Legal Fundamentals for Canadian Business 3E Richard A. Yates Test Bank

Type:

Test Bank

Resource:

Legal Fundamentals for Canadian Business

Edition:

3rd Edition

Author(s):

Richard A. Yates

TEST ITEM FILE Julia Dotson Confederation College

Legal Fundamentals for Canadian Business Third Edition Richard A. Yates Simon Fraser University

CONTENTS CHAPTER 1 The Canadian Legal System

1-1

CHAPTER 2 Torts and Professional Liability

2-1

CHAPTER 3 Formation of Contracts

3-1

CHAPTER 4 Enforcing Contractual Obligations

4-1

CHAPTER 5 Legislation in the Marketplace

5-1

CHAPTER 6 Agency and Employment

6-1

CHAPTER 7 Methods of Carrying on Business

7-1

CHAPTER 8 Property

8-1

CHAPTER 9 Ideas and Information

9-1

CHAPTER 10 Electronic Commerce and International Trade

10-1

..

ii

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 1: The Canadian Legal System

1) Why is law important?

Answer: Business activities involve significant human interaction. Our business relationships involve important rights, responsibilities, and obligations. These take the form of legal rules, so it's important to understand law as we participate in business.

Feedback: Business activities involve significant human interaction. Our business relationships involve important rights, responsibilities, and obligations. These take the form of legal rules, so it's important to understand law as we participate in business.

Diff: 1 Type: ES Page Reference: 2a Skill: Applied 2) Identify five ways in which companies can reduce legal risks in business transactions.

Answer: Students may identify any number of options available to businesses. Some that they might suggest include these risk-avoidance strategies and practices: 1.

Know enough about the law to be able to avoid legal problems.

2.

Know when legal advice is needed.

3.

Recognize legal risks associated with physical facilities.

4.

Prepare contracts with an anticipation of all possible eventualities.

5.

Include alternate dispute resolution options in contracts.

6.

Protect intellectual property.

Feedback: Students may identify any number of options available to businesses. Some that they might suggest include these risk-avoidance strategies and practices: 1.

Know enough about the law to be able to avoid legal problems.

2.

Know when legal advice is needed.

3.

Recognize legal risks associated with physical facilities.

4.

Prepare contracts with an anticipation of all possible eventualities.

5.

Include alternate dispute resolution options in contracts.

6.

Protect intellectual property.

Diff: 2 Type: ES Page Reference: 2b Skill: Applied 3) When a client consults with a lawyer, the lawyer provides instruction and direction as to what to do. a. True b. False Answer: b

..

1

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 1: The Canadian Legal System

Diff: 1 Type: TF Page Reference: 2c Skill: Applied 4) Risk avoidance involves anticipation of what can go wrong and taking steps to avoid that eventuality. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 2d Skill: Recall 5) Which of the following is the most usable definition of law? a. It is most useful to us to define law in terms of what we think people ought to do. b. We must define law in terms of what people used to do. c. We must define law in terms of what the courts or other agents of government will enforce. d. We must define law in terms of what society needs people to do. e. It is most useful to us to define law in terms of what people do.

Answer: c Diff: 1 Type: MC Page Reference: 3a Skill: Recall 6) Law and morality are the same thing. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 3b Skill: Applied 7) Substantive law is concerned with how legal institutions work. a. True b. False Answer: b Diff: 1

..

2

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 1: The Canadian Legal System

Type: TF Page Reference: 3c Skill: Recall 8) Which of the following statements with regard to the characteristics of civil and criminal actions is true? a. The person who begins a civil action is usually called the prosecutor. b. A civil action is a private action; that is, a person or persons sue another or others usually for the purpose of being compensated for injury or loss suffered. c. If a person is convicted of a criminal offence, he or she cannot also be sued in a civil action by the victim. d. In a criminal case, an individual person is taking the action against the accused. e. The prosecutor must prove his or her case based "upon a balance of probabilities."

Answer: b Diff: 2 Type: MC Page Reference: 3d, 17d, 22b Skill: Recall 9) Distinguish between a criminal trial and a civil trial.

Answer: A criminal trial involves a prosecutor acting on behalf of the state, prosecuting an accused to the end that that person will be punished for his offence against the state. The status of the victim is as a witness. In a civil action (often referred as a private action), one person is suing another to the end that the court will award compensation for injury suffered or some other remedy requested by the plaintiff. The standard proof is also different in a criminal action, where the matter must be proved beyond a reasonable doubt, while in a civil action the standard is upon the balance of probabilities.

Feedback: A criminal trial involves a prosecutor acting on behalf of the state, prosecuting an accused to the end that that person will be punished for his offence against the state.

The status of the victim is as a witness. In a civil action (often referred as a private action), one person is suing another to the end that the court will award compensation for injury suffered or some other remedy requested by the plaintiff. The standard proof is also different in a criminal action, where the matter must be proved beyond a reasonable doubt, while in a civil action the standard is upon the balance of probabilities.

Diff: 3 Type: ES Page Reference: 3e, 21c, 30c, f Skill: Applied 10) Who brings a civil action?

Answer: The plaintiff

..

3

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 1: The Canadian Legal System

Feedback: The plaintiff Diff: 1 Type: FIB Page Reference: 3f Skill: Recall 11) Who are the parties in a civil action?

Answer: Plaintiff and defendant Feedback: Plaintiff and defendant Diff: 1 Type: FIB Page Reference: 3g Skill: Recall 12) Which of the following is incorrect regarding roles played in legal cases? a. In a civil action, the person suing is the plaintiff. b. In a civil action, the person being sued is the defendant. c. In an appeal, the person filing the appeal is the appellant. d. In a civil case, the appellant is the same as the defendant, but he or she is now in the appeals process. e. In a criminal case, the victim is likely to have the status of a witness.

Answer: d Diff: 2 Type: MC Page Reference: 3h, 30e Skill: Recall 13) Identify the parties and their roles in a civil action.

Answer: The person who is suing is the plaintiff and the person being sued is the defendant. If one party is dissatisfied with the outcome of the case and decides to appeal the decision, the one who files the appeal is the appellant and the other party is the respondent. Note that the appellant can be either the former plaintiff or the former defendant.

Feedback: The person who is suing is the plaintiff and the person being sued is the defendant. If one party is dissatisfied with the outcome of the case and decides to appeal the decision, the one who files the appeal is the appellant and the other party is the respondent. Note that the appellant can be either the former plaintiff or the former defendant.

Diff: 2 Type: ES Page Reference: 3i

..

4

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 1: The Canadian Legal System

Skill: Recall 14) A person has the right to appeal a decision in a civil court. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 3j Skill: Recall 15) The appellant may be either the plaintiff or the defendant. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 3k Skill: Recall 16) A criminal matter is usually offensive conduct considered serious enough for the government to get involved and punish the wrongdoer. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 3l Skill: Recall 17) What role does the civil code system of law play in Canada?

Answer: Quebec uses a civil code for areas that fall under its jurisdiction.

Feedback: Quebec uses a civil code for areas that fall under its jurisdiction.

Diff: 1 Type: ES Page Reference: 4a Skill: Applied 18) Which province in Canada continues to use a civil code system of law?

..

5

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 1: The Canadian Legal System

Answer: Quebec Feedback: Quebec Diff: 1 Type: FIB Page Reference: 4b Skill: Recall 19) Civil law is based on a codified system. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 4c Skill: Recall 20) Which of the following is correct with respect to the civil law system? a. Quebec and New Brunswick use a system based on the French Civil Code. b. The Civil Code as used in Quebec covers private disputes between individuals. c. The code is persuasive only and the judges are free to disregard it where the situation warrants. d. The system used in Quebec is based on Justinian's code rather than the Napoleonic Code. e. The Civil Code governs all legal matters arising in Quebec, including criminal actions.

Answer: b Diff: 2 Type: MC Page Reference: 4d Skill: Recall 21) If a lawsuit is filed in Quebec after a runner carelessly bumps into another and causes injury, the judge would rely on precedent cases to determine the outcome of the case. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 4e Skill: Applied 22) Explain what role precedent plays in the civil code system of law.

..

6

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 1: The Canadian Legal System

Answer: Prior judges' decisions are merely persuasive, not binding; the Code is binding.

Feedback: Prior judges' decisions are merely persuasive, not binding; the Code is binding.

Diff: 1 Type: ES Page Reference: 4f Skill: Applied 23) At a recent computer show, you heard a student trying to explain our legal system to a man who recently immigrated from Russia. Which one of the following statements that he made is correct? a. Today, we are governed only by statutes passed by our elected representatives. b. All of the provinces follow law that stemmed from the English common law. c. With the creation of our court system, the equitable tradition was lost. Today, a judge of our superior court does not apply principles or remedies developed by the courts of equity. d. Judge-made law in England came from two traditions, civil law and parliamentary supremacy. e. The chief characteristic of the common law is the theory of precedent; that is, judges are bound by decisions of judges on superior courts in that jurisdiction on the same point of law.

Answer: e Diff: 2 Type: MC Page Reference: 4g Skill: Recall 24) Judges in a common law system base their decisions on other judges' decisions. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 4h Skill: Recall 25) (Modify this question for your province.) Which of the following is false with respect to our court system? a. The consequence of the merger of the common law courts with the courts of equity is that the courts now apply both legal and equitable principles and remedies.

..

7

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 1: The Canadian Legal System

b. The lawyer arguing before the B.C. Supreme Court could cite a British case, but the judge is not bound to follow it. c. There is no monetary limitation on the B.C. Supreme Court (i.e., the case may involve any amount of money). d. A negligence action, where the extent of damage is $1500, would most likely begin in the B.C. Provincial Court, small claims division. e. A judge on the B.C. Court of Appeal is bound to follow the decision of a judge on the B.C. Supreme Court on an identical case.

Answer: e Diff: 2 Type: MC Page Reference: 4i Skill: Recall 26) A British Columbia judge is required to follow the decisions of a higher court in Alberta. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 4j Skill: Recall 27) In the common law system, if a judge feels that the decision made by a judge in a higher court is wrong, he or she is free to disregard it. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 4k Skill: Recall 28) Common law judges in Canada often look to decisions from other, similar judicial systems, including Great Britain, the United States, Australia, and New Zealand; these decisions are not binding, although they can be persuasive on Canadian courts. a. True b. False Answer: a Diff: 1 Type: TF

..

8

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 1: The Canadian Legal System

Page Reference: 4l Skill: Recall 29) The custom of following already decided cases is called: a. Substantive law b. Procedural law c. Res judicata d. Stare decisis e. Civil law system Answer: d Diff: 1 Type: MC Page Reference: 4m Skill: Recall 30) Which of the following statements is correct with respect to the sources of our law? a. The Courts of Chancery developed the law of contracts. b. Equity is a system of law developed by the provincial legislatures. c. The term stare decisis refers to the practice of following precedent, which forms the basis of our common law system. d. The only province in which a judge is required to follow a comprehensive civil code is Ontario. e. The common law derived aspects of the law of families and estates from the French Civil Code.

