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1. What is the primary benefit of contract law to business?
  a. Contract law allows businesses to transfer risk.
  b Once a contract is created, it permits both parties to rely on the terms they have
.  negotiated and plan their business affairs accordingly.
  c. Contract law guarantees that others will follow through with their promises.
  d It ensures that businesses treat each other as equals and do not take advantage
.  of one another in business relationships.
ANSWER:  b

2. Which statement best explains the requirement that “contracts must be supported by mutual consideration”?
  a.  There must always be at least two parties to a contract.
  b. Contracts require that the parties treat each other fairly.
  c.  A contract involves a bargain or exchange between the parties.
  d. Contracts must be in writing to be enforceable.
ANSWER:  c

3. With respect to what the terms contained in a negotiated formal contract should ultimately be representative
of, each parties’ reasonable expectations will most likely be founded on which of the following?
  a.  that all of the parties to the contract have legal capacity to contract
  b. the time period within which all obligations must be performed
  c.  that there has been a formal intention to create legal relations
  d. the binding commitments that form the essence of the contract
ANSWER:  d

4. When resolving contractual conflicts, what laws do the courts usually apply?
  a.  the Contracts Act
  b. the Sale of Goods Act
  c.  all decisions based on principles of fairness and equity
  d. common law and occasionally statutory law
ANSWER:  d

5. With respect to the relationship that exists between contractual parties, what is meant by the phrase “meeting
of the minds”?
  a.  There is an agreement between two or more persons.
  b. The legal cornerstone of the commercial operation has been formed.
  c.  There is an informing idea behind the contractual relationship.
  d. There is agreement upon the intrinsic responsibilities owed to each other.
ANSWER:  d

6. Two accomplished software developers want to combine their talents on a lucrative project offered by a large
document storage firm. The developers will have their agreed roles and responsibilities incorporated into a
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Chapter 5 - An Introduction to Contracts

formal contract to be prepared by their respective lawyers. Which of the following is a valid representation of
the legal significance of the relationship between the parties that will be evidenced by the contract?
  a.  Each party will get exactly what it bargained for.
  b. There has been a deliberate meeting of the minds.
  c.  Some of the parties to a contract can be sued under it.
  d. No element of coercion exists between the contracting parties.
ANSWER:  b

7. Which of the following is a good reason to use a contract as opposed to having a casual understanding?
  a.  Casual understandings require lengthy negotiations and time to perform.
  b. All contracts typically involve arrangements that are unlikely to be repeated.
  c.  Casual understandings are casually conducted and completed instantly.
  d. All contracts are subject to the same set of compulsory legal rules.
ANSWER:  d

8. Matt purchases a car for his son from an auto dealership. A week later, his son discovers a defect that renders
the car unsafe. The defect is one that a court would consider to be a breach of contract. What legal recourse is
available to remedy this problem?
  a.  The court’s resistance to imposing ethical business standards leaves no
recourse.
  b. Matt may commence a lawsuit against the dealer for breach of contract.
  c.  Matt’s son may file a lawsuit against the auto dealer for breach of contract.
  d. Mat’s son can sue the manufacturer of the car for breach of contract.
ANSWER:  b

9. Which statement best describes the value of contracts to society?

  a. Contracts can never be breached and therefore provide permanence to promises
made between parties.
  b. Contracts permit parties to rely on terms and plan their business affairs
accordingly.
  c. Contracts create equal bargaining power between negotiating parties.
  d. Contracts ensure that agreements are fair to both parties.
ANSWER:  b

10. What types of employees should a company’s head of risk management choose when putting together a
negotiating team?
  a. executives with highly developed abilities to deceive when necessary in order
to secure a favourable agreement
  b experienced individuals who want to win and are willing to bluff and bluff hard
.  to have a successful career
  c. individuals with adequate legal knowledge for the negotiation of an enforceable
contract that meets needs and protects interests
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Chapter 5 - An Introduction to Contracts

  d individuals who know the game and are not shy in demonstrating a complete
.  lack of ethical standards
ANSWER:  c

11. The purchase of stationery supplies from a retailer for cash, without an invoice or a receipt being provided in
return, is an example of which of the following?
  a. an incomplete agreement b. a formal contract
  c. a standard form d. an informal agreement
agreement
ANSWER:  b

