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ICCSSL Business Law practice questions

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Question 1Contract Formation, Terms, and Defenses

A retail chain places a coat in its shop window with a price tag reading '$180.' A customer insists that the display is an offer, which she accepts by tendering $180 at the counter. Under common-law contract principles, how should the display be characterized?

  1. An executory offer that becomes binding when the customer enters the store.
  2. A unilateral offer that the customer accepts by tendering the price.
  3. An invitation to treat, so the customer makes the offer that the retailer may accept. Correct answer.
  4. A binding firm offer that remains open until the retailer withdraws the coat.

Explanation

A display of goods with a price tag is generally an invitation to treat, not an offer. The customer who presents the item at the counter makes the offer, and the retailer's cashier accepts it, forming the contract at that point. Treating the display as an offer would let customers bind retailers before any staff member could check stock or correct a pricing error.

Question 2Contract Formation, Terms, and Defenses

After receiving a written offer to supply 500 reams of paper, a buyer files the document without responding. The offer states that the buyer's silence will count as acceptance. Under common-law rules, what is the effect of the buyer's silence?

  1. It is an acceptance after ten days because the offer remains open for a reasonable time.
  2. It is not an acceptance, because silence generally cannot be imposed as acceptance by an offeror. Correct answer.
  3. It is a binding acceptance because the offeror expressly stipulated silence as the mode of acceptance.
  4. It is an acceptance only if the offer was made under seal.

Explanation

The common-law rule is that an offeror cannot turn the offeree's silence into acceptance merely by saying so. Silence may operate as acceptance only in narrow settings, such as a prior course of dealing or where the offeree indicates that silence will be treated as assent. Filing the offer without more therefore leaves no contract.

Question 3Contract Formation, Terms, and Defenses

A homeowner owes a builder $20,000 under an existing contract to finish a roof. When the builder threatens to walk off the job, the homeowner promises an extra $2,000 to complete the work on time. The builder finishes the roof. Under the pre-existing duty rule, can the builder recover the extra $2,000?

  1. Yes, because the promise to pay extra was recorded in a signed writing.
  2. Yes, because the builder completed the roof on time as requested.
  3. No, because the builder gave no fresh consideration beyond the performance already owed. Correct answer.
  4. No, because the homeowner did not have capacity to modify the contract.

Explanation

Under the pre-existing duty rule, promising to do what one is already contractually bound to do is not consideration for a new promise. The builder's completion of the original scope therefore does not support the homeowner's promise of an extra $2,000. A fresh benefit or detriment, or a qualifying statutory exception, would be needed.

Question 4Contract Formation, Terms, and Defenses

A seller offers to sell a machine for $50,000, open for acceptance until Friday. On Wednesday the buyer replies, 'I will take it if you include a one-year service plan.' The seller does not respond. On Thursday the buyer sends an unconditional acceptance at $50,000 without the service plan. What is the legal position?

  1. A contract formed on Wednesday, because the buyer's reply was a valid acceptance with a request.
  2. A contract formed on Thursday, because the original offer remained open until Friday.
  3. A contract formed on Friday, because the seller's silence operated as acceptance of the buyer's counteroffer.
  4. No contract, because the Wednesday reply was a counteroffer that terminated the original offer. Correct answer.

Explanation

A purported acceptance that varies the terms of the offer is a counteroffer, and a counteroffer terminates the original offer. The buyer's Thursday message therefore could not accept an offer that no longer existed. Silence by the seller did not revive the original offer or accept the counteroffer.

Question 5Contract Formation, Terms, and Defenses

Which of the following contracts is within the traditional statute of frauds writing requirement?

  1. An oral agreement to mow a homeowner's lawn for one summer season.
  2. An oral agreement for the sale of a house and the land beneath it. Correct answer.
  3. An oral agreement to buy a wristwatch for $100.
  4. An oral agreement for three months of consulting services.

Explanation

The traditional statute of frauds requires a writing for contracts involving interests in land, among other categories. A house sale transfers an interest in land and must therefore be evidenced by a signed writing. Lawn care, a $100 watch, and a short consulting engagement do not fall within the land category or the goods threshold.

Question 6Contract Formation, Terms, and Defenses

A signed distribution agreement contains an integration clause stating that it is the complete agreement. Before signing, the supplier orally promised a 5% promotional rebate. The distributor sues to enforce that oral promise. Under the parol evidence rule, what is the likely result?

  1. The oral promise is admissible only if it was also sent by email before signing.
  2. The oral promise is admissible because it was made before the agreement was signed.
  3. The oral promise is admissible because integration clauses are unenforceable boilerplate.
  4. The oral promise is excluded because it adds to a writing that the parties intended as a complete integration. Correct answer.

Explanation

The parol evidence rule bars prior or contemporaneous oral statements that contradict or supplement a fully integrated written agreement. An integration clause is strong evidence that the writing was intended to be complete. The distributor could escape the rule only through an exception such as fraud, mistake, or a separate condition precedent.

