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100 Cards in this Set
- Front
- Back
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Common law in the United States derived from what source?
a. The American Congress b. The American President c. The American Courts following the Declaration of Independence d. The English legal system e. The various English colonies in early America |
The correct answer is D. Although common law is made through the courts, originally common law was started in England in 1066 with William the Conqueror. As this country was formed as English colonies, it adopted English law. Each state adopted the English common law as it became a new member of the United States.
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Under the doctrine of stare decisis, when can a precedent be overturned or changed without doing damage to the doctrine?
a. When a court thinks the precedent is no longer a reasonable rule; for example, for technological or sociological reasons. b. When the state legislature deems the precedent is not politically appealing. c. When a majority of justices on the state's highest court do not share the political philosophies of the court that established the precedent. d. When a trial court regards the precedent as unreasonable. e. When a court regards the precedent as still reasonable and workable, but for sociological reasons the highest federal or state court wants to change the law. |
The correct answer is A. A precedent will be used until it becomes unreasonable and should be changed. Choice B is incorrect because the legislature does not create precedents through court decisions. Legislature may, however, overturn a precedent through enactment of a statute contrary to the precedent case. Choice C is incorrect because it requires a conclusion that courts are politicized, which they should not be. Choice D is incorrect because a trial court has no power to establish a precedent. Choice E is incorrect because to change precedent too easily or often would damage the stability that the doctrine of stare decisis provides.
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If a statute is clear and not ambiguous, which of the following best reflects how a court will treat the statute in ruling on the case?
a. The court will look at statements made by legislators during debate on the statute to determine legislative intent. b. The court will not look beyond the words of the statutE. c. The court will apply common sense to the reading of the statute. d. The court will interpret the statute to mean what it desires the statute to mean. e. The court will look to the circumstances that led the legislature to enact the statute and the evil the legislature wanted to cure. |
The correct answer is B. When statutes are clear and not ambiguous, interpretation does not extend beyond the words contained in the statute. Courts will not consider other ways to find the intent of the legislature, thus choices A and E are incorrect. Courts have no authority to change a statute that is constitutional, so the judges' personal likes, dislikes, or preferences are irrelevant.
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Which of the following is a type of private law?
a. Administrative law b. Property law c. Constitutional law d. Public law e. Criminal law |
The correct answer is B. Property law, like agency, contracts, and torts, is a form of private law because it deals with the rights and obligations of the individual as they relate to each other. Choices A, C, and E are types of public law. Public law (Choice D) is just the opposite of private law because it focuses on the individual's rights and obligations as they relate to society.
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Which of the following is the most important First Amendment right under the U.S. Constitution for private companies?
a. Freedom of association b. Freedom of speech c. Freedom of religion d. Freedom against unreasonable searches and seizures e. Right of due process |
The correct answer is B. Freedom of speech is an invaluable First Amendment right for both individuals and business entities because it protects both political and commercial speech (advertising). Although freedom of association and freedom of religion are important rights, for business entities governmental restrictions on association are not significant and the First Amendment's freedom of religion does not apply to private business. The First Amendment restricts the government's power over the people. Choices D and E are incorrect because they are not First Amendment rights. These very important rights for businesses are found in the Fourth Amendment and Fifth/Fourteenth Amendments, respectively.
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Which of the following is a requirement for procedural due process under the U.S. Constitution?
I. Governmental action against one's life, liberty, or property II. Notice of the government's action III. Right to be heard by a tribunal a. I only b. II only c. III only d. I, II, and III e. II and III |
The correct answer is D. All three are required to meet procedural due process requirements. The first step in procedural due process is the trigger that makes the other two applicable. The Fifth Amendment provides that life, liberty, or property will not be taken by the government without due process of law. The second two requirements, notice and hearing, meet the fairness requirement for procedural due process.
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Which of the following is a right of a corporation under the U.S. Constitution in a criminal matter?
I. Right to have the government produce a search warrant before it proceeds with a search of the corporation's property to find evidence of a crime II. Right to a jury trial III. Right against self-incrimination a. I only b. II only c. III only d. I, II, and III e. I and II |
The correct answer is E. The Fourth Amendment freedom against unreasonable searches and seizures and the Sixth Amendment right to a speedy and public trial by jury in a criminal matter apply to corporations as well as individuals. However, as corporations are only legal entities, unlike individuals, they have no Fifth Amendment freedom against self-incrimination. Only their officers, directors, and employees would have this right in their individual capacity.
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Which of the following is the lowest level test for constitutional scrutiny by a court?
a. Strict scrutiny b. Compelling interest scrutiny c. Rational basis test d. Intermediate scrutiny e. Commerce Clause test |
The correct answer is C. The lowest level of constitutional scrutiny is the rational basis test and is applied to actions by governments under the Commerce Clause. The highest level, strict scrutiny, is used when either a fundamental constitutional right or the affected person is a member of a suspect class. There is a mid-level scrutiny, called intermediate scrutiny, that is applied when persons are affected by government based on their gender or legitimacy.
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State desires to regulate an industry. The federal government has expressed a concern that the industry should be regulated solely by the federal government to achieve uniformity in the regulation of that industry. Which of the following best describes State's power to regulate that industry?
a. The Preemption Clause of the U.S. Constitution would not allow State to regulate the industry regardless of State's desire or need. b. The Preemption Clause of the U.S. Constitution would allow State to regulate the industry provided State had a legitimate interest to regulate the industry. c. The Preemption Clause prohibits states and local governments from ever regulating business when the federal government has made any attempt to regulate that industry. d. The Dormant Commerce Clause would allow State to regulate the industry regardless of the federal government's regulation. e. The Dormant Commerce Clause would allow State to regulate the industry as long as the state regulation did not conflict with the regulation of the federal government. |
The correct answer is A. Even though State may have concurrent power to regulate an industry, under Article VI , federal regulation preempts state regulation rendering it void where the federal government chooses to act exclusively, as here. This preemption right under the Supremacy Clause makes choice B incorrect. Choice C is an incorrect statement because it ignores that states may have concurrent power to regulate business as long as state regulation does not directly conflict (choice E), and, as noted above, when Congress shows its intent to regulate exclusively. Choice D is an incorrect statement of a state's power to regulate an industry.
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Plaintiff wins a judgment against Defendant in a civil lawsuit. After the judgment becomes final, Defendant leaves State. Plaintiff finds Defendant and his property in Adjacent State. Which of the following provisions of the U.S. Constitution will allow Plaintiff to enforce her judgment in Adjacent State without filing a new lawsuit to obtain a new judgment in Adjacent State?
a. Due Process Clause b. Equal Protection Clause c. Contracts Clause d. Full Faith and Credit Clause e. Privileges and Immunities Clause |
The correct answer is D. Article IV, Section 1 states that the "full Faith and Credit shall be given in each State to the public Acts, Records, and Judicial Proceedings of every other State." As it is applied to judicial decisions, State's judgment against Defendant is enforceable in Adjacent State.
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In the federal court system, which of the following courts is a general jurisdiction trial court?
I. U.S. District Court II. U.S. Court of International Trade III. U.S. Claims Court a. I only b. II only c. III only d. I, II, and III e. I and III |
The correct answer is A. Although all three courts are trial courts of competent jurisdiction, only the U.S. District Court has general jurisdiction to hear almost any kind of legal matter involving a federal question and diversity of citizenship actions. The other two courts have limited jurisdiction in the types of legal actions they can hear, namely foreign trade and matters involving the federal government, respectively.
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Which of the following is NOT a correct statement about resolving disputes through arbitration rather than litigation in court?
a. Arbitration is usually faster in resolving the dispute than is litigation. b. An arbitrator does not have to apply exactness of the law as long as she does not ignore the law altogether (i.e., manifest disregard of the law) in deciding the dispute. c. Arbitration is usually much less expensive than litigation. d. Parties arbitrating a legal dispute usually have the right of full discovery just as the rules of civil procedure provide a person in court. e. Arbitration usually is a less hostile means of resolving disputes and reduces the risk of damaging the relationship with the other party. |
The correct answer is D. All of the statements are true regarding the advantages that arbitration has over litigation in court except for choice D. In arbitration discovery is usually limited greatly, if the parties have any right of discovery. This reduced, or restricted discovery, has the effect of speeding up the process and reducing legal fees. Choice B is correct because it recognizes that arbitrators generally look to do what is fair and just, but the courts require that the arbitrators do not manifest disregard of the law. [For example, see the decision in Montes v. Shearson Lehman Brothers, Inc., 128 F.3d 1456 (11th Cir. 1997).]
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In the federal court system, which of the following is the proper ranking of the courts from highest to the lowest?
a. Court of Appeals, District Court, Supreme Court b. Supreme Court, District Court, Court of Appeals c. Supreme Court, Court of Appeals, District Court d. Supreme Court, Court of Criminal Appeals, Court of International Trade e. Court of Appeals, Supreme Court, District Court |
The correct answer is C. In the federal court system the highest court is the U.S. Supreme Court, the intermediate appellate court is the Court of Appeals, and trial courts. The U.S. District Court is the only general jurisdiction trial court and there are other limited jurisdiction trial courts, like Court of International Trade, Bankruptcy Court, Claims Court, and Tax Court. Although there is an appellate court to hear military appeals, in the federal system there is no court of criminal appeals like there is commonly in state court systems.
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An appeal is filed by a party who is displeased with the decision of the trial court. The party who files the appeal is called which of the following?
a. Appellant b. Appellee c. Plaintiff d. Petitioner e. Defendant |
The correct answer is A. Appellants file appeals and appellees defend appeals. Plaintiffs file complaints and petitioners file petitions in trial court. Defendants are sued in trial courts.
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Which of the following is a correct statement about subject matter jurisdiction based on diversity of citizenship?
a. Diversity of citizenship means that at least one defendant must have citizenship in a state different from one of the plaintiffs. b. A corporation is deemed to be a citizen only of the state of its incorporation. c. Diversity of citizenship jurisdiction is only available when the legal dispute involves a federal question. d. Diversity of citizenship requires that the amount of the plaintiff's damages in the dispute must exceed $75,000. e. Diversity of citizenship jurisdiction may replace the personal jurisdiction requirement. |
The correct answer is D. Diversity of citizenship is a means of a federal court obtaining subject matter jurisdiction to hear a dispute when the case does not involve a federal question. Diversity of citizenship requires (1) that the citizenship of all of the plaintiffs be different from the citizenship of all of the defendants and (2) that the amount of the dispute must exceed $75,000. Choice A is incorrect because it does not reflect the requirement for total diversity of citizenship. Choice B is incorrect because a corporation is deemed to hold citizenship in both the state of its incorporation and the state of its principal place of business. Choice E is incorrect because personal jurisdiction is still required unless the court relies on in rem jurisdiction.
