of Vincent by one of the partners, Jackson & Wilcox will be liable for breach of contract.

Answer 14

Explanation

Choice ‘‘2’’ is correct.

Personal service contracts calling for special skill cannot be assigned or delegated absent consent of all parties. Although most contracts can be assigned and duties delegated, an exception exists for personal service contracts calling for special skill. Clearly the duty to perform an audit is one requiring special skill.

Choice 11111 is incorrect because it states this duty can be delegated. The duty cannot be delegated because the contract inv0lves personal services.

Choice 11411 is incorrect because it states Jackson & Wilcox would be liable for breach of contract if they did not accept Vincent because of a dislike of Vincent. They do not have to accept Vincent because the personal service contract here is nondelegable. Thus, their reason for rejecting Vincent is irrelevant.

Choice 11311 is also incorrect because it states they must accept Vincent. The duty is nondelegable because it inv0lves personal services.

Question 15

Question FR-00615

On May 1, Apple mailed a signed offer to sell an office building to Fein for $90,000. The offer indicated that it would remain open until May 10. On May 5, Fein assigned the offer to Boyd for $5,000. On May 8, Boyd orally accepted Apple’s offer. Apple refused to sell the building to Boyd. Which of the following statements is correct?

1. Boyd’s acceptance was ineffective because the offer could not be assigned.
2. Boyd’s acceptance was ineffective against Apple because it was oral.
3. Fein’s assignment to Boyd was effective against Apple because valid consideration was given.
4. Fein’s assignment to Boyd was effective because an option contract was formed between Apple and Fein on May 1.

Answer 15

Explanation

Choice ‘‘1’’ is correct.

Except for option contracts, an offer can only be accepted by the party to whom it was made. As such, an offer generally cannot be assigned. Boyd’s payment to Fein was not sufficient to create an option because it was an agreement with the purported assignor rather than with the offeror/obligor.

Choices ‘‘4’’ and ‘‘3’’ are incorrect because an offer generally cannot be assigned. Thus, the assignment was not effective.

Choice ‘‘2’’ is incorrect. The reason the assignment was ineffective was not because it was oral, but rather because offers generally cannot be assigned.

Question 16

Question FR-00616

Fred entered into a written contract with Joe to purchase a car. The written contract was intended to be the final and complete agreement of the parties. Fred is unhappy with the performance of the car and has commenced an action for breach of contract based on an oral representation made at the time the written contract was executed. Fred may introduce evidence of the representation if it:

1. Completely contradicts the written contract.
2. Partially contradicts the written contract.
3. Serves to clarify an ambiguous term in the written contract.
4. Falls within the provision of the statute of frauds.

Answer 16

Explanation

Choice ‘‘3’’ is correct.

Under the parol evidence rule oral or written statements made before a fully integrated contract is executed, and oral statements made contemporaneous to execution are inadmissible to contradict the terms of the written contract. However, the rule does not bar evidence of such prior or contemporaneous statements that seek to clarify an ambiguous term.

Choices ‘‘1’’ and ‘‘2’’ are incorrect because evidence that contradicts a fully integrated written contract is inadmissible.

Choice ‘‘4’’ is incorrect. The statute of frauds requires certain contracts to be evidenced by a writing to be enforceable. It does not prohibit introduction of oral evidence regarding the contents of contracts.

Question 17

Question FR-00631

Kraft Corp. published circulars containing price quotes and a description of products which it would like to sell. Rice, a prospective customer, demands the right to purchase one of the products at the quoted price. Which of the following statements is correct under general contract law?

1. Kraft has made an offer.
2. Kraft must sell the product which Rice demands at the quoted price.
3. Rice has accepted Kraft’s offer to sell.
4. Rice has made an offer.

Answer 17

Explanation

Choice ‘‘4’’ is correct.

Advertisements and price quotes generally are not offers, but rather are invitations to deal. Thus, Kraft’s circular containing price quotes is not an offer, but rather an invitation to the public to make a deal. Rice’s demand to purchase one of the advertised items is an offer to Kraft.

Choice ‘‘2’’ is incorrect because there has only been an offer by Rice. There has been no acceptance of this offer by Kraft. Without an acceptance, there is no contract and Kraft does not have to sell.

Choices ‘‘3’’ and ‘‘1’’ are incorrect because Kraft has not made an offer. Advertisements and price quotes generally are invitations to deal, not offers.

Question 18

Question FR-00632

On July 25, Archer, the president of Post Corp., engaged Biggs, a CPA, to examine Post’s July 31 financial statements and to issue a report in time for the annual stockholder’s meeting to be held on September 5.

Notwithstanding Biggs’ reasonable efforts, the report was not ready until September 7 because of delays by Post’s staff. Archer, acting on behalf of Post, refused to accept or pay for the report since it no longer served its intended purpose. In the event Biggs brings a legal action against Post, what is the probable outcome?

1. The case would be dismissed because it is unethical for a CPA to sue for his fee.
2. Biggs will not recover since the completion by September 5th was a condition precedent to his recovery.
3. Biggs will be entitled to recover only in quasi contract for the value of the services to the client.
4. Biggs will recover because the delay by Post’s staff prevented Biggs from performing on time and thereby eliminated the timely performance condition.

Answer 18

Explanation

Choice ‘‘4’’ is correct.

If payment is conditioned on timely performance and the party benefited by the condition hinders performance, the condition is excused. Here, Post Corp. was to benefit from the condition that the examination report be ready by September 5, and Post Corp.’s employees caused the delay. Therefore, Biggs is excused from the condition of timely performance and may recover under the contract.

Choice ‘‘1’’ is incorrect because it is not unethical for a CPA to sue for his fee.

Choice ‘‘3’’ is incorrect. A quasi-contractual recovery is possible here, a court could find that the contract was discharged because of Post Corp.’s employees’ hindrance. However, it is not the only possible remedy. A court will more likely find that the hindrance merely discharged a condition of timely performance and allow Biggs to sue under the contract. Beware of answer choices with absolutes, such as ‘‘only.”

Choice ‘‘2’’ is incorrect because Biggs can recover due to prevention of performance by Post’s staff.

Question 19

Question FR-00645

Silvers entered into a contract which contains a substantial arithmetical error. Silvers asserts mistake as a defense to his performance. Silvers will prevail:

1. If the error was unilateral and the other party knew of it.
2. Only if the error was not due to his negligence.
3. Only if the mistake was a mutual mistake.
4. If the contract was written.

Answer 19

Explanation

Choice ‘‘1’’ is correct.

Most mistakes have no effect on a contract. There are two exceptions to this rule: contracts based on a mutual mistake of material facts are v0idable by either party; and contracts based on a unilateral mistake of material facts are v0idable if the other party knew or should have known a mistake was being made. Choice 11111 offers a unilateral mistake of a material fact with the other party aware of the error.

Choice 11311 is incorrect. Although a mutual mistake of a material fact can be a defense, it is not theonly defense. A unilateral mistake can also be a defense if the other party was aware of it.

Choice 11211 is incorrect. Negligence does not preclude a mistake defense.

Choice 11411 is incorrect. Mutual mistakes and unilateral mistakes can be a defense whether the contract is written or oral.