Answer: c Diff: 1 Type: MC Page Reference: 4n Skill: Recall 31) Which of the following is correct with respect to stare decisis in the common law? a. Statutes play the same role as the code used in the French system. b. It prevents a higher court from overruling a lower one. c. It is based on trial by battle and trial by ordeal. d. This term refers to the role played by the law of equity in our system. e. It allows decisions of the courts to be set by precedent.

Answer: e Diff: 2 Type: MC Page Reference: 4o Skill: Recall 32) Stare decisis is the Latin term for following the code.

..

9

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 1: The Canadian Legal System

a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 4p Skill: Recall 33) Explain what is meant by stare decisis.

Answer: This is the foundation of the common law system whereby one judge's decision must be followed by another. This system involves a complex set of rules to determine which precedent must be followed. Basically, a decision in a case involving the same legal issue decided in a higher court in the same jurisdiction is a binding precedent that must be followed.

Feedback: This is the foundation of the common law system whereby one judge's decision must be followed by another. This system involves a complex set of rules to determine which precedent must be followed. Basically, a decision in a case involving the same legal issue decided in a higher court in the same jurisdiction is a binding precedent that must be followed.

Diff: 2 Type: ES Page Reference: 4q Skill: Recall 34) The common law courts as developed by the king of England were used to impose the will of the sovereign on the people. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 5a Skill: Recall 35) Which of the following was not one of the factors that led to the creation of the law of equity? a. The need for a supplement to the common law b. The adherence to precedent c. The outcome in the common law courts was unpredictable d. Stare decisis e. Rigidity in the common law courts

..

10

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 1: The Canadian Legal System

Answer: c Diff: 2 Type: MC Page Reference: 5b Skill: Recall 36) Explain why the law of equity developed.

Answer: Because of the inequity and harshness of the common law, people seeking unique remedies would petition the king for relief. Since, in theory, the king was the source of all power for all courts, he had the power to make orders overcoming individual injustices caused by the shortcomings of the common law courts. This task was soon assigned to others and eventually developed into a separate body known as the Court of Equity. The body of law that developed was equity, and so it can be said that equity developed to supplement the common law because of the inadequacy and rigidity of the common law.

Feedback: Because of the inequity and harshness of the common law, people seeking unique remedies would petition the king for relief. Since, in theory, the king was the source of all power for all courts, he had the power to make orders overcoming individual injustices caused by the shortcomings of the common law courts. This task was soon assigned to others and eventually developed into a separate body known as the Court of Equity. The body of law that developed was equity, and so it can be said that equity developed to supplement the common law because of the inadequacy and rigidity of the common law.

Diff: 2 Type: ES Page Reference: 5c Skill: Recall 37) Although the Court of Chancery and common law courts were merged, the bodies of law remain separate today. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 6a Skill: Recall 38) "The term equity refers to fairness in our legal system." Discuss the accuracy of this statement.

Answer:

..

11

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 1: The Canadian Legal System

Equity is that body of law developed by the Court of Chancery and may or may not be considered fair by today's standards. In the 19th century, the Court of Chancery and common law courts were merged into one court system, but it must be emphasized that the bodies of law developed (that is, common law and equity) remain separate and distinct bodies of law.

Feedback: Equity is that body of law developed by the Court of Chancery and may or may not be considered fair by today's standards. In the 19th century, the Court of Chancery and common law courts were merged into one court system, but it must be emphasized that the bodies of law developed (that is, common law and equity) remain separate and distinct bodies of law.

Diff: 2 Type: ES Page Reference: 6b Skill: Applied 39) Which of the following is correct with respect to the law of equity? a. Equity means fairness in our legal system. b. Equity refers to the body of law created by the Court of Chancery. c. The Court of Equity was essentially a common law court. d. Equity no longer exists; the courts were merged. e. Equity refers to the amount still owing on a debt.

Answer: b Diff: 2 Type: MC Page Reference: 6c Skill: Recall 40) The law of equity was developed in the Court of Chancery. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 6d Skill: Recall 41) The body of law developed by the Court of Chancery is called ________.

Answer: Equity Feedback: Diff: 1 Type: FIB Page Reference: 6e

..

12

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 1: The Canadian Legal System

Skill: Recall 42) The law of equity was developed by ________.

Answer: The Court of Chancery Feedback: The Court of Chancery Diff: 1 Type: FIB Page Reference: 6f Skill: Recall

43) Civil law is also known as judge-made law. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 6g Skill: Recall 44) Which of the following is incorrect regarding the development of common law in Canada? a. Canon law (church law) influenced the development of common law in relation to the laws of wills and estates. b. Common law was developed by the Court of Chancery. c. Roman law influenced the development of common law in relation to property law. d. The law merchant influenced the development of common law in relation to the law of negotiable instruments. e. Common law is a body of rules based on cases developed in the common law courts.

Answer: b Diff: 2 Type: MC Page Reference: 6h Skill: Recall 45) Although the English-speaking provinces adopted the English legal system at different times in their history, they now have a common body of laws. a. True b. False Answer: b

..

13

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 1: The Canadian Legal System

Diff: 1 Type: TF Page Reference: 7a Skill: Recall 46) Explain why statutes override the common law.

Answer: Because of the principle of parliamentary supremacy, when Parliament passes a statute, it overrides common law or equity.

Feedback: Because of the principle of parliamentary supremacy, when Parliament passes a statute, it overrides common law or equity.

Diff: 2 Type: ES Page Reference: 7b Skill: Applied 47) Which of the following is correct with respect to the role of statutes in our legal system? a. Only the federal Parliament may enact statutes. b. In Canada, most new laws follow the Civil Code legal system. c. Where a properly passed provincial statute is in conflict with a well-established common law principle, the statute will be void. d. Once a statute has been interpreted and applied in a court, a subsequent judge in a lower court is not required to follow that decision if he or she disagrees with it. e. A statute, if it is clear and concise and properly passed, will always override common law and equity.

Answer: e Diff: 1 Type: MC Page Reference: 7c Skill: Recall 48) Which of the following statements about statutes is true? a. A statute may be only federal. b. Statutes apply only when there is no common law covering the situation. c. Government regulations are considered supreme to statute law. d. Statutes are laws created by legislative bodies. e. Statutes often summarize or modify canon law.

Answer: d Diff: 2 Type: MC Page Reference: 7d

..

14

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 1: The Canadian Legal System

Skill: Recall 49) Which of the following will a judge not apply in a Canadian court? a. Constitutional law b. Equitable principles c. Statute law d. Common law principles e. Roman law Answer: e Diff: 1 Type: MC Page Reference: 7e Skill: Recall 50) What is the significance of the Constitution Act (1867)?

Answer: It created the Confederation of Canada and, for our purposes today, it divides powers between the federal and provincial governments.

Feedback: It created the Confederation of Canada and, for our purposes today, it divides powers between the federal and provincial governments.

Diff: 2 Type: ES Page Reference: 7f, i Skill: Recall 51) "Canada's Constitution is embodied in the British North America Act." Comment on the accuracy of this statement.

Answer: This is incorrect. Canada has a constitution similar to that of the United Kingdom. It is an unwritten constitution in the sense that it is found in various proclamations, statutes, traditions, and judicially proclaimed principles. Thus, the rule of law, the Magna Carta, and parliamentary supremacy are all part of the constitutional tradition inherited by Canada. The BNA Act has constitutional status in Canada.

Feedback: This is incorrect. Canada has a constitution similar to that of the United Kingdom. It is an unwritten constitution in the sense that it is found in various proclamations, statutes, traditions, and judicially proclaimed principles. Thus, the rule of law, the Magna Carta, and parliamentary supremacy are all part of the constitutional tradition inherited by Canada. The BNA Act has constitutional status in Canada.

Diff: 2 Type: ES Page Reference: 7g

..

15

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 1: The Canadian Legal System

Skill: Applied 52) Explain what is meant by the principle of the rule of law.

Answer: Essentially, the rule of law ensures that all are subject to the law and the legal process.

Feedback: Essentially, the rule of law ensures that all are subject to the law and the legal process.

Diff: 2 Type: ES Page Reference: 7h Skill: Recall 53) Which of the following is incorrect with respect to the Charter and the Constitution? a. Canada is no longer required to go to the Parliament of England for any constitutional change. b. The most significant accomplishment of the Constitution Act (1982) was to create a new court structure for Canada. c. The BNA Act (Constitution Act [1867]) divides power between the federal and provincial governments. d. The provisions of the Charter of Rights and Freedoms guarantee us rights and freedoms that restrict both federal and provincial governments. e. Rights such as freedom of expression are now constitutionally guaranteed.

Answer: b Diff: 2 Type: MC Page Reference: 7j, 10b, 12f, r Skill: Recall 54) Give examples of areas that fall under federal jurisdiction.

Answer: Money and banking, the military, criminal law, and weights and measures Feedback: Money and banking, the military, criminal law, and weights and measures Diff: 2 Type: ES Page Reference: 8a Skill: Recall 55) Uncle Max just emigrated to Canada and learned some things about our laws and constitution on the plane. Which of the following things he heard is true? a. There are many aspects of our constitution that we have inherited from the United States.

..

16

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 1: The Canadian Legal System

b. The Charter of Rights and Freedoms, part of the Constitution Act (1982), has been entrenched in our constitution and therefore cannot be changed. c. The Constitution Act (1982) was the first document to determine which classes of subjects could be dealt with by the provinces and which by the federal government. d. Our constitution provides that the provincial legislatures have exclusive jurisdiction to enact laws concerning health and education in the province. e. Our federal Parliament is supreme in enacting laws concerning municipalities.

Answer: d Diff: 2 Type: MC Page Reference: 8b Skill: Recall 56) Give an example of powers that are given to the provincial government under section 92 of the Constitutional Act (1867).

Answer: Health, education, and commercial activities carried on at the local level Feedback: Health, education, and commercial activities carried on at the local level Diff: 2 Type: ES Page Reference: 8c Skill: Recall 57) When an individual is faced with federal legislation and provincial legislation both dealing with the same subject matter, which should he or she obey?

Answer: When this happens, and there is a true conflict (where it is impossible to obey both), the federal legislation takes precedence over the provincial legislation. This is called the principle of paramountcy.

Feedback: When this happens, and there is a true conflict (where it is impossible to obey both), the federal legislation takes precedence over the provincial legislation. This is called the principle of paramountcy.

Diff: 2 Type: ES Page Reference: 8d Skill: Applied 58) In addition to the federal and provincial governments, other bodies have the authority to make laws. Provide four examples of other bodies with this authority and limitations placed on the laws they create.

..

17

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 1: The Canadian Legal System

Answer: The Yukon, the Northwest Territories, and Nunavut have been authorized by the federal government to pass legislation much like the provinces. Other bodies that also have authority to make law include cities and towns, as well as regional districts and First Nations communities. However, these bodies pass subordinate legislation (by-laws) and they must act within the limited authority granted under federal or provincial legislation.