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Which of the following methods of discovery under the rules of civil procedure is characterized by written questions to be Choiceed in writing under oath by a party?
a. Interrogatories b. Oral deposition c. Request for admissions d. Production of documents e. Subpoena |
The correct answer is A. Interrogatories, as the name implies, are questions. Attorneys use them to get background information about the defendant and persons involved so that those attorneys can focus more on collecting evidence or facts through other means of discovery, such as oral depositions and production of documents. Requests for admissions are made in writing and require the other party to admit or deny the factual statements contained therein. A subpoena is an order of the court commanding the person to appear at a legal proceeding as a witness or deponent, subject to penalty for noncompliance.
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Which of the following usually prohibits the admission in court of an out-of-court statement made by a non-witness with the intent to prove the truth of the matter asserted in the non-witness's statement?
a. Motion in alimony b. Parole evidence rule c. Hearsay rule d. Admissions against interest rule e. Choice |
The correct answer is C. This is the definition of hearsay. Only in special situations can an out-of-court statement made by someone who is not a witness at the trial be admissible in court if that hearsay statement is made to prove the truth of the hearsay statement made. The admissions against interest rule is an exception to the hearsay rule. The parole evidence rule is a rule of contract law that prohibits a court from admitting any outside (or extrinsic) evidence, existing before or contemporaneously with the making of a contract, if it will contradict a complete and fully integrated contract. A motion in limony is used to keep testimony out of court before the witness takes the stand.
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The party who files a pleading--that is, a general denial or admission to the allegations contained in the complaint--is which of the following parties?
a. Complainant b. Movant c. Defendant d. Respondent e. Counter-plaintiff |
The correct answer is C. This party to a lawsuit is called the defendant. As a complaint is filed by a plaintiff in an action at law, and a petition is filed by a petitioner in an action seeking an equitable remedy, choice D is incorrect. A complainant is sometimes used to refer to one who files a complaint. A movant files a motion, and a counter-plaintiff files a countersuit through the use of a counter-complaint.
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Defendant does not believe Plaintiff has stated a legal claim in her complaint for which he can be liable under the law and the alleged facts. In the case what would Defendant file with the court to obtain a ruling to end the lawsuit for failure to state a claim for which relief may be granted?
a. Choice b. Motion to dismiss c. Motion to suppress d. Response e. Motion for summary judgment |
The correct answer is B. Defendant would file a motion to dismiss to end the lawsuit. An example might be that the statute of limitations has expired preventing legal action. The motion to dismiss may be made at the same time as the Choice responding to the complaint or response to the petition. A motion to suppress is used principally in criminal trials to prevent the jury or trier of fact from hearing testimony that is tainted, such as is done with illegal searches by the government. The same result could be achieved with a motion for summary judgment, which motion is granted when there is not a genuine issue of material fact for a trier of fact to hear. This means, there is no reason to have a trial. A motion for summary judgment is usually made later in the lawsuit than a motion to dismiss, unless the motion to dismiss is voluntary.
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The part of a trial to select a jury is called which of the following?
a. Inquisition b. Opening arguments c. Voir dire d. Examination e. Instructing the jury |
The correct answer is C. Voir dire is French meaning "to speak the truth." The voir dire process is the questioning of the jury in the jury selection process. It precedes the plaintiff's opening argument. Jury instructions are given by the trial judge after closing arguments to the jury. Examination is the direct and cross examination of the witnesses.
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Customer stops at a self-service gasoline station and fills the tank of her automobile. What type of contract did the customer create with the gasoline station owner that requires Customer to pay the purchase price?
a. Implied in fact contract b. Express contract c. Quasi contract d. Bilateral contract e. Implied in law contract |
The correct answer is A. A contract created based on the conduct of the parties in the normal course of business, as with self-service gasoline stations, is a contract implied in fact. Choice B is incorrect because both Customer and the gasoline station did not set forth the terms of their agreement verbally or in writing. Choices C and E are incorrect because they are not really contracts at all. They create the rights to an equitable remedy based on unjust enrichment. Choices C and E are also the same concept. Choice D is incorrect because Customer and the self-service station did not exchange promises, one to sell and the other to purchase before Customer pumped the gasoline.
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Which type of contract will be treated by a court as though it never existed?
a. Valid contract b. Void contract c. Voidable contract d. Enforceable contract e. Implied in fact contract |
The correct answer is B. A void contract--for example, one that is unconscionable or illegal--is a nullity in the eyes of the law. Void contracts cannot be enforced in court; they are just the opposite of valid contracts that exist under the law. Voidable contracts are contracts in which one of the parties may avoid (get out of) if the proper grounds exist, such as minority or fraud. Implied in fact contract is a form of a valid contract.
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Under the common law of contracts, which of the following is NOT necessary for an offer to be effective?
a. There must be an intention of the offeror to contract. b. Terms of the offer must be reasonably certain or definite c. The offer must be communicated by the offeror to the offeree d. There must be a fixed time limit for accepting the offer. e. The offer must be made by words or conduct of the offeror. |
The correct answer is D. The time limit for accepting the offer does not have to be a fixed time. The law will allow the offeree a reasonable time to accept the offer depending on the circumstances, such as perishability and exigencies of the situation. Under the common law the first three elements--intention, certainty of terms, and communication--are generally required. The offer has to be made to the offeree through words or conduct of the offeror. For example, an offer made by an auction attendee may be by raising her hand.
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Which of the following is a valid offer that can be accepted to form a contract?
a. A price list posted for customers in which a top coat sells for $100. b. An invitation to bid or submit a proposal to construct a 10,000 square foot steel commercial building. c. The expression of an opinion as to how many persons would request an author's autograph at a book signing. d. A newspaper advertisement to sell first come, first served a used 2003 Toyota Camry automobile where the selling price and stock or vehicle identification number is given. e. A catalogue description of a sale item received from a mail order or Internet company. |
The correct answer is D. Choice D provides enough specificity to constitute an offer rather than an invitation to negotiate because the quantity (only one), time for performance (first come, first served), price, and place are fixed. An invitation to bid or request for proposal is not an offer as it is preliminary negotiation. Price lists and catalogue descriptions are not offers usually because they are not specific enough (i.e., time, quantity, etc.). They are regarded as invitations to negotiate. An opinion usually is not a statement of fact and is not an offer.
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Jones is selling his farm by auction with reserve. At the auction, bids were substantially lower than Jones anticipated. In this case which of the following statements would be true?
a. Jones has to sell to the highest bidder. b. Jones can withdraw his property and refuse to sell so long as this is done before the auctioneer announces the acceptance of the bid or by the fall of the auctioneer's hammer. c. Jones would be the offeror and those bidding would be offerees. d. Jones can withdraw his property and refuse to sell to the highest bidder regardless of the auction being with reserve or without reserve. e. Acceptance of the auction price is deemed to occur when the bidder raises his or her hand or otherwise states a price he or she is willing to pay. |
The correct answer is B. If the auction is with reserve, as is usually done, the person auctioning the property can refuse to sell at the offered (bid) price as long as this is done before acceptance of the bid. Choice A is incorrect because the auction is with reserve. Choice D is incorrect because it ignores the difference between an auction with reserve and an auction without reserve. In an auction without reserve, the auctioneer must accept the highest bid price. Choices C and E are incorrect because the person making the bid at an auction is the offeror, whose offer is accepted by the fall of the auctioneer's hammer.
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Rancher offers to sell Rider her prize horse for $10,000. Rider goes to Rancher's place to accept the offer and pay for the horse. Rancher tells Rider that the horse is dead. Which of the following is true in this situation?
a. Rancher's offer was revoked as a matter of law upon the death of the horse. b. Rancher must sell Rider another horse acceptable to Rider. c. Rancher's offer was not revoked because she did not inform Rider of her withdrawal of the offer to sell. d. Rancher's offer was revoked because Rider did not accept it immediately after it was made. e. Rancher is liable to Rider for damages in not selling the horse. |
The correct answer is A. Death of the subject matter before the offer is accepted terminates an offer as a matter of law. In such a situation, the offer cannot be accepted even though the offeror did not immediately inform the offeree of the horse's death. Since the offer was effectively revoked, Rider could not accept the offer and no contract could be formed. If no contract is formed, there is no breach of contract and no remedy for Rider. Choice D is incorrect because if no time for acceptance is provided in the offer, a reasonable time to accept is allowed.
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Which of the following best describes an option contract for offer revocation purposes?
a. The offeree has an unlimited time to accept an offer made under an option contract. b. The offeree must give legal consideration to obtain an option contract. c. An option contract cannot have a period revocability greater than three months. d. The option contract stops any possibility of termination of the offer by operation of law. e. An option contract has little value in the acquisition of real estate. |
The correct answer is B. The offeree must pay legal consideration to create an option contract with the offeror which makes the offer irrevocable. An option contract usually sets forth a time period of irrevocability. The option period, as with any offer, cannot have an unlimited duration. Choice C is incorrect because the option period can extend beyond three months. Three months is the maximum amount of time of irrevocability for a firm offer under the UCC. Choice D is incorrect because termination of an offer by operation of law ends the offeree's right to accept an irrevocable offer, unless the situation is by death or incompetence of either the offeror or offeree. Choice E is incorrect because option contracts are common in real estate acquisitions.
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Which of the following would NOT be legal consideration to support a contract?
a. Settlement of a legal claim against the other party b. A gift c. An amount, not a sham, is significantly less than should have been paid to acquire the good or service d. Forebearance to do a legal act e. Unforeseen difficulties requiring a modification (increase) to the contract price |
The correct answer is B. A gift is not legal consideration. Choices A and D are the same because forebearance of a legal right to do something--for example, the right to sue to collect damages--has a value to it. The value, however, is not known with exact certainty. Choice C is incorrect because the law will not protect an individual from making a bad deal, except when the consideration is a sham or based on the lack of reality of consent. Choice E is incorrect because it states an exception to the preexisting duty rule requiring modifications to contracts to be supported by new consideration.