12. What sequence of procedures will a court follow when asked to determine a matter involving a contractual
dispute between two large corporations?
  a. review the conduct of the parties, evaluate the relevant law and the contract
terms, then reach a decision
  b evaluate the contract terms and the conduct of the parties, then apply relevant
.  law to arrive at a determination
  c. review the relevant law, evaluate the conduct of the parties, then apply the
contract terms to arrive at a decision
  d evaluate the conduct of the parties, review the contract terms, then apply the
.  rules of law to arrive at a decision
ANSWER:  b

13. Fatima needs to copy and bind five sets of legal submissions with beige covers, but none are left in the
supply cabinet. The office manager offers to reimburse Fatima for the cost of the covers and buy her lunch from
petty cash if she will dash to the nearby office supply store to buy them. Fatima agrees. What is the nature of the
arrangement negotiated between Fatima and the office manager?
  a. a formal accord b. an informal business arrangement
  c. a haphazard promise d. a binding agreement
ANSWER:  b

14. Which statement best describes written contracts?

  a. Written contracts must be filed at the appropriate registry in order to be
enforceable.
  b. Only certain types of contracts must be in writing in order to be enforceable in
court.
  c. All contracts must be in writing in order to be enforceable in court.
  d. Written contracts are usually less cost-effective than verbal contracts.
ANSWER:  b

15. Grandview Developments negotiated an oral agreement with a landowner to purchase property on the
outskirts of the city. Grandview intends to develop the land into a housing project. What is Grandview’s legal
position regarding this agreement?
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Chapter 5 - An Introduction to Contracts

  a. The agreement is legally binding on Grandview and the landowner.
  b. The agreement is not legally enforceable because it is not in writing.
  c. The agreement is not legally enforceable because it is not supported by mutual
consideration.
  d. The agreement is not legally enforceable because the parties have not achieved
a ‘meeting of the minds’.
ANSWER:  b

16. What is the likely outcome when a court is asked to resolve a dispute involving parties that have reached an
incomplete agreement?
  a. The court will decline jurisdiction to provide a remedy derived under contract
law.
  b. The court will refer to statute law that will be applied to formulate a binding
contract
  c. The court will lack jurisdiction to refer the issue to alternative dispute
resolution.
  d. The court will apply the principles of the common law to constitute a binding
contract.
ANSWER:  a

17. How is the general body of law governing contracts best characterized?

  a. common law b. statutory law
  c. constitutional law d. civil law
ANSWER:  a

18. Which of the following best describes the relationship between bargaining power and the law of contract?
  a. The law of contract is not generally concerned with the parties’ relative
bargaining power.
  b. The law of contract seeks to correct inequalities in bargaining power.
  c. The law of contract is very concerned with the relative bargaining power of the
parties.
  d. The goal of the law of contract is to reduce the bargaining power of the parties.
ANSWER:  a

19. What test will a court apply when asked to determine a matter involving a dispute between parties regarding
the formation of a contract?
  a. whether the contract is sufficiently complete to provide certainty to all parties
  b. whether the terms of the contract provide sufficient mutual consideration
  c. whether a reasonable person could conclude that an offer and acceptance
occurred
  d. whether the parties to the agreement have legal capacity to enter into contracts
ANSWER:  c
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Chapter 5 - An Introduction to Contracts

20. Under what circumstances would a court apply the objective standard test?
  a.  when deciding the amount of damages to award the winning party
  b. if there is inequality of bargaining power between the parties
  c.  where it is unclear whether the parties intended to form a contract
  d. if the enforcement of the contract might cause harm to a third party
ANSWER:  c

21. Ajay entered into a contract to buy a used car from a dealership for $10,000. Upon doing further research, he
has now discovered the car is actually only worth $9,000. Which of the following best describes Ajay’s legal
position?
  a.  The contract is binding as Ajay was expected to take care of his own interests.
  b. The contract is not binding because it is not a fair price for the car.
  c.  The contract is binding because both parties had equal bargaining power.
  d. The contract is not binding because the dealership has committed fraud.
ANSWER:  a

22. Under which of the following circumstances would a court be likely to set a contract aside?
  a.  if there is a lack of sufficient equality of the benefits received by each party
  b. if there is an attempt to take advantage of a handicapped, vulnerable person
  c.  if there were witnesses to the contract
  d. if the parties put their contract in writing
ANSWER:  b