Question 20

Question FR-00646

Moss entered into a written contract to purchase certain real property from Shinn. Which of the following statements is not correct?

1. If Shinn fails to perform the contract, Moss can obtain specific performance.
2. Any amendments to the contract must be agreed to by both Moss and Shinn.
3. The contract is nonassignable as a matter of law.
4. The statute of frauds applies to the contract.

Answer 20

Explanation

Choice ‘‘3’’ is correct.

Most contracts can be assigned and duties delegated. The exceptions occur when the assignment would change the basic deal between the parties. The following are nonassignable because they would change the basic deal: personal service contracts calling for special skill, assignments that materially increase risk or alter duties, assignments that are prohibited by contract or law and insurance contracts. Shinn could certainly assign to a third party his right to receive payment from Moss without changing the basic deal between Shinn and Moss.

Choice ‘‘1’’ is incorrect because specific performance is available for unique property. All real estate is considered uni• que.

Choice ‘‘4’’ is incorrect because the statute of frauds requires a writing for contracts concerning land.

Choice ‘‘2’’ is also incorrect. It took the agreement of Shinn and Moss to make the contract. It would take the agreement of Shinn and Moss to amend the contract.

Question 21

Question FR-00659

Sardy, a famous football player, was asked to autograph a pad of paper held by Maple. Unknown to Sardy, Maple had carefully concealed a contract for the sale of Sardy’s home to Maple in the pad which Sardy signed. If Maple seeks to enforce the contract, Sardy’s best defense to have the contract declared v0id would be:

1. Mistake.
2. Duress.
3. Fraud in the inducement.
4. Fraud in the execution.

Answer 21

Explanation

Choice ‘‘4’’ is correct.

Fraud in the execution occurs when the victim does not know a contract is being made. Fraud in the execution has all the elements of fraud and makes a contract v0id. All of the elements of fraud are present: amaterial misrepresentation of fact, done with scienter (because Maple clearly knew what he was doing), reliance (because Sardy relied on the representation that he was signing an autograph pad), intent to induce reliance (because Maple told Sardy it was an autograph pad with the intention of inducing Sardy to sign) and there are clearly damages. This is fraud in the execution because Sardy never knew he was making a contract.

Choice ‘‘3’’ is incorrect. Fraud in the inducement makes a contract v0idable, not v0id. Equally, with fraud in the inducement the victim knows a contract is being made. Sardy did not know he was making a contract.

Choice ‘‘1’’ is incorrect. This was not a mistake. This was an intentional action on the part of Maple to deceive Sardy.

Choice ‘‘2’’ is incorrect. Duress requires forcing someone into a contract by threat of violence, economic destruction or criminal action. Sardy was not forced into the contract. Sardy was deceived.

Question 22

Question FR-00660

Lark, CPA, entered into a signed contract with Bale Corp. to perform management advisory services for Bale. If Lark repudiates the contract prior to the date performance is to begin and Bale Corp. had not yet performed, which of the following is not correct?

1. Bale could successfully maintain an action for breach of contract prior to the date performance is due to begin.
2. Bale can obtain a judgment for the monetary damages it incurred as a result of the repudiation.
3. Bale can obtain a judgment ordering Lark to perform.
4. Bale could successfully maintain an action for breach of contract after the date performance was due to begin.

Answer 22

Explanation

Choice ‘‘3’’ is correct.

Specific performance is a court order requiring the breaching party to perform as promised under a contract. A court will not order a person to perform a nonassignable duty, as such an order would constitute inv0luntary servitude. The duties of a CPA are not assignable because they rely on the skills of the particular CPA.

Choices ‘‘1’’ and ‘‘4’’ are incorrect. By breaching the contract prior to the date of performance, Lark committed an anticipatory repudiation. An anticipatory repudiation permits Bale, the injured party, to sue Lark immediately or wait until the time of performance has past and then sue.

Choice ‘‘2’’ is incorrect. Anytime there is a breach of contract, the injured party has the right to sue for compensatory damages and receive an award of money to compensate for all harm done.

Question 23

Question FR-00670

Stahl Corp. entered into a written contract to purchase a warehouse from Mehl for $385,000. Thereafter, Mehl received an offer from another purchaser to buy the warehouse for $395,000. As a result, Mehl has refused to transfer the warehouse to Stahl. Stahl has commenced an action for specific performance. Mehl has raised the statute of frauds as a defense. In order for Stahl to successfully prevail on the statute of frauds issue, it must be shown among other requirements that the contract was signed by:

1. Stahl and Mehl at the same time.
2. Stahl.
3. Stahl and Mehl with proper notarizations affixed to the contract.
4. Mehl.

Answer 23

Explanation

Choice ‘‘4’’ is correct.

The statute of frauds requires real estate contracts to be evidenced by some type of writing to be enforceable. The writing need only be signed by one party, but it can only be enforced against the one who signed. Stahl is attempting to enforce this written contract against Mehl. Thus, the writing need only be signed by Mehl.

Choices ‘‘2’’, ‘‘1’’, and ‘‘3’’ are incorrect because the contract need only be signed by Mehl. Additionally, the statute of frauds does not require notarization.

Question 24

Question FR-00671

A clause in a contract for the purchase of real estate which provides that the seller shall be entitled to retain the purchaser’s downpayment as liquidated damages should the purchaser fail to close the transaction will generally be enforceable:

1. In addition to the seller’s right to recover compensatory damages.
2. If the amount of the downpayment bears a reasonable relationship to the probable loss.
3. In all cases provided the parties have agreed in a signed writing.
4. As a penalty if the purchaser has intentionally defaulted.

Answer 24

Explanation

Choice ‘‘2’’ is correct.

A liquidated damage clause is enforceable if the damages are a reasonable estimate of the harm likely to result from a breach where actual damages would be difficult to calculate and the liquidated amount is not a penalty.

Thus, the forfeiture of downpayment clause would be enforceable if it bears a reasonable relationship to the probable loss.

Choice ‘‘1’’ is incorrect because liquidated damages are not in addition to compensatory damages. Liquidated damages are what the parties have agreed damages will be.

Choice ‘‘4’’ is incorrect because a liquidated damage clause is unenforceable if it constitutes a penalty rather than a reasonable estimate of actual damages.

Choice ‘‘3’’ is incorrect. The enforceability of liquidated damage clauses depends on the reasonableness of the agreed amount to the actual harm. It does not matter whether the contract is in writing or not.

Question 25

Question FR-00505

An oral agreement concerning the sale of goods entered into without consideration is binding if the agreement:

1. Modifies the price in an existing, enforceable written contract from $525 to $475.
2. Modifies the price term from $495 to $505.
3. Is a firm offer made by a merchant who promises to hold the offer open for 30 days.
4. Contradicts the terms of a subsequent written contract that is intended as the complete and exclusive agreement of the parties.

Answer 25

Explanation

Choice ‘‘1’’ is correct.

A contract for the sale of goods is modifiable without consideration. Moreover, if a modification takes the price of the contract under $500, no writing is required under the statute of frauds.

Choice ‘‘3’’ is incorrect. Although Merchant’s Firm Offers are irrev0cable without consideration, the contract here cannot be a firm offer because it is not in writing.

Choice ‘‘2’’ is incorrect because the modification takes the contract over the threshold for the statute of frauds.

