Clark 11e TB a Ch18

177

Chapter 18

Breach of Contract and Remedies

TRUE/FALSE QUESTIONS

A1. If a party breaches a contract, the other party can file a criminalcomplaint

ANSWER: F PAGE: 353 TYPE: NNAT: AACSB Analytic AICPA Legal

A2. Damages are designed to punish a breaching party and deter othersfrom similar conduct.


A3. A remedy is the relief provided to an innocent contracting party whenthe other party breaches the contract.

ANSWER: T PAGE: 353 TYPE: NNAT: AACSB Analytic AICPA Legal

A4. The four broad types of damages in contract law are conciliatory,consecutive, punctual, and nominative.

ANSWER: F PAGE: 353 TYPE: NNAT: AACSB Analytic AICPA Critical Thinking

A5. Compensatory damages are foreseeable damages that arise from aparty’s breach of a contract.

ANSWER: F PAGE: 353 TYPE: =NAT: AACSB Analytic AICPA Legal

A6. Compensatory damages compensate the nonbreaching party for injuriesor damages sustained by that party.

ANSWER: T PAGE: 353 TYPE: =NAT: AACSB Analytic AICPA Legal

178 TEST BANK A: UNIT THREE: CONTRACTS AND E-CONTRACTS

A7. A party seeking to recover compensatory damages may also be entitled torecover incidental damages.


A8. The measure of damages for breach of a construction contract dependson which party breaches and when.

ANSWER: T PAGE: 354 TYPE: =NAT: AACSB Reflective AICPA Legal

A9. On the breach of a contract involving the sale of land, money damages isalways the most appropriate remedy.

ANSWER: F PAGE: 354 TYPE: +NAT: AACSB Reflective AICPA Legal

A10. Consequential damages are awarded to cover all of the remote conse-quences of whatever injury a nonbreaching party suffers.


A11. A person’s actions may cause a breach of contract or a tort, but not both.


A12. Punitive damages are never awarded in breach of contract actions.


A13. The duty owed under the mitigation of damages doctrine depends on thesituation.


A14. A breach of contract may entitle the innocent party to rescind thecontract.


CHAPTER 18: BREACH OF CONTRACT AND REMEDIES 179

A15. Liquidated damages are damages that are certain in amount.


A16. Specific performance is the remedy customarily used when one party hasbreached a contract for the sale of goods.


A17. The purpose of the doctrine of election of remedies is to permit a doublerecovery.

ANSWER: F PAGE: 363 TYPE: NNAT: AACSB Reflective AICPA Legal

A18. a party seeking to recover in quasi contract must show that he or sheacted without reasonably expecting to be paid.


A19. A contract may include a clause stating that no damages can berecovered for a certain type of breach.


A20. A party who knowingly accepts defective performance of a contractwaives the breach.


MULTIPLE CHOICE QUESTIONS

A1. Even-Flo Hydraulics enters into a contract to repair valves and fittingsin Fiesta Company’s plant. If Even-Flo breaches the contract, Fiesta can

a. do nothing but make a deal with .a different service provider.b. do nothing but temporarily suspend operations and wait.c. file a criminal complaint against Even-Flo.d. sue Even-Flo for damages.

ANSWER: D PAGE: 353 TYPE: NNAT: AACSB Reflective AICPA Legal


A2. Carol pays Dick $10,000 to design an ad campaign for Carol’s CoffeeStand chain. The next day, Dick tells Carol that he has accepted a job inNew York and cannot design her campaign. Carol files a suit againstDick. As compensatory damages, Carol can recover

a. $100,000.b. $10,000.c. $1,000.d. $0.

ANSWER: B PAGE: 353 TYPE: =NAT: AACSB Reflective AICPA Legal

A3. Development Associates (DA) agrees to buy five acres of land fromEastside Properties for $15,000. Eastside fails to go through with thedeal on the agreed date, when the market price of the land is $17,000. DAmay recover

a. $17,000.b. $15,000.c. $2,000.d. $0.

ANSWER: C PAGE: 354 TYPE: =NAT: AACSB Reflective AICPA Legal

A4. Pam contracts to buy a Quotient-brand computer set-up from RegalSystems for $5,000, but Regal fails to deliver. Pam buys the computerelsewhere for $6,500. Pam’s measure of damages is

a. $1,500 only.b. $1,500 plus incidental damages.c. incidental damages only.d. $0.


A5. Rite Contractors, Inc., agrees to build a motel for Sleep Inn Corporation.The project proceeds according to plan, but before it is done, Sleep tellsRite to quit. Rite may recover

a. the contract price less costs of materials and labor.b. the contract price.c. the costs needed to complete construction.d. profits plus the costs incurred up to the time of the breach.