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Buyer and Seller enter into a contract where Seller is to sell Buyer all of the ice cream that Buyer may want during a year at a price of $2 per gallon. Buyer purchased only 100 gallons, an insignificant amount, of ice cream from Seller. Seller had contemplated selling 5,000 gallons to Buyer under the contract. Which of the following best describes the outcome of this dispute?
a. Seller and Buyer have entered into a requirements contract that Buyer breached. b. The contract was not supported by legal consideration since Buyer's promise to purchase was an illusory promise. Buyer did not breach the contract. c. Seller and Buyer have entered into an output contract that Buyer has breached. d. A court will hold Buyer liable for not purchasing a reasonable number of gallons of ice cream from Seller. e. The contract was not supported by legal consideration based on unconscionability. |
The correct answer is B. Buyer made an illusory promise, which is not legal consideration. The key is that Buyer may or may not want to purchase Seller's ice cream. This is neither a requirements contract nor an output contract because the purported contract did not express the parties' clear intent to be either. In an output contract, the exact quantity is not stated because Buyer is required to purchase all of Seller's output or production of a product. In a requirements contract, the exact quantity is not stated because Buyer is obligated to purchase all of a product that Buyer needs or uses from Seller. Thus, Buyer is not liable for purchasing so small a quantity of ice cream from Seller. Unconscionability is irrelevant to these facts.
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Which of the following contracts entered into by a minor can be disaffirmed without being liable for the reasonable value of the goods or services?
a. A contract to purchase a pickup truck b. A contract for necessaries c. Student loan contracts d. A contract in which the minor has misrepresented his age e. A contract with a bank to provide banking services |
The correct answer is A. Choice A is the only contract that would be voidable under the general rule that the minor's only legal obligation upon disaffirmance due to minority is the return of the consideration if he has it. Some contracts are not voidable at all, such as student loan contracts and contracts with banks. Choices C and D are special situations where a minor may disaffirm but must pay fair value for what he or she got or the amount of damage to the other party.
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Which of the following persons without legal capacity can avoid a contract but must pay full restitution (fully return any consideration received) as a condition of disaffirmance?
a. A minor who has purchased a non-necessary item b. A minor who has entered into a banking contract c. A legally insane (adjudged insane) person d. A small child e. An intoxicated person |
The correct answer is E. An intoxicated person is allowed to avoid a contract he enters into while intoxicated, but as a condition of the avoidance must fully make restitution to the other party. The other party will be put in the same position she was before entering into the contract with the intoxicated person. Choice A would fall under the general rule of the right of a minor to disaffirm by returning the consideration if he has it. Choices C and D are incorrect because contracts of small children and adjudicated insane persons are void ab initio. A banking contract of a minor cannot be disaffirmed.
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Which of the following is the expression by words or act of an individual's intention to become bound by a contract made as a minor?
a. Disaffirmance b. Ratification c. Avoidance d. Restitution e. Emancipation |
The correct answer is B. This is the definition of ratification of a minor's contract. Ratification by a person, who entered into a contract as a minor, ends the minor's right to disaffirm and obligates the individual for the contract. Disaffirmance is the process of avoiding a contract entered into as a minor. Restitution is the return to status quo ante by returning consideration received from the other party or paying for what one received from the other party. Emancipation is making a minor legal as an adult even though the individual is below the age of majority.
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Which of the following is NOT a correct statement about a contract based on a mistake?
a. Generally, a contract based on a unilateral mistake of fact may be avoided by the mistaken party. b. Generally, a contract based on a mutual mistake of fact can be avoided by either party. c. A contract based on mutual mistake of future market value or quality can be enforced by either party. d. The proper remedy for a person who mistakenly contracts is rescission of the contract. e. When a party makes a material mistake of fact and the other party knows of this mistake, the mistaken party may avoid the contract. |
The correct answer is A. As a general rule, unilateral mistakes MAY NOT be avoided. Exceptions would be (1) when the other party knows of the unilateral mistake and takes advantage of the mistake (Choice E) or (2) when a party makes a palpable clerical error on a document and the other party knew or should have known of the mistake. Choice B states the general rule for avoidance for mutual mistake of fact. Choice C is correct about the unavoidability of mistakes of future value. If a party to a contract believes the consideration will increase in value in the future, there is no right to later avoid the contract if the value does not increase as expected. Rescission is the remedy for a party who legally avoids a contract due to mistake.
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Clarisse entered into a contract with Smith to purchase Big Tom, Smith's prize winning bull with a valuable bloodline. Clarisse paid $20,000 for the bull, an amount her livestock appraiser said was $5,000 too low for the animal. After she paid the purchase price and took possession of the bull, she discovered that Big Tom was actually an imposter, a bull with a mediocre bloodline and a value of only $8,000. Smith acted intentionally. Which of the following best describes Clarisse's rights?
a. Based on Smith's innocent misrepresentation, Clarisse's only remedy is to rescind the contract and get her money back. b. Based on Smith's intentional misrepresentation, Clarisse's only remedy is to rescind the contract and get her money back. c. Based on Smith's negligent misrepresentation, Clarisse may choose to seek money damages as her remedy. d. Based on Smith's intentional misrepresentation, Clarisse may choose to seek money damages or rescission of the contract, but not both. e. The above facts do not constitute illegal misrepresentation. |
The correct answer is D. The facts state all of the elements of fraud, which are (1) misrepresentation of a material fact by Smith, (2) with intent to deceive by Smith, (3) reliance by Clarisse, and (4) injury or damages. Thus, Clarisse has her choice of remedies but not both of them—money damages or rescission with restitution. As the misstatement was made with intent to deceive, this is not negligent or innocent misrepresentation.
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Misrepresentation as a contract defense includes all of the following EXCEPT:
a. innocent misrepresentation. b. reliance misrepresentation. c. fraudulent misrepresentation. d. negligent misrepresentation. e. intentional misrepresentation. |
The correct answer is B. There is no reliance misrepresentation, thus the answer can be reached through deductive logic. Innocent misrepresentation requires no bad act or negligence but a party can still be injured by relying on untruthful statements. If a party acts with intent to deceive (or scienter), the misrepresentation can be fraudulent misrepresentation which is the same as intentional misrepresentation. When a party does not misrepresent a material fact intentionally but makes the misstatement negligently, then negligent misrepresentation results.
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Syms believes that an antique clock has a much greater value than the seller wants for it. Syms buys the clock and later learns that he was incorrect about the value of the clock. Can Syms rescind the purchase contract and get his money back?
a. No, because he made a unilateral mistake in value. b. No, because he made a bilateral mistake in value. c. Yes, because he made a unilateral mistake in value. d. Yes, because he made a bilateral mistake in value. e. Yes, because the seller committed a negligent misrepresentation by not correcting Syms's belief about the clock's value. |
The correct answer is A. Since Syms was the only person mistaken about the value of the clock, this is a unilateral mistake. Unilateral mistakes in value are not avoidable by the mistaken party. Bilateral mistakes of value are avoidable, but that is not the case here. Choice E is incorrect because the facts do not reflect negligence on the part of the seller and, with regard to value, the notion of caveat emptor applies as long as there is no wrongdoing on a seller's part.
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Contracts contrary to public policy include all of the following EXCEPT
a. contracts in restraint of trade. b. unconscionable contracts. c. unreasonable exculpatory clauses. d. usurious loan contracts. e. contracts to commit a tort. |
The correct answer is D. Usurious loan contracts are illegal as a matter of law. Usury is the charging by a lender of interest greater than the legal rate of interest. All of the other contracts would be illegal as they violate public policy. Choice A is generally the most problematic because contracts in restraint of trade usually violate an antitrust statute. Not all contracts in restraint of trade do, however; for example, a covenant not to compete.
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Which of the following is NOT a requirement before a court will enforce a covenant not to compete?
a. The agreement must be reasonable as to duration. b. The restriction must be reasonably necessary. c. The agreement must pertain only to the purchase of a business. d. The restriction on the geographical area covered must be reasonable. e. The agreement must be supported by consideration. |
The correct answer is C. Choice C is the answer because it fails to recognize that the two principal uses of these restrictive covenants are in purchases of businesses and in employment contracts. Covenants not to compete must be reasonable as to need, duration, and geographic scope, and they must be supported by consideration. Consideration is easily found in the purchase price of a business and the compensation paid to employees for work performed under the employment contract.
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Which of the following is NOT an exception to the parole evidence rule?
a. Evidence of contracts subsequently modified by the parties can be introduced in court. b. When the terms of a written contract are ambiguous, parole evidence is admissible to show the meaning of the terms. c. Parole evidence can be introduced to show that the contract is based on a fraud. d. Parole evidence can be introduced to correct an obvious typographical or clerical error. e. Parole evidence can usually be introduced when the written contract is clear and complete, i.e., an integrated contract. |
The correct answer is E. Choice E is not an exception to the parole evidence rule because the parole evidence rule states that this outside (extrinsic) evidence cannot be admitted into evidence when the contract is complete and clear. Parole evidence that is inadmissible is evidence that exists before or concurrent with the making of the agreement. Thus, parole evidence to explain later modifications to the contract is admissible. Also, parole evidence can be used when the contract is based on fraud, contains an obvious clerical error, or to clear up an ambiguity in the contract.
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Barbara enters into a one-year oral contract of employment on April 1 for her to begin work on June 1. Her new employer will require her to complete 2,000 hours of work during the year to complete her contractual obligations. She can work at her own pace and work as many hours a week as she chooses as long as she completes the 2,000 by May 31 of next year. On June 1, her new employer decides not to allow her to begin her job. Which of the following best describes the legal consequences in this case?
a. Barbara's contract is illegal and void since it was not in writing. b. Barbara's contract is void under the Statute of Frauds. c. Barbara's contract is valid and enforceable and was not covered by the Statute of Frauds since it was possible to perform within one year of its making. d. Barbara's contract is valid but unenforceable under the Statute of Frauds since it was for more than one year in duration and it was not in writing and signed by her employer. e. Barbara's contract is enforceable because contracts of employment are not covered by the Statute of Frauds. |
The correct answer is C. This contract was not covered by the Statute of Frauds because it was a contract that could be performed within one year of its making. Thus her oral contract is both valid and enforceable. A contract that fails to meet the requirements of the Statute of Frauds is a valid contract but is unenforceable in court. Employment contracts may fall under the Statute of Frauds provided they cannot possibly be performed within one year of the date the contract is entered into.
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Which of the following contracts must be in writing and signed by the party against whom enforcement is sought?
a. A residential apartment lease for one year to begin immediately b. A construction contract for $1 million c. An employment contract for six months d. A contract for the sale of goods priced at $500 or more e. A services contract priced at $500 or more |
The correct answer is D. UCC 2-201(1) provides that contracts for the sale of goods of $500 or more must be in writing to be enforceable. Service contracts do not fall under the Statute of Frauds other than where performance period is concerned (choices B, C and E). A one-year apartment lease beginning immediately can be performed within one year of its making.