Question 7Contract Formation, Terms, and Defenses

A shipowner learns that a charterer's cargo is perishable and, after loading, demands triple freight, refusing to sail unless the charterer agrees. The charterer agrees under protest to keep the cargo from spoiling. Can the charterer avoid the extra payment?

  1. Yes, because the shipowner applied illegitimate pressure that left the charterer no practical alternative. Correct answer.
  2. Yes, but only if the shipowner used physical force against the charterer's employees.
  3. No, because freight rates fluctuate with the market and the higher rate was commercially reasonable.
  4. No, because the charterer agreed to the higher freight in writing.

Explanation

Economic duress arises when one party applies illegitimate pressure that leaves the other with no reasonable alternative and causes that party to agree. Refusing to sail with perishable cargo after loading is a classic example of such pressure. The charterer may therefore avoid the promise to pay the increased freight.

Question 8Contract Formation, Terms, and Defenses

Both parties to a sale of a used violin believe it is an ordinary student instrument and price it at $300. After the sale, the buyer discovers it is a rare antique worth $30,000. Which doctrine best describes the buyer's position?

  1. Mutual mistake about a basic assumption, because both parties underestimated the violin's value.
  2. Unilateral mistake, because the buyer failed to investigate the violin's provenance before purchasing.
  3. Fraud, because the seller failed to disclose the violin's true value to the buyer.
  4. No relief, because a shared mistake about value does not ordinarily avoid a contract. Correct answer.

Explanation

A mutual mistake can avoid a contract only when it concerns a basic assumption about the subject matter and materially affects the agreed exchange. A mistake about the market value or quality of the item is generally allocated to the buyer, who takes the risk of a good bargain or a bad one. The seller's silence, without a duty to disclose, is not fraud.

Question 9Contract Formation, Terms, and Defenses

A construction contract requires final payment 'only after the client's engineer issues a certificate of satisfactory completion.' The work is complete and satisfactory, but the engineer refuses to issue the certificate because of a personal dispute with the contractor. Can the contractor recover final payment?

  1. Yes, because a party may not rely on a condition when it has wrongfully prevented that condition from occurring. Correct answer.
  2. No, because only an arbitrator can determine whether completion was satisfactory.
  3. Yes, because payment is always due once the contractor has finished the work.
  4. No, because an express condition must be satisfied exactly, whatever the reason for its failure.

Explanation

The prevention doctrine provides that a party who wrongfully prevents a condition from occurring cannot insist on non-occurrence to escape its own obligation. The engineer's personal dispute with the contractor is not a good-faith judgment about satisfactory completion. The contractor may therefore recover despite the missing certificate.

Question 10Contract Formation, Terms, and Defenses

A supplier promises a small manufacturer that it will supply components for the next two years at a fixed price. Relying on this, the manufacturer leases a new factory and turns down another supplier. No written contract is signed and no consideration is paid. The supplier then refuses to supply. What is the manufacturer's strongest theory?

  1. Promissory estoppel, because the supplier's promise induced reasonable and detrimental reliance by the manufacturer. Correct answer.
  2. Breach of an implied duty of good faith, because the supplier negotiated without intending to perform.
  3. Unjust enrichment, because the manufacturer conferred a benefit on the supplier.
  4. No claim, because the parties never signed a written contract and no consideration was paid.

Explanation

Promissory estoppel can make a promise enforceable without consideration when the promisor should reasonably expect reliance, reliance actually occurs, and injustice can be avoided only by enforcement. The manufacturer's lease and rejection of the alternative supplier are classic detrimental reliance. A two-year supply commitment also satisfies the requirement that the promise be definite enough to enforce.

Question 11Contract Formation, Terms, and Defenses

A homeowner tells a landscaper, 'Because you did such good work on my garden last month, I promise to pay you an extra $500.' The landscaper gave no new promise or work in return. If the homeowner later refuses to pay, what is the landscaper's best legal position?

  1. The promise is unenforceable because $500 exceeds the value of the earlier work.
  2. The promise is unenforceable because it rests on past consideration. Correct answer.
  3. The promise is enforceable because the earlier landscaping was adequate consideration.
  4. The promise is enforceable because the homeowner made it voluntarily in writing.

Explanation

Consideration must be bargained for and given in exchange for the promise. Work already performed before the promise is past consideration and cannot support a later promise. A gratuitous promise to reward past services is therefore unenforceable.

Question 12Contract Formation, Terms, and Defenses

A 16-year-old student buys required textbooks for a high-school course on credit from a campus bookstore. The student later disaffirms the purchase and refuses to pay. How is the student most likely treated?

  1. The contract is voidable at the bookstore's option because the buyer is a minor.
  2. The minor is liable for the reasonable value of the textbooks as necessaries. Correct answer.
  3. The contract is void because a minor lacks all capacity to contract.
  4. The contract is enforceable only if the minor's parent also signed it.

Explanation

A minor's contracts are generally voidable, but a minor remains liable for the reasonable value of necessaries such as food, shelter, clothing, and education. Textbooks required for school are likely necessaries. The minor is liable in quasi-contract for their value rather than on the contract itself.