Feedback: The Yukon, the Northwest Territories, and Nunavut have been authorized by the federal government to pass legislation much like the provinces. Other bodies that also have authority to make law include cities and towns, as well as regional districts and First Nations communities. However, these bodies pass subordinate legislation (by-laws) and they must act within the limited authority granted under federal or provincial legislation.

Diff: 2 Type: ES Page Reference: 9a Skill: Recall 59) What is meant by a statute?

Answer: A statute is a parliamentary or legislative enactment having the force of law. It is sometimes referred to as a bill prior to passage and as legislation or an Act afterwards.

Feedback: A statute is a parliamentary or legislative enactment having the force of law. It is sometimes referred to as a bill prior to passage and as legislation or an Act afterwards.

Diff: 2 Type: ES Page Reference: 9b Skill: Recall 60) Since the passage of the Constitution Act (1982), federal legislation in Canada no longer requires royal assent from the governor general. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 9c Skill: Recall 61) What is meant by the Revised Statutes of Canada?

Answer: Every so many years, the statutes are summarized and brought up to date. When this happens, they are referred to as the Revised Statutes.

..

18

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 1: The Canadian Legal System

Feedback: Every so many years, the statutes are summarized and brought up to date.

When this happens, they are referred to as the Revised Statutes.

Diff: 2 Type: ES Page Reference: 9d Skill: Recall 62) Explain the relationship between regulations and statutes.

Answer: Statutes often authorize a cabinet minister or other official to create sublegislation or regulations to accomplish the objectives of the statute. These regulations are published and available to the public. If the regulations have been properly passed within the authority as specified in the statute, they have the same legal standing as a statute. Thus, the Canadian Human Rights Act has nine different bodies of regulations associated with it, including equal wage guidelines, immigration guidelines, and regulations protecting personal information. The general rules would be set out in the statute, whereas the regulations set out the specific procedures to be followed, penalties for violations, or the fees to be charged for different services. Both the statutes and the regulations passed under it have the force of law and can be enforced by the government department that created them.

Feedback: Statutes often authorize a cabinet minister or other official to create sublegislation or regulations to accomplish the objectives of the statute. These regulations are published and available to the public. If the regulations have been properly passed within the authority as specified in the statute, they have the same legal standing as a statute. Thus, the Canadian Human Rights Act has nine different bodies of regulations associated with it, including equal wage guidelines, immigration guidelines, and regulations protecting personal information. The general rules would be set out in the statute, whereas the regulations set out the specific procedures to be followed, penalties for violations, or the fees to be charged for different services. Both the statutes and the regulations passed under it have the force of law and can be enforced by the government department that created them.

Diff: 2 Type: ES Page Reference: 10a Skill: Recall 63) Identify four prohibited discriminatory practices set out in the Canadian Human Rights Act. Answer: The Act includes the denial of goods, services, facilities, or accommodations that would normally be available to the public and the denial of access to commercial premises or residential accommodations on one of the prohibited grounds. Harassment and hate

..

19

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 1: The Canadian Legal System

messages are also prohibited. Prohibited discriminatory practices with regards to employment include advertising, application forms, hiring, training, wages, promotion, transfers, termination, and all other matters related to employment. Also included are harassment in the workplace and the requirement to accommodate people with special needs.

Feedback: The Act includes the denial of goods, services, facilities, or accommodations that would normally be available to the public and the denial of access to commercial premises or residential accommodations on one of the prohibited grounds. Harassment and hate messages are also prohibited. Prohibited discriminatory practices with regards to employment include advertising, application forms, hiring, training, wages, promotion, transfers, termination, and all other matters related to employment. Also included are harassment in the workplace and the requirement to accommodate people with special needs.

Diff: 2 Type: ES Page Reference: 10c Skill: Recall 64) Discuss why it is important for business people to become familiar with the human rights legislation in force in their province.

Answer: While the legislation may vary by province, all provinces have human rights laws and strong enforcement bodies. These bodies have the power to hear complaints, gather information, hold hearings, and provide remedies. A business person is more likely to have dealings with provincial human rights bodies than with the Charter or other constitutional matters and should become well acquainted with their requirements and processes to avoid any practices that can give rise to complaints. It is critical that employees be trained properly on these laws to eliminate the risk of human rights violations.

Feedback: While the legislation may vary by province, all provinces have human rights laws and strong enforcement bodies. These bodies have the power to hear complaints, gather information, hold hearings, and provide remedies. A business person is more likely to have dealings with provincial human rights bodies than with the Charter or other constitutional matters and should become well acquainted with their requirements and processes to avoid any practices that can give rise to complaints. It is critical that employees be trained properly on these laws to eliminate the risk of human rights violations.

Diff: 2 Type: ES Page Reference: 11 Skill: Applied

..

20

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 1: The Canadian Legal System

65) Discuss the significance of the passage of the Charter of Rights and Freedoms in Canada's legal system.

Answer: Students should describe the nature of the Charter of Rights and Freedoms, why it was needed, and how it affected the rest of Canada's legal system. Before the Charter, there were few restrictions on government because of supremacy of Parliament. There was a need for overall entrenched rights that controlled the actions of government and government officials and agents. It is important that they indicate that the Charter only applies directly to governments but indirectly affects individuals' relations with each other because provincial and federal human rights legislation and other statutes must conform to the Charter. They should show that the Charter shifts power to the courts, that Parliament is no longer supreme, but also that there is an exception with the notwithstanding clause.

Students' answers should show that they know what the Charter of Rights and Freedoms is, why it was passed, and that it fundamentally altered the relationship between the courts and Parliament in this country.

Feedback: Students should describe the nature of the Charter of Rights and Freedoms, why it was needed, and how it affected the rest of Canada's legal system. Before the Charter, there were few restrictions on government because of supremacy of Parliament.

There was a need for overall entrenched rights that controlled the actions of government and government officials and agents. It is important that they indicate that the Charter only applies directly to governments but indirectly affects individuals' relations with each other because provincial and federal human rights legislation and other statutes must conform to the Charter. They should show that the Charter shifts power to the courts, that Parliament is no longer supreme, but also that there is an exception with the notwithstanding clause.

Students' answers should show that they know what the Charter of Rights and Freedoms is, why it was passed, and that it fundamentally altered the relationship between the courts and Parliament in this country.Diff: 2 Type: ES Page Reference: 12a Skill: Recall 66) How does the Charter of Rights and Freedoms affect the principle of parliamentary supremacy?

Answer: Prior to 1982, in theory at least, Parliament was supreme. Either the federal government or the provincial government had the power to pass all types of legislation. After 1982, however, the Charter placed limitations on that power, thus redirecting power to the courts and limiting the principle of supremacy of Parliament.

Feedback: Prior to 1982, in theory at least, Parliament was supreme. Either the federal government or the provincial government had the power to pass all types of legislation.

..

21

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 1: The Canadian Legal System

After 1982, however, the Charter placed limitations on that power, thus redirecting power to the courts and limiting the principle of supremacy of Parliament.

Diff: 2 Type: ES Page Reference: 12b Skill: Applied 67) With regard to the Constitution of Canada, which of the following is true? a. Federal judges have been given the sole power to amend the Charter of Rights and Freedoms. b. The Constitution provides for a single system of government. c. The British Parliament can continue to pass legislation that affects Canada. d. The Constitution Act (1982) contains a Charter of Rights and Freedoms that curbs the power of the federal and provincial legislatures. e. The Constitution Act (1982) outlines which matters can be dealt with only by the federal government.

Answer: d Diff: 1 Type: MC Page Reference: 12c Skill: Recall 68) Which of the following statements is correct with respect to our constitutional law? a. The Constitution Act (1982) is the supreme law of Canada and overrides statutes. b. The Canadian Charter of Rights and Freedoms is part of the BNA Act (1867). c. The Constitution Act (1982) was passed only by the English Parliament. d. The Charter of Rights and Freedoms is entrenched and, as such, none of its provisions can be overridden by any level of government. e. Both the federal and provincial governments can change the provisions of the Charter of Rights and Freedoms without going through the constitutional amending process.

Answer: a Diff: 2 Type: MC Page Reference: 12d Skill: Recall 69) Regarding the Charter of Rights and Freedoms, which of the following statements is true? a. Any statute, by any level of government, no matter how inconsistent it is with the provisions of the Charter, is still considered binding on all Canadians. b. Neither the federal government nor the provincial governments can change the provisions of the Charter without going through the constitutional amending process. c. Any action by a government official that violates the provisions of the Charter is not actionable under the Charter.

..

22

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 1: The Canadian Legal System

d. The guarantee of the right of free speech allows citizens to avoid being held liable for defamation under the Constitution of Canada. e. The Charter protects fundamental freedoms that apply only to relations between private citizens.

Answer: b Diff: 1 Type: MC Page Reference: 12e Skill: Recall 70) Which of the following statements is correct with respect to the application of the Charter of Rights and Freedoms? a. Any provincial human rights legislation must comply with the provisions of the Charter. b. The Charter applies to the federal and provincial governments. c. The Charter takes precedence over Aboriginal treaty rights when there are inconsistencies between the two. d. The provisions of the Charter apply only to government and to any government representative exercising a statutory power. e. The Charter specifically prohibits discrimination on the basis of sexual orientation.

Answer: b Diff: 2 Type: MC Page Reference: 12g Skill: Recall 71) Which of the following is true with regard to our legal system? a. Our constitution can be amended by the federal Parliament acting alone. b. Our Charter of Rights and Freedoms diminishes the power of both the federal and provincial legislatures. c. Case law overrides the statute law on the same point. d. If a case were heard before a provincial trial-level court, the judge could apply legal principles and award only cash remedies. e. An appeal from the Supreme Court of Canada goes to the Federal Court of Appeal.

Answer: b Diff: 2 Type: MC Page Reference: 12h Skill: Recall 72) Parliamentary supremacy is no longer completely in effect in Canada today. a. True b. False

..

23

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 1: The Canadian Legal System

Answer: a Diff: 1 Type: TF Page Reference: 12i Skill: Recall 73) With regard to the relationship between the judiciary (courts) and the legislatures, which of the following is true? a. Common law overrides case law on the same point. b. The courts have no authority to affect a statute once it has been passed by our elected representatives in the federal Parliament. c. A provincial statute could be struck down by the courts for being contrary to the Charter of Rights and Freedoms. d. The courts have no power to declare a provincial statute to be void; only federal statutes can be struck down by the courts. e. The courts cannot affect the meaning of the statute through subsequent interpretation.

Answer: c Diff: 2 Type: MC Page Reference: 12j, 15b Skill: Recall 74) The Charter of Rights and Freedoms applies to which of the following? a. The police b. A municipal council c. The provincial cabinet d. A human rights commission e. All of the above Answer: e Diff: 1 Type: MC Page Reference: 12k Skill: Recall 75) Explain how the rights set up in the Charter of Rights and Freedoms are limited.