Choice ‘‘4’’ is incorrect because a prior oral agreement that contradicts a subsequent written contract is inadmissible under the parol evidence rule and would therefore not be binding.

Question 26

Question FR-00521

In order to have an irrev0cable merchant’s firm offer under the UCC in Sales, the offer must:

1. Be made by a merchant to a merchant.
2. Not be contained in a form supplied by the offerer.
3. State the period of time for which it is irrev0cable.
4. Be contained in a signed writing that gives assurance that the offer will be held open.

Answer 26

Explanation

Choice ‘‘4’’ is correct.

Merchants’ firm offers in sales are irrev0cable without additional consideration if the offer was made by a merchant, in writing and guaranteed that it would be held open.

Choice ‘‘1’’ is incorrect. Although the offer must be made by a merchant (one who ordinarily sells this type of goods), it does not have to be made to a merchant.

Choice ‘‘3’’ is incorrect because if no time is specified in the merchanfs firm offer, the offer is irrev0cable for a reasonable time not to exceed three months.

Choice ‘‘2’’ is incorrect because the firm offer can still be irrev0cable if it is contained in a form supplied by the offerer. To be irrev0cable, it need only be made by a merchant, in writing and guarantee it will be held open.

Question 27

Question FR-00537

Kirk Corp. sold Nix an Ajax freezer, Model 24, for $890. The contract required delivery to be made by June 23. On June 12, Kirk delivered an Ajax freezer, Model 52 to Nix. Nix immediately notified Kirk that the wrong freezer had been delivered and indicated that the delivery of a correct freezer would not be acceptable. Kirk wishes to deliver an Ajax freezer, Model 24 on June 23. Which of the following statements is correct?

1. Nix always may reject the nonconforming freezer and refuse delivery of a conforming freezer on June 23.
2. Nix must accept the nonconforming freezer but may recover damages.
3. Kirk may deliver the freezer on June 23 without further notice to Nix.
4. Kirk may deliver the freezer on June 23 if it first seasonably notifies Nix of its intent to do so.

Answer 27

Explanation

Choice ‘‘4’’ is correct.

A buyer may reject any nonconforming delivery made by a seller. The seller has the right to correct or cure the nonconforming delivery by notifying the buyer it will be corrected on time. Thus, Kirk may deliver the freezer on June 23 by notifying Nix of its intent to do so.

Choice 11311 is incorrect because notice is required to cure.

Choice 11211 is incorrect because a buyer has an absolute right to reject a nonconforming delivery.

Choice 11111 is incorrect because a seller has the right to cure or correct nonconforming deliveries if time is left before performance is due under the contract.

Question 28

Question FR-00553

Greed Co. telephoned Stieb Co. and ordered 30 tables at $100 each. Greed agreed to pay 15°/o immediately and the balance within 30 days after receipt of the entire shipment. Greed forwarded a check for $450 and Stieb shipped 15 tables the next day, intending to ship the balance by the end of the week. Greed decided that the contract was a bad bargain and repudiated it. Stieb sued Greed. Which of the following will allow Stieb to enforce the contract in its entirety despite the statute of frauds?

1. Greed paid 15°/o down.
2. Stieb shipped 15 tables.
3. The contract is not within the requirements of the statute of frauds.
4. Greed admitted in court that it made the contract in question.

Answer 28

Explanation

Choice ‘‘4’’ is correct.

The statute of frauds requires a writing for most contracts for the sale of goods of $500 or more. A writing is not required however, if the party admits in court that he made the contract.

Choices 11211 and 11111 are incorrect because part performance of a contract within the statute of frauds makes the contract enforceable only to the extent of the performance tendered and accepted. This question required the contract to be enforced in its entirety.

Choice 11311 is incorrect because the contract inv0lved the sale of goods of $500 or more.

Question 29

Question FR-00569

Smith purchased a table from Rex Furniture Store. Rex tendered delivery of the table after receiving payment in full from Smith. Smith informed Rex that Smith would be unable to take possession of the table until later that day. Thieves stole the table before Smith returned. The risk of loss:

1. Remained with Rex because Smith had not yet taken possession of the table.
2. Passed to Smith at Rex’s tender of delivery.
3. Remained with Rex because Smith made payment in full.
4. Passed to Smith at the time the contract was formed and payment was made.

Answer 29

Explanation

Choice ‘‘1’’ is correct.

In sales without a common carrier, risk of loss will pass from a merchant seller to the buyer only when the buyer gets possession of the goods.

Choices ‘‘2’’ and ‘‘4’’ are incorrect because the seller has the risk of loss, not Smith because the seller, here, is a merchant and the buyer did not take possession.

Choice ‘‘3’’ is incorrect because Rex has the risk of loss due to Smith not having possession. The fact that Smith made payment in full is irrelevant.

Question 30

Question FR-00585

Under the UCC Sales Article, which of the following warranties requires the seller to be a merchant with respect to the goods being sold in order for the warranty to apply?

1. The warranty of title.
2. The implied warranty of merchantability.
3. II only.
4. Both I and II.
5. I only.
6. Neither I nor II.

Answer 30

Explanation

Choice ‘‘1’’ is correct.

The implied warranty of merchantability requires a merchant seller. The warranty of title applies to all sellers, not just merchants.

Question 31

Question FR-00601

Kent suffered an injury due to a malfunction of a chain saw he had purchased from Grey Hardware. The saw was manufactured by Dill Tool Corp. Kent has commenced an action against Grey and Dill based upon strict liability. Which of the following is a correct statement?

1. Kent’s suit against Grey will be dismissed since Grey was not at fault.
2. Privity will not be a valid defense against Kent’s suit.
3. The lawsuit will be dismissed since strict liability has not been applied in product liability cases in the majority of jurisdictions.
4. Dill will not be liable if it manufactured the saw in a nonnegligent manner.

Answer 31

Explanation

Choice ‘‘2’’ is correct.

Privity is irrelevant in a suit for strict liability in tort. Thus, privity is not a valid defense.

Choice ‘‘4’’ is incorrect because negligence is not relevant. Strict liability is liability without fault.

Choice ‘‘3’’ is incorrect because virtually all states permit suits for injuries from defective products under a strict liability theory.

Choice ‘‘1’’ is incorrect because strict liability is liability without fault.

Question 32

Question FR-00617

The UCC Sales Article applies:

1. To the sale of patents.
2. To the sale of specially manufactured goods.
3. To a contract for personal services.
4. To the sale of goods only if the buyer and seller are merchants.

Answer 32

Explanation

Choice ‘‘2’’ is correct.

UCC sales must inv0lve the sale of goods. Goods are moveable personal property. The UCC Sales Article does not apply to personal service contracts, real estate contracts or contracts inv0lving intangible personal property. The sale of specially manufactured goods clearly inv0lves the sale of moveable personal property (goods).

Choice 11311 is incorrect. The UCC Sales Article does not apply to personal service contracts.

Choice 11111 is not correct because the UCC Sales Article does not apply to contracts inv0lving intangible personal property.

Choice 11411 is not correct because the UCC Sales Article applies to all contracts inv0lving the sale of goods. It is not limited to contracts for the sale of goods between merchants. It also applies to contracts for sale of goods between nonmerchants, for example.

