Fundamentals of Business Law Summarized Cases
Miller 8th Edition Test Bank
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Chapter 7
Nature and Classification
N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows.
N A question new to this edition of the Test Bank. + A question modified from the previous edition of the Test Bank, = A question included in the previous edition of the Test Bank.
TRUE/FALSE QUESTIONS
1. All promises are legal contracts.
ANSWER: F PAGE: 152
TYPE: =
NAT: AACSB Analytic AICPA Critical Thinking
2. A promise is an assertion that one will or will not do something in the future.
ANSWER: T PAGE: 152
TYPE: N
NAT: AACSB Analytic AICPA Critical Thinking
3. A promisee is a person who makes a promise.
ANSWER: F PAGE: 153
NAT: AACSB Analytic AICPA Legal
TYPE: =
4. A contract is formed when two parties promise to perform a future act.
ANSWER: T PAGE: 153
TYPE: =
NAT: AACSB Analytic AICPA Legal
5. A contract is an agreement that can be enforced in court.
ANSWER: T
PAGE: 153
NAT: AACSB Analytic AICPA Legal
TYPE: =
6. Under the objective theory of contracts, the intention to enter into a contract is judged by objective facts as interpreted by a reasonable person.
ANSWER: T PAGE: 153
NAT: AACSB Analytic AICPA Legal
TYPE: =
7. Contract disputes rarely arise on a promise of future performance.
ANSWER: F PAGE: 153
NAT: AACSB Analytic AICPA Legal
TYPE: =
8. Parties with contractual capacity may form an enforceable contract.
ANSWER: T PAGE: 153
NAT: AACSB Analytic AICPA Legal
TYPE: N
9. Three elements agreement, consideration, and contractual capacity are sufficient to form a binding contract.
ANSWER: F PAGE: 153
NAT: AACSB Analytic AICPA Legal
10. An agreement includes an offer and an acceptance.
ANSWER: T PAGE: 153
NAT: AACSB Analytic AICPA Legal
TYPE: =
TYPE: =
11. There are no exceptions to the rule that contracts voluntarily entered into will be enforced.
ANSWER: F PAGE: 154
NAT: AACSB Analytic AICPA Legal
12. An offeror is a person who makes an offer.
TYPE: =
ANSWER: T PAGE: 154 TYPE: +
NAT: AACSB Analytic AICPA Legal
13. An offer to form a bilateral contract is accepted by a promise to perform.
ANSWER: T PAGE: 154
NAT: AACSB Analytic AICPA Legal
TYPE: =
14. An offer to form a unilateral contract is accepted by a promise to perform.
ANSWER: F PAGE: 154
NAT: AACSB Analytic AICPA Legal
TYPE: =
15. A unilateral contract is formed when the one receiving the offer completes the requested act or performance.
ANSWER: T PAGE: 154
NAT: AACSB Analytic AICPA Legal
16. Offers may not be revoked before they are accepted.
TYPE: N
ANSWER: F PAGE: 155 TYPE: =
NAT: AACSB Analytic AICPA Legal
17. Informal contracts are usually based on substance rather than form.
ANSWER: T PAGE: 156 TYPE: N
NAT: AACSB Analytic AICPA Critical Thinking
18. A contract under seal is a formal contract.
ANSWER: T PAGE: 156 TYPE: N
NAT: AACSB Reflective AICPA Legal
19. An oral contract is an implied-in-fact contract.
ANSWER: F PAGE: 156 TYPE: =
NAT: AACSB Analytic AICPA Legal
20. An express contract must be in writing.
ANSWER: F PAGE: 156 TYPE: =
NAT: AACSB Analytic AICPA Legal
21. Parties can form a contract without putting the terms in writing.
ANSWER: T PAGE: 156 TYPE: +
NAT: AACSB Reflective AICPA Legal
22. An executory contract is one that has been fully performed.
ANSWER: F PAGE: 157 TYPE: +
NAT: AACSB Analytic AICPA Legal
23. A voidable contract is a valid contract that can be avoided at the option of at least one of the parties to it.
ANSWER: T PAGE: 157
NAT: AACSB Analytic AICPA Legal
TYPE: =
24. An otherwise valid contract may be unenforceable if it is not in writing.
ANSWER: T PAGE: 158
NAT: AACSB Analytic AICPA Legal
TYPE: =
25. To be valid, a contract must be enforceable by all of the parties to it.
ANSWER: F PAGE: 158 TYPE: =
NAT: AACSB Analytic AICPA Legal
26. A quasi contract arises from a mutual agreement between two parties.
ANSWER: F PAGE: 158
NAT: AACSB Analytic AICPA Legal
27. A quasi contract is not an actual contract.
TYPE: =
ANSWER: T PAGE: 158 TYPE: =
NAT: AACSB Analytic AICPA Critical Thinking
28. A party who confers a benefit on someone else unnecessarily can recover the cost under the principle of quasi contract.