23. What is a defining characteristic of the principle of equality of bargaining power?

  a. Judicial assistance is readily available to all disadvantaged parties to a contract.
  b. It is applied to adjust the terms so that the contract is fair and then enforces it.
  c. It is applied to reject unfair contracts and return the parties to their prior
positions.
  d. It generally applies regardless of some distinct advantage favouring one party.
ANSWER:  d

24. Bespoke Designs Inc., a custom suit maker, has a contract to purchase its suiting fabric from ABC Textiles.
The dye used in the most recent order of fabric from ABC appears to be slightly different from the sample
agreed upon in the contract and from orders in the past and will not work with Bespoke’s product line. The
manufacturer insists that the material is the same as previous orders. What should Bespoke consider at this
point?
  a.  whether it makes business sense to sue ABC
  b. that failure to immediately sue ABC will result in giving up its right to sue
  c.  the impact of the litigation on the industry
  d. whether it can prove that the breach was due to negligence on the part of ABC

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ANSWER:  a

25. Which of the following is an example of an alternative method of dealing with a breach of contract, rather
than starting a lawsuit?
  a. Treat the subject matter of the contract as a standard or ordinary commodity.
  b. Maintain the project’s profitability by insisting on full compensation for any
loss.
  c. Seek sufficient compensation for any resulting loss but extend the time for
payment.
  d. Show respect for the other party while seeking a standard of reasonableness in
return.
ANSWER:  d

26. Countdown Events made what looks like an offer to Roxy Theatre group to provide online ticketing services
to Roxy in exchange for a share of ticket proceeds. Roxy has now accepted the offer. Countdown now insists it
was only exploring a possible business relationship and did not intend to make an offer to Roxy. How will a
court resolve this dispute?
  a.  by considering the parties’ legal capacity to contract
  b. by considering whether the bargain is fair to both parties
  c.  by considering the relative bargaining power between the parties
  d. by considering how ‘a reasonable person’ would view the matter
ANSWER:  d

27. A large greenhouse grower that wants to source a suitable organic liquid fertilizer contacts Organics. The
grower is willing to pay a premium price for Organics’s product. Accepting the order would mean Organics will
not be able to completely fill existing orders to its current customers. Organics desires the new business but
wants to maintain its existing customer base. Which of the following strategies should Organics use to solve this
problem?
  a. Abandon all but the most important of the existing orders and fill the new
order.
  b. Present an ultimatum on existing orders offering delivery on a later date or
nothing at all.
  c. Comply with existing obligations, fill the orders, and offer the new business
what is left.
  d. Offer a price break on existing orders in return for varying quantity and
delivery date.
ANSWER:  d

28. Which of the following is a requirement in order to have a legally enforceable agreement?

  a.  The parties must have intended to create legal relations.
  b. The agreement must have been signed by the parties.
  c.  The parties must have equal bargaining power.

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Chapter 5 - An Introduction to Contracts

  d. The agreement must be in writing and witnessed.
ANSWER:  a

29. How should a manufacturer try to salvage its reputation after it has been discovered to have knowingly
produced and sold a defective product to the public?
  a.  Deny any wrongdoing and obtain top lawyers to defend against litigation.
  b. Take ownership for the problem and voluntarily compensate affected
customers.
  c.  Hire bloggers to create confusion about the facts on social networking
websites.
  d. Have a top executive issue an official apology presented on national television.
ANSWER:  b

30. Monkeytown Playground Supplies has negotiated an oral agreement with a highly reputable toy store to
deliver $10,000 worth of product to the store for resale. Why should Monkeytown insist that the agreement be
put in writing?
  a.  because oral contracts are unenforceable
  b. because personnel can change and memories can be selective and self-serving
  c.  because a lawsuit cannot be based on an oral agreement
  d. because the toy store can cancel the agreement unless it is in writing
ANSWER:  b

31. Juha agreed to hire Zen Home Builders Ltd. (Zen) to construct his new home. Juha, Zen, and their lawyers
met to review and sign a contract that provided for specific types of environmentally safe construction materials
to be used. In many instances, Zen failed to use the stipulated “green” construction materials. What would a
court, faced with determining a resolution to the ensuing dispute, rely on the existence of to establish the
existence of the contract?
  a. Juha’s entitlement to rescind the contract due to poor contractual performance.
  b. A framework of rules created by the parties and which judges automatically
enforce.
  c. Mandatory rules which every type of contract is subject to.
  d. An intention between the parties to create a legal relationship.
ANSWER:  d