Question 13Contract Formation, Terms, and Defenses

An offeror sends a written offer by mail and states that acceptance is effective when dispatched. The offeree mails an acceptance on Monday. On Tuesday, before the acceptance arrives, the offeror telephones a revocation. When is a contract formed?

  1. On Tuesday, when the offeror telephones the revocation.
  2. On Monday, when the offeree mails the acceptance. Correct answer.
  3. Only when the offeror actually reads the acceptance.
  4. No contract forms because the revocation was communicated before receipt.

Explanation

Under the mailbox rule, acceptance is generally effective when dispatched, unless the offer provides otherwise or an option contract is involved. A revocation that arrives after acceptance has already become effective does not defeat the contract. The agreement therefore forms on Monday.

Question 14Contract Formation, Terms, and Defenses

A merchant signs a written offer to sell 1,000 widgets at a fixed price and states that the offer will remain open for 60 days. The buyer pays no consideration for the promise to keep the offer open. Thirty days later, the merchant revokes before the buyer accepts. Is the revocation effective?

  1. Yes, because no consideration was given for the promise to keep the offer open.
  2. Yes, because the buyer had not yet accepted the offer when the revocation occurred.
  3. No, because all offers are irrevocable for 90 days under the UCC.
  4. No, because a merchant's signed firm offer is irrevocable for the stated period. Correct answer.

Explanation

Under UCC 2-205, a merchant's signed written offer that gives assurance it will be held open is irrevocable for the stated period, up to three months, even without consideration. The 60-day period is within that limit. The revocation is therefore ineffective.

Question 15Contract Formation, Terms, and Defenses

A seller of a used delivery van tells the buyer that the van 'has never had an engine repair.' The seller knows this is false because the engine was rebuilt last year. The buyer relies on the statement, buys the van, and discovers the truth. What cause of action is the buyer most likely to assert?

  1. Undue influence, because the seller had superior knowledge of the van.
  2. Innocent misrepresentation, because the seller did not intend to deceive the buyer.
  3. Unilateral mistake, because only the buyer misunderstood the van's history.
  4. Fraudulent misrepresentation, because the seller knowingly lied to induce the sale. Correct answer.

Explanation

Fraudulent misrepresentation requires a false statement of material fact, knowledge of falsity, intent to induce reliance, justifiable reliance, and resulting loss. The seller knew the engine statement was false and made it to induce the purchase. The buyer may seek rescission or damages.

Question 16Contract Formation, Terms, and Defenses

An elderly homeowner in declining health relies entirely on her live-in caregiver for daily decisions. The caregiver persuades her to sell her house to the caregiver's relative at a price far below market value. The homeowner later seeks to avoid the sale. Which defense best supports avoidance?

  1. Undue influence, because a confidential relationship overcame the homeowner's free will. Correct answer.
  2. Unconscionability, because the price was below market value alone.
  3. Mistake, because the homeowner did not know the market value of her house.
  4. Duress, because the caregiver threatened physical harm.

Explanation

Undue influence requires a confidential relationship plus improper persuasion or domination that overcomes the weaker party's free will. The homeowner's total dependence on the caregiver and the caregiver's orchestration of a below-market sale support that defense. The remedy is typically rescission.

Question 17Contract Formation, Terms, and Defenses

A written contract for the sale of a bakery states that it is 'effective upon signature.' Before signing, the buyer and seller orally agree that the sale will not take effect unless the buyer obtains a loan. The buyer signs but cannot obtain the loan and refuses to perform. The seller sues. May the buyer introduce evidence of the oral loan condition?

  1. Yes, because the oral agreement is a subsequent modification of the written contract.
  2. No, because the written contract states that it is effective upon signature and the oral term contradicts it.
  3. Yes, because evidence of a condition precedent to the contract's effectiveness is admissible. Correct answer.
  4. No, because the parol evidence rule bars all evidence of prior oral agreements.

Explanation

The parol evidence rule does not bar evidence showing that a written contract never became effective. An oral condition precedent to effectiveness may be proved despite a seemingly complete writing. The buyer may therefore introduce the loan condition.

Question 18Contract Formation, Terms, and Defenses

A consumer signs a home-security contract with a clause stating that the company is not liable for any loss, including losses caused by its own gross negligence, and that the consumer waives all defenses in any dispute. The consumer later sues after a break-in allegedly caused by the company's failure to respond. How will a court most likely treat the clause?

  1. Refuse to enforce it as unconscionable, because it is one-sided and excuses gross negligence. Correct answer.
  2. Enforce it fully, because freedom of contract allows parties to allocate risk as they choose.
  3. Void it entirely, because exculpatory clauses are illegal in all consumer contracts.
  4. Enforce it only if the consumer read and understood the clause before signing.