Question 33

Question FR-00633

Bizzy Corp. wrote Wang ordering 100 Wang radios for $2500. Wang unequiv0cally accepted Bizzy’s offer but in doing so Wang added a clause providing for interest on any overdue inv0ices pertaining to the sale, a practice which is common in the industry. If Wang and Bizzy are both merchants and there are no further communications between the parties relating to the terms, then:

1. A contract is formed with Wang’s additional term becoming a part of the agreement.
2. A contract is formed incorporating only the terms of Bizzy’s offer.
3. A contract cannot be formed unless Bizzy expressly accepts the term added by Wang.
4. Wang has made a counteroffer.

Answer 33

Explanation

Choice ‘‘1’’ is correct.

Under common law contract law, an acceptance must mirror the original offer. Under the Sales Article, an acceptance can be effective even though it states additional or different terms than were included in the offer. Between merchants additional terms that do not significantly change the offer generally become part of the contract. Here, Wang’s insertion of a clause providing for interest on any overdue inv0ices pertaining to the sale, a practice which is common in the industry, would clearly be a minor change. Thus, Wang has made a valid acceptance and a contract was formed with Wang’s additional term becoming part of the contract.

Choices ‘‘4’’ and ‘‘3’’ are incorrect. At common law, a purported acceptance that includes a term that was not included in the offer is treated as a counteroffer, but the Sales Article does not follow this rule. Under the Sales Article an acceptance with an additional or different term generally is effective.

Choice ‘‘2’’ is incorrect. With no objection from Bizzy, Wang’s acceptance was valid. The contract was formed with Wang’s term becoming part of the contract.

Question 34

Question FR-00647

By fax, Bell ordered 10,000 yards of fabric, first quality, 50°10 wool and 50°10 cotton. The shipping terms were FOB Major’s factory in Akron, Ohio. Major emailed an acceptance and packed the fabric for shipment. In the process it discovered that one-half the fabric was 30°10 wool and 70°10 cotton. Since Major did not have any additional 50°10 wool fabric, it decided to send the shipment to Bell as an accommodation. The goods were shipped and later that day Major emailed Bell its apology and indicated that the 5,000 yards of 30°10 wool would be priced at $2 a yard less. The truck delivering the fabric was destroyed on the way to Akron. Under the circumstances, who bears the risk of loss?

1. Major, because the order was not in a signed writing.
2. Bell, since Bell has title to the goods.
3. Bell, since the shipping terms were FOB Major’s place of business.
4. Major since it shipped goods which failed to conform to the contract.

Answer 34

Explanation

Choice ‘‘4’’ is correct.

When nonconforming goods are shipped, the risk of loss is always on the seller, regardless of the shipping terms. The shipment was nonconforming because half of the goods were only 30°10 wool, thus risk of loss is on Major.

Choice ‘‘2’’ is incorrect because risk of loss is on Major due to the nonconforming shipment. It is irrelevant whether or not Bill had title to the fabric.

Choice ‘‘1’’ is incorrect. Major has risk of loss because the delivery was nonconforming. Whether or not the order was in a signed writing has no effect on risk of loss. Moreover, the fax and email here would probably be sufficient writings under the statute of frauds in any event.

Choice ‘‘3’’ is incorrect because a risk of loss is on Major due to the nonconforming shipment. The FOB term is irrelevant here.

Question 35

Question FR-00661

Wally, a CPA and a neighbor of Rita’s, offered to sell Rita his chain saw for $400. Rita stated that she knew nothing about chain saws, but would buy the saw if it is capable of cutting down the trees in her backyard, which had an average diameter of three feet. Wally assured Rita that the saw ‘‘would do the job.’’ Relying on Wally’s assurance, Rita purchased the saw. Wally has created a warranty that:

1. Is unenforceable because it is not in writing.
2. The saw is of an average quality.
3. The saw is fit for the ordinary purposes for which it is used.
4. The saw is capable of cutting trees in Rita’s backyard.

Answer 35

Explanation

Choice ‘‘4’’ is correct.

Wally has created a warranty of fitness for a particular purpose. To create this implied warranty, the buyer must rely on the seller to select suitable goods and the seller must know of this reliance. With fitness for a particular purpose, the goods must be fit for the buyer’s specified purpose. Rita relied on Wally to select a saw capable of cutting down trees with a three foot diameter. Wally knew Rita was relying on him because she told him she knew nothing about chain saws and asked if the saw was capable off cutting trees in her backyard. Thus, Wally has created a warranty that the saw is capable of cutting down trees in Rita’s backyard.

Choice ‘‘2’’ is incorrect because it is the implied warranty of merchantability that warrants the goods are of an average fair quality, not fitness for a particular purpose. Wally did not make such a warranty because he is not a merchant who deals in chain saws.

Choice ‘‘3’’ is incorrect because fitness for a particular purpose warrants the goods are fit for the specific purpose of the buyer, not the ordinary purposes for which it is used. Again it is the warranty of merchantability that warrants goods are fit for the ordinary purposes for which they are used, not fitness, and Wally is not a merchant.

Choice ‘‘1’’ is incorrect because no implied warranty requires a writing. Implied warranties require no written or oral words. They are implied into the contract.

Question 36

Question FR-00672

Sand Corp. received an order for $11,000 of assorted pottery from Gluco, Inc. The shipping terms were FOB Sand’s place of business, 2/10 net/30. Sand packed and crated the pottery for shipment and loaded it upon a carrier. While the goods were in transit to Gluco, Sand learned that Gluco was unable to pay its debts in the ordinary course of business. Sand promptly contacted the carrier and instructed them to stop shipment to Gluco and store the pottery until further instructions. The carrier complied with these instructions. Regarding the rights, duties and liabilities of the parties, which of the following is correct?

1. Sand’s stoppage in transit was improper if Gluco’s assets exceed its liabilities.
2. The fact that Gluco became insolvent in no way affects the rights, duties and obligations of the parties.
3. Once Sand correctly learned of Gluco’s insolvency, it had no further duty or obligation to Gluco.
4. Gluco is entitled to the pottery if it pays cash.

Answer 36

Explanation

Choice ‘‘4’’ is correct.

If a seller finds out a buyer is insolvent, the seller has the right to stop the delivery and demand cash. When Sand learned that Gluco was insolvent, Sand could properly stop the delivery. This does not terminate the contract, but rather gives the seller the right to demand cash. Thus, Gluco is entitled to the goods if it pays cash.

Choice ‘‘1’’ is incorrect. Sand’s stoppage in transit was proper. The test for insolvency is being unable to pay

debts in the ordinary course of business, not assets minus liabilities. Since Gluco was insolvent, Sand’s stoppage was proper.

Choice ‘‘2’’ is incorrect. Gluco’s insolvency gave Sand the right to stop delivery and demand cash.

Choice ‘‘3’’ is incorrect. Sand does not have the right to terminate the contract due to Gluco’s insolvency. It just has the right to stop delivery and demand cash.

Question 37

Question FR-00602

A holder in due course of a negotiable promissory note will take the note subject to which of the following defenses?

1. Failure of consideration.
2. Breach of contract.
3. Fraud in the inducement.
4. Unauthorized signature.

Answer 37

Explanation

Choice ‘‘4’’ is correct.