ANSWER: F PAGE: 158
NAT: AACSB Reflective AICPA Legal
29. A contract cannot be void if its purpose it legal.
ANSWER: F PAGE: 158
NAT: AACSB Reflective AICPA Legal
30. A void contract is enforceable if it is in writing.
TYPE: N
TYPE: N
ANSWER: F PAGE: 158 TYPE: N
NAT: AACSB Reflective AICPA Legal
31. A contract that cannot be enforced because of certain legal defenses is an unenforceable contract.
ANSWER: T PAGE: 158
NAT: AACSB Analytic AICPA Legal
TYPE: =
32. The doctrine of quasi contract applies only if there is an actual contract.
ANSWER: F PAGE: 159
NAT: AACSB Reflective AICPA Legal
TYPE: +
33. Under the plain meaning rule, a court will enforce a contract, in which the writing is clear and unequivocal.
ANSWER: T PAGE: 160
NAT: AACSB Analytic AICPA Legal
TYPE: =
34. When the words in a contract have more than one meaning, they are interpreted against the party who drafted the contract.
ANSWER: T PAGE: 161
NAT: AACSB Reflective AICPA Legal
TYPE: =
35. A contract’s general intent will usually be subordinated to specific clauses contained within the contract.
ANSWER: F PAGE: 161
NAT: AACSB Analytic AICPA Legal
MULTIPLE-CHOICE QUESTIONS
TYPE: N
1. Cathy assures Dylan that she will deliver his products as he directs. An assertion that one will do something in the future is part of the definition of
a. a declaration.
b. a moral obligation.
c. an ethical principle.
d. a promise.
ANSWER: D PAGE: 152
TYPE: N
NAT: AACSB Reflective AICPA Critical Thinking
2. Britney promises to deliver a certain couch to Dan, who promises to pay for the service. Britney does not perform. She may be required to
a. do nothing.
b. make another promise.
c. pay damages.
b. perform a different service.
ANSWER: C
PAGE: 153
NAT: AACSB Reflective AICPA Legal
TYPE: =
3. Joy promises to buy Kevin’s car for $1,500. Joy is
a. an offeree.
b. an officer.
c. a promisee.
d. a promisor.
ANSWER: D PAGE: 153
NAT: AACSB Reflective AICPA Legal
TYPE: =
4. Don contracts to tutor Ellen in the principles of business law. For the breach of a contractual promise, contract law entitles innocent parties to
a. any relief that a court wants to provide.
b. any relief that a defendant wants to concede.
c. any relief that a plaintiff wants to seek.
d. some forms of relief.
ANSWER: D PAGE: 153
TYPE: =
NAT: AACSB Analytic AICPA Critical Thinking
5. Laura and Mike enter into what Laura later claims is a contract. In deciding whether a valid contract was formed, a court will not look at
a. the circumstances surrounding the alleged contract.
b. the parties’ conduct at the time of the alleged contract.
c. the parties’ statements at the time of the alleged contract.
d. the parties’ subjective beliefs at the time of the alleged contract.
ANSWER: D PAGE: 153
NAT: AACSB Reflective AICPA Legal
TYPE: =
6. Bob claims that Carol breached their contract. Carol responds that she never intended to enter into a contract with Bob. The intent to enter into a contract is determined with reference to
a. the conscious theory of contracts.
b. the objective theory of contracts.
c. the personal theory of contracts.
d. the subjective theory of contracts.
ANSWER: B PAGE: 153
TYPE: =
NAT: AACSB Analytic
AICPA Legal
7. Sam makes an offer to Tina to enter into a contract. Tina accepts the offer. A valid contract requires
a. a valid offer only.
b. a valid acceptance only.
c. a valid offer and a valid acceptance.
d. neither a valid offer nor a valid acceptance.