Explanation

Unconscionability examines both procedural unfairness and substantively one-sided terms. A clause that eliminates liability for gross negligence and strips the consumer of all defenses is likely to be refused enforcement. Courts often sever or refuse the unfair clause rather than invalidate the entire contract automatically.

Question 19Contract Formation, Terms, and Defenses

A contractor submits a bid to install flooring for a building owner. The contractor accidentally omits the cost of materials and bids $40,000 instead of $90,000. The owner knows from prior dealings that the bid is far too low but accepts immediately. The contractor seeks to avoid the contract before work begins. What is the most likely result?

  1. The contractor may avoid because the owner knew of the mistake and stayed silent. Correct answer.
  2. The contractor is bound because the owner accepted the bid before the mistake was discovered.
  3. The contractor may avoid the contract only by proving the owner caused the mistake.
  4. The contractor is bound because a unilateral mistake never permits avoidance.

Explanation

A unilateral mistake can support rescission when the nonmistaken party knew or had reason to know of the error and enforcement would be unconscionable. The owner's knowledge that the bid was far too low and immediate acceptance satisfy that standard. Because work has not begun, rescission is the likely remedy.

Question 20Contract Formation, Terms, and Defenses

A theater company contracts to rent a banquet hall for a one-night charity performance. Two weeks before the event, the hall is destroyed by a fire that was not caused by either party's fault. The theater company has no reasonable substitute venue. Must the theater company pay the rent?

  1. No, because destruction of the hall makes the promised performance impossible without fault. Correct answer.
  2. Yes, because the fire occurred after the contract was formed and before the rental date.
  3. No, because the theater company's purpose in renting the hall has become less profitable.
  4. Yes, because the theater company assumed the risk of fire when it signed the rental contract.

Explanation

Destruction of the specific subject matter of a contract can discharge performance under the doctrine of impossibility or impracticability when neither party caused the loss. The risk may shift if the contract expressly assigns it, but no such allocation is stated here. The theater company is therefore excused from paying rent.

Question 21Contract Formation, Terms, and Defenses

A software consultant offers to perform a one-week training program for a client for $8,000 and states that the offer will remain open for 14 days. The client pays nothing for the promise to keep the offer open. Six days later, before the client accepts, the consultant revokes the offer. Is the revocation effective?

  1. Yes, because a promise to keep an offer open is binding only if supported by consideration. Correct answer.
  2. No, because an offer cannot be revoked before the stated expiration date.
  3. No, because the consultant expressly promised to keep the offer open for 14 days.
  4. Yes, but only if the client has not begun preparations to perform.

Explanation

Under common law, a promise to keep an offer open is enforceable only if the offeree gives consideration, creating an option. Without consideration, the offeror may revoke before acceptance even if a stated deadline has not passed. The client paid nothing, so the revocation is effective.

Question 22Contract Formation, Terms, and Defenses

A court has adjudicated a man mentally incompetent and appointed a guardian. While still under the adjudication, the man signs a contract to purchase a boat. What is the status of the contract?

  1. Valid because he physically signed the document.
  2. Voidable at the man's option.
  3. Void. Correct answer.
  4. Enforceable only if the boat seller acted in good faith.

Explanation

A person who has been adjudicated mentally incompetent lacks contractual capacity, and a contract made after that adjudication is void. The seller's good faith or the person's signature does not cure the defect. Only the guardian may bind the estate.

Question 23Contract Formation, Terms, and Defenses

An employment contract includes a clause barring a salesperson from working for any competitor anywhere in the world for 10 years after leaving the job. A court applying traditional restraint-of-trade doctrine is most likely to:

  1. Hold the clause unenforceable because it is unreasonable in time and scope. Correct answer.
  2. Enforce the clause because the employer has a legitimate interest in customer relationships.
  3. Reform the clause to a one-year period and enforce it worldwide.
  4. Enforce the clause only if the salesperson received a signing bonus.

Explanation

Restrictive covenants are enforced only if reasonable in duration, territory, and scope and necessary to protect a legitimate interest. A worldwide 10-year bar on any competitor is far broader than needed. Courts typically refuse to enforce such a clause rather than rewrite it.

Question 24Contract Formation, Terms, and Defenses

A homeowner orally agrees to sell a lake cabin to a buyer for $250,000. The buyer pays the full price, takes possession, and builds a new dock. The homeowner later refuses to convey, invoking the statute of frauds. Is the oral contract enforceable?

  1. Yes, under the part performance doctrine because the buyer paid, took possession, and made improvements. Correct answer.
  2. No, because land sale contracts must always be in writing.
  3. No, because the buyer's improvements were not requested in writing.
  4. Yes, but only if the buyer can prove the oral price by clear and convincing evidence.

Explanation

The statute of frauds requires a writing for land sales, but the part performance doctrine can enforce an oral agreement. Payment of the price, possession, and substantial improvements are classic acts that make rescission inequitable. The buyer's reliance thus removes the writing bar.