An HOC only loses to real defenses (FAIDS). An unauthorized signature is a forgery, which is one of the real defenses.

Choice ‘‘3’’ is incorrect because fraud in the inducement is a personal defense. Only fraud in the execution is a real defense.

Choices ‘‘1’’ and ‘‘2’’ are also incorrect. Neither failure of consideration nor breach of contract is a real defense.

Question 38

Question FR-00673

Which of the following will not constitute value in determining whether a person is a holder in due course?

•

The performance of services rendered the payee of a negotiable instrument who endorses it in payment for sel”\llces.

1. The taking of a negotiable instrument as security for a loan.
2. The taking of a negotiable instrument for future consideration.
3. The giving of one’s own negotiable instrument in connection with the purchase of another negotiable instrument.

Answer 38

Explanation

Choice ‘‘3’’ is correct.

To be a holder in due course, one must give present or past value, not future value.

Choices ‘‘2’’, ‘‘4’’, and ‘‘1’’ are incorrect. The value requirement may be met by taking a negotiable instrument as security for a loan, by giving a negotiable instrument for the instrument and by the performance of services.

Question 39

Question FR-00527

Terrence has been Pauline’s agent in the liquor business for ten years and has made numerous contracts on Pauline’s behalf. Under which of the following situations could Terrence continue to have the power to bind Pauline?

1. The bankruptcy of Pauline with Terrence’s knowledge.
2. Terrence lost his license to sell liquor in that state.
3. The death of Pauline without Terrence’s knowledge.
4. The firing of Terrence by Pauline.

Answer 39

Explanation

Choice ‘‘4’’ is correct.

If the principal fires an agent, the principal must give actual notice to persons with whom the agent has dealt and constructive notice to all others. Failure to give the required notice leaves the agent with apparent authority to act on behalf of the principal.

Choices ‘‘2’’, ‘‘3’’, and ‘‘1’’ are incorrect. An agency terminated by law ends automatically without notice to any party. Agencies are terminated by law by death or insanity of either party, by bankruptcy of the principal, or by failure of the agent to have a required license and by destruction of a subject essential to the agency.

Question 40

Question FR-00543

Able, on behalf of Pix Corp., entered into a contract with Sky Corp., by which Sky agreed to sell computer equipment to Pix. Able disclosed to Sky that she was acting on behalf of Pix. However, Able had exceeded her actual authority by entering into the contract with Sky.

If Pix wishes to ratify the contract with Sky, which of the following statements is correct?

1. Able must be a general agent of Pix.
2. Able must have acted reasonably and in Pix’s best interest.
3. Pix must have knowledge of all material facts relating to the contract at the time it is ratified.
4. Pix must notify Sky that Pix intends to ratify the contract.

Answer 40

Explanation

Choice ‘‘3’’ is correct.

To ratify a contract, the principal must have knowledge of all material facts.

Choice ‘‘4’’ is incorrect. Ratification does not require notification to be effective (the third party already thinks he or she has a contract with the principal).

Choice ‘‘2’’ is incorrect. If the principal ratifies an unauthorized contract, the principal is bound even if the agent acted unreasonably.

Choice ‘‘1’’ is incorrect. There is no requirement that an agent be a general agent in order to give a principal the right to ratify; principals may ratify contracts of special agents as well. It may even be possible to ratify a contract entered into by someone who was not an agent of the principal but purported to be one.

Question 41

Question FR-00559

If an employee has, within the scope of the agency relationship, committed both negligent and intentional acts resulting in injury to third parties, the principal:

1. Will be liable under the doctrine of respondeat superior only for intentional acts.
2. Will never be criminally liable unless it actively participated in the acts.
3. May be liable even if the employee’s acts were unauthorized.
4. May effectively limit its liability to those third parties if the agent has signed a disclaimer absolving the principal from liability.

Answer 41

Explanation

Choice ‘‘3’’ is correct.

An employer may be liable for a tort committed by an employee within the scope of employment.

Choice ‘‘4’’ is incorrect. The disclaimer would only apply to the parties who signed it (the employer and employee). It would not be binding on third parties as they never agreed to it.

Choice ‘‘1’’ is incorrect because under the doctrine of respondeat superior a principal generally is not liable for intentional torts of the agent, but generally is liable for negligent torts (i.e., this choice is ‘‘backwards’’).

Choice ‘‘2’’ is incorrect. If the principal ordered an agent to commit a criminal act, both the principal and the agent would be criminally liable. An employer can also be liable for an employee’s strict liability crimes (e.g., selling liquor to a minor).

Question 42

Question FR-00591

Which of the following will not terminate an agency by operation of law?

1. Loss of the agent’s license to perform the task called for by the agency agreement.
2. Bankruptcy of the agent.
3. Death of the agent.
4. Bankruptcy of the principal.

Answer 42

Explanation

Choice ‘‘2’’ is correct.

Bankruptcy of the agent does not terminate the agency by operation of law; the agent may still represent the principal.

Choices ‘‘4’’, ‘‘1’’ and ‘‘3’’ are incorrect. All are events that will terminate an agency by operation of law.

Question 43

Question FR-00607

Owner sells his stock in ABC Corporation to Buyer and appoints Buyer as his agent to v0te the stock at a shareholders’ meeting that will be held the following week. The agency appointment provides that it is irrev0cable. Which of the following statements is true?

1. The agency cannot be terminated by either Owner or Buyer because it is coupled with an interest.
2. The agency may be terminated only by Buyer.
3. Owner can rev0ke the appointment anytime before the meeting despite the language stating that the agency is irrev0cable.
4. Buyer’s appointment will be rev0ked by operation of law if Owner dies before the shareholders meeting.

Answer 43

Explanation

Choice ‘‘2’’ is correct.

If an agent has paid for the right to be appointed as an agent, the agency is coupled with an interest and may be rev0ked only by the agent. The principal may not terminate the agency, and the agency does not terminate by operation of law by the death of the principal.

Choices ‘‘3’’, ‘‘4’’, and ‘‘1’’ are incorrect, per the above explanation.

Question 44

Question FR-00623

If a principal is undisclosed, which of the following statements is NOT true?

1. The principal is personally liable on contracts that the agent enters into with authority.
2. The agent’s actual authority is the same as if the principal’s identity were disclosed.
3. The principal may ratify an unauthorized act by the agent.
4. The agent is personally liable on contracts that he is authorized to enter on the principals behalf.

Answer 44

Explanation

Choice ‘‘3’’ is correct.

This statement is not true. If a principal is undisclosed, the principal may not ratify an unauthorized act of his agent. A principal may ratify only if the agent purported to be acting on behalf of the principal, which is impossible if the principal’s identity and existence are undisclosed.

Choice ‘‘2’’ is incorrect because it is true. An agent’s actual authority depends on the communications between the principal and the agent; whether the principafs existence and identity are disclosed or undisclosed to third parties is irrelevant to actual authority.

Choices ‘‘1’’ and ‘‘4’’ are incorrect because they are true. If the principal is undisclosed, the third party with whom the agent dealt may hold either the principal or the agent liable on the authorized contracts that the agent enters into.