ANSWER: C
PAGE: 153
NAT: AACSB Analytic AICPA Legal
TYPE: =
8. Holly enters into a contract to design robotic software for Interstate Assembly Corporation. The freedom to enter into contracts is
a. a fundamental public policy of the United States.
b. an ambiguous business goal that is irrelevant in terms of the law
c. a philosophical concept that underlies international law.
d. a principle that describes contracting parties’ intent.
ANSWER: A PAGE: 153
NAT: AACSB Reflective AICPA Legal
TYPE: =
9. A-One Pavers, Inc., contracts with Buyers Outlet Mall Corporation to repave Buyers’s parking lot. The elements of a contract do not include
a. consideration.
b. contractual capacity.
c. legality.
d. practicality.
ANSWER: D
PAGE: 153
NAT: AACSB Analytic AICPA Legal
TYPE: N
10. Jill offers to pay Kyle $500 if he jogs across the Golden Gate Bridge. Kyle can accept the offer only by jogging across the bridge. If Kyle jogs across the bridge, he and Jill will have formed
a. a bilateral contract.
b. a trilateral contract.
c. a unilateral contract.
d. no contract.
ANSWER: C PAGE: 154
NAT: AACSB Reflective AICPA Legal
TYPE: +
11. Mona asserts that a contract she entered into with Nate is unenforceable. Defenses to the enforcement of a contract include
a. a desire not to perform.
b. adverse economic consequences.
c. results that do not match expectations.
d. the lack of a party’s genuine assent.
ANSWER: D PAGE: 154
NAT: AACSB Reflective AICPA Legal
TYPE: =
12. Newt and Odell enter into a bilateral contract, which is created when Newt gives a promise in exchange for Odell’s
a. particular act.
b. performance.
c. promise.
d. prudent awareness.
ANSWER: C PAGE: 154
NAT: AACSB Reflective AICPA Legal
TYPE: N
13. Clay offers to pay Dot $50 for a golf lesson for Eula. They agree to meet the day after tomorrow to exchange the cash for the lesson. These parties have
a. a bilateral contract.
b. a trilateral contract.
c. a unilateral contract.
d. no contract.
ANSWER: A PAGE: 154
NAT: AACSB Reflective AICPA Legal
TYPE: N
14. Lana applies for a firefighter’s job with Metro City, which responds with a letter setting an appointment for a medical exam. The letter also states that it is “a conditional employment offer.” Based on the court’s reasoning in Case 7.1, Ardito v. City of Providence, this letter is
a. a bilateral contract that Lana accepted by applying for the job.
b. a quasi contract on which Lana can rely for employment.
c. a unilateral contract that Lana can accept by passing the exam.
d. no contract.
ANSWER: C PAGE: 155 TYPE: =
NAT: AACSB Communication AICPA Legal
15. Max begins to perform, intending that the completion of his performance act as an acceptance of Nia’s offer, which can only be accepted by the completion of the act. Nia can revoke her offer any time
a. after Nia makes it.
b. before Max completes performance of the act.
c. before Max has substantially begun performance of the act.
d. before Max indicates that he will perform.
ANSWER: C PAGE: 155 TYPE: N
NAT: AACSB Analytic AICPA Legal
16. Jay tells Kim that he will buy her textbook from the last semester for $80. Kim agrees. Jay and Kim have
a. an express contract.
b. an implied-in-fact contract.
c. an implied-in-law contract.
d. a quasi contract.
ANSWER: A PAGE: 156
NAT: AACSB Reflective AICPA Legal
TYPE: =
17. Gwen agrees to paint Holly’s Gift Shop. Gwen does the work, but Holly does not pay. To recover the price, Gwen can collect from Holly on the basis of their
a. express contract.
b. implied-in-fact contract.
c. implied-in-law contract.
d. quasi contract.
ANSWER: A PAGE: 156
NAT: AACSB Reflective AICPA Legal
TYPE: +
18. Tom enters a coffee shop at which he has an open account, fills a cup of coffee, holds it up so the cashier can see it, acknowledges the cashier’s nod,
CHAPTER 7: NATURE AND CLASSIFICATION 121
and walks out with the coffee, knowing that he will be billed for it at the end of the month. Tom has formed
a. an express contract.
b. an implied-in-fact contract.
c. an implied-in-law contract.
d. a quasi contract.