Question 25Contract Formation, Terms, and Defenses

A written contract for the sale of a commercial lot contains an integration clause stating that it is the entire agreement. Before signing, the seller orally told the buyer that the lot had approved sewer connections. The statement was false, and the buyer relied on it. In the buyer's fraud action, may the buyer introduce evidence of the oral statement?

  1. Yes, because evidence of fraud in the inducement is an exception to the parol evidence rule. Correct answer.
  2. No, because the integration clause bars all prior oral statements.
  3. Yes, but only if the oral statement is consistent with the written contract.
  4. No, because the buyer should have inspected the sewer connections.

Explanation

The parol evidence rule bars prior oral terms that contradict a fully integrated writing, but it does not bar evidence offered to prove fraud in the inducement. An integration clause cannot be used as a shield for fraudulent statements that induced assent. The buyer may introduce the statement to support rescission or damages.

Question 26Contract Formation, Terms, and Defenses

A collector buys a vintage watch from a dealer. The dealer honestly believes the watch has original parts and says so. In fact, the watch has replacement parts and is worth half the price. The buyer discovers this and seeks rescission. What is the buyer's best argument?

  1. A material innocent misrepresentation can support rescission even without proof of scienter. Correct answer.
  2. The buyer can rescind only if the dealer knew the statement was false.
  3. The buyer cannot rescind because the dealer acted in good faith.
  4. The dealer's statement was a warranty of quality, so damages are automatic.

Explanation

Rescission for misrepresentation requires a false statement of material fact that induces reliance; it does not require scienter. An innocent but material misrepresentation can therefore support rescission. Damages for fraud would require intent, but rescission restores the parties.

Question 27Contract Formation, Terms, and Defenses

A company accountant discovers that a supplier has been overbilling. The supplier's manager threatens to report the accountant to prosecutors for embezzlement unless the accountant signs a contract favorable to the supplier. The accountant signs. The contract is most likely:

  1. Enforceable unless the accountant can show a physical threat.
  2. Voidable by the accountant because the threat was improper pressure to obtain assent. Correct answer.
  3. Enforceable because the accountant had a duty to report the overbilling.
  4. Void because a threat of criminal prosecution always makes a contract illegal.

Explanation

A threat to report a crime can amount to duress when it is used to extract a contractual advantage rather than to pursue justice. The accountant's assent is voidable, not void. The improper pressure overcomes free will.

Question 28Contract Formation, Terms, and Defenses

Under a contract for the sale of 5,000 pounds of coffee beans, the buyer and seller agree in good faith to modify the delivery date and price. Neither party gives new consideration for the modification. Is the modification enforceable?

  1. Yes, because a good-faith modification of a sale-of-goods contract needs no consideration. Correct answer.
  2. No, because the modification was not in writing.
  3. Yes, but only if the buyer pays an additional fee for the modification.
  4. No, because every contract modification requires new consideration.

Explanation

UCC Article 2 permits good-faith modification of a sale-of-goods contract without new consideration. The common-law pre-existing duty rule does not apply. An oral modification may be enforceable unless the contract requires a signed writing.

Question 29Contract Formation, Terms, and Defenses

A buyer sends a purchase order for 1,000 circuit boards. The seller responds with an acknowledgment that expressly states it is a definite acceptance, but adds a clause requiring arbitration in a distant city. The buyer is a merchant and does not object. Under UCC Article 2, what is the effect?

  1. A contract is formed; the clause is only a proposal under the material-alteration test. Correct answer.
  2. A contract is formed, and the clause automatically becomes part of the contract because both parties are merchants.
  3. No contract is formed because the acceptance added a new term.
  4. No contract is formed unless the buyer signs the seller's acknowledgment.

Explanation

Under UCC 2-207, a definite expression of acceptance forms a contract even if it adds terms. Between merchants the additional term becomes part of the contract only if it does not materially alter the bargain and is not objected to. An arbitration clause in a distant forum is often material, so it is treated as a proposal.

Question 30Contract Formation, Terms, and Defenses

A commercial lease is written on a preprinted form containing a clause that the tenant accepts the premises 'as is' with no warranties. Before signing, the parties type a clause stating that the landlord warrants the heating system for the first year. A dispute arises about the heating system. Which clause is most likely to control?

  1. The preprinted 'as is' clause, because it appears in the standard form.
  2. The preprinted clause, because it was not deleted.
  3. The typewritten clause, because specific terms control over inconsistent preprinted terms. Correct answer.
  4. Neither clause, because the lease is too ambiguous to enforce.

Explanation

When a contract contains conflicting preprinted and typewritten terms, the specific, negotiated term generally controls. The typewritten warranty was added for this transaction and narrows the boilerplate 'as is' clause. Courts interpret the document as a whole to give effect to the parties' actual bargain.

Question 31Contract Formation, Terms, and Defenses

An online retailer posts a product page stating: 'Model X cordless drill - $79. Quantities limited. Prices subject to change without notice.' A customer clicks 'Buy now' at $79, but the retailer refuses to honor the price. Is the product page an offer that the customer accepted?