Question 45

Question FR-00638

Phil asks his employee Ed to take a company truck to deliver some lumber to a customer, Carl. After delivering the lumber, Ed drives 10 miles beyond the customer’s house to visit his mother at her house. While pulling the truck in into his mother’s driveway, Ed negligently strikes a pedestrian, Vic. If Vic sues Phil for his injuries, will Vic likely recover?

1. No, because Ed was negligent.
2. No, because the collision did not occur within the scope of Eds employment.
3. Yes, because Ed was Phil’s employee.
4. Yes, because Ed was driving Phil’s truck.

Answer 45

Explanation

Choice ‘‘2’’ is correct.

Generally, a principal is not liable for an agent’s torts. However, an employer is liable for an employee’s torts committed within the scope of the employment (i.e., while the employee was attending to the employers business). Here, Ed completed the requested delivery and then continued 10 miles out of his way to get to his mother’s house where the collision occurred. Thus, the collision occurred outside of the scope of the employment and Phil will not be held liable.

Choice 11311 is incorrect because it is not enough merely that Ed was Phif s employee-the tort must also occur within the scope of the employment. As explained above, the collision here did not occur within the scope of Eds employment. He was on a frolic of his own.

Choice 11411 is incorrect. It is not enough merely that Ed was driving Phif s truck. Ed must be an employee and the tort must have been committed within the scope of the employment. See above.

Choice 11111 is incorrect. It is not enough merely that Ed was negligent. Ed must be an employee and the tort must have been committed within the scope of the employment. See above.

Question 46

Question FR-00652

Able, on behalf of Pix Corp., entered into a contract with Sky Corp., by which Sky agreed to sell computer equipment to Pix. Able disclosed to Sky that she was acting on behalf of Pix. However, Able had exceeded her actual authority by entering into the contract with Sky.

If Pix does not want to honor the contract, it will nonetheless be held liable if Sky can prove that:

1. Able was an employee of Pix and not an independent contractor.
2. Able actually but unreasonably believed she was acting within the scope of her authority.
3. The agency relationship between Pix and Able was formalized in a signed writing.
4. Able had apparent authority to bind Pix.

Answer 46

Explanation

Choice ‘‘4’’ is correct.

The principal is liable for all authorized contracts made on his behalf by an agent. It does not matter whether the authority is actual or apparent. Thus, Pix will be liable if Able had apparent authority.

Choice 11211 is incorrect. A principal1s liability depends on an agent having either actual authority or apparent authority. If Able mistakenly but unreasonably believed she was authorized, no actual authority exists, but there may still be apparent authority (which will bind Pix, the principal) if Sky can establish that it was reasonable for Sky to believe that Able was authorized to act on behalf of Pix.

Choice 11111 is incorrect. The principal is not liable for contracts made by an employee unless there was either actual authority or apparent authority to make the contract or unless the principal ratified the unauthorized contract.

Choice 11311 is incorrect. Liability does not depend on whether or not the agency relationship was in writing.

Question 47

Question FR-00129

Noll Corp. and Orr Corp. are contemplating entering into an unincorporated joint venture. Such a joint venture:

1. Will be treated as a partnership in most important legal aspects.
2. Will be treated as an association for federal income tax purposes and taxed at the prevailing corporate rates.
3. Must be dissolved upon the completion of a single undertaking.
4. Must file a certificate of limited partnership with the appropriate state agency.

Answer 47

Explanation

Choice ‘‘1’’ is correct.

A joint venture is treated as a partnership for most legal purposes.

Choice ‘‘3’’ is incorrect because a joint venture may be for more than a single venture; it may be for a series of transactions.

Choice ‘‘2’’ is incorrect because a joint venture, like a partnership, is not taxed as a separate entity. Choice ‘‘4’’ is incorrect because like a partnership, a joint venture need not file with the state.

Question 48

Question FR-00139

Able, Baker, and Charlie entered into an oral agreement to form the ABC Partnership. Their agreement was silent as to the duration of the partnership. Five years later they orally agreed to dissolve the partnership.

1. The ABC Partnership must file articles of partnership with the state.
2. The ABC Partnership may be dissolved only after notice of the proposed dissolution is given to all partnership creditors.
3. The oral partnership agreement is invalid because the partnership lasted for more than one year.
4. The oral partnership agreement was valid.

Answer 48

Explanation

Choice ‘‘4’’ is correct.

A partnership agreement can be oral unless the partners agree in advance that it is to last for more than one year. Whether a partnership agreement must be in writing is determined at the time the agreement is made.

Choice 11211 is incorrect because notice to creditors upon dissolution is not required, although absent notice, partner liability for firm debts may arise after dissolution.

Choice 11311 is incorrect. The agreement can be oral unless the partners agree in advance that it is to last more than one year.

Choice 11111 is incorrect because no filing is necessary to form a partnership.

Question 49

Question FR-00149

Milton is a general partner in the Omni Company general partnership. Milton:

1. Has no apparent authority if the partnership agreement is contained in a formal and detailed signed writing.
2. Cannot be sued individually for a tort he has committed until the partnership has been sued and a judgment returned unsatisfied.
3. Can bind the partnership by renewing an existing lease that the remaining partners had decided to terminate.
4. Can bind the partnership by submitting a written admission of liability in a lawsuit brought against the partnership.

Answer 49

Explanation

Choice ‘‘3’’ is correct.

A partner can impose contract liability on the partnership and fellow partners when acting with apparent authority. It would be reasonable for a third party to believe that a partner could renew an existing lease.

Choice ‘‘1’’ is incorrect. Apparent authority depends on how things appear to third parties. It does not depend on a written partnership agreement.

Choice ‘‘2’’ is incorrect. A person is liable for his own torts and can be sued for them, regardless of whether the torts were committed on behalf of some business entity.

Choice ‘‘4’’ is incorrect because a partner has no apparent authority to admit liability in a lawsuit.

Question 50

Question FR-00150

In general, which of the following statements is correct with respect to a limited liability company (LLC)?

1. An LLC can be formed with limited liability for all members.
2. An LLC must have at least two members.
3. Unless otherwise agreed, an LLC is taxed like a corporation.
4. The operating agreement must be filed with the state.

Answer 50

Explanation

Choice ‘‘1’’ is correct.

Unless agreed otherwise, all LLC members have no liability beyond their investment. Thus, an LLC can be formed with limited liability for all members, unlike a limited partnership.

Choice ‘‘4’’ is incorrect. The articles of organization are filed with the state, not the operating agreement. Choice ‘‘3’’ is incorrect. Unless otherwise agreed, an LLC is taxed like a partnership, not a corporation.

Choice ‘‘2’’ is incorrect. Virtually every state permits a one person LLC.

Question 51

Question FR-00159

Which of the following rights would a general partner in a general partnership not have?

1. The right to be reimbursed for loans made to the partnership.
2. The right to inspect partnership books and records.
3. The right to be compensated for the fair market value of services performed on behalf of the partnership.
4. The right to be indemnified for liability incurred in a suit brought by a third party while acting on behalf of the partnership.

Answer 51

Explanation

Choice ‘‘3’’ is correct.

Partners have no right to compensation other than profits unless otherwise agreed.