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Which of the following is a true statement about the Statute of Frauds?
a. Under the Statute of Frauds all contracts must be in writing and signed by the party against whom enforcement is sought. b. Under the Statute of Frauds only certain types of contracts must be in writing and signed by the party against whom enforcement is sought. c. Under the Statute of Frauds only certain types of contracts must be in writing and signed by both parties. d. Under the Statute of Frauds the signed contract must be formally written and contain all of the details. e. It is not possible to meet the Statute of Frauds through a written memorandum, such as a fax, check, or invoice that contains the proper signature and essential facts of the agreement. |
The correct answer is B. The Statute of Frauds does not cover all contracts, but for those types of contracts covered the statute requires those contracts to be set forth in some written memorandum evidencing the transaction. Furthermore, the written memorandum must be signed by the party to be charged (against whom enforcement is sought). The party to be charged is usually that person who claims there is no contract. The signed written memorandum does not require both parties to sign and it does not require a formal writing setting forth every detail. The signed written memorandum may be something as informal as a check, invoice, or on scratch paper.
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Which of the following is NOT a correct element of promissory estoppel?
a. Promissor makes a promise to promissee. b. To induce an action, but never a forebearance, of a definite character on the part of promissee c. Reliance on the promise by the promissee d. Promisee performs as she is induced to do. e. Injustice can only be avoided by fulfillment of the promissor's promise. |
The correct answer is B. Action or forebearance of a definite character on the part of the promises must be induced by the promise. The other required elements of promissory estoppel (or detrimental reliance as it is called) include the making of the promise, reliance on the promise, the actual performance or forebearance as induced by the promise, and an injustice requiring an equitable remedy of enforcement of the promise.
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All the parties involved in an assignment of contractual rights are best described to include which of the following?
a. Delegator, delegatee, obligor, and obligee b. Assignor, assignee, obligor, and obligee c. Assignor, assignee, delegator, and delegatee d. Promissor, promissee, assignor, and assignee e. Transferor, transferee, assignor, and assignee |
The correct answer is B. Assignor is the party who assigns her rights (who is also the obligee), assigns her rights to the assignee (who now becomes the obligee), and the obligor who is required to fulfill the obligation to the obligee. Choices A and C are incorrect because the question does not concern a delegation of duties. Choice D is incorrect because promissor and promissee do not properly describe the obligor and obligee, although a person who is obligated usually makes a promise. Choice E is incorrect because transferor and transferee, names used sometimes for assignor and assignee, respectively, do not describe the obligor and obligee.
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Which of the following types of third-party beneficiaries is unintentional and cannot sue to enforce the contract?
I. Incidental beneficiary II. Donee beneficiary III. Creditor beneficiary a. I only b. II only c. III only d. I, II, and III e. I and II |
The correct answer is A. Incidental beneficiaries are not intended to benefit from an assignment as are creditor and donee beneficiaries. Incidental beneficiaries have no right to sue an obligor to enforce the obligor's promise. Donee and creditor beneficiaries are third-party beneficiaries who have this right.
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A contractor enters into a contract with a city to construct a large sports arena. Construction operations are to begin at once. The contract contains a termination for convenience clause that allows the city to terminate the contract upon giving written 30-day advance notice of contract termination to the contractor. Contractor's only legal rights would then be to collect all expenditures to date, wrap-up costs, and an allowance for part of the profits on the contract. Which of the following types of conditions explains best why the city's contractual obligations stop or are curtailed?
a. Condition subsequent b. Condition precedent c. Implied condition d. Condition concurrent e. Express condition |
The correct Choice is A. Since the city's contractual obligations end or are reduced by meeting a condition subsequent, the giving of a 30-day advance written notice to Contractor. A condition precedent must occur to create a contractual obligation or to create a new contract. A condition concurrent is an act that must be performed at the same time or contemporaneously with another's act. Neither condition precedent nor condition concurrent is relevant here. The termination for convenience right is an express condition because it is written (implied conditions are not) but it does not accurately explain why the city's legal obligations stop or are curtailed.
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Which of the following is a correct statement regarding contract damages when there is only substantial performance by a party?
a. If there is substantial performance, the amount of the recovery by the breaching party under the contract is the contract price less the damages sustained by the nonbreaching party. b. If there is substantial performance and the breach is willful (intentional), the breaching party gets nothing under the contract. c. If there is substantial performance and the breach is not willful (intentional), the breaching party may recover in equity for unjust enrichment (quantum meruit). d. If there is substantial performance, the party is entitled to the full contract price. e. Substantial performance is all that is required of a contractor to fulfill its contractual obligations. |
The correct answer is A. Substantial performance discharges one's obligation except for the actual damages suffered by the nonbreaching party as a result of the breach. The breaching party who has only substantially performed may sue to collect under the contract, usually whether the breach is willful or not, but the nonbreaching (innocent) party does not have to pay for the damages he sustains as a result of breach. One who only substantially performs has no right to sue under quasi-contract for unjust enrichment because there is an underlying contract on which to bring a cause of action to collect for the work performed. Substantial performance does not allow the nonbreaching party to withhold payment of the whole or unpaid contract price if that amount exceeds the actual cost to complete the work as the contract provides.
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Which of the following contractual defenses exists when parties have a dispute over the amount of contract debt, the debtor tenders a check marked "paid in full", and the creditor cashes the debtor's check?
a. Accord and satisfaction b. Novation c. Discharge by substituted agreement d. Discharge by alteration of the contract e. Commercial impracticability |
The correct answer is A. This is accord and satisfaction, meaning agreement to settle and performance of the settlement obligation. A requirement is that the debtor and creditor must have a legitimate dispute over the amount of the debt. The debtor's offer to settle the debt for less than the creditor claims is found in the writing of the debtor's check with the " paid in full" explanation and the tender of the check. The accord (agreement) is the acceptance of the check by the creditor and the cashing of the check. This results in the satisfaction (settlement) of the debt. A novation usually arises in delegation of duties cases where the original obligor (delegator) is relieved of further legal liability on the contract by the substitution of a new contract between the delegatee and the obligee. In this case there is no modification of the contract or substitution of debtors.
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Lost profits are an example of which of the following types of contract damages?
a. Compensatory damages b. Consequential damages c. Liquidated damages d. Punitive damages e. Nominal damages |
The correct answer is B. Lost profits are consequential damages if they arise out of special circumstances known to both parties at the time of contracting. Compensatory damages in contract cases include general damages and incidental damages. Punitive damages generally are not allowed in breach of contract cases. Liquidated damages are agreed damages. Nominal damages are awarded only when there is a lawsuit for damages but the plaintiff does not prove the amount or existence of her damages.
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Which of the following is NOT a correct statement regarding liquidated damages for breach of contract?
a. Liquidated damages must be agreed upon by the parties at the time of contracting. b. "Penalty" is another word for liquidated damages and they are treated the same under contract law. c. Liquidated damages are not allowed if the exact amount of damages for breach of contract will be known to the parties when they enter into the contract. d. At the time of contracting, the exact amount of damages must be unknown but capable of reasonable estimation. e. Liquidated damages clauses are included in construction contracts to act as an incentive to perform the construction work in a timely manner. |
The correct answer is B. All of the statements are true about liquidated damages except with regard to penalties. Liquidated damages are not penalties and penalties cannot be liquidated damages. Penalties are abhorred by the law and will not be enforced in contract law. Liquidated damages clauses will be enforced in court. Liquidated damages clauses are common in construction contracts because they provide some incentive to the contractor to perform according to the contract schedule. Requirements for a valid liquidated damages clause is that the parties must agree at the time of contracting on the liquidated damages that will be paid in the event of breach and the exact amount of the damages are not known with certainty but may be reasonably estimated.
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Marwan, a U.S. nationalized citizen from Jordan, is denied employment at a business firm of twenty full-time employees because he is of Arabic descent. In this case the employer is liable for violation of which of the following federal discrimination laws?
a. Fair Labor Standards Act b. Civil Rights Act of 1964, Title IX c. Civil Rights Act of 1964, Title VII d. Equal Pay Act e. Americans with Disabilities Act |
The correct answer is C. Since the employer employs more than fourteen employees, the employer must comply with Title VII of the Civil Rights Act of 1964 which prohibits discrimination in employment based on national origin, as well as race, religion, sex, and color. Title IX of the CRA covers educational institutions and prohibits discrimination because of sex. The ADA covers disabilities, EPA prohibits unlawful pay disparity between men and women, and FLSA covers wage and hours laws and child workers.
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Sam works for Acme Company, a manufacturer. Acme is located in a state that follows the employment-at-will doctrine. Acme fires Sam for encouraging his fellow workers to organize a labor union at Acme. Which of the following federal laws makes Sam's termination of employment wrongful?
a. Fair Labor Standards Act b. Civil Rights Act of 1964, Title VII c. National Labor Relations Act d. The Landrum-Griffin Act e. National Railway Labor Act |
The correct answer is C. The National Labor Relations Act (Wagner Act) prohibits an employer from taking any negative action against an employee who participates in union activities. Employers cannot coerce or threaten workers or interfere with a worker's right to carry out a concerted activity, which may be union activity, for their mutual aid and protection. Both the Landrum-Griffin Act and the National Railway Labor Act are federal labor laws. The Landrum-Griffin Act provides union members with a "bill of rights" against their union representatives and provides for legislative control over union officials. The National Railway Labor Act did not establish unfair labor practices of management. Neither the FLSA nor Title VII deal with labor-management relations.
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Which of the following would NOT violate the Fair Labor Standards Act?
a. Employing a 16-year-old person to perform hazardous work on a construction project. b. Paying a nonexempt employee less than time-and-a-half compensation for all hours the employee works over forty hours in a workweek. c. Employing a 17-year-old to work 40 hours per week, Monday through Friday, at a grocery store. d. Paying a permanent employee less than the federal minimum wage. e. Employing a 15-year-old person to work in a grocery store from 10 A.m. to 4 p.m., Monday through Friday. |
The correct answer is C. The Fair Labor Standards Act covers both child labor and wage and hour laws. A child of 17 is not limited in the number of hours he or she works or when those hours are worked. Persons 14 and 15 years old are limited as to the number of hours they can work during a week and are prohibited from working during school hours. Thus, a 17-year-old working 40 hours, Monday through Friday at a grocery store is lawful. A child less than 18 years of age may not be employed in hazardous jobs or in jobs detrimental to their health and well-being. If an employee is non-exempt from the wage and hour provisions of FLSA, the employee must be paid time and a half for all time worked in excess of 40 hours in a work week. FLSA establishes a federal minimum wage which currently is $5.15 per hour.