  1. No, because the customer's click was a counteroffer that the retailer rejected.
  2. Yes, because the retailer cannot revoke a price that it has listed to the public.
  3. Yes, because the listing stated a product and a price that the customer accepted.
  4. No, because a price listing is ordinarily an invitation to negotiate, not an offer. Correct answer.

Explanation

A general price listing or advertisement is usually an invitation to negotiate rather than an offer, because it does not show a present intent to be bound by every response. The customer's click is therefore an offer to buy, which the retailer may accept or reject. Without an offer, there is no acceptance and no contract.

Question 32Contract Formation, Terms, and Defenses

A restaurant owner asks a supplier to extend credit to her friend's catering company. The owner has no personal economic interest in the catering company's credit arrangement. To induce the supplier, the owner orally says: 'If the catering company does not pay your invoices, I will pay them.' The supplier extends credit, and the catering company defaults. The owner refuses to pay and invokes the Statute of Frauds. Is the owner's oral promise enforceable?

  1. No, because the supplier gave no consideration for the owner's promise.
  2. Yes, because the owner made the promise directly to the supplier rather than to the catering company.
  3. Yes, because the supplier extended credit in reliance on the owner's promise.
  4. No, because a promise to answer for another's debt generally must be in a writing signed by the promisor. Correct answer.

Explanation

A promise to answer for the debt of another is within the Statute of Frauds and generally must be evidenced by a writing signed by the promisor. The main-purpose doctrine can remove such a promise from the writing requirement, but it does not apply here because the owner had no personal economic interest in the credit arrangement. Reliance by the supplier does not cure the absence of a signed writing.

Question 33Contract Formation, Terms, and Defenses

An alumnus orally promises a university library that he will donate $100,000 for a new reading room. The library, without any request from the alumnus, signs a construction contract and orders custom shelving in reliance on the pledge. The alumnus later refuses to pay, and the library sues. What is the library's strongest theory of recovery?

  1. Promissory estoppel, because the library substantially relied on a definite promise. Correct answer.
  2. No recovery, because a promise to donate is unenforceable without consideration.
  3. Bilateral contract, because the library accepted the offer by relying on it.
  4. Quasi-contract, because the library conferred a benefit on the alumnus.

Explanation

Promissory estoppel can make a promise enforceable when the promisor should reasonably expect reliance, the promisee actually relies, and injustice can be avoided only by enforcement. A definite charitable pledge followed by substantial reliance is a common setting for that doctrine. Quasi-contract is unavailable because the library did not confer a benefit on the alumnus.

Question 34Contract Formation, Terms, and Defenses

A grain mill agrees in writing to buy 'all the organic wheat that a farmer produces on the farmer's 200-acre farm during the coming season,' and the farmer agrees to sell all of that wheat to the mill. The farmer later argues that the contract is unenforceable because the quantity is indefinite and the promise is illusory. Under the UCC, which statement is correct?

  1. The contract is enforceable only if the parties later agree on a specific number of bushels.
  2. The contract is unenforceable because the mill did not promise to buy a minimum quantity.
  3. The contract is unenforceable because the farmer made an illusory promise to sell an indefinite quantity.
  4. The contract is enforceable because the quantity is measured by the farmer's good-faith output. Correct answer.

Explanation

Under the UCC, an output or requirements term can supply the quantity needed for an enforceable sales contract. The quantity is measured by the party's actual good-faith output or requirements rather than by a fixed number. The farmer's promise is not illusory because it is limited by the actual production of the identified farm.

Question 35Contract Formation, Terms, and Defenses

A collector and a dealer agree on a price of $40,000 for a violin that both believe was made by a famous 18th-century luthier. After the sale, both discover that the violin is a modern reproduction worth $4,000. Neither party knew or should have known the truth. Can the collector rescind the contract?

  1. Yes, because both parties were mistaken about a basic assumption that materially affected the bargain. Correct answer.
  2. No, because the mistake concerned value rather than a fact.
  3. Yes, because the seller always bears the risk of any defect in the goods sold.
  4. No, because the buyer had an opportunity to inspect the violin before purchase.

Explanation

A mutual mistake about a basic assumption of the contract can make the contract voidable when the mistake is material and the party seeking relief did not bear the risk. The identity of the violin's maker is a factual assumption central to the bargain, not merely a mistaken opinion about value. An opportunity to inspect does not bar rescission absent negligence or a risk allocation.

Question 36Contract Formation, Terms, and Defenses

A construction contract provides that final payment is due 'only upon the owner's architect issuing a certificate of satisfactory completion.' The contractor completes the work according to the plans, but the owner tells the architect not to issue the certificate because the owner wants to avoid paying. The architect refuses. What is the contractor's best argument for recovering final payment?

  1. The contractor cannot recover because the certificate is an express condition precedent to payment.
  2. The contractor may recover only if the architect is shown to have acted negligently.
  3. The contractor cannot recover because the architect is an independent third party.
  4. The contractor may recover because the owner wrongfully prevented the condition from occurring. Correct answer.