Answer: 1. The Charter applies only to government, government institutions, and agents acting on behalf of government.

2. Section 1 of the Charter allows for reasonable exceptions to the rights and freedoms set out in the Charter. This is only where it is reasonable (e.g., preventing prisoners from claiming mobility rights). Section 33, the "notwithstanding clause," allows the provinces

..

24

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 1: The Canadian Legal System

or the federal government to override section 2 and sections 7-15 by so declaring in the legislation.

Feedback: 1. The Charter applies only to government, government institutions, and agents acting on behalf of government.

2. Section 1 of the Charter allows for reasonable exceptions to the rights and freedoms set out in the Charter. This is only where it is reasonable (e.g., preventing prisoners from claiming mobility rights). Section 33, the "notwithstanding clause," allows the provinces or the federal government to override section 2 and sections 7-15 by so declaring in the legislation.Diff: 2 Type: ES Page Reference: 12l, r Skill: Applied 76) How does section 33 limit the rights set out in the Charter of Rights and Freedoms?

Answer: This is the "notwithstanding clause"; it allows the government, for a period of five years, to override the rights set out in sections 2 and 7-15 of the Charter by so stating in the legislation. At the end of five years, such overriding legislation lapses and must be passed again.

Feedback: This is the "notwithstanding clause"; it allows the government, for a period of five years, to override the rights set out in sections 2 and 7-15 of the Charter by so stating in the legislation. At the end of five years, such overriding legislation lapses and must be passed again.

Diff: 2 Type: ES Page Reference: 12m Skill: Recall 77) Explain the limitations on the application of the Charter of Rights and Freedoms.

Answer: The Charter applies only to government, including laws made by all levels of government, government institutions, and agents acting on behalf of governments. Thus, the provisions of the Charter cannot be relied on to challenge nongovernmental situations such as employment, accommodation, or services, areas that are normally protected by provincial human rights legislation.

Feedback: The Charter applies only to government, including laws made by all levels of government, government institutions, and agents acting on behalf of governments. Thus, the provisions of the Charter cannot be relied on to challenge nongovernmental situations such as employment, accommodation, or services, areas that are normally protected by provincial human rights legislation.

Diff: 2

..

25

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 1: The Canadian Legal System

Type: ES Page Reference: 12n Skill: Applied 78) "An individual who is refused service at a restaurant because of his race has had his Charter rights violated." Comment on the accuracy of this statement.

Answer: The Charter of Rights and Freedoms is not intended to cover this situation; it's not a public matter involving government, but rather a private matter between citizens. That must be dealt with by the human rights legislation in the province. However, if that local human rights legislation does not counter this situation, then that human rights legislation, which is an Act of the government, can be challenged under the Charter.

Feedback: The Charter of Rights and Freedoms is not intended to cover this situation; it's not a public matter involving government, but rather a private matter between citizens.

That must be dealt with by the human rights legislation in the province. However, if that local human rights legislation does not counter this situation, then that human rights legislation, which is an Act of the government, can be challenged under the Charter.

Diff: 2 Type: ES Page Reference: 12o Skill: Applied 79) Which of the following situations would be addressed on the basis of the Charter of Rights and Freedoms? a. Discrimination in hiring at the local coffee shop on the basis of a physical disability b. Denying a promotion at a provincial ministry on the basis of age c. Refusing apartment accommodation on the basis of a mental disability d. Refusing access to a concert on the basis of having no ticket e. Denying employment at a provincial ministry on the basis of inadequate academic preparation Answer: b Diff: 2 Type: MC Page Reference: 12q, 13h Skill: Applied 80) Indicate what kind of fundamental freedoms are protected under the Charter.

Answer: Freedoms of speech, religion, the press, and association Feedback: Freedoms of speech, religion, the press, and association Diff: 2

..

26

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 1: The Canadian Legal System

Type: ES Page Reference: 12s Skill: Recall 81) Which of the following is a right or freedom guaranteed in the Charter? a. The right to vote in federal and provincial elections b. The right to have your children educated in any language c. The right to be assured of a minimum level of income d. The right to own property e. The right to bear arms Answer: a Diff: 2 Type: MC Page Reference: 13a Skill: Recall 82) What kinds of rights are protected under the heading of mobility rights in the Charter?

Answer: The rights of Canadians to live and work anywhere within Canada, as well as the right to enter and leave Canada Feedback: The rights of Canadians to live and work anywhere within Canada, as well as the right to enter and leave Canada Diff: 2 Type: ES Page Reference: 13b Skill: Recall 83) Which of the following is a legal right under the Charter? a. The Charter applies only to government employees. b. Legal rights include the rights to life, liberty, and the security of person. c. The Charter states that everyone is not equal under the law. d. The Charter does not protect the rights of Aboriginal people. e. The Charter applies only to the federal government.

Answer: b Diff: 3 Type: MC Page Reference: 13c Skill: Recall 84) What kind of legal rights are protected under the Charter?

..

27

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 1: The Canadian Legal System

Answer: The rights to life, liberty, and the security of person; the rights to be told why you are being arrested and to have a lawyer; the right not to incriminate yourself; the right to be tried within a reasonable time; the right to a jury trial; and the right not to be exposed to any unreasonable search and seizure or cruel or unusual treatment Feedback: The rights to life, liberty, and the security of person; the rights to be told why you are being arrested and to have a lawyer; the right not to incriminate yourself; the right to be tried within a reasonable time; the right to a jury trial; and the right not to be exposed to any unreasonable search and seizure or cruel or unusual treatment Diff: 2 Type: ES Page Reference: 13d Skill: Applied 85) Which of the following is a legal right under the Charter? a. Everyone has the democratic right to vote regardless of age or mental capacity. b. Everyone has the right to be employed. c. Everyone has the right not to be deprived of his or her property. d. Everyone has the right not to be exposed to any unreasonable search and seizure. e. Everyone has the right to freedom of expression even if it interferes with the freedom of others.

Answer: d Diff: 2 Type: MC Page Reference: 13e Skill: Recall 86) What kind of equality rights are protected by the Charter of Rights and Freedoms?

Answer: "Every individual is equal before and under the law and has the right to the equal protection and equal benefit of the law without discrimination." Discrimination on the basis of race, national or ethnic origin, colour, religion, sex, age, or mental or physical disability is prohibited. (NOTE: Section 15 of the Charter is actually broader than this and prohibits any form of discrimination.)

Feedback: "Every individual is equal before and under the law and has the right to the equal protection and equal benefit of the law without discrimination." Discrimination on the basis of race, national or ethnic origin, colour, religion, sex, age, or mental or physical disability is prohibited. (NOTE: Section 15 of the Charter is actually broader than this and prohibits any form of discrimination.)

Diff: 2 Type: ES Page Reference: 13f, 14

..

28

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 1: The Canadian Legal System

Skill: Recall 87) Which of the following is correct with respect to the Charter of Rights and Freedoms? a. The Parliament or provincial legislature cannot override a section of the Charter. b. The federal or provincial legislatures cannot override a person's right not to be discriminated against on the basis of race or religion. c. The federal or provincial legislatures cannot override a person's right to free speech. d. Section 33 (the notwithstanding clause) applies to all provisions of the Charter. e. Mobility rights cannot be restricted by government or its agents.

Answer: b Diff: 2 Type: MC Page Reference: 13g Skill: Recall 88) The provisions set out in the Charter of Rights and Freedoms are general principles.

To understand what they really mean, it is necessary to examine the decisions of courts, especially those of the Supreme Court of Canada. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 15a Skill: Recall 89) (Modify this question for your province.) Fred sold Carole his old Macintosh computer and his printer in addition to eight programs for $2900. After she paid $1000, Carole quit paying. When she had no complaint about the computer, printer, or programs but simply wouldn't pay, Fred decided to sue. He would most likely begin his action in: a. Small Claims Division, Provincial Court b. B.C. Supreme Court c. Criminal Division, Provincial Court d. Federal Court e. B.C. Court of Appeal Answer: a Diff: 1 Type: MC Page Reference: 15c Skill: Recall

..

29

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 1: The Canadian Legal System

90) The small claims court deals with civil actions where one party sues another for relatively small amounts of money. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 15d Skill: Recall 91) Indicate the jurisdiction of the Small Claims Court in your area.

Answer: This will vary from province to province. For example, in British Columbia and Ontario, it is civil matters up to $25 000.

Feedback: This will vary from province to province. For example, in British Columbia and Ontario, it is civil matters up to $25 000.

Diff: 2 Type: ES Page Reference: 15e Skill: Recall 92) What types of cases are handled in small claims court?

Answer: The small claims court deals with civil actions where one party sues another for relatively small amounts of money.

Feedback: The small claims court deals with civil actions where one party sues another for relatively small amounts of money.

Diff: 2 Type: FIB Page Reference: 15f Skill: Recall

93) Which of the following is correct with respect to specialized divisions of lower-level provincial courts? a. Family courts deal with family law matters, including division of assets, custody of children, and divorce. b. Youth courts deal with juveniles. c. Criminal courts deal with all criminal offences. d. The small-claims courts deal with criminal actions involving relatively small amounts of money.

..

30

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 1: The Canadian Legal System

e. All provinces share the same court structure.

Answer: b Diff: 3 Type: MC Page Reference: 15g Skill: Recall 94) Describe the court structure in place in your province.

Answer: This will vary from province to province. In British Columbia, the bottom level is Provincial Court, including the Small Claims Court, the Family Court, and the Criminal Division. The next level is the B.C. Supreme Court; the highest level is the Court of Appeal.

Feedback: This will vary from province to province. In British Columbia, the bottom level is Provincial Court, including the Small Claims Court, the Family Court, and the Criminal Division. The next level is the B.C. Supreme Court; the highest level is the Court of Appeal.

Diff: 3 Type: ES Page Reference: 15h Skill: Applied 95) The highest-level trial court of the province cannot do which one of the following? a. Award punitive damages b. Try a case involving a claim for billions c. Hear trials (i.e., be a court of first instance) d. Hear criminal cases e. Bind the court of appeal of the province by its decisions Answer: e Diff: 2 Type: MC Page Reference: 16a Skill: Recall 96) A jury is not available in civil disputes. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 16b

..

31

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 1: The Canadian Legal System

Skill: Recall 97) What is the highest court in Canada?

Answer: Supreme Court of Canada Feedback: Supreme Court of Canada Diff: 2 Type: FIB Page Reference: 16c Skill: Recall 98) How many judges are involved at the Supreme Court of Canada level and how are they appointed?

Answer: There are nine judges. These judges are appointed by the governor general upon recommendation by the prime minister and cabinet.

Feedback: There are nine judges. These judges are appointed by the governor general upon recommendation by the prime minister and cabinet.