ANSWER: B
PAGE: 156
NAT: AACSB Reflective AICPA Legal
TYPE: =
19. Macro Corporation and Micro, Inc., enter into an agreement. To constitute a contract
a. all terms must be express.
b. all terms must be implied.
c. the terms may be express, implied, or a mix of both.
d. the terms may be express or implied, but not both.
ANSWER: C PAGE: 156
NAT: AACSB Analytic AICPA Legal
TYPE: N
20. Lou claims that he and Mira entered into an implied-in-fact contract. To establish this contract, it is not necessary to show that
a. a court imposed a promise in the interest of fairness.
b. Lou expected to be paid for providing services or property.
c. Lou provided Mira with services or property.
d. Mira failed to reject services or property provided by Lou.
ANSWER: A PAGE: 156
NAT: AACSB Reflective AICPA Legal
TYPE: =
21. Webb Design Company and Xpert Services, Inc., sign a document that states Webb agrees to design a Web page for Xpert and Xpert agrees to pay Webb for this service. Webb and Xpert have made
a. an express contract.
b. an implied-in-fact contract.
c. an implied-in-law contract.
d. a quasi contract.
ANSWER: A PAGE: 156
NAT: AACSB Reflective AICPA Legal
TYPE: N
22. Jolly Sales Company and Kwik Distributors, Inc., enter into an agreement that contains some express terms and some that are implied. This is
a. a mixture of an express contract and an implied-in-fact contract.
b. an express contract only.
c. an implied-in-law contract.
d. not a contract.
CHAPTER 7: NATURE AND CLASSIFICATION
ANSWER: A PAGE: 156
NAT: AACSB Reflective AICPA Legal
TYPE: N
23. Scot and Tiffany enter into an implied-in-fact contract. The parties’ conduct
a. defines the contract’s terms.
b. finds the contract’s facts.
c. terminates any unintended consequences.
d. undercuts any terms based on the facts.
ANSWER: A PAGE: 156
NAT: AACSB Reflective AICPA Legal
TYPE: =
24. Federal Oil Company and Great Apartments, Inc., sign a contract in which Federal agrees to deliver heating oil in exchange for Great’s promise to pay for it. Federal delivers the oil. The contract is
a. executory on the part of Federal.
b. executory on the part of Great.
c. fully executed.
d. neither executed nor executory on the part of either party.
ANSWER: B PAGE: 157
NAT: AACSB Reflective AICPA Legal
TYPE: =
25. Beth claims that her contract with Carl is voidable. If the contract is avoided
a. both parties are released from it.
b. neither party is released from it.
c. only Beth is released from it.
d. only Carl is released from it.
ANSWER: A PAGE: 157
NAT: AACSB Reflective AICPA Legal
TYPE: N
26. Employment Sources, Inc., enters into a contract with Fred. If Fred is a minor, this contract is most likely
a. enforceable.
b. unenforceable.
c. void.
d. voidable.
ANSWER: D PAGE: 157
TYPE: =
AND
NAT: AACSB Reflective AICPA Legal
27. Uma promises to buy a house from Viola, who promises to vacate the property on July 1. If these promises are in writing, they are most likely
a. enforceable.
b. unenforceable.
c. void.
d. voidable.
ANSWER: A PAGE: 157
NAT: AACSB Reflective AICPA Legal
TYPE: =
28. Curt promises to buy illegal copies of CDs and DVDs from Donna, who promises to deliver on May 1. These promises are most likely
a. enforceable.
b. valid.
c. void.
d. voidable.
ANSWER: C PAGE: 158
NAT: AACSB Reflective AICPA Legal
TYPE: =
29. Ferb mistakenly pays property taxes that should have been assessed against Grace. Ferb can recover the amount from Grace in quasi contract
a. even if Grace was not aware of the error.
b. only if Grace tried to conceal the error.
c. only if Grace was aware of the error.
d. under no circumstances.
ANSWER: A PAGE: 158
NAT: AACSB Reflective AICPA Legal
TYPE: +
30. In negotiations with Delta Distribution Company, Excel Trucking, Inc., insists that their contract be drafted according to certain plain language laws, which concern the phrasing of
a. contracts.
b. court documents only.
c. government forms only.
d. statutes only.