Choices ‘‘4’’, ‘‘1’’, and ‘‘2’’ are incorrect. Partners do have the right to be indemnified, the right to be reimbursed for loans and the right to inspect books and records.

Question 52

Question FR-00160

Generally, which of the following must be contained in a corporation’s articles of incorporation?

1. Names of the initial officers and their terms of office.
2. The name of each incorporator.

Ill. Provision for the issuance of v0ting stock.

1. I, II, and Ill.
2. II only.
3. II and Ill.
4. I and II.

Answer 52

Explanation

Choice ‘‘3’’ is correct.

The articles must contain the name of the corporation, the name of its registered agent, the name of its incorporators and stock provisions (specifically including the amount of shares the corporation is authorized to issue and which stock has v0ting power). Thus, the names of all incorporators and a provision for the issuance of v0ting stock must by included. The names of the officers are not required.

Question 53

Question FR-00169

Al, Sue, and Jim are partners in Crabcakes, a general partnership. The partnership agreement provides that they split profits according to their capital contributions. Al contributed $10,000, Sue contributed $30,000 and Jim contributed $50,000. At year-end, there was $180,000 in losses. What amount should be allocated to Al?

1. $20,000
2. $100,000
3. $90,000
4. $60,000

Answer 53

Explanation

Choice ‘‘1’’ is correct.

Generally, if the partners do not agree as to how losses will be split, losses are split according to how profits are split. Here the partners have agreed that profits will be split according to capital contributions. The split between Al, Sue and Jim is 1:3:5, respectively.

Al’s share of the loss is: [1 x (1/9 x $180,000)] = $20,000

Question 54

Question FR-00170

Trinket Corporation is being sued by its distributor, International, for nonpayment of debts. International will be able to hold Jasper Crumb, a shareholder of Trinket, personally liable for the companys debts if:

1. Trinket has four shareholders, including Jasper Crumb.
2. The shareholder’s personal assets are materially commingled with Trinkets assets.
3. Trinket’s articles of incorporation allow for more than one class of stock.
4. Trinket Corporation is overcapitalized.

Answer 54

Explanation

Choice ‘‘2’’ is correct.

The corporate entity may be disregarded and stockholders held personally liable for fraud, undercapitalization at the time of formation or commingling of funds.

Choice 11411 is incorrect because it is undercapitalization, not overcapitalization that will permit piercing of the corporate veil.

Choice 11311 is incorrect because a corporation may have more than one class of stock unless it is an S­ corporation.

Choice 11111 is incorrect because the number of stockholders does not matter in determining whether a stockholder is personally liable.

Question 55

Question FR-00179

Donovan, a partner of Monroe, Lincoln and Washington, is considering selling all or part of his interest in the partnership. The partnership agreement is silent on the matter. Donovan can:

1. Sell his partnership interest, but only with the consent of his fellow partners.
2. Sell all of his partnership interest without causing dissolution.
3. Sell his entire partnership interest and confer partner status upon the purchaser, even without the consent of the other partners.
4. Sell part but not all of his partnership interest without the consent of the other partners.

Answer 55

Explanation

Choice ‘‘2’’ is correct.

A partner’s interest in his or her partnership is defined as the partner’s right to receive profits and surplus. This interest is fully assignable without the approval of the other partners. Such an assignment does not transfer the partner’s management rights and does not cause a dissolution.

Choice ‘‘4’’ is incorrect. A partner may sell all or part of his partnership interest.

Choice ‘‘1’’ is incorrect. A sale of an interest (i.e., the right to receive profits and surplus) can be made without the consent of fellow partners.

Choice ‘‘3’’ is incorrect. A transferee does not become a partner without the consent of all other partners.

Question 56

Time-To-Pass, Inc. has five shareholders. Each shareholder will have the right to approve:

1. The hiring of an officer.
2. An amendment of the corporation’s articles of incorporation changing the number of authorized shares.
3. None of the above.
4. The declaration of dividends.

Answer 56

Explanation

Choice ‘‘2’’ is correct.

Stockholders have the right to elect directors and v0te on fundamental changes. Fundamental changes include dissolutions, amending the articles of incorporation, mergers, consolidations and compulsory share exchanges and sale of substantially all of the corporation’s assets. Only choice ‘‘2’’ reflects a fundamental change.

Question 57

Question FR-00189

Ted Fein, a partner in the ABC Partnership, wishes to withdraw from the partnership and sell his interest to Gold. All of the other partners in ABC have agreed to admit Gold as a partner and to hold Fein harmless for the past, present and future liabilities of ABC. A provision in the original partnership agreement states that the partnership will continue upon the death or withdrawal of one or more of the partners. The agreement to hold Fein harmless for all past, present and future liabilities of ABC will:

1. Prevent partnership creditors from holding Fein personally liable only as to those liabilities of ABC existing at the time of Fein’s withdrawal.
2. Not affect the rights of partnership creditors to hold Fein personally liable for those liabilities of ABC existing at the time of his withdrawal.
3. Permit Fein to recover from the other partners only amounts he has paid in excess of his proportionate share.
4. Prevent partnership creditors from holding Fein personally liable for the past, present and future liabilities of ABC.

Answer 57

Explanation

Choice ‘‘2’’ is correct.

A withdrawing partner is personally liable to creditors of the old partnership even if there is a hold harmless agreement. Fein was a partner in ABC. Thus, Fein is liable to the creditors of ABC. A hold harmless agreement allows Fein to recover from other partners any amounts he is required to pay to creditors.

Choices ‘‘1’’ and ‘‘4’’ are incorrect. A hold harmless agreement does not prevent creditors from holding an outgoing partner liable.

Choice ‘‘3’’ is incorrect. A hold harmless agreement allows Fein to recover from other partners any amounts he is required to pay to creditors. It is not limited to the amounts he has paid in excess of his proportionate share.

Question 58

Question FR-00190

Able and Baker are two corporations, the shares of which are publicly traded. Able plans to merge Baker into itself. Which of the following is a requirement of the merger?

1. The boards of directors of both Able and Baker must approve the merger.
2. The IRS must approve the merger.
3. The creditors of Baker must approve the merger.
4. The common stockholders of Baker must receive common stock of Able.

Answer 58

Explanation

Choice ‘‘1’’ is correct.

A merger is a fundamental change. The boards of both corporations must pass a resolution approving the merger. Choice ‘‘2’’ is incorrect. Mergers do not require the approval of the IRS.

Choice ‘‘4’’ is incorrect. A merger does not require that the stockholders of the merged corporation receive the stock of the surviving corporation.

Choice ‘‘3’’ is incorrect. A merger does not require the approval of the creditors of the corporation.

Question 59

Question FR-00199

Unless otherwise provided in the limited partnership agreement, which of the following statements is correct?

1. A person may own a limited partnership interest in the same partnership in which he is a general partner.
2. A limited partnership can be formed with limited liability for all partners.
3. Upon assignment of a limited partnership interest, the assignee will become a substituted limited partner if the consent of two-thirds of all partners is obtained.
4. Upon the death of a limited partner, the partnership will be dissolved.

Answer 59

Explanation

Choice ‘‘1’’ is correct.

A general partner may be a limited partner in the same partnership at the same time.

Choice ‘‘2’’ is incorrect. To form a limited partnership, there must be at least one general partner and one limited partner. General partners have unlimited liability.