Diff: 2 Type: FIB Page Reference: 16d Skill: Recall 99) Which of the following is true in relation to the Supreme Court of Canada? a. The Supreme Court of Canada has one judge from each province and territory. b. The Supreme Court of Canada selects the cases it hears based on what it thinks is most important for the country. c. Private citizens have the right to take cases to the Supreme Court of Canada as a final appeal. d. The judges on the Supreme Court of Canada are appointed by Parliament. e. The Supreme Court of Canada hears appeals from federal courts, but not from provincial courts of appeal.

Answer: b Diff: 2 Type: MC Page Reference: 17a Skill: Recall 100) The Supreme Court of Canada hears only appeals of private citizens. a. True b. False

..

32

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 1: The Canadian Legal System

Answer: b Diff: 1 Type: TF Page Reference: 17b Skill: Recall 101) Which of the following statements is correct? a. In a civil action, the prosecution is referred to as Rex or Regina. b. Tribunals act under provincial human rights legislation, which may not be in harmony with the provisions of the Charter of Rights and Freedoms. c. Provincial courts deal only with civil matters. d. In some provinces, discovery is increasing in scope, leading to a need to allow more time for it. e. The tax court and military tribunals have the status of federal courts with specialized functions.

Answer: e Diff: 2 Type: MC Page Reference: 17c Skill: Recall 102) A case in which one person sues another for breach of contract would be conducted in a criminal court. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 17e Skill: Recall 103) Which of the following is correct in relation to legal representation and services? a. People have the right to represent themselves, but only in civil cases. b. Notary publics are lawyers who specialize in estates and land transfers. c. In the English-speaking provinces of Canada, when lawyers are "called to the bar," they are designated as both barristers and attorneys. d. In England, the term solicitor is no longer accepted; only barristers and attorneys may provide legal representation. e. In both civil and criminal systems, people have the right to represent themselves.

Answer: e Diff: 3 Type: MC

..

33

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 1: The Canadian Legal System

Page Reference: 17f Skill: Recall 104) Describe the process involved when one person sues another in a civil action.

Answer: Students should describe in some detail the process of civil litigation and note that it may vary by province. A bonus would be where students describe the difference between an action in the superior court and small claims court. Students should point out that usually there is a period of negotiation and that the action must be commenced within the limitation period. The action is commenced with the issuance and service of a particular document, which varies with the jurisdiction (e.g., a writ of summons). Once the action has started, the defendant must respond with an appearance and then the plaintiff responds with the statement of claim. The defendant then must file a statement of defence, and sometimes a counterclaim will be launched at this time. This concludes the pleadings. Discovery then takes place, being eliminated in some jurisdictions where the claim is for a lower amount. There may be formal offers to settle before trial. In many jurisdictions there is a pre-trial hearing to promote settlement. The trial then takes place, judgment is rendered, and remedies are ordered. Steps can be taken to enforce the judgment, including a post-trial hearing to identify the judgment debtor's assets.

Enforcement tools may include garnishment of wages or seizing property.

The question does not limit itself to the pre-trial process, and so students should deal with the trial and the enforcement of judgment as well.

Feedback: Students should describe in some detail the process of civil litigation and note that it may vary by province. A bonus would be where students describe the difference between an action in the superior court and small claims court. Students should point out that usually there is a period of negotiation and that the action must be commenced within the limitation period. The action is commenced with the issuance and service of a particular document, which varies with the jurisdiction (e.g., a writ of summons). Once the action has started, the defendant must respond with an appearance and then the plaintiff responds with the statement of claim. The defendant then must file a statement of defence, and sometimes a counterclaim will be launched at this time. This concludes the pleadings. Discovery then takes place, being eliminated in some jurisdictions where the claim is for a lower amount. There may be formal offers to settle before trial. In many jurisdictions there is a pre-trial hearing to promote settlement. The trial then takes place, judgment is rendered, and remedies are ordered. Steps can be taken to enforce the judgment, including a post-trial hearing to identify the judgment debtor's assets.

Enforcement tools may include garnishment of wages or seizing property.

The question does not limit itself to the pre-trial process, and so students should deal with the trial and the enforcement of judgment as well.Diff: 2 Type: ES Page Reference: 19a, 20b, 23d Skill: Applied

..

34

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 1: The Canadian Legal System

105) (Modify this question for your province.) Which of the following is the document that initiates a court action in this jurisdiction? a. Discovery b. Writ of summons c. Appearance d. Statement of claim e. Statement of defence Answer: b Diff: 1 Type: MC Page Reference: 19b Skill: Recall 106) Indicate what a statement of claim is.

Answer: The statement of claim is the document that summarizes the allegations that support the cause of action.

Feedback: The statement of claim is the document that summarizes the allegations that support the cause of action.

Diff: 2 Type: ES Page Reference: 19d Skill: Recall 107) Explain what is meant by the discovery process.

Answer: Discovery is a two-stage process. First, each party has the right to look at and copy documents held by the other side (e.g., receipts, electronic documents) that may be used later as evidence in the trial. The second step involves examination under oath of each party by the other side's lawyer. This is done in the presence of a court reporter.

Transcripts can later be used as evidence at the trial.

Feedback: Discovery is a two-stage process. First, each party has the right to look at and copy documents held by the other side (e.g., receipts, electronic documents) that may be used later as evidence in the trial. The second step involves examination under oath of each party by the other side's lawyer. This is done in the presence of a court reporter.

Transcripts can later be used as evidence at the trial.

Diff: 2 Type: ES Page Reference: 19f-20a Skill: Recall

..

35

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 1: The Canadian Legal System

108) In the procedure leading to trial of a civil matter, the step in which one party can be required to answer under oath questions that are put to him by the other party's lawyer is known as which of the following? a. Stare decisis b. The appearance c. The statement of defence d. Discovery e. Default judgment Answer: d Diff: 2 Type: MC Page Reference: 20c Skill: Recall 109) Explain recent changes related to discovery.

Answer: Pre-trial proceedings result in considerable delays. Some provinces (British Columbia, Alberta, Ontario, and Nova Scotia), in an effort to increase efficiency and reduce cost, have recently made significant changes to their litigation procedures. One of the most important reforms has been to reduce the scope of discovery and the time permitted for it.

Where smaller claims are involved or where the facts are not in dispute, they eliminate it entirely.

Feedback: Pre-trial proceedings result in considerable delays. Some provinces (British Columbia, Alberta, Ontario, and Nova Scotia), in an effort to increase efficiency and reduce cost, have recently made significant changes to their litigation procedures. One of the most important reforms has been to reduce the scope of discovery and the time permitted for it. Where smaller claims are involved or where the facts are not in dispute, they eliminate it entirely.

Diff: 2 Type: ES Page Reference: 20e Skill: Applied 110) Which of the following is incorrect in relation to the trial and judgment? a. Usually, trials are open to the public. b. Criminal juries consist of 12 people, and if some are disqualified or become sick during the trial, at least 10 jurors must render the decision and they must be unanimous in their decision. c. Once a judgment for liability is obtained in a civil action, the standard remedy is an order that the defendant pay the plaintiff a sum of money called damages. d. "You were there on Saturday, weren't you?" would be allowed in direct examination. e. If a judgment debtor tries to conceal assets or otherwise avoid payment, his conduct may amount to contempt of court.

..

36

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 1: The Canadian Legal System

Answer: d Diff: 3 Type: MC Page Reference: 21a, 22a, c, 23k Skill: Applied 111) With regard to the process of a civil law suit, which of the following is true? a. The plaintiff must prove his or her case on the balance of probabilities, not beyond a reasonable doubt. b. The statement of claim is a document registered by the plaintiff that contains a summary of the allegations that support the cause of action. c. Any admission by the defendant at the examination for discovery can be used against him or her by the plaintiff at trial. d. A counterclaim is an action by the defendant back against the plaintiff. e. All of the above Answer: e Diff: 2 Type: MC Page Reference: 21b, 19c, 20e Skill: Recall 112) What is the standard of proof used in a civil action?

Answer: Balance of probabilities Feedback: Balance of probabilities Diff: 2 Type: FIB Page Reference: 21d Skill: Recall 113) In a criminal matter, the judge must be satisfied that the accused probably committed the crime. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 21e Skill: Recall 114) Which of the following is true related to remedies the court might order?

..

37

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 1: The Canadian Legal System

a. Permanent injunctions may be awarded prior to trial where circumstantial evidence shows a specific action must be prevented. b. Interim and interlocutory injunctions are given before trial, usually to prevent greater harm to one of the parties. c. A Mareva injunction allows the seizure of evidence and documents to ensure that they are not destroyed. d. Solicitor client costs refers to payment by the losing party to compensate the winner for such costs as photocopying and partial compensation for lawyers' fees. e. General damages are those that can be accurately calculated (e.g., medical expenses, lost wages).

Answer: b Diff: 2 Type: MC Page Reference: 22d, f, 23a Skill: Recall 115) Which of the following statements is incorrect regarding legal remedies? a. If a business had improperly used the logo of another company to market its own products, misleading the public as to the source of the product, the judge might order an accounting. b. Where a person is selling pirated versions of a Disney movie, an Anton Piller order could be used to seize the movies and related documents in advance of the trial. c. If a business had improperly used the logo of another company to market its own products, misleading the public as to the source of the product, the judge would likely award damages for pain and suffering. d. Where a person is selling pirated versions of a Disney movie, both an Anton Piller order and a Mareva injunction might be authorized. e. In the case of dispute over the sale of land, if the judge determines that the sale should proceed, he or she might order specific performance.

Answer: c Diff: 2 Type: MC Page Reference: 22e Skill: Applied 116) Which of the following is correct with respect to the litigation process? a. A statement of defence is a pleading prepared and filed by a plaintiff in response to the defendant's claims. b. Even though a judgment is obtained, payment is not assured. c. An offer to settle brings to an end the parties' right to proceed to trial. d. A counterclaim is brought by the plaintiff who is then claiming against the defendant. e. An examination for discovery of documents is an opportunity for the parties to settle the dispute before proceeding to trial.

..

38

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 1: The Canadian Legal System

Answer: b Diff: 2 Type: MC Page Reference: 23b Skill: Recall 117) Mr. Holden, a program developer, had a successful business helping small firms and shops computerize their businesses. In his spare time, he developed software for inventory control that was superior to others on the market. He launched an ad campaign and all went well for several months until a competitor released a cheaper program. In time, he could not pay his debts when they became due and owing. A supplier sued for damages and was awarded $21 000. Holden did not pay. With regard to the supplier's position at this time, which of the following is true? a. The supplier could ask for a post-trial hearing to identify Holden's assets and sources of income. b. Since the decision is in his favour, the supplier would be a judgment creditor and Holden would be a judgment debtor. c. The supplier could have a garnishee order served on Holden's bank, ordering the bank to pay money into court instead of to Holden. d. The supplier could get a government official to seize and sell enough of Holden's property to satisfy the debt. e. All of the above Answer: e Diff: 2 Type: MC Page Reference: 23c, e, h, j Skill: Applied 118) A significant disadvantage of the court system is that there is no way to enforce a judgment. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 23f Skill: Recall 119) Bruce told Ewen that he would be willing to pay a high rate of interest for a twomonth loan of $1000. Ewen agreed to lend Bruce this amount at an annual rate of 25%, repayable June 14. Bruce agreed to these terms. Meanwhile, Bruce had recently completed some plumbing work for Martinson for which he was owed $2000. If Bruce failed to pay Ewen on June 14, which of the following is true? a. Ewen could execute against Bruce even if he had not obtained judgment against him.