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Which of the following would constitute illegal sexual harassment under Title VII of the Civil Rights Act of 1964?
a. Objectionable lewd or obscene comments, suggestions, and actions by coworkers to an employee because she is a lesbian. b. Lewd or obscene banter between male coworkers and a female worker when the female worker participates in the banter and does not object to it. c. A male supervisor makes unwelcome sexual comments frequently to both male and female subordinates. d. A male supervisor conditions the promotion of a female subordinate on sexual favors. e. A supervisor who curses and utters profanity at both male and female subordinates. |
The correct answer is D. Title VII of the CRA of 1964 prohibits sex discrimination in employment including sexual harassment. The harassment must be nonconsensual, objectionable, and must affect the conditions of employment. Sexual harassment can be either quid pro quo sexual harassment or hostile work environment sexual harassment. Choice D is correct because it qualifies as unlawful quid pro quo sexual harassment, the worst kind. Choice A is not a violation because sexual orientation or sexual preference (sexual affinity) are not covered under Title VII. Choice B is not a violation because the sexual banter is not unwelcome. Choice C is not illegal under Title VII because the sexual harasser does not discriminate because of sex; he harasses both genders. The same can be said about the harasser in Choice E. The facts in choice E do not state that the supervisor's comments are sexual in nature.
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Which of the following descriptive names may an administrative agency be called?
I. Commission II. Board III. Authority a. I only b. II only c. III only d. I, II, and III e. II and III |
The correct answer is D. Administrative agencies may be called a number of names, including commission, board, and authority. Other names include corporation, bureau, and department.
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Which of the following is NOT a legal requirement before a federal administrative agency can issue a valid legislative rule or regulation in the formal rule-making process?
a. An enabling act must grant the agency the authority to make the rule. b. There must be a comment period for citizens to provide input on the proposed rule or regulation. c. There must be a preferential election by the citizens providing input to the agency as to which proposed rule or regulation they prefer to have adopted. d. There must be notice of the proposed rule or regulation given by the agency to the citizens by publication of the proposed rule in the Federal Register. e. The final rule or regulation is adopted by the agency and is published in the Federal Register. |
The correct answer is C. Choice C is correct because it is not a requirement. Citizens have the right of input (letters, attend hearings by the agency, etc.) so that the agency promulgating a legislative rule can make the best rule possible, but citizens have no right to vote on acceptance or rejection of a proposed rule. The power to create a legislative rule rests with the agency. Choices B, D, and E state the general requirements under the Administrative Procedure Act that the agency must give advance notice of the proposed rule, a comment period must be provided to obtain input from the affected citizens, and the final rule must be published in the Federal Register. Choice A is a requirement of substantive due process requiring an act of an administrative agency to be authorized by an enabling act creating the agency and giving it powers.
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Which person employed by an administrative agency is the adjudicator in a tribunal of the agency?
a. Administrative law judge b. Director of the agency c. Judge d. Agency jury e. Governing board of the agency |
The correct answer is A. An administrative law judge (ALJ) works for the agency, decides the facts of the dispute, and applies the agency's interpretation of the rule to those facts. As an added procedural safeguard, an administrative agency may use a review panel or board to rehear an ALJ's decision. The head of agency tribunals is not the director of the agency or the agency's governing board. An agency tribunal does not use a jury or a judge who would have power to interpret the rule, regulation, or statute.
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Which of the following is a goal of the Clean Water Act?
I. To eliminate the discharge of pollutants into the navigable waterways II. To protect fish and wildlife III. To assure safe drinking water a. I only b. II only c. III only d. I, II, and III e. I and II |
The correct answer is E. The Clean Water Act in 1972 is concerned with the discharge of pollutants into the navigable waterways and fish and wildlife protection. It does not have the same focus as the Safe Drinking Water Act of 1974, which focuses on the safety of public water supply systems.
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Which of the following securities laws regulates the initial issuance of securities in the primary securities market?
a. Sarbanes-Oxley Act of 2002 b. Securities Act of 1933 c. Securities Exchange Act of 1934 d. Private Securities Litigation Reform Act of 1995 e. Market Reform Act of 1990 |
The correct answer is B. The Securities Act of 1933 regulates new issuances of securities, such as initial public offerings (IPOs) of stock. New securities issuances are in the primary securities market whereas the subsequent trading of securities, which is regulated by the Securities Exchange Act of 1934, takes place in the secondary securities market. The Sarbanes-Oxley Act regulates corporate governance and auditors. The Private Securities Litigation Reform Act regulates the making of forward-looking statements in financial reports and regulates securities litigation. The Market Reform Act gave the SEC authority to suspend trading of securities in the event that prices rise and fall excessively in a short period of time.
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Which of the following acts would constitute a violation of Section 10(b) of the Securities Exchange Act of 1934?
a. Committing a fraud in the trading of securities by an investor b. Committing a fraud in the registration of an issuance of common stock c. Committing a fraud in the registration of a bond issuance d. A negligent error on the part of the auditor of a publicly traded company that led to the inclusion of misleading financial statements in the annual report e. Aiding and abetting a fraud in an IPO |
The correct answer is A. Under Section 10(b) of the Securities Exchange Act of 1934 it is unlawful for an investor, or securities issuer, auditor, underwriter, officer, or director, to manipulate the trading of securities through fraud or deceit. Choices B, C, and E all are violations of the Securities Act of 1933 because they deal with primary securities market. Choice D is not correct because negligence alone is not actionable. Section 10(b) violations can carry both criminal and civil penalties and a private right of action.
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Which of the following is required of publicly traded companies by the Sarbanes-Oxley Act of 2002?
I. Establishment of a system of internal accounting controls with the ability to detect accounting fraud II. Establishment of corporate policies to encourage and protect whistleblowers III. Rotation of independent auditors no less frequently than every five years a. I only b. II only c. III only d. I, II, and III e. I and II |
The correct answer is D. The Sarbanes-Oxley Act of 2002, among other things, requires most publicly traded companies to establish and prove compliance with an adequate system of internal accounting controls designed to prevent and detect fraud. Those companies covered under SOX must establish a code of ethics to cover at least their financial executives. These companies can no longer use the same independent public accounting firm to audit their financial statements. Their auditors must now be rotated at least every five years.
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Which of the following federal statutes prohibits price discrimination among purchasers when the effect may be to substantially limit competition or tend to create a monopoly?
a. The Sherman Act of 1890, Section 1 b. The Sherman Act of 1890, Section 2 c. The Clayton Act of 1914, Section 2 (as amended by the Robinson-Patman Act) d. The Clayton Act of 1914, Section 7 (as amended by the Cellar-Kefauver Act) e. The Federal Trade Commission Act of 1914 |
The correct answer is C. Price discrimination, i.e., the selling of goods and services cheaper to some customers than others when there is not justifiable economic reason, is made unlawful by the Robinson-Patman Act, which amended Section 2 of the Clayton Act. Section 7 of the Clayton Act deals with mergers. Section 1 of the Sherman Act prohibits contracts, combinations or conspiracies in restraint of trade. Section 2 of the Sherman Act prohibits monopolies that restrain trade. The Federal Trade Commission Act prohibits unfair and deceptive trade practices and established the FTC.
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Defendants, who are competitors in the high-voltage electrical contracting business, privately agreed to split up the United States into five geographic regions. Each region would have several competing companies. Defendants agreed they would not successfully bid on construction projects outside their respective regions. Which of the following is a correct statement of the potential liability of Defendants?
a. Defendants are not liable under any federal or state law because they are free to compete for business in any way they choosE. Such is the free market. b. Defendants are not liable under Section 2 of the Sherman Act because none of them would have a monopoly on the high-voltage electrical contractor market. c. Defendants are liable under Section 1 of the Sherman Act for the per se violation of horizontal geographic market division. d. Defendants are liable under Section 1 of the Sherman Act for the per se violation of horizontal price fixing. e. Defendants are liable under Section 1 of the Sherman Act for an illegal group boycott. |
The correct answer is C. This is a horizontal market division situation and is a per se violation of Section 1 of the Sherman Act. Section 1 makes contracts, combinations, or conspiracies in restraint of trade illegal. Here there is prior agreement to restrain trade through splitting up a market based on geographic territories. A per se violation of the Sherman Act does not require proof of an unreasonable restraint on trade under the rule of reason. Section 2 of the Sherman Act regarding unlawful monopolies is irrelevant.
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Which of the following is required before a company can be considered a monopolist under the Sherman Act?
I. Company has the power to control price in the market. II. Company has the power to exclude competition from the market. III. Company alone must possess a market share of greater than 70 percent. a. I only b. II only c. III only d. I, II, and III e. I or II |
The correct answer is E. To be a monopolist under Section 2 of the Sherman Act, the government or private plaintiff needs to prove either the power to control price or the power to exclude competitors from the market. Usually proving a monopoly requires consideration of the firm's market share, but there is no bright line test of 70 percent market share to determine whether or not a monopoly exists. In merger situations the FTC will give closer consideration when the industry concentration ratio is above 30 percent.
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Betty has been a working wife for five years. She meets all of the requirements to obtain a new car loan at favorable terms under her own name and merit. Bank does not object that Betty is a woman; rather, Bank requires all married persons as a condition of obtaining a loan to have the applicant's spouse to co-sign the promissory note or to sign the note as a guarantor. Which of the following is a correct statement of Betty's legal right against Bank in this case?
a. Betty has no legal recourse against Bank because Bank may reduce its credit risk in any way it chooses. b. Betty has no legal recourse against Bank under the Equal Credit Opportunity Act because she has not been denied credit because of her sex. c. Betty has legal recourse against Bank for violating the Equal Credit Opportunity Act based on marital status. d. Betty has legal recourse against Bank for violating the Fair Credit Reporting Act for denial of credit based on marital status. e. Betty has legal recourse against Bank for violating the Fair Credit Billing Act. |
The correct answer is C. Bank has violated the Equal Credit Opportunity Act because it discriminated against a loan applicant based on marital status. Lenders cannot require an otherwise creditworthy applicant to have their spouses co-sign or guaranty their promissory note as a condition of granting credit. The Fair Credit Reporting Act regulates credit reporting agencies and the Fair Credit Billing Act regulates credit card billing practices. Under the ECOA prohibition on requiring unnecessary spousal co-signing, denial of credit is not required.