Explanation

A party may not rely on a condition precedent that it wrongfully prevents from being satisfied. When the owner deliberately blocks the architect's certification to avoid payment, the prevention doctrine excuses the condition. The contractor can then seek payment as though the condition had been fulfilled.

Question 37Business Organizations and Corporate Governance

A sole proprietor operates a bakery and incurs a $40,000 unpaid supplier invoice. Which statement correctly describes the proprietor's legal position?

  1. The proprietor's liability is capped at the capital originally contributed to the business.
  2. Personal liability is unlimited because a sole proprietorship is not a separate legal entity. Correct answer.
  3. The proprietor is shielded from liability once the business name is registered with the state.
  4. The proprietor is liable only if the supplier first obtains a judgment against the business entity.

Explanation

A sole proprietorship has no legal identity separate from its owner, so business debts are the owner's personal debts and can be enforced against personal assets. No statute caps the owner's liability at contributed capital, and registering a trade name does not create an entity shield.

Question 38Business Organizations and Corporate Governance

In a limited partnership formed under a state's uniform limited partnership act, a limited partner who does not participate in control of the business is:

  1. Liable for all partnership debts incurred after the limited partner joined the partnership.
  2. Liable only to the extent of the capital the partner agreed to contribute. Correct answer.
  3. Personally liable for partnership obligations to the same extent as a general partner.
  4. Not liable for any partnership obligation, including unpaid capital contributions.

Explanation

A limited partner's exposure is generally limited to the contribution the partner agreed to make to the partnership. Once that contribution is paid, the limited partner is not personally liable for partnership debts, although participating in control can forfeit protection in many statutes.

Question 39Business Organizations and Corporate Governance

Which consequence follows from a corporation's status as a separate legal person?

  1. Shareholders are personally liable for corporate torts committed by employees.
  2. The corporation can act only through a licensed natural person.
  3. The corporation's debts are the personal debts of its directors.
  4. Shareholders' personal assets are generally beyond the reach of corporate creditors. Correct answer.

Explanation

Separate legal personality means the corporation owns its property and owes its debts, while shareholders own only their shares. Creditors therefore cannot ordinarily reach shareholders' personal assets, and directors are not personally liable merely because the corporation owes money.

Question 40Business Organizations and Corporate Governance

A director of a real estate development corporation learns, in her corporate capacity, that a parcel adjoining the company's project is for sale. Without informing the board, she buys the parcel for herself. Which claim is strongest?

  1. Breach of the duty of care, because she failed to obtain an appraisal.
  2. Breach of the duty of loyalty under the corporate opportunity doctrine. Correct answer.
  3. No breach, because a director may take any opportunity the corporation has declined.
  4. Breach of the duty of candor owed to shareholders in a proxy statement.

Explanation

The corporate opportunity doctrine, a branch of the duty of loyalty, prevents a fiduciary from diverting to herself an opportunity that comes to her in her corporate capacity and that the corporation could financially undertake. The director needed to disclose the opportunity and let the board reject it before purchasing the parcel.

Question 41Business Organizations and Corporate Governance

After a reasonable investigation and with no conflict of interest, a board approves an acquisition that later loses money. A shareholder sues the directors for damages. What is the likely result under the business judgment rule?

  1. The court will substitute its own judgment about whether the deal was wise.
  2. The directors are liable unless they can prove that the acquisition was profitable.
  3. The directors are liable because the acquisition ultimately lost money for the company.
  4. The directors are protected: the decision was informed, disinterested, and in good faith. Correct answer.

Explanation

The business judgment rule presumes that directors acted on an informed basis, in good faith, and without conflicting interest. When that presumption applies, courts do not second-guess the wisdom of a business decision merely because it produced a loss.

Question 42Business Organizations and Corporate Governance

A member of a limited liability company defaults on a personal loan. The creditor seeks to collect from the member's ownership interest in the LLC. Under the typical LLC statute, the creditor's remedy is:

  1. Direct ownership of the member's management rights.
  2. Foreclosure on the LLC's operating assets.
  3. Appointment of a receiver to run the LLC.
  4. A charging order on the member's distributional interest. Correct answer.

Explanation

Under typical LLC statutes, a creditor with a judgment against a member may obtain a charging order against that member's distributional interest. The remedy is often exclusive: the creditor receives distributions the member would have received but does not acquire the member's voting or management rights or the LLC's assets.

Question 43Business Organizations and Corporate Governance

Which statement best describes the allocation of authority between shareholders and the board in a typical business corporation?

  1. Shareholders manage the corporation's day-to-day operations through majority vote.
  2. The board manages the business under the shareholders' direct supervision of each decision.
  3. Shareholders may overrule any board decision by majority vote at a special meeting.
  4. The board manages the business; shareholders hold only reserved powers. Correct answer.

Explanation

Corporate statutes vest management of the business in the board of directors, subject to shareholder approval of fundamental transactions such as mergers and charter amendments. Shareholders do not manage daily operations and cannot override ordinary board decisions by majority vote; their powers are those granted by statute, the articles, and the bylaws.