..

39

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 1: The Canadian Legal System

b. Ewen could sue Martinson for violation (breach) of the contract. c. Ewen could serve Martinson with a garnishing order after obtaining judgment commanding Martinson to pay the money owed to Bruce into court if the money had not yet been paid to Bruce. d. Ewen does not have to wait to obtain a judgment before executing against Bruce's assets. e. If Ewen obtained a judgment against Bruce, he could compel Bruce to be examined about Martinson's income, property, and debts.

Answer: c Diff: 2 Type: MC Page Reference: 23g Skill: Applied 120) Explain what is meant by a garnishee.

Answer: Funds that are owed to the judgment debtor can be intercepted by the judgment creditor by serving a garnishment order (issued by the court) on the bank or employer who owes that money to that judgment debtor.

Feedback: Funds that are owed to the judgment debtor can be intercepted by the judgment creditor by serving a garnishment order (issued by the court) on the bank or employer who owes that money to that judgment debtor.

Diff: 2 Type: ES Page Reference: 23i Skill: Recall 121) "A plaintiff must be very certain of some return before risking litigation." Discuss the wisdom of this statement as well as options that may increase the likelihood of collection after a judgment.

Answer: This is a very wise statement. The cost of a trial can be significant and winning may not ensure compensation even if it is awarded by the court. If a judgment debtor has no assets or is bankrupt, trying to collect may be fruitless. This risk must be considered when deciding whether to sue. Often taking some form of security at the outset, before any conflict arises, can avoid much of the risk associated with litigation. Depending on the type of transaction, it is possible where debt is created to take a claim against some asset as security. This might be anything from tangible property (e.g., boat, car, land) to intangible property (e.g., shares, negotiable instruments, accounts receivable). Another alternative is to have a third party guarantee the debt. When security is present, the claimant can usually take possession of it and resell it without a court order.

..

40

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 1: The Canadian Legal System

Feedback: This is a very wise statement. The cost of a trial can be significant and winning may not ensure compensation even if it is awarded by the court. If a judgment debtor has no assets or is bankrupt, trying to collect may be fruitless. This risk must be considered when deciding whether to sue. Often taking some form of security at the outset, before any conflict arises, can avoid much of the risk associated with litigation.

Depending on the type of transaction, it is possible where debt is created to take a claim against some asset as security. This might be anything from tangible property (e.g., boat, car, land) to intangible property (e.g., shares, negotiable instruments, accounts receivable). Another alternative is to have a third party guarantee the debt. When security is present, the claimant can usually take possession of it and resell it without a court order.

Diff: 2 Type: ES Page Reference: 24a Skill: Applied 122) Consider the alternatives to going to court and suing someone that are available, and discuss the relative merits of these different courses of action.

Answer: The first alternative is for the parties to negotiate directly with each other to try to come up with a solution that is agreeable to both parties. When there is a higher level of conflict and the parties cannot reach agreement through negotiation, they may agree to hire a mediator to facilitate the resolution of the dispute. The mediator communicates with both parties and makes suggestions, but it is still up to the parties to make the final decision. When both parties agree to the settlement, it is more likely they will live up to their obligations and feel better about the settlement. If they fail to live up to the agreement, the terms of the settlement will be influential in a court hearing or may even form the basis of the court-imposed decision. Mediation is required in some situations (e.g., collective bargaining). A mediated settlement is convenient, inexpensive, and private, and allows the parties to resume their business relationship.

A third alternative is arbitration. In this case, the parties surrender the decision making to an arbitrator selected by both parties. This is often set out in the initial contract between the parties, or it can be agreed upon as a means of settling a dispute after it arises. The parties must agree in advance to be bound by the decision, but they can place limitations on the scope of the decision and what remedies can be imposed. Where arbitration is a requirement in a contract and one party chooses to litigate instead, the courts will usually refuse to hear the case on the basis that it should have been arbitrated. Arbitrators usually have expertise in the area under dispute. This expertise and the power to make a binding decision make arbitrators very effective and the process is relatively quick. Arbitration is required by law in some areas (e.g., collective bargaining).

Including such litigation alternatives in commercial dealings is a valuable cost-reducing tactic and should be included in a risk-avoidance strategy formulated for any business.

The advantages with each of these processes is that they are faster, less costly, and more private for the parties, and although there is still typically a winner and loser, the decision

..

41

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 1: The Canadian Legal System

is usually easier for the parties to live with. The difficulty is that there are limited powers of enforcement.

Feedback: The first alternative is for the parties to negotiate directly with each other to try to come up with a solution that is agreeable to both parties. When there is a higher level of conflict and the parties cannot reach agreement through negotiation, they may agree to hire a mediator to facilitate the resolution of the dispute. The mediator communicates with both parties and makes suggestions, but it is still up to the parties to make the final decision. When both parties agree to the settlement, it is more likely they will live up to their obligations and feel better about the settlement. If they fail to live up to the agreement, the terms of the settlement will be influential in a court hearing or may even form the basis of the court-imposed decision. Mediation is required in some situations (e.g., collective bargaining). A mediated settlement is convenient, inexpensive, and private, and allows the parties to resume their business relationship.

A third alternative is arbitration. In this case, the parties surrender the decision making to an arbitrator selected by both parties. This is often set out in the initial contract between the parties, or it can be agreed upon as a means of settling a dispute after it arises. The parties must agree in advance to be bound by the decision, but they can place limitations on the scope of the decision and what remedies can be imposed. Where arbitration is a requirement in a contract and one party chooses to litigate instead, the courts will usually refuse to hear the case on the basis that it should have been arbitrated. Arbitrators usually have expertise in the area under dispute. This expertise and the power to make a binding decision make arbitrators very effective and the process is relatively quick. Arbitration is required by law in some areas (e.g., collective bargaining).

Including such litigation alternatives in commercial dealings is a valuable cost-reducing tactic and should be included in a risk-avoidance strategy formulated for any business.

The advantages with each of these processes is that they are faster, less costly, and more private for the parties, and although there is still typically a winner and loser, the decision is usually easier for the parties to live with. The difficulty is that there are limited powers of enforcement.Diff: 2 Type: ES Page Reference: 24b, 25b, 26 Skill: Applied 123) Negotiation works only when both parties are willing to make concessions. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 24c Skill: Recall 124) Distinguish between mediation and arbitration.

..

42

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 1: The Canadian Legal System

Answer: Mediation involves someone trying to help the parties to get a settlement, but any recommendations are not binding and the mediator has no power to impose an agreement.

Arbitration involves a third party deciding the matter, and that decision is binding on the parties.

Feedback: Mediation involves someone trying to help the parties to get a settlement, but any recommendations are not binding and the mediator has no power to impose an agreement. Arbitration involves a third party deciding the matter, and that decision is binding on the parties.

Diff: 2 Type: ES Page Reference: 25a, d Skill: Recall 125) The job of the mediator is to make a decision for the parties. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 25c Skill: Recall 126) Which of the following statements is true? a. The rules of precedent apply to arbitration hearings. b. Mediators have the power to enforce decisions. c. The public is entitled to know the result of mediated cases. d. Alternate dispute resolution methods are less costly than litigation. e. Use of alternate dispute resolution precludes parties from litigating.

Answer: d Diff: 2 Type: MC Page Reference: 26b Skill: Recall 127) Which of the following statements is correct? a. Alternate dispute resolution agreements are enforceable and appealable. b. The parties to a dispute lose control in negotiations. c. There is a great deal of flexibility in negotiation and mediation. d. Goodwill is most likely maintained in litigation. e. Privacy is maintained in an adjudication.

Answer: c

..

43

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 1: The Canadian Legal System

Diff: 2 Type: MC Page Reference: 26c Skill: Recall 128) A negotiation will most likely lead to agreement when the parties are: a. Equal in power b. Coercive c. Vulnerable d. Uncommunicative e. Aggressive Answer: a Diff: 2 Type: MC Page Reference: 26d Skill: Applied 129) Serious disadvantages of alternate dispute resolution are that it is expensive and time consuming. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 26e Skill: Recall 130) There are many characteristics associated with the use of the court process that may be considered advantages and disadvantages when compared to alternate dispute resolution. Which of the following is a favourable characteristic one would associate with the litigation process? a. It is a less costly method of obtaining a resolution to a dispute. b. It is a method of dispute resolution where both parties are more likely to be satisfied with the outcome. c. Confidentiality is protected. d. It is a speedier method of obtaining resolution of a dispute. e. Enforcement of the decision is more likely.

Answer: e Diff: 2 Type: MC Page Reference: 26f Skill: Applied

..

44

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 1: The Canadian Legal System

131) Which of the following regulatory board decisions would likely merit a court review? a. A decision where the party involved had a fair hearing but felt the board decision was not the best one for her b. A decision made despite the absence of one member of the board for 15 minutes during the hearing c. A decision in which the party was not allowed to cross-examine witnesses d. A decision in which the board did not apply the rules of evidence commonly used in a judicial hearing e. A decision made after the person had been given reasonable notice of the hearing and related information, but he was not prepared with an appropriate response Answer: b Diff: 3 Type: MC Page Reference: 27, 30b Skill: Applied 132) With regards to administrative law, the court exercises its review power with the option to apply which of the following remedies? a. Mandamus b. Injunction c. Prohibition d. Certiorari e. All of the above are remedies available to the court.

Answer: e Diff: 2 Type: MC Page Reference: 29a Skill: Recall 133) Prohibition involves overturning the decision of the decision-maker. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 29b Skill: Recall 134) Mandamus involves the decision-maker being required to make a decision. a. True b. False

..

45

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 1: The Canadian Legal System

Answer: a Diff: 1 Type: TF Page Reference: 29c Skill: Recall 135) Administrative decisions are excluded from the Charter of Rights and Freedoms. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 29d Skill: Recall 136) Ms. Jones was dissatisfied with the decision of the worker's compensation tribunal, feeling its decision may have been fair but that it did not take her personal objectives into consideration. She decided to ask for a court to review the decision, but her request was denied. Explain when courts will intervene in such situations.

Answer: The Supreme Court of Canada has made it clear that considerable deference should be given to such regulatory bodies, and only rarely should the courts interfere with their decisions. The grounds for such interference have been reduced to "correctness" and "reasonableness." Correctness refers to the process and includes the tribunal having the authority (jurisdiction) and to the fairness of the process. The reasonableness standard means essentially that where the board has several different options, the choice made is reasonable. Where the board has several different options, and if the one chosen could be said to be reasonable, a reviewing court cannot substitute its own decision even if it determines it to be more reasonable than that of the board.