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David's wallet and credit card were lost while he was shopping at the mall. The next day after he discovered that his wallet and credit card were missing, he immediately notified the issuers of the credit card. Unfortunately, someone had made purchases with David's credit card totaling $1,500. Which of the following most accurately states David's liability for the unauthorized use of his credit card?
a. David is liable for all of the unauthorized purchases since he lost his credit card. b. David is liable for only $500 of the unauthorized purchases under the Truth-in-Lending Act. c. David is liable for only $50 of the unauthorized purchases under the Truth-in-Lending Act. d. David is liable for only $50 of the unauthorized purchases under the Fair Credit Billing Act. e. David is not liable for any of the unauthorized purchases under the Truth-in-Lending Act. |
The correct answer is C. Under the Truth-in-Lending Act a credit cardholder is only liable for up to $50 for unauthorized purchases made before the card issuer is notified of the loss or theft. Unlike a negligently lost checkbook that may result in greater liability for a bank depositor and debit card holders who wait longer than two business days to notify the bank after discovery of a missing debit card, the TILA provides greater protection to cardholders. A lost or stolen debit card that is not reported within two days of discovery will require a bank to refund the amount above $500 of unauthorized withdrawals and purchases on the debit card. The Fair Credit Billing Act is not applicable.
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Which of the following creditors have the highest priority in a bankruptcy?
a. State and local governments for income and property taxes b. Employees for certain unpaid wages up to a statutory amount c. Secured creditors to the extent of the value of the collateral d. Consumer deposits up to a statutory amount per deposit e. Unpaid alimony |
The correct answer is C. Under UCC Article 9 and the Bankruptcy Reform Act, secured creditors are given prior to the extent that the collateral covers the outstanding debt. If the collateral does not cover the whole debt of the secured creditor, then the deficiency is regarded as general unsecured debt and has the lowest priority. Of the other four, they rank from highest to lowest priority as follows: unpaid wages, consumer deposits, unpaid alimony, and back taxes.
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Which of the following types of liens exists when a contractor provides services in improving real estate and is not paid for those services?
a. Artisan's lien b. Judicial lien c. Judgment lien d. Mechanic's lien e. Materialman's lien |
The correct answer is D. The contractor would have a mechanics lien on the real estate when it is not paid for the work performed on the premises. Materialman's lien is given to vendors of construction materials whose debt is not paid. An artisan's lien is not applicable because it pertains to personal property that is retained for nonpayment. A judgment lien may be filed against property of a defendant after a judgment is entered by a court. This may be called a judicial lien. A judicial lien may also be filed on a defendant's property during a pending lawsuit.
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Which of the following tort legal theories may an injured person recover her personal injury or property damages caused by a defective product?
I. Breach of express warranty II. Strict liability III. Negligence a. I only b. II only c. III only d. I, II, and III e. II and III |
The correct answer is E. The key here is that the Choice must be a "tort" theory that excludes breach of contract. Thus, the answer is strict liability and negligence. Strict liability, however, is usually easier to prove in defective product cases than is negligence
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Which of the following is NOT a legal defense to a claim of strict product liability?
a. Plaintiff assumed the risk of using the product that he knew was defective and dangerous. b. Plaintiff altered the product and the altered product caused plaintiff's injury. c. The product was state of the art when it was manufactured but has since then been upgraded for additional safety features. d. The statute of repose has not expired but the product's warranty expired four years before the injury. e. Plaintiff has misused the product and the misuse causes plaintiff's injury. |
The correct answer is D. A statute of repose is a product liability defense. They provide for time periods after a product is manufactured or used to bring a lawsuit for injuries due to defective products. In choice D the statute of repose has not expired, so the lawsuit is not barred. Also, strict product liability does not require privity of contract to exist or for the lawsuit to be brought under a warranty claim. Other product liability defenses include the state of the art defense, assumption of risk, product misuse, and product alteration by the plaintiff.
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Acme Company, a U.S. corporation, has the opportunity to obtain a very profitable contract in Foreign Nation. Acme's president orders the company's treasurer to pay a deputy minister high in Foreign Nation's government $200,000 out of a slush fund and to cover up the payment in the accounting records. Which of the following is correct regarding this situation?
a. Unless such a payment is illegal in Foreign Nation, neither Acme Company nor any of its officers are liable for bribery. b. Acme Company alone is criminally liable for a felony for bribing a foreign official under the Foreign Corrupt Practices Act. c. Acme Company, its president, and its treasurer are criminally liable for a felony for bribing a foreign official and conspiring to cover up the bribE. d. There will be no criminal liability of Acme or its officers if the actions took place outside the United States. However, if they took place in the United States, there would be criminal prosecution. e. There is no criminal liability because this payment would be regarded as a "grease payment" only. |
The correct answer is C. This would be a violation of the Foreign Corrupt Practices Act, a felony, for bribing a foreign official and conspiring to cover up the bribery. Acme, its president, and its treasurer would be liable. Most nations do not have similar criminal laws. They leave matters to foreign prosecution. The United States has jurisdiction to prosecute under the FCPA regardless of where the bribery takes place. Grease payments are not violations of the FCPA. These payments are not made to induce a government official to do any more than the office is already required to do. The "grease payment" merely speeds up the process to get the official to act more promptly.
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Which of the following legal risks in having foreign operations arises from the foreign host nation unilaterally taking the assets of a foreign company?
a. Expropriation b. Nationalization c. Business risk d. Credit risk e. Retaliation |
The correct answer is A. This risk is expropriation, the taking of private property by a foreign government. Usually there is compensation to the owner of the private property. A company doing business abroad can insure against this risk by purchasing insurance through Overseas Private Investment Corporation (OPIC). Nationalization is a similar terms as it occurs when a foreign nation takes over a whole private industry to operate as a public institution. Business risk is more of an investment risk term as it relates to the profitability of a business or industry and products. Credit risk is another business term that exists when a company's debtor may go bankrupt. Retaliation is not a risk under consideration.
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Sigma Company is considering whether or not to move its apparel manufacturing plant to Asia to obtain lower labor costs. The company is no longer profitable using American workers even though the plant has been operating in the United States for 50 years. The American workers have depended on the stability of the plant and finding new work in the area will be very difficult for most of the workers. The workers and the community have been major contributors to the success of the company. In deciding whether relocating the plant is ethical, which of the following forms of ethical reasoning would be MOST LIKELY to support the decision to close the U.S. plant and to relocate?
a. Utilitarianism b. Cultural relativism c. Kantian ethics d. Virtue ethics (Aristotelian ethics) e. Distributive justice (John Rawls) |
The correct answer is A. As this situation requires a close examination of the effect of non-profitability will have on Sigma Company and its shareholders and customers, utilitarianism would most likely support the decision to go offshore. Utilitarianism is a form of consequentialism ethical theory. A decision is ethical if it results in the most good for the greatest number. In this case a bankrupt company that remains in the United States will do no one any benefit. Relocating offshore will benefit shareholders, the company's creditors and customers even though it will not benefit other stakeholders like present employees, the community, and the company's current vendors. Cultural relativism concerns how one acts with regard to a foreign culture or acts in a foreign country. Kantian ethics, distributive justice, and virtue ethics may not support the relocation at all when one considers the harm and unfairness to the workers who built the company. Is it right to run out on the current workers?
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Which theory of corporate social responsibility requires the company to give the first consideration to act in favor of the shareholders rather than other stakeholders?
a. Shareholder theory of Milton Friedman b. Stakeholder theory of Edward Freeman c. Stakeholder analysis theory of Kenneth Goodpasture d. Distributive justice theory of John Rawls e. Emanuel Kant's theory of categorical imperative |
The correct answer is A. Milton Friedman, a Nobel prize-winning economist most noted for his work on free market economics, argues the shareholder theory of corporate responsibility. This theory states that a corporation should act only in ways that will maximize profits for the shareholders provided no laws are broken. Other stakeholders are not considered under this theory as they are under the stakeholder theory of Edward Freeman and the stakeholder analysis theory of Kenneth Goodpasture. The stakeholder theory would require the corporation to consider all of the stakeholders (shareholders, employees, community, customers, vendors, etc.) when making decisions. Shareholders are not given preference. Goodpasture's stakeholder analysis theory considers all of the stakeholders but first consideration should be to the shareholders because they have to make a reasonable profit on their investment. Distributive justice is a rights or justice theory. Kant's theory of categorical imperative does not fit as easily into the corporate social responsibility scheme.
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Which of the following acts would probably be unethical but not illegal?
a. Intrusively invading the privacy of employees through private surveillance b. Allowing executives to sexually harass female subordinates as a perquisite c. Laying off customer support employees in the United States and contracting with a foreign contractor in a developing country to have the work done much cheaper d. Lying to customers about important product facts e. Insider trading of securities |
The correct answer is C. All but choice C would be both unethical and illegal. It is not illegal to relocate a company's operations offshore to obtain cheap labor. Determining whether the relocation is unethical requires the use of ethical reasoning through one or more theories such as consequentialism, deontology (or duty ethics such as Kantian ethics), virtue ethics, or rights-based ethics. Relocation might be unethical depending on the facts. Intrusively invading employees' privacy is a tort of invasion privacy. Sexual harassment is illegal under Title VII. Lying to customers can be a tort of fraud and a deceptive trade practice. Finally, insider trading is illegal under Section 10(b) of the Securities Exchange Act of 1934. These four illegal acts cannot be regarded as ethical since the law establishes only a minimum threshold for ethics
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Which of the following ethical theories would probably justify paying a large public company's CEO a huge salary when workers are paid poorly by industry standards?
a. Kantian ethics b. Distributive justice of John Rawls c. Moral relativism or situational ethics d. Stakeholder theory of corporate social responsibility e. Cultural relativism |
The correct answer is C. Moral relativism or situational ethics would probably support such a decision. If other companies are paying their CEOs inflated salaries, then, comparatively speaking, this company should as well. Moral relativism is attacked by many as an inappropriate means to deciding right and wrong, but it is frequently used. The stakeholder theory and distributive justice theory would not support paying the CEO an inordinately high salary while refusing to share the company's wealth with the employees to create some equity. Kantian ethics would also probably not support the CEO's compensation. Cultural relativism is irrelevant in this case since a foreign culture is not under consideration.
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An act that is legal is not unethical. Which of the following most accurately describes the preceding statement?
a. It is a true statement because the law delineates what is right and what is wrong. b. It is a true statement because an act cannot be immoral if it is a legal act. c. It is a true statement because both the law and ethics ask the same question, namely, is it right? d. It is not a true statement because a law establishes a requirement or prohibition by a controlling authority and establishes only a minimum moral or ethical standard. e. It is not a true statement because a law can never be the same as an ethic. |
The correct answer is D. The law establishes only a minimum threshold for ethics. Generally, one is not ethical if he does not comply with the law. However, just because one complies with the law does not make one ethical. The law is not legislated morality although the law may be based on moral precepts. Ethics looks at what should be done rather than what has to be done to comply with the law. This is especially the case when one uses certain theories of ethical reasoning such as Kantian ethics, duty-based ethics, and virtue ethics, which set much higher ethical standards.