32. The law applies the principle of equality of bargaining power even though usually one party has an
advantage over the other.
  a. True
  b. Fals
e
ANSWER:  True

33. All contracts are complex documents that must be prepared by lawyers.

  a. True
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Chapter 5 - An Introduction to Contracts

  b. Fals
e
ANSWER:  Fals
e

34. Individuals who negotiate a contract on behalf of their employer are bound to the contract along with their
employer.
  a. True
  b. Fals
e
ANSWER:  Fals
e

35. In most instances, the rules governing contractual disputes are based on the common law.
  a. True
  b. Fals
e
ANSWER:  True

36. If someone has suffered a legal wrong, he or she should automatically sue the wrongdoer.
  a. True
  b. Fals
e
ANSWER:  Fals
e

37. Every contract is subject to the same set of mandatory rules.

  a. True
  b. Fals
e
ANSWER:  True

38. It is important for a business person to know when simple communications crystalize into legal obligations.
  a. True
  b. Fals
e
ANSWER:  True

39. Contract law is primarily derived from statutory law.

  a. True
  b. Fals
e
ANSWER:  Fals
e

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40. Contract law ensures that all parties concerned may rely on the terms included in the contract.
  a. True
  b. Fals
e
ANSWER:  True

41. A business should always insist on the strict observance and enforcement of its legal rights.
  a. True
  b. Fals
e
ANSWER:  Fals
e

42. Any contract can be written or oral; each are equally enforceable.

  a. True
  b. Fals
e
ANSWER:  Fals
e

43. In order for a court to recognize a contract as a binding agreement between the contracting parties, there
must be clear evidence of each party having given something of value in exchange for receiving something of
value.
  a. True
  b. Fals
e
ANSWER:  True

44. Luna Quan has been directed to attend a meeting tomorrow for the purpose of negotiating a new supply
contract. It is vitally important that Luna pay particular attention during those negotiations to when simple
business communications transform into legal obligations.
  a. True
  b. Fals
e
ANSWER:  True

45. It is a legal assumption in contract law that parties to a contract are able to look out for their own interests.
  a. True
  b. Fals
e
ANSWER:  True

46. In order to be binding, an agreement must contain a bargain or exchange between the parties.
  a. True
  b. Fals
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Chapter 5 - An Introduction to Contracts

e
ANSWER:  True

47. Courts will take into account the impact on the long-term relationship between the parties when applying
contract law principles.
  a. True
  b. Fals
e
ANSWER:  Fals
e

48. Alberta Carr, in his well-known article published in the Harvard Business Review, encouraged
businesspeople to break the law to seek advantage in business negotiations.
  a. True
  b. Fals
e
ANSWER:  Fals
e

49. The principle of equality of bargaining power follows the rationale that parties should be able to rely on
contractual commitments.
  a. True
  b. Fals
e
ANSWER:  True

50. Business people regularly breach contracts because the decision to breach a contract is both a business and
legal decision.
  a. True
  b. Fals
e
ANSWER:  True

51. Issues can arise in contractual relationships that will require owners and managers to be conscious of the fact
that business relationships are long-term, and so is reputation.
  a. True
  b. Fals
e
ANSWER:  True

52. Identify and briefly describe the necessary elements that must be present in order for a court to recognize a
contract as a legally binding agreement.
ANSWER For a court to recognize a contract as a legally binding agreement, it must
:   consist of the following necessary elements:
1. an agreement composed of an offer and an acceptance of that offer; an
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element of completeness;
3. an element of deliberateness, formally known as an intention to create legal
relations;
4. an element of fairness and voluntary willingness of the parties to enter into
the arrangement;
5. at least two parties having legal capacity to contract;
6. mutual consideration; and
7. preferably, it is contained within a written document.

53. Do all contracts have to be in writing in order to be legally enforceable? What are the advantages of putting
your contract in writing?
ANSWER As a general rule, even oral contracts are enforceable, though it is preferable for
:   negotiators to get the contract in writing. That said, in most Canadian
jurisdictions there are certain kinds of contracts—such as those involving an
interest in land—that must be in writing in order to be enforceable.