ANSWER: D PAGE: 354 TYPE: =NAT: AACSB Reflective AICPA Legal


A6. Hybrid Corporation enters into a contract with Insure Service, Inc. (ISI),to obtain health insurance for Hybrid employees. If ISI breaches thecontract and Hybrid is awarded compensatory damages, the purposewould be to

a. establish, as a matter of principle, that ISI acted wrongfully.b. provide Hybrid with funds for a foreseeable loss beyond the

contract.c. provide Hybrid with funds for its loss of the bargain.d. punish ISI and set an example to deter others from similar acts.

ANSWER: C PAGE: 354 TYPE: NNAT: AACSB Reflective AICPA Legal

A7. Mona contracts to repair a computer for NuData, Inc. (NDI). Monaknows that without the computer, NDI will lose a sale. Mona does notperform as promised. NDI files a suit against Mona. As consequentialdamages, NDI can recover

a. the cost of a new computer.b. the difference between Mona’s price and the actual cost of repair.c. the loss of profit from the lost sale.d. nothing.


A8. Pure Oil Company enters into a contract with QuikBilt, Inc., toconstruct an oil pipeline to withstand specific conditions. If QuikBiltfails to meet this standard, which is construed as a breach of contractand a breach of a duty of care, Pure might be awarded punitive damagesto

a. establish, as a matter of principle, that QuikBilt acted wrongfully.b. provide Pure with funds for a foreseeable loss beyond the contract.c. provide Pure with funds for its loss of the bargain.d. punish QuikBilt and deter others from similar acts.



A9. Fashion Retail Center enters into a contract with Great Promotions,Inc., to provide Fashion with a plan to retool its merchandising strategy.If Great Promotions breaches the contract, Fashion has a duty to

a. reduce the damages that Fashion might otherwise suffer.b. reduce the loss that Great Promotions might otherwise suffer.c. punish Great Promotions and deter others from similar acts.d. take no action.

ANSWER: A PAGE: 357 TYPE: NNAT: AACSB Reflective AICPA Legal

A10. Office Accounting, Inc., hires Perry to repair a computer on site for $400,but Perry does not show up as agreed. Office Accounting hires Raul to dothe job for $350. Office Accounting may recover from Perry

a. compensatory damages.b. consequential damages.c. nominal damages.d. punitive damages.


A11. Ray breaches his lease with Sunny Properties and vacates the premisessix months before the end of the term. In some states, Sunny would haveto

a. avoid reletting the premises to recover damages from Ray.b. make reasonable efforts to relet the premises to mitigate damages.c. relet the premises to recover damages from Ray.d. sell the premises to recover damages from Ray.


A12. Home Delivery Corporation and Interstate Transport, Inc., sign anagreement that provides for the payment of “$1,000 by whichever partycommits a material breach of the contract that creates damages difficultto estimate but approximately $1,000.” This is

a. a liquidated damages clause.b. a mitigation of damages clause.c. a nominal damages clause.d. a penalty clause.

ANSWER: A PAGE: 359 TYPE: =NAT: AACSB Reflective AICPA Legal


A13. Rural Utility, Inc., enters into a contract with Shovel Excavation Serviceto dig up, replace, and rebury Rural’s cables in a certain location. Ruraladvances Shovel 10 percent of its cost. If the parties rescind the contract,Shovel’s refund of the payment would be

a. a penalty.b. liquidated damages.c. restitution.d. specific performance.

ANSWER: B PAGE: 359 TYPE: NNAT: AACSB Reflective AICPA Legal

A14. Lou and Mira want to rescind their contract under which Lou sold anMP3 player to Mira for $50. To rescind the contract

a. Lou must return the $50 and Mira must return the player.b. Lou must return the $50 only.c. Mira must return the player only.d. the parties can keep the “benefits” of their bargain.

ANSWER: A PAGE: 359 TYPE: =NAT: AACSB Reflective AICPA Legal

A15. Ira orally agrees to buy a unique collection of sports memorabilia for$1,000 from Jane and sends her $250 as a down payment. When Irasends her the rest of the price, Jane refuses to ship Ira the collection. Irashould seek

a. damages.b. reformation.c. rescission.d. specific performance.


A16. Grady enters into a contract to buy 440 acres from Hollis to expandGrady’s ranch. If Hollis breaches the contract, Grady’s normal remedywould be

a. damages.b. quasi contract.c. reformation.d. specific performance.