ANSWER: A PAGE: 160
NAT: AACSB Reflective AICPA Legal
TYPE: =
31. Phil enters into a contract with Quality Resorts, Inc., to work as a chef. Under the plain meaning rule, the meaning of this contract must be determined by reference to
a. any available evidence.
b. any relevant extrinsic evidence.
c. the face of the instrument.
d. the later testimony of the parties.
ANSWER: C PAGE: 160
NAT: AACSB Reflective AICPA Legal
TYPE: =
32. Cory enters into a contract with Dian to act as her personal sports trainer. If they later dispute the meaning, and the contract contains unclear terms, the rules of contract interpretation will give effect to
a. the parties’ intent as expressed in their contract.
b what the defendant claims was the parties’ intent.
c. what the plaintiff claims was the parties’ intent.
d. what the parties now agree they intended.
ANSWER: A PAGE: 161
NAT: AACSB Reflective AICPA Legal
TYPE: =
33. Nora enters into a contract with Owen’s Transport Company for the delivery of a shipment of fresh produce. If the language in the contract has more than one meaning, it will be construed against
a. the party who drafted the contract.
b. the party with the greater bargaining power.
c. the promisor.
d. the promisee.
ANSWER: A PAGE: 161
NAT: AACSB Reflective AICPA Legal
TYPE: =
34. Adams Accounting Services and Best Products, Inc., enter into a contract. Terms in the contract that are the subject of separate negotiation are considered subordinate to
a. standardized terms.
b. terms that can be understood only by lawyers and judges.
c. terms that are not negotiated separately.
d. none of the choices.
ANSWER: D
PAGE: 161
NAT: AACSB Analytic AICPA Legal
TYPE: N
35. Eve and Frank enter an express contract for the construction of an office building. Express contract terms are given
a. less priority than the parties’ prior dealing.
b. less priority than the trade usage in that particular industry.
c. less priority than the parties’ course of performance.
d. more priority than the prior dealing, course of performance, and trade usage.
ANSWER: D
PAGE: 161 TYPE: =
NAT: AACSB Reflective AICPA Legal
ESSAY QUESTIONS
1. Cody signs and returns a letter from Dora, referring to Dora’s Double-D Ranch and its price. When Cody attempts to complete the deal, Dora refuses, claiming that they do not have a contract. Cody claims they do. What standard determines whether these parties have a contract?
ANSWER: The objective theory of contracts is the standard to determine whether the parties have a contract. Under this standard, if a reasonable person would have thought that the offeree (Cody) accepted a legitimate offer by the offeror (Dora) when the offeree signed and returned the letter, a contract was made, and both parties are bound. This assessment is determined in part by what was said in the letter (did the letter constitute a valid offer?) and what was said in response (did the response constitute a valid acceptance?). Under any circumstances, the issue is not whether either party subjectively believed that they did, or did not, have a contract.
PAGE: 155
TYPE: N
NAT: AACSB Reflective AICPA Decision Modeling
2. Ed, a businessperson, is a friend of Fran, the owner of a candy store. Every day, Ed spends five minutes in Fran’s candy store, looking at the candy and usually buying one or two candy bars. One afternoon, Ed goes into the store, looks at the candy, and picks up a $1 candy bar. Ed waves the candy at Fran without saying a word and walks out. Is there a contract? If so, how would it be classified in terms of formation, performance, and enforceability?
ANSWER: The facts presented here indicate the presence of all the elements necessary for a valid contract. There are a serious offer and acceptance, consideration is exchanged (a candy bar for $1), the parties have capacity, the selling of the candy is legal, and there is no particular form required for this type of contract. Thus, a contract exists and for the reasons given here is classified as valid, enforceable, and informal. In addition, this is a classic case of an implied-in-fact contract. There is no explicit agreement between the parties. Rather, an agreement is implied by Ed’s action of waving the candy bar and by his past conduct. By his conduct Ed is telling Fran that he will pay for the candy later. The contract is also bilateral (as opposed to unilateral), because Fran impliedly promises to sell the candy to Ed in exchange for Ed’s implied promise to pay. The contract is partially executory, as Ed has engaged to pay for the candy in the future. Because the contract is for a legal purpose, both parties have capacity, and reality of consent is not an issue, the contract is neither voidable nor void.
PAGES: 157–158 `
TYPE: N
NAT: AACSB Reflective AICPA Decision Modeling