Feedback: The Supreme Court of Canada has made it clear that considerable deference should be given to such regulatory bodies, and only rarely should the courts interfere with their decisions. The grounds for such interference have been reduced to "correctness" and "reasonableness." Correctness refers to the process and includes the tribunal having the authority (jurisdiction) and to the fairness of the process. The reasonableness standard means essentially that where the board has several different options, the choice made is reasonable. Where the board has several different options, and if the one chosen could be said to be reasonable, a reviewing court cannot substitute its own decision even if it determines it to be more reasonable than that of the board.

Diff: 2 Type: ES Page Reference: 29e, 30a Skill: Applied

..

46

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 1: The Canadian Legal System

137) Who prosecutes a criminal matter?

Answer: The state (i.e., the Crown) Feedback: Diff: 2 Type: FIB Page Reference: 30d Skill: Recall 138) What is the standard of proof used in a criminal matter?

Answer: Beyond a reasonable doubt Feedback: Diff: 2 Type: FIB Page Reference: 30g Skill: Recall 139) Which of the following statements is incorrect? a. If a person is accused of a crime, the prosecutor must establish "beyond a reasonable doubt" that he or she is guilty of the offence. b. The huge bonuses that executives at U.S. financial institutions took for themselves after the government bailout may be viewed as morally reprehensible, but it is doubtful that any law was broken. c. "You were there at noon on the day the event occurred, weren't you?" would be allowed on cross-examination. d. If a person drinks and drives and injures someone, he or she can usually rely on intoxication as a defence. e. If two parties include a clause in a contract that stipulates that any disputes will be resolved by arbitration, it is unlikely a court would hear the case if one of the parties decided to litigate instead of relying on arbitration.

Answer: d Diff: 2 Type: MC Page Reference: 30h, 31 Skill: Applied

..

47

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

1) Which of the following best describes the primary purpose of tort law? a. To punish wrongdoers b. To prevent crime c. To compensate victims of wrongful conduct d. To ensure that contractual promises are kept e. To force people to do good (e.g., rescue those in trouble) Answer: c Diff: 1 Type: MC Page Reference: 38a Skill: Recall 2) A truck was driven into the family room of a home, causing $14 000 in damage. The driver was impaired, so the homeowners called the police. The driver was arrested and charged with an offence under the Criminal Code, convicted, and sentenced. Which of the following is true? a. In the criminal action, the individual is taking the action against the accused. b. A civil action is a private action in which the plaintiff's primary purpose, generally, is to seek compensation. c. In the criminal proceeding, the prosecutor had to prove the case on the balance of probabilities. d. In a civil action, the plaintiff must prove his case beyond a reasonable doubt. e. The owners cannot sue the driver in a civil action because he has been convicted in the criminal action, and the same behaviour cannot be the subject matter of both types of actions.

Answer: b Diff: 2 Type: MC Page Reference: 38b Skill: Applied 3) A mean-spirited neighbour, Lahey, yelled insults at Rob, a real estate agent, as Rob was leaving an open house. Lahey then suddenly rushed toward Rob. Although Rob tried to defend himself by throwing his briefcase at Lahey, Lahey hit him above the eye, causing a serious cut that required stitches. Lahey was arrested, convicted, and sentenced in a criminal action for his attack. Rob couldn't work for two months because of the injury. On these facts, which of the following is false?

..

1

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

a. The attack by Lahey shows the elements of the torts of assault and battery; the assault was making Rob apprehend the hit, and the battery was the hit. b. The insults yelled at Rob would not, in themselves, give Rob the right to hit Lahey with his briefcase. c. Although Rob suffered damages because of the attack, he could not sue Lahey in a civil action because a criminal action had been taken, and the same incident cannot result in both types of proceedings. d. If Lahey sued Rob for hitting him with the briefcase, Rob most likely would argue that it was justified on the basis of self-defence. e. Rob could not succeed in an action against Lahey for the tort of nuisance.

Answer: c Diff: 3 Type: MC Page Reference: 38c,s, 40e Skill: Applied 4) What is a tort?

Answer: A tort is a civil or private wrong.

Feedback: A tort is a civil or private wrong.

Diff: 1 Type: ES Page Reference: 38d Skill: Recall 5) Distinguish between a tort and a breach of contract.

Answer: A tort involves conduct that is inherently wrong, whereas in breach of contract, the conduct is wrongful only because it violates the promise set out in the contract.

Feedback: A tort involves conduct that is inherently wrong, whereas in breach of contract, the conduct is wrongful only because it violates the promise set out in the contract.

Diff: 1 Type: ES Page Reference: 38e Skill: Recall

..

2

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

6) Distinguish a crime from a tort.

Answer: Both involve conduct that is inherently wrong or unacceptable. However, a criminal process involves prosecution by the state and punishment of the wrongdoer, whereas a tort involves a process whereby the injured party sues the other and receives compensation. The standard of proof is also different.

Feedback: Both involve conduct that is inherently wrong or unacceptable. However, a criminal process involves prosecution by the state and punishment of the wrongdoer, whereas a tort involves a process whereby the injured party sues the other and receives compensation. The standard of proof is also different.

Diff: 2 Type: ES Page Reference: 38f Skill: Recall 7) When Mr. P dropped off his wife at work, the driver behind him, Mr. H, angered by the slight delay in traffic, approached Mr. P's car, called him names, and then punched Mr. P in the nose and mouth area with a closed fist. Mr. H was convicted and sentenced in criminal proceedings for his action. Given these facts, which of the following is true? a. Mr. P could also proceed in a civil action against Mr. H for the tort of nuisance. b. Mr. P could also proceed in a civil action against Mr. H for the tort of battery. c. Mr. P could not take a civil action because a criminal action had taken place, and the same behaviour or action cannot be the subject matter of both types of proceedings. d. Mr. P could ask for special damages, but not for general or punitive damages.

Answer: b Diff: 1 Type: MC Page Reference: 38g Skill: Applied 8) In January, a driver accidentally caused a snowplow to go off the road, crash into a house, and enter the living room of that house. No one was hurt, but the incident caused extensive damage to the house. If the driver of the snowplow was charged with the crime of driving while impaired, and subsequently convicted, which of the following is true?

..

3

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

a. The owners of the house could not proceed in a civil action, because the driver had already gone through a criminal action and he cannot be forced to go through two proceedings for the action. b. The owners of the house could also proceed in a civil action against the driver for the tort of nuisance. c. The owners of the house could also proceed in a civil action against the driver for the tort of negligence. d. The driver would be found liable in a civil action only if the prosecutor could prove he was guilty beyond a reasonable doubt. e. The owners of the house would have no civil action against the driver because no one was hurt.

Answer: c Diff: 2 Type: MC Page Reference: 38h Skill: Applied 9) It is possible for wrongful conduct to be both a tort and a crime. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 38i Skill: Recall 10) Once acquitted of a crime, a person cannot be sued in tort. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 38j Skill: Recall 11) Mrs. Kahn arranged a trip to Europe for herself and her two children. Her husband couldn't go. She spent hours with the travel agent, Mr. Tobin, deciding on the vacation ..

4

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

package. She asked him, and wrote a note asking again, what documents, vaccinations, etc., would be needed for the trip. Tobin said and wrote that all they would need would be their passports. Tobin forgot to tell her that a new regulation required a note from the father allowing the children to leave Canada, although he had received a memo warning him to alert travellers of the new regulation. When Mrs. Kahn and the children reached Toronto to embark on a plane for London, England, they were stopped because she did not have the required note from Mr. Kahn. They lost their reservations for both the flight and the tour with no refund. On these facts, which of the following is true? a. Libel is the only tort available for persons injured by another's words. b. There could be a civil action against Tobin and his employer, although the employer did no wrong. c. A travel agent owes no duty of care to his customers. d. There is no possibility of suing Mr. Tobin because he had no intention of hurting anyone; his oversight was an accident. e. Tobin could sue for false imprisonment.

Answer: b Diff: 2 Type: MC Page Reference: 38k Skill: Applied 12) The term that is used in tort law to describe a situation where an employer is held responsible for the conduct of the employee is ________.

Answer: Vicarious liability Feedback: Vicarious liability Diff: 1 Type: ES Page Reference: 38l Skill: Recall 13) Explain the principle of vicarious liability and give an example.

Answer: Vicarious liability occurs when one person is responsible for the wrongful acts of another. For example, an employer is vicariously liable for the wrongful acts committed by an employee during the course of employment when the employee is doing what he or she was employed to do.

..

5

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

Feedback: Vicarious liability occurs when one person is responsible for the wrongful acts of another. For example, an employer is vicariously liable for the wrongful acts committed by an employee during the course of employment when the employee is doing what he or she was employed to do.

Diff: 1 Type: ES Page Reference: 38m Skill: Applied 14) Explain any limitation on the principle of vicarious liability in the employment context.

Answer: An employer is responsible only for those acts of an employee committed during the course of employment (i.e., while doing what he or she was employed to do).

Feedback: An employer is responsible only for those acts of an employee committed during the course of the employment (i.e., while doing what he or she was employed to do).

Diff: 1 Type: ES Page Reference: 38n Skill: Recall 15) When an employee commits a tort in the process of his or her employment, the principle of vicarious liability states that the employer is liable, not the employee. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 38o Skill: Recall 16) "The person who committed the assault and battery must have intended to hurt the other person." Comment on the accuracy of this statement.

Answer:

..

6

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

It is necessary that only the act be wilful or intended, not the results. The act may be motivated by the best of intentions, but if it interferes with the other person, it is still actionable.

Feedback: It is necessary that only the act be wilful or intended, not the results. The act may be motivated by the best of intentions, but if it interferes with the other person, it is still actionable.

Diff: 2 Type: ES Page Reference: 38p Skill: Applied 17) Trevor and Roger, employees of Ezon Ltd., accidentally dropped a crate that they were unloading. The crate just missed an 80-year-old woman, Mrs. Sloe, who was on her way to the bus stop. She was not hurt at all nor upset, because the crate fell behind her.

Just to be sure she wasn't hurt or upset, Trevor said, "Let me take your arm and help you to the bus." She agreed, so he took her by the arm and walked with her for the rest of the block. When they arrived at the bus stop where others were waiting, she then turned to him, screaming, "Let go of me! You have no right to touch me!" With that, she hit him with her purse. On these facts, which of the following is true? a. In law, the battery was committed by Mrs. Sloe. b. Mrs. Sloe could successfully sue Trevor and Roger for negligence. c. To avoid a negligence action, the standard of care owed by workers is to act sincerely and with goodwill. d. Mrs. Sloe could successfully sue Trevor for battery. e. In a negligence action, the standard of care owed by workers is to do the best they can.