A17. Refined Commodities, Inc., agrees to deliver ten tons of sheet metal toSelect Builders Corporation. The agreement states that delivery is to bewithin “3” days, although the parties intend “30” days. Refined cannotconvince Select to amend the contract. Refined should seek

a. damages.b. reformation.c. rescission.d. specific performance.


A18. Outdoor Properties, Inc. (OPI), agrees to sell certain acreage to Pia. OPIrepudiates the deal. Pia sues OPI and recovers damages. Pia can nowobtain

a. an amount in a quasi-contractual recovery.b. damages representing restitution.c. specific performance of the deal.d. nothing more.


A19. Creekside Property Corporation enters into a contract with DeltaManagement Associates to manage and maintain Creekside’s apartmentcomplex. Their contract provides that neither party can recover damagesfor a non-fraudulent or unintentional breach. This is

a. a limitation-of-liability clause.b. an exculpatory clause.c. an illegal clause.d. a quasi contract.

ANSWER: A PAGE: 365 TYPE: NNAT: AACSB Reflective AICPA Legal

A20. To avoid liability for intentional injuries, Vermont Power Corporation in-cludes in its contracts an exculpatory clause. This is

a. enforceable if the other parties are protected from liability.b. enforceable if the other parties consent to it.c. enforceable if the other parties have equal bargaining power.d. not enforceable.



ESSAY QUESTIONS

A1. National Drilling Company ships its only pump to American HydraulicsCorporation, the manufacturer, for repair. National hires OverlandTransport, Inc., to take the pump to American Hydraulics and to returnit to National as soon as the repair is complete. National is forced to sus-pend operations without a pump, but Overland does not know this.National expects to be without the pump for five days and to lose profitsof $5,000. When the pump is not returned by the end of the fifth day,National rents a pump at a cost of $100 per day. Overland delays fivemore days before returning the pump. National files a suit againstOverland, asking for compensatory, consequential, and punitivedamages. Will National recover?

ANSWER: Yes and no. National will succeed in recovering damages,but not all of the damages that it seeks. Overland’s failure to performpromptly is a breach of contract for which National can recover dam-ages. Because of Overland’s late delivery of the pump, National is enti-tled to recover the cost of renting the pump for the five days thatOverland delayed. Expenses that are caused directly by a breach of con-tract—such as the cost to rent the replacement pump after Overlandbreached the contract—are recoverable as compensatory damages. Theseexpenses were foreseeable. Consequential damages—damages caused byspecial circumstances beyond the contract—are recoverable only if thebreaching party knew or should have known at the time of contracting oftheir possibility. In this problem, National’s shutdown of its operations isa special circumstance, but Overland did not know of thesecircumstances so National’s consequent loss of profits is not recoverable.Also, National cannot recover punitive damages, which are not usuallyrecoverable in breach of contract suits. Punitive damages are intended topunish wrongdoing. The purpose of damages in a breach of contract suitis to place the nonbreaching party in the position he or she would haveoccupied if the contract had been performed, not to punish the breachingparty.

PAGES: 353–357 TYPE: =NAT: AACSB Reflective AICPA Decision Modeling

A2. Owen buys a used Prius from Quality Motors, Inc., paying $1,000 downand agreeing to pay off the balance in thirty-six monthly payments of$200 each. The terms of the agreement call for Owen to make a paymenton or before the first of each month, beginning March 1. During the firstsix months, Quality receives a $200 payment before the first of eachmonth. Starting in September, however, and continuing for thesubsequent five months, Owen’s payment is never made until the fifth ofthe month. Quality accepts and cashes the payment check each time.Before the next payment is due, Quality decides that it is no longer


willing to accept late payments. Can Quality sue Owen immediately forbreach? Can Owen continue to make late payments without liability?Explain.

ANSWER: The dispute between these parties turns on whetherQuality’s acceptance of six late payments constitutes a waiver of Owen’sagreement to pay on or before the first of each month. When anonbreaching party waives the breach, he or she relinquishes the legalright to claim failure of full performance. Quality’s acceptance of six latepayments not only constitutes a waiver but also constitutes a pattern ofconduct of waiver, and thus the waiver extends to the thirteenth andfuture payments—until such time as Quality gives notice to Owen thatfull compliance with the contract will be required in the future. Qualitycannot immediately hold liable Owen for breach on the late thirteenthpayment but can notify Owen that any further tender of late paymentswill constitute a breach. In other words, on notice from Quality, Owencan no longer make late payments without liability.

PAGES: 364–365 TYPE: NNAT: AACSB Reflective AICPA Decision Modeling

Clark 11e TB a Ch18

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