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Which of the following would LEAST LIKELY be included in a corporate code of ethics?
a. Whistleblowing provisions and assurance of protection for whistleblowers b. Instructions that the corporate code of ethics applies to all employees except the CEO and Treasurer, who have greater discernment and need for flexibility c. Prohibitions on conflicts of interest by employees d. Prohibitions on taking money or gifts from vendors or customers above a certain value e. Goals for promoting human dignity and growth within the company |
The correct answer is B. Usually the corporate code of ethics applies to every employee in the company. They should also be applicable to the company's officers. For publicly traded companies that must comply with the Sarbanes-Oxley Act, the CEO and Treasurer would have to be covered under the code of ethics. The other four choices contain provisions that are commonly included in corporate codes of ethics, including whistleblower encouragement and protections, conflicts of interest, gifts from vendors or customers, and professional growth within the company.
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Sam hits Kevin in the face with his fist, breaking Kevin's nose. Sam's act is intentional and out of unprovoked anger. What specific tort would this be?
a. Negligence b. Assault c. Battery d. Outrageous conduct e. Intentional infliction of emotional distress |
The correct answer is C. Since this act was an intentional act to cause injury it is an intentional tort, specifically battery. Battery is the harmful or offensive touching of the person of another without consent or privilege. Although in criminal law battery is sometimes called "assault," in tort law there is a separate tort of assault. In tort law assault is the causing of a reasonable fear of a harmful or offensive touching of the person without consent or privilege. Since there was an actual touching (hitting), this is a battery rather than assault.
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Which of the following is NOT a requirement for the tort of negligence?
a. The plaintiff must suffer an injury or damages. b. The defendant must owe a legal duty to the plaintiff to conduct herself to some standard of care. c. The defendant's action must be a cause for the plaintiff's injury. d. The defendant must have failed to comport her actions according to the standard of care owed the plaintiff. e. Both the plaintiff and the injury must have been reasonably foreseeable. |
The correct answer is C. The four elements of the tort of negligence are (1) duty, (2) breach of the duty, (3) causation, and (4) damage. Causation means the but-for cause; but for the defendant's breach there would have been no injury. The cause must also be the proximate cause, the most closely related to the injury. It is not enough that the defendant's act was "a" cause.
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Which of the following statements would constitute the tort of slander, assuming the statement was untrue and damaged the plaintiff's reputation?
a. A newspaper article stating the plaintiff has committed a crime b. A discussion a supervisor has with the plaintiff's former coworkers that the plaintiff was fired for use of illegal drugs c. A television documentary that a meat packing company sold meat from diseased animals d. A statement the defendant makes to herself, but aloud and when she thinks no one is present, that the plaintiff is dishonest and incompetent e. A letter written by a former employer to other companies within the same industry that they should not hire the plaintiff because he is an embezzler |
The correct answer is B. Slander is spoken defamation while libel is in writing or some other fixed medium of expression. Both forms have to be published (communicated) to some third person. In this case the supervisor's discussion of a former employee to his coworker fits both of the requirements. Choices A, C, and E are incorrect because they are not in spoken form. The statement made in choice D was not communicated since it was spoken in private to oneself.
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Which of the following would be a defense or privilege to defamation of a private plaintiff?
I. Statement is true. II. Statement was not made with actual malice. III. Statement was made in a judicial proceeding. a. I only b. II only c. III only d. I, II, and III e. I and III |
The correct answer is E. To comply with the constitutional protections of free speech and free press the U.S. Supreme Court established a test for defamation that protects free speech and free press rights. Plaintiffs are classified into two groups—private plaintiffs and public plaintiffs. A public plaintiff (or person) is one who has cast himself into the public's eye, such as a celebrity, a professional athlete, or a wealthy socialite. A private plaintiff (or person) is not known by the public and has no public reputation. A private plaintiff does not have to prove that the defendant acted with actual malice, that is, the defendant knew the statement was false or acted recklessly in making the statement without regard of the truth. A public plaintiff has to allege and prove actual malice. In this case the absence of actual malice is not a defense since this is a private plaintiff. Other defenses are truth of the statement, judicial privilege, and qualified privilege. Both truth and judicial privilege are absolute privileges and cannot result in liability.
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Which of the following is the usual legal duty owed by a business to its invitees (or customers)?
a. Duty to make reasonable inspections of the premises for any hazards and the removal of the hazard within a reasonable time after discovery. b. Duty to make daily inspections of the premises for any hazards and the removal of the hazard within a reasonable time after discovery. c. Duty to make reasonable inspections of the premises for any hazards and the removal of the hazard immediately upon discovery. d. Duty to not intentionally injure the invitee. e. There is no duty to inspect the premises for any hazards, but once a hazard is found, the business must remove the hazard within a reasonable time. |
The correct answer is A. Owners of real estate owe different duties to different types of persons who may go upon the owner's property. The owner of a business who has customers on its property owes these business invitees a duty to make reasonable inspections of the premises for hazards that may hurt the invitee and to remove any hazard within a reasonable period of time after the hazard is discovered. What is reasonable depends on the facts, including how serious the hazard and the likelihood of someone getting hurt. The inspections do not necessarily have to be every day and removal of the hazard does not have to be immediate. Some businesses, like a grocery store, would probably do both, however. Choice D states the general rule that the premises owner owes no duty to a trespasser other than to not intentionally injury the trespasser. A minority of states follow the rule in choice E for trespassers. Some states follow the rule in choice E for licensees.
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Jury finds both Defendant and Plaintiff were at fault in causing Plaintiff's injury in a negligence lawsuit where Plaintiff's total damages were $100,000. Defendant was 70 percent at fault and Plaintiff was 30 percent at fault as they both were negligent. Assuming the law of the state where the lawsuit is heard applies the modified comparative fault rule (or 50 percent comparative negligence rule), what will be the result in the lawsuit?
a. Plaintiff will receive an award of $100,000. b. Plaintiff's case will be barred and she will receive nothing. c. Plaintiff will receive an award of $70,000. d. Plaintiff will receive an award of $30,000. e. Plaintiff will lose because in comparative negligence states any degree of fault above 20 percent is an affirmative defense for the defendant. |
The correct answer is C. The general rule used to be contributory negligence was an affirmative defense. If the plaintiff in any way contributed to his own injury through negligence, the plaintiff could not recover any damages from the defendant regardless of the degree of fault of the defendant. Courts have moved away from contributory negligence and now the general rule is one of comparative negligence. There are two forms of comparative negligence (or fault)—pure and modified. Only a few states follow pure comparative negligence. Most states follow modified comparative negligence (or the 50-percent comparative negligence rule). In this case if both the plaintiff and the defendant are at fault in causing the plaintiff's injury, the trier of fact will determine the share of fault of each one. As long as the plaintiff is not more than 50 percent at fault, the plaintiff can recover but not for his own share of negligence. If the plaintiff is more than 50 percent at fault, the plaintiff's case is barred and he takes nothing. In this case with the plaintiff 30 percent at fault, the plaintiff can only recover $70,000 ($100,000 less 30% times $100,000).
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Which of the following is an example of negligence per se?
a. Defendant damages Plaintiff's automobile by throwing a brick through its windshield. b. Defendant is cited and pleads guilty to failure to yield the right of way in traffic court which act resulted in personal injury to another motorist. c. Defendant is cited and pleads guilty to failure to yield the right of way in traffic court. Defendant's act caused him to lose control of his automobile and to drive through a store window along the side of the road. d. Defendant is cited but acquitted in traffic court on a charge of failure to yield the right of way which act resulted in personal injury to another motorist. e. Coal mine is cited for several safety violations and pays a civil penalty for the violations. A safety inspector (not an employee of the mine) is injured inside the mine as a result of one of the violations. |
The correct answer is B. If the plaintiff is injured by a defendant's act the state violated a statute designed to protect the plaintiff or a group like the plaintiff, and if the defendant is found or pleads guilty in a criminal proceeding, then the defendant is deemed to have committed the negligent act for prosecution as a tort of negligence. The plaintiff will not have to prove the defendant's duty and breach of duty in court. Choice B meets this test because the rules of the road are intended to protect motorists and the defendant was found guilty in traffic court which is criminal in nature. Paying a civil fine does not qualify.
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Which of the following types of damages in a tort case may be awarded to a plaintiff when the defendant acted maliciously and the jury wants to punish the defendant?
a. Special damages b. Incidental damages c. Compensatory damages d. Nominal damages e. Punitive damages |
The correct answer is E. Punitive damages are awarded to punish a defendant for bad behavior. They are sometimes called exemplary damages and actual or inferred malice is required.
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Which of the following is NOT a correct statement about strict liability torts?
a. Liability will be without regard to any intent by the defendant to injure the plaintiff. b. Liability is not based on any intentional or wrongful act of the defendant. c. Liability may result even if the defendant uses due care in performing the act that results in injury to the plaintiff. d. The activity resulting in strict liability must involve a high degree of risk of serious injury to another that cannot be completely guarded against by the exercise of due care. e. The doctrine of strict liability is applicable only to activities or services and is not applied to sellers of harmful or defective products. |
The correct answer is E. Courts in all states have accepted the doctrine of strict liability for defective products. If strict liability applies, negligence or intent to injure or the amount of due care used are irrelevant. Strict liability is based on the high risk of injury even when due care is used.
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Which of the following is a correct statement about the tort of intentional interference with contractual relations?
a. The defendant does not have to be aware of an existing contract between the plaintiff and a third party. b. The defendant who causes a third party to breach its contract with the plaintiff will be liable even if he was acting to protect a legal right. c. The defendant who causes a third party to breach its contract with the plaintiff will be liable even if he was hired as a consultant or adviser to instruct his client on how to handle the situation. d. The defendant must intentionally act to induce a third party to breach its contract with the plaintiff. e. The tort of intentional interference with contractual relations allows the plaintiff to sue the party who intentionally breaches its contract with the plaintiff. The plaintiff can sue in tort and obtain punitive damages. |
The correct answer is D. The tort of intentional interference with contractual relations requires (1) the defendant to have known of a contract the plaintiff had with another person, (2) the defendant induced the contracting party to breach its contract with the plaintiff, and (3) the plaintiff was injured as a result of the breach of contract. The defendant has a defense of privilege to counsel to breach a contract if it is done to benefit the defendant and justification to protect an interest of the defendant. A plaintiff may proceed with an action in tort against one who induces another to breach a contract with the plaintiff in order to obtain punitive damages or sue the breaching party for breach of contract. The breaching party cannot be liable for interference with contract. Choice A is incorrect because there was no prior knowledge of a contract. Choices B and C are incorrect because the defendants had defenses of justification and privilege, respectively.