Question 44Business Organizations and Corporate Governance

Before the corporation is formed, a promoter signs a lease on behalf of a planned corporation that does not yet exist. The corporation is later formed but does not adopt the lease. Who is liable to the landlord?

  1. No one, because the contract was a nullity.
  2. The promoter, who is personally liable absent a novation. Correct answer.
  3. The corporation, because it was the intended party.
  4. The state, because the corporation was not yet in existence.

Explanation

Because a corporation cannot contract before it exists, the promoter who signs a pre-incorporation agreement is personally liable unless the parties agree otherwise. Adoption or ratification by the later-formed corporation does not by itself release the promoter; a novation is required.

Question 45Business Organizations and Corporate Governance

A sole shareholder uses corporate funds for personal expenses, keeps no minutes, and ignores formalities, leaving the corporation undercapitalized. A creditor obtains a judgment against the corporation and cannot collect. Which standard governs whether the creditor may reach the shareholder's personal assets?

  1. The creditor must obtain a derivative judgment on behalf of the corporation.
  2. Alter ego use plus an inequitable result such as fraud or injustice. Correct answer.
  3. The creditor must show the shareholder failed to hold an annual meeting.
  4. The creditor must show the corporation's decision was a breach of the business judgment rule.

Explanation

Veil piercing generally requires both a unity of interest, shown by commingling, disregard of formalities, or undercapitalization, and an inequitable result such as fraud or injustice. The alter ego showing alone is usually insufficient; the creditor must also show that honoring the separate entity would work a wrong.

Question 46Business Organizations and Corporate Governance

In a jurisdiction applying the demand futility test, a shareholder sues derivatively after the board refuses to act, and a majority of directors are named as defendants for self-dealing. What must the shareholder establish at the pleading stage?

  1. That demand would be futile because a majority of directors are interested or not independent. Correct answer.
  2. That the shareholder has already won a direct action against the directors.
  3. That the shareholder owns at least 10 percent of the shares.
  4. That the board's refusal was a breach of the duty of care under the business judgment rule.

Explanation

A derivative plaintiff must either make demand on the board or plead with particularity that demand would be futile. Futility commonly requires facts showing that a majority of directors are interested in the challenged transaction, lack independence, or face a substantial likelihood of liability.

Question 47Business Organizations and Corporate Governance

A corporation's articles authorize 1,000,000 shares of common stock. It has sold 600,000 shares to investors and later reacquired 50,000 of them as treasury shares. How many shares are issued and how many are outstanding?

  1. 550,000 issued and 550,000 outstanding
  2. 1,000,000 issued and 600,000 outstanding
  3. 600,000 issued and 600,000 outstanding
  4. 600,000 issued and 550,000 outstanding Correct answer.

Explanation

Treasury shares are issued but not outstanding. Issued shares therefore total 600,000, and subtracting the 50,000 treasury shares leaves 550,000 outstanding. Authorized shares are only the maximum the charter permits and are not counted as issued here.

Question 48Business Organizations and Corporate Governance

An LLC's members want to govern internal affairs-voting, profit sharing, and management-in a way that differs from the state's default rules. Assuming the statute is not mandatory on the point, which document controls when it conflicts with those defaults?

  1. The articles of organization filed with the state
  2. The operating agreement among the members Correct answer.
  3. The bylaws adopted at the first members' meeting
  4. The certificate of good standing issued by the state

Explanation

The operating agreement is the contract that governs an LLC's internal affairs, including management, voting, and distributions. Statutory rules generally supply defaults that the operating agreement may vary unless the statute makes a rule mandatory.

Question 49Business Organizations and Corporate Governance

Which feature distinguishes an S corporation from a C corporation under U.S. federal tax law?

  1. The corporation may have an unlimited number of shareholders
  2. Income generally passes through without entity-level federal tax Correct answer.
  3. Shareholders bear unlimited personal liability for corporate debts
  4. The corporation must distribute all profits each year to avoid entity-level tax

Explanation

An S corporation is a pass-through entity for federal income tax purposes, so its income is generally taxed to shareholders rather than at the entity level. C corporations pay entity-level tax, and the S election requires eligibility, including limits on the number and type of shareholders.

Question 50Business Organizations and Corporate Governance

A director owns 30% of a company that supplies goods to her corporation. After full disclosure, a majority of the disinterested directors approve a supply contract at market terms. Under the Model Business Corporation Act approach, what is the effect of that approval?

  1. The contract is voidable at the option of the interested director.
  2. The contract is valid only if all shareholders unanimously ratify it.
  3. The conflict is cleansed, so the contract is not voidable on that ground alone. Correct answer.
  4. The contract is void because a director had a conflicting interest.

Explanation

Under the Model Business Corporation Act, a conflicting-interest transaction is not voidable solely because of the conflict if qualified disinterested directors approve it after disclosure, the shareholders approve it, or it is fair to the corporation. Approval at market terms after disclosure therefore cleanses the conflict.