The difficulty with oral contracts is uncertainty. Personnel can change,

memories may become selective and self-serving, and genuine differences of
opinion may arise. A written agreement creates certainty, reduces disputes and
improves the enforceability of the contract.

54. Is a lawsuit always the best response to a contractual legal dispute? Explain your answer.
ANSWER
:   Businesspeople regularly breach contracts. For example, a purchaser may fail to
pay invoices on a timely basis; a supplier may deliver the wrong product, or the
wrong amount of product, or a defective product.

Each of these examples amounts to a breach of contract but whether the other
side sues for breach of contract is not just a legal decision; it is a business
decision, too. Even if the prospects of successfully proving your case in court
are high, there are other considerations. Not only is litigation costly and
unpredictable, a business that insists on strict observance of its legal rights may
damage its reputation in the marketplace. For example, while a business may
have a valid defence for having sold a defective product, it may be better in the
end to compensate the customer voluntarily rather than fight out a lawsuit. A
lawsuit may result in a serious blow to reputation and a public relations disaster.
Litigation will also damage, if not end the relationship between the parties. If
the relationship is an important one, it is often wiser to look at options other
than strict insistence on one’s legal rights.

55. Explain the notion of equality of bargaining power and its impact on the operation of contract law.
ANSWER Equality of bargaining power is the legal assumption that parties to a contract
:   are able to look out for their own interests. In effect, it underscores a
requirement that contracts should not be binding on individuals unless entered
freely and voluntarily. In fact, the court will presume there is such equality
unless there is good reason not to. Only in extreme circumstances, when one
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party has taken gross advantage of the other’s pronounced weakness to
“impose” a contract, will the court refuse to enforce the contract.

56. Identify and briefly explain the circumstances where a party might opt to deliberately breach a contract by
refusing to honour its promises to the other side. Provide an example and a possible alternative to an outright
breach of existing contractual obligations.
ANSWER There may be situations in which the cost of paying compensation to the other
:   party is less than the benefit to be gained by breaching an existing contract
through non-performance of obligations. A business may be faced with
circumstances where there may be a more profitable opportunity to sell a
manufacturer’s production to a different buyer at a much higher price over a
longer period of time. In that instance, it may be possible to offer a price
reduction as an incentive under the existing contract that would allow for a
lesser quantity to be supplied over a longer delivery period or later delivery of
the quantity contracted for.

57. An alternative to a contract is a casual understanding between the parties. Explain the disadvantages of
casual understandings and outline the advantages of ensuring a business understanding is formalized by a
contract.
ANSWER
:   Relying on casual understandings often makes little business sense. For one
thing, there is no remedy in contract law should one of the parties fail to keep its
word. Also, even if the other party is reputable and trustworthy, cooperation and
goodwill between parties can suddenly evaporate when an unforeseen conflict
or problem arises.

Contracts also provide a record of the parties’ agreement. Personnel can change,
memories may become selective and self-serving, and genuine differences of
opinion may arise. A contract can reduce disputes by helping to ensure both
parties have a clear understanding of their respective rights and obligations.

58. Identify and briefly describe the objectives that owners and managers should keep in mind when dealing
with a customer who is attempting to expand or restrict an existing contract.
ANSWER In circumstances where a customer is attempting to expand or restrict an
:   existing contract, owners and managers can approach the issue with the
following objectives in mind:
1. maintain the project’s profitability;
2. treat the customer with respect while seeking a standard of reasonableness in
return;
3. ensure the work is completed on a safe and timely basis without incident;
4. refrain from approaching the issue legalistically; and
5. understand that business relationships are long-term, and so is reputation.

59. Identify the role that a contract plays in any commercial operation. Provide several examples of what
activities a business is able to do through a contract. Identify and briefly explain the role contract law plays with
respect to contractual participants and their commercial operations.
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ANSWER Contracts are the legal cornerstone of any commercial operation. Through a
:   contract, the business enterprise can sell a product or service, hire employees,
rent office space, borrow money, purchase supplies, and enter into any other
kind of binding agreement it chooses. In this way, contract law is facilitative
because it allows participants to create their own rights and duties within a
framework of rules that a judge will later enforce, if called upon to do so.

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