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Celebrity's name and picture has been used by Merchant to promote Merchant's business. Celebrity did not give her consent to the use of her name and picture. In this case Merchant would be liable for which of the following torts?
a. Misappropriation of trade secrets b. Misappropriation of another's name, likeness, or publicity c. Conversion d. Trade disparagement e. Trade libel |
The correct answer is B. Misappropriation of another's name, likeness, or publicity is a form of invasion of privacy. There must not be consent by the celebrity and the use of another's name must have been a non-news item and without consent in a commercial activity.
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Defendant's business is the advertising using e-mail. Defendant wrongfully, and without permission, obtains Internet Service Provider's (ISP) database of customers and their e-mail addresses. Defendant sends many unsolicited e-mail advertisements (SPAM) to them. ISP's customers complain to ISP. In this case which of the following torts has Defendant committed against ISP for which it could be liable?
a. Conversion b. Trespass to chattel c. Intentional infliction of emotional distress d. Misappropriation of trade secrets e. Invasion of privacy |
The correct answer is B. The intentional tort of trespass to chattel was one of the original seven intentional torts. It exists when one intentionally uses or makes another's property unavailable for use. It is not theft of the item with intent to keep and permanently deprive the owner with use and enjoyment. Since the ISP still had its database, this was not conversion. However, since the spammer damaged the ISP's business by using the ISP's database without permission causing it to lose customers and incur additional costs of ridding itself of the spammer, the tort is applicable here. Large ISPs like AOL and EarthLink have successfully used trespass to chattel against companies using those ISPs' databases to send unsolicited e-mail advertising to the ISPs' customers.
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The formation of an agency relationship may be created by all of the following EXCEPT
a. by express agreement. b. by assurances given to a third party by an agent that she has the authority to act. c. by operation of law. d. by implied agreement. e. by ratification of a contract entered into by a person who is not an agent. |
The correct answer is B. Agency relationships may be created expressly in writing or orally, implicitly by the nature of the agent's duties that require the authority to perform those duties, and by the conduct of the principal that leads a third party to reasonably believe that the agent has actual authority. Thus, the types of authority granted to an agent are actual authority, implied authority, and apparent authority. Even if there is no authority of an agent to enter into a contract on behalf of the principal, the principal may ratify the agent's contracts and those contracts will become contracts of the principal. Choice B is not a correct statement because an agent cannot create apparent authority by assuring a third party that the agent has authority.
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A fiduciary duty that a principal owes to its agent includes which of the following?
I. Duty to cooperate II. Duty to provide safe working conditions III. Duty of loyalty a. I only b. II only c. III only d. I, II, and III e. I and II |
The correct answer is E. The principal has fewer fiduciary duties to the agent than the agent does to the principal. The principal's fiduciary duties to the agent include (1) duty to cooperate, (2) duty to reimburse and indemnify, and (3) duty to provide safe working conditions. There is no fiduciary duty of loyalty to the agent as there is with the agent to the principal.
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An agent enters into a contract with another person and the agent does not disclose the identity of the agent's principal but does disclose that she is acting as an agent for another. Which of the following best describes the person(s) liable on the contract?
a. Only the undisclosed principal is liable on the contract. b. Only the agent is liable on the contract. c. Both the partially disclosed principal and the agent are probably liable on the contract. d. Neither the agent nor the partially disclosed principal is liable on the contract. e. An agent will always be liable for any contract it enters into regardless of her disclosure or nondisclosure of the identity or existence of the principal. |
The correct answer is C. What are the consequences of an agent entering into a contract with another person when the agent does not disclose the identity of the principal or discloses only that the agent is acting for a principal? In the former situation the principal would be undisclosed and the agent may find himself solely liable on the contract. In the latter situation, both the principal and the agent would be liable. When the agent discloses the identity of the principal, only the principal is liable.
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Which of the following types of business associations (entities) exist when two or more persons agree to carry on on a trade or business together as coowners for the purpose of making a profit?
a. A corporation b. A partnership c. A limited liability company d. A limited partnership e. A trust |
The correct answer is B. This is the definition of a partnership under the Uniform Partnership Act. Note that a partnership requires at least two persons, unlike a corporation, a limited liability company, and a trust. Also, there must be a profit purpose. A limited liability partnership and a limited partnership are both creatures of statute which specify how they are created, operated, and provide limited liability to some, but not all, of the owners.
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Sue and Sharon form S && S Partnership under an oral agreement. Sue works many more hours than Sharon in the partnership but Sharon provided most of the startup capital. They have not agreed on how they will share the profits and losses. How should the profits and losses be divided between them?
a. Sue will be entitled to a greater share of the profits because she works more hours for the partnership. b. Sharon will be entitled to a greater share of the profits because she provided more startup capital for the partnership. c. Sue and Sharon must share the profits with Sue getting fair market value for her services and Sharon getting a fair interest for her capital, and they will share the rest of the profits. d. Sue and Sharon must share the profits and losses equally. e. A court or arbitrator must decide how Sue and Sharon will split the profits and losses. |
The correct answer is D. Under the Uniform Partnership Act the partners will share profits and losses equally unless they have expressly agreed otherwise. When this is the case, some inequity might arise in terms of who is working for the partnership's business and who is providing the capital. Many times partners will execute partnership agreements with profit and loss allocation methods similar to a combination of those in choices B and C. Failing this, Sue and Sharon will have to share profits and losses equally.
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Which of the following types of corporations usually has the smallest number of shareholders and is usually family-owned?
a. Professional corporation b. Personal services corporation c. Closely held (or close) corporation d. Public corporation e. Not-for-profit corporation |
The correct answer is C. A corporation that has a small number of shareholders, which characteristic prevents it from being publicly traded, is usually called a closely held or close corporation. Many times professional corporations have a small number of shareholders, but are not family-owned. Also, S corporations have a small number of shareholders (75 or less).
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Which of the following is a legal right of a shareholder of a corporation?
a. Right to inspect the books and records of the corporation regardless of his purpose, number of shares owned, and length of time as a shareholder. b. Right to participate in the management of the corporation by voting for officers of the corporation. c. Right to indemnification if they expend monies to investigate the management of the corporation. d. Right to receive annual dividends from the corporation e. Right to vote on the election of directors to serve on the board of directors of the corporation. |
The correct answer is E. Under the Revised Model Business Corporation Act, shareholders have the right and responsibility to elect the directors to manage the company. Shareholders have no right to annual dividends unless the articles of incorporation provide for it. This is seldom the case, except for S corporations. Shareholders do not have an unfettered right to inspect the books and records of the company. There usually is a time requirement for owning shares before there is a right to inspect. Only the directors vote to elect the officers. Finally, shareholders have no indemnification rights.
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Director voted to authorize Corporation to acquire a major product line of one of its competitors. Director did not advise the other directors that she owned a substantial block of common stock in that competitor. Still, she thought the new product line could be profitable with the right management, though it might be difficult at first. Corporation's board of directors approved the acquisition with Director casting the decisive vote in favor. The acquisition was a disaster and Corporation's stock fell substantially. If Director is sued by Corporation's shareholders for damages sustained as a result of the bad business decision, what will be the result of the lawsuit?
a. Director will probably be liable for breaching her fiduciary duty of loyalty, and she will not have the defense of the business judgment rule since she had a conflict of interest. b. Director will be strictly liable as a fiduciary of the corporation. c. Director will not be liable because her decision comports with the business judgment rule defense. d. Director will not be liable because directors of a corporation cannot be held liable for any decisions they make regarding the corporation. e. Director will be liable for breach of her duty to exercise reasonable care in making the decision regardless of her conflict of interest. |
The correct answer is A. This is a case to determine if the director has a defense of the business judgment rule. The business judgment rule is a defense of an officer or director in a charge of negligence in making a decision on behalf of the corporation. If the officer or director (1) acts in good faith, (2) in the best interests of the corporation, and (3) makes an informed decision (i.e., due diligence), then the officer or director is immunized from liability for the corporate decisions they make. Good faith requires that the officer or director not have a conflict of interest in the decision. That is the case here. Director will probably face liability in this case since she will not be able to use the business judgment defense.
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Seller sends Buyer a signed letter offering to sell resin pellets for $4,000 per ton for a period of four months. Buyer liked this price since it was a sizeable discount. With about two weeks left on the offer period (i.e., 3.5 months had expired on the offer), Seller sent Buyer another letter stating that the price of resin pellets had gone back to $5,500. Buyer attempted to place an order to acquire 50 tons of the resin pellets at the $4,000 per ton price. Seller refused to sell stating the price had increased and it had revoked its earlier offer. If a lawsuit for breach of contract is filed by Buyer, what will be the result?
a. Seller will win because its offer was properly revoked since Buyer did not pay anything (consideration) for the offer to be held open for four months. b. Buyer will win because an option contract made Seller's offer irrevocable for four months. c. Seller will win because Seller's offer, though a firm offer under the UCC, was irrevocable only for a period of three months. The offer had been properly revoked. d. Buyer will win because of detrimental reliance on Seller's offer. e. Buyer will win because the firm offer made Seller's offer irrevocable for four months. |
The correct answer is C. This case applies the UCC's firm offer rule. The firm offer rule states that an offer made by a merchant in a signed writing giving assurances that the offer will be held open is irrevocable without consideration paid by the buyer for the time period stated, and if no time period is stated, then for a reasonable period of time, but the period of irrevocability cannot exceed three months. The firm offer rule did apply in this case, but the period of irrevocability ended after three months. Seller effectively revoked its offer, and Buyer cannot accept the revoked offer.
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A sales contract is silent on the shipping terms. What will those shipping terms be under the UCC, provided course of dealing, course of performance, and usage of trade do NOT apply?
a. F.O.B Destination b. F.O.B. Shipping Point c. F.A.S. Destination Port d. C.I.F. e. Delivery ex-ship |
The correct answer is B. Unless the buyer and seller agree otherwise, and if there are no course of performance, course of dealing, or usage of trade factors that would dictate what shipping terms applied, then the default provision is F.O.B. Shipping Point. Under this term title and risk of loss would pass to the buyer when the seller turns the goods over to the buyer or buyer's carrier. The buyer would be responsible for the transportation costs. F.O.B. Destination Point means that the seller bears the transportation costs and risk of loss until the goods are delivered. Title would pass upon delivery. F.O.B. means "free on board" and is for land shipments. F.A.S. means "free along side" and is for water and air shipments.
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