Choice ‘‘4’’ is incorrect. Changes in limited partners do not cause dissolution.

Choice ‘‘3’’ is incorrect. The assignee does not become a substituted partner without the unanimous consent of all general and limited partners.

Question 60

Generally, officers of a corporation:

1. Are agents and fiduciaries of the corporation.
2. Are elected by the shareholders.
3. May declare dividends or distributions to shareholders when it is in the best interest of the corporation.
4. May be removed by the board of directors without cause only if the removal is approved by a majority of the shareholders.

Answer 60

Explanation

Choice ‘‘1’’ is correct.

Officers are agents of the corporation and owe the same duties all agents owe.

Choice ‘‘2’’ is incorrect because officers are selected and removed by the board, not the stockholders. Choice ‘‘4’’ is incorrect because the shareholders do not have the right to v0te for removal of officers.

Choice ‘‘3’’ is incorrect because dividends are declared by the board, not the officers.

Question 61

Question FR-00210

Directors are authorized to:

1. Act as agents individually for the corporation.
2. Declare dividends.
3. Act individually when entering into corporate agreements.
4. Individually confess judgments on behalf of the corporation.

Answer 61

Explanation

Choice ‘‘2’’ is correct.

Directors are authorized to declare dividends.

Choice 11311 is incorrect. Directors cannot act individually when entering into corporate agreements. The directors can act only upon agreement of the board.

Choice 11411 is incorrect. Directors are not authorized individually to confess a judgment on behalf of the corporation.

Choice 11111 is incorrect. Directors generally are not agents of their corporation and generally do not have any power to act individually for the corporation. The directors can act only upon agreement of the board.

Question 62

Question FR-00219

Fred, the general partner of Smackey, Ltd., a limited partnership, wants the partnership’s main supplier, Ace Supply, to raise the partnership’s line of credit substantially. Ace Supply is reluctant. Fred asks Allison, who is a limited partner in Smackey, Ltd., and is well-regarded in the financial community, to negotiate with Ace Supply.

After Allison contacts Ace Supply, Ace Supply agrees to increase Smackey, Ltd’s line of credit, erroneously thinking that Allison is a general partner in Smackey, Ltd., although Allison did not make such a representation. If Smackey, Ltd., borrows against its new line of credit with Ace Supply and fails to pay, who can be held personally liable for the payment?

A**llisao* *Fred

1. No Yes
2. No No
3. Yes Yes
4. Yes No

Answer 62

Explanation

Choice ‘‘3’’ is correct.

Fred is personally liable by virtue of being a general partner. Allison is personally liable because although she is a limited partner with respect to all other creditors, she acted like general partner with managing authority by negotiating with the supplier and so is personally liable to that supplier for giving rise to the supplier’s erroneous beliefs.

Choices ‘‘4’’, ‘‘1’’, and ‘‘2’’ are incorrect, per the above.

Question 63

Question FR-00220

Chris is a member in an LLC in Philadelphia. Chris wishes to participate in the management of the LLC. His fellow members have told him he cannot participate in its management. Chris seeks your advice. You correctly tell him:

1. By default, Chris may participate in management unless the LLC elected to be manager managed.
2. None of the above.
3. Members of an LLC are not entitled to participate in management.
4. LLCs are not managed by members within the LLC.

Answer 63

Explanation

Choice ‘‘1’’ is correct.

All members can participate in the management of the LLC unless the LLC has chosen to be manager managed like a corporation.

Choice ‘‘3’’ is incorrect. All members have the right to participate in management unless the members have agreed otherwise.

Choice ‘‘4’’ is incorrect. LLCs are managed by its members unless the members have agreed otherwise. Choice ‘‘2’’ is incorrect, per the above.

Question 64

The governing document in a corporation is called the:

1. Articles of incorporation.
2. Operating agreement.
3. Articles of organization.
4. Voting trust agreement.

Answer 64

Explanation

Choice ‘‘1’’ is correct.

'’Articles of incorporation’’ is the name of the governing document for a corporation.

Choice ‘‘3’’ is incorrect. ‘‘Articles of organization’’ is the name of the governing document for a LLC.

Choice ‘‘2’’ is incorrect. An ‘‘operating agreement’’ is the agreement made between the members of the LLC.

Choice ‘‘4’’ is incorrect. A ‘‘v0ting trust agreement’’ is a trust agreement by which shareholders transfer their legal ownership in their shares to be v0ted a certain way by a trustee.

Question 65

Question FR-00237

Which of the following partnership decisions must be approved by all the partners of a partnership?

1. Firing an employee of the partnership.
2. Making a contract to sell inventory.
3. Admitting liability for a breach of contract.
4. Ordering business cards for the partners.

Answer 65

Explanation

Choice ‘‘3’’ is correct.

Admitting liability requires unanimous consent of all partners. Decisions in a partnership regarding extraordinary matters must be approved by unanimous consent. Admitting liability for a breach of contract is an extraordinary matter. Thus, all partners must agree.

Choices ‘‘2’’, ‘‘1’’, and ‘‘4’’ are incorrect as they are not decisions regarding extraordinary matters.

Question 66

Question FR-00238

Officers are empowered to:

1. Make fundamental changes within the corporation.
2. Run the day to day operations of the corporation.
3. Hire the directors.
4. Declare dividends.

Answer 66

Explanation

Choice ‘‘2’’ is correct.

Officers run the day to day operations of the business and are hired by the directors. Choice ‘‘3’’ is incorrect. Shareholders nominate and elect directors.

Choice ‘‘1’’ is incorrect. Officers do not have the power to make fundamental changes to the corporation; the directors initiate such action and the shareholders must also approve the change.

Choice ‘‘4’’ is incorrect. Directors are empowered to declare dividends.

Question 67

Question FR-00243

The board of directors of Smackey Dog Food pass a resolution to merge with Texas Cat Chow to form Smackey Chow. The shareholders of Smackey must:

1. Be notified of the resolution and approve the merger by at least a majority v0te.
2. Be notified only after the merger and be given a chance to exercise dissenters’ rights.
3. Be notified of the resolution and approve it unanimously.
4. Receive cash payments in exchange for their shares.

Answer 67

Explanation

Choice ‘‘1’’ is correct.

When there is a fundamental change proposed such as a merger, the board must pass a resolution, and the shareholders must be given notice and must approve of the change by at least a majority to pass the resolution.

Choice ‘‘3’’ is incorrect. A unanimous v0te is not required.

Choice ‘‘2’’ is incorrect. Shareholders must generally be given notice before the merger and be given an opportunity to v0te to approve it.

Choice ‘‘4’’ is incorrect. There is no requirement that shareholders in a merger must receive cash payments.

Question 68

Generally, shareholders owe which of the following fiduciary duties to the corporation?

1. None of the answer choices are correct.
2. Duty of loyalty.
3. Duty of obedience.
4. Duty to account.

Answer 68

Explanation

Choice ‘‘1’’ is correct.

Generally, shareholders (not controlling shareholders) do not owe the corporation any fiduciary duties.

Choices ‘‘2’’, ‘‘3’’, and ‘‘4’’ are incorrect. Directors, officers and controlling shareholders owe these duties but not noncontrolling shareholders.