Answer: a Diff: 2 Type: MC Page Reference: 38q Skill: Applied 18) Clark was at Computerheaven Ltd. and asked for a box of the highest-grade computer paper. Don, an employee, went to the back to get it, but he didn't know which of the five choices available was the best grade of paper. He took out a box of paper called "superstuff" and told Clark that was the highest-grade paper, even though he wasn't sure it was. Clark bought it. On the way out, Clark, a successful freelance computer programmer for the last five years, asked Don some questions about a new laser printer on display. Don started giving Clark his sales pitch, and Clark said with a smile, "I don't

..

7

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

think you know what you're talking about." Don flushed and yelled, "You go to %^&%!

You call yourself a programmer and you don't know anything about programming.

You're a first-class fraud!" A client of Clark's overheard this conversation. Clark called Don a "jerk" and turned to go. As he was walking out the door, Don threw a hard disk drive at him and hit Clark in the back of the head. Considering the legal meaning of the following, indicate which would be successful based on these facts? a. An action against Computerheaven Ltd. for the tort of trespass b. An action against Computerheaven Ltd. for the tort of battery c. An action against Computerheaven Ltd. for the tort of defamation d. An action against Clark for the tort of negligence e. An action for the tort of nuisance Answer: b Diff: 2 Type: MC Page Reference: 38r Skill: Applied 19) When a person throws a hammer at another person and that person ducks, this is an example of battery. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 38t Skill: Applied 20) Distinguish between assault and battery.

Answer: A battery involves actual physical contact, whereas an assault involves situations in which the act complained of creates fear or apprehension in the mind of the victim of imminent physical contact.

Feedback: A battery involves actual physical contact, whereas an assault involves situations in which the act complained of creates fear or apprehension in the mind of the victim of imminent physical contact.

Diff: 2 ..

8

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

Type: ES Page Reference: 38u, 39d Skill: Recall 21) Which of the following incidents describes the legal meaning of the tort of assault? a. Unknown to you, I threw a hammer at your head but missed. b. I threw a hammer at your head, but you saw it coming and ducked out of the way. c. When you are asleep in the house, I sneak up and throw a hammer through your garage window. d. I come up from behind you without your seeing me and hit the back of your knees, causing you to fall down. e. I accidentally drop a hammer on your foot.

Answer: b Diff: 1 Type: MC Page Reference: 39a Skill: Applied 22) Options

True

Score (Numeric value - 0 or higher) 0

False

1

Feedback

23) Which of the following actions constitutes an assault? a. Pointing an unloaded gun at another who does not know whether or not the gun is loaded b. A rude gesture from another motorist c. A car accident in which you are hit by an impaired driver d. Bumping into another person in a crowded hallway e. A bystander struck by a ball during a baseball game Answer: a Diff: 1 Type: MC Page Reference: 39c

..

9

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

Skill: Recall 24) Ms. Reed attended the zoning offices of the city. She explained to the chief zoning officer, Mr. Shore, that she was interested in a piece of property, but only if it were zoned as a "multiple-family dwelling." Mr. Shore checked the property himself and assured her it was zoned as a "multiple-family dwelling," but he had not checked the new regulations properly. Relying on his statement, Reed invested $300 000 in the purchase and development of the property. When the apartment building was half finished, she was informed by the city that her building was unacceptable because the property was zoned as a "duplex." Upon hearing this news, she rushed to the zoning offices and approached Mr. Shore, started yelling, and threw her briefcase at him. He ducked; she missed. When she persisted in yelling, he threw some cold water in her face. On these facts, which of the following is true? a. Reed could not sue Shore for saying the property was zoned as a "multiple-family dwelling" because he did not intend to make the error; it was just a mistake. b. Shore could successfully sue Reed for assault. c. Reed could successfully sue the city for negligence. d. Reed could successfully sue Shore for defamation. e. Reed could successfully sue Shore for assault and battery.

Answer: b Diff: 3 Type: MC Page Reference: 39e Skill: Applied 25) Which of the following actions would result in a successful tort action by the person or persons wronged? Assume that all persons involved learn these facts. a. An accountant accurately prepared the financial statements of a corporation that he knew would be used by a potential investor, Mr. Lam. Lam, relying on the statements, invested $10 000 and lost it all. b. Ed became sick from consuming too much alcohol that he had purchased from the store. c. When Jed accidentally dropped a board and broke Al's glasses, Al threw a cup at Jed, but Jed saw it coming and moved away in time to avoid being hit. d. Mr. Meen wrote a letter to the editor of the Vancouver Sun in which he criticized the mayor of Vancouver. e. A store detective stopped Joan after she left the shop because he saw her leave with candy she hadn’t paid for. She had slipped the candy into her pocket. He detained her for 20 minutes until the police arrived.

..

10

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

Answer: c Diff: 2 Type: MC Page Reference: 39f Skill: Applied 26) "In order for a person to successfully sue for an assault and battery, damage or injury must be demonstrated." Comment on the accuracy of this statement.

Answer: It is not necessary for injury or damage to be present in an action of assault and battery.

Feedback: It is not necessary for injury or damage to be present in an action of assault and battery.

Diff: 2 Type: ES Page Reference: 39g Skill: Applied 27) Discuss the position of a doctor when faced with a patient refusing life-saving medical treatment.

Answer: This is the problem of consent and a doctor's dilemma about saving a life in the face of instructions not to do so. Medical practitioners can be sued for battery for performing procedures without proper, informed consent. Students have difficulty with this problem, but it is a good question because it forces them to look at both sides and clearly understand that interference with another person's body without consent is a battery.

Good students will explain that consent can be implied only where conditions are life threatening, the patient is unable to give instructions to the doctor, and no guardian is available.

Feedback: This is the problem of consent and a doctor's dilemma about saving a life in the face of instructions not to do so. Medical practitioners can be sued for battery for performing procedures without proper, informed consent. Students have difficulty with this problem, but it is a good question because it forces them to look at both sides and clearly understand that interference with another person's body without consent is a battery. Good students will explain that consent can be implied only where conditions are life threatening, the patient is unable to give instructions to the doctor, and no guardian is available.

..

11

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

Diff: 3 Type: ES Page Reference: 39h Skill: Applied 28) Contrast the use of the terms assault and battery in tort law as compared to their use in the Criminal Code.

Answer: Battery, in almost all tort cases, also includes an assault, so it has become common to simply use the term assault to cover situations where physical contact is involved. Under the Criminal Code, the term assault includes physical contact (which would be referred to as battery in tort law).

Feedback: Battery, in almost all tort cases, also includes an assault, so it has become common to simply use the term assault to cover situations where physical contact is involved. Under the Criminal Code, the term assault includes physical contact (which would be referred to as battery in tort law).

Diff: 2 Type: ES Page Reference: 39i Skill: Recall 29) Which of the following is true related to assault and battery? a. Under the Criminal Code, the term assault includes physical contact that in tort law would be referred to as battery. b. The definition of assault is the same under the Criminal Code and under tort law. c. Under tort law, assault involves physical contact. d. Intentional physical interference with another is a tort but is not a crime under the Criminal Code. e. Provocation is a defence successfully used to justify a violent response to verbal abuse.

Answer: a Diff: 2 Type: MC Page Reference: 39i Skill: Recall

..

12

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

30) When a doctor treats or operates on a patient, explain why that patient cannot sue for battery.

Answer: The patient has consented to the procedure; therefore, it is not actionable.

Feedback: The patient has consented to the procedure; therefore, it is not actionable.

Diff: 2 Type: ES Page Reference: 40a Skill: Applied 31) Jed played hockey for his company's team. During the playoffs, three seconds after a play, he was deliberately hit in the back with a stick by Ed, a player on the opposing team. The hit broke Jed's rib. If Jed sued Ed, which of the following is true? a. The defendant's best defence would be that the plaintiff consented to the hit. b. The plaintiff's most likely cause of action would be negligence. c. The plaintiff's most likely cause of action would be malicious prosecution. d. The defendant's best defence would be provocation. e. The defendant's best defence would be qualified privilege.

Answer: a Diff: 2 Type: MC Page Reference: 40b Skill: Applied 32) Bubba, an angry, foul-mouthed fan, yelled insults at Rob, a professional athlete, as Rob was leaving the field. Bubba then suddenly rushed toward Rob. Although Rob tried to defend himself by throwing his gym bag at Bubba, Bubba hit Rob above the eye, causing a serious cut that required stitches. Bubba was arrested, convicted, and sentenced in a criminal action for his attack. Rob, a starting player, missed 10 games because of the injury. On these facts, which of the following is true? a. The attack by Bubba shows the elements of the torts of assault and battery: the assault was the hit; the battery was the sudden rush toward Rob. b. The insults yelled at Rob would in themselves give Rob the right to hit Bubba with his gym bag. c. Rob could succeed in an action against Bubba for the tort of nuisance.

..

13

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

d. Although Rob suffered damages because of the attack, he could not sue Bubba in a civil action because a criminal action had been taken and the same incident cannot result in both types of proceedings. e. If Bubba sued Rob for hitting him with the gym bag, Rob would most likely argue that it was justified on the basis of self-defence.

Answer: e Diff: 2 Type: MC Page Reference: 40c Skill: Applied 33) Explain how your right to defend yourself is limited.

Answer: You are permitted to use only reasonable force to defend yourself.

Feedback: You are permitted to use only reasonable force to defend yourself.

Diff: 2 Type: ES Page Reference: 40d Skill: Applied 34) Joe was jogging along a deserted trail beside a river when he met Sam coming the other way. Joe stopped and, in conversation with Sam, accused Sam of stealing and shoplifting from the store. Sam was appalled, became irate, and struck Joe in the nose. In the resulting fight, Joe was injured, suffering a broken nose and significant bruises.

Finally, after some time, another jogger came along the trail and broke up the fight. Joe sued Sam for battery and Sam sued Joe for defamation. Explain the likely outcome.

Answer: Joe would win his battery action since his words of provocation would not justify Sam's violent response. Joe was defending himself; Sam was the aggressor. Sam would be liable for the damages Joe had suffered, although the provoking words that Joe spoke would be taken into consideration in determining the damages. Sam would lose his defamation action against Joe, since the words were not published to anyone else. No third party heard them; the other jogger who came along subsequently and broke up the fight did not hear the statement.

Feedback: Joe would win his battery action since his words of provocation would not justify Sam's violent response. Joe was defending himself; Sam was the aggressor. Sam

..

14

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

would be liable for the damages Joe had suffered, although the provoking words that Joe spoke would be taken into consideration in determining the damages. Sam would lose his defamation action against Joe, since the words were not published to anyone else. No third party heard them; the other jogger who came along subsequently and broke up the fight did not hear the statement.

Diff: 2 Type: ES Page Reference: 40f, 43i Skill: Applied 35) What elements must be established in order to sue another for false imprisonment?

Answer: 1. There was an imprisonment.

2. It was done without authority.

Feedback: 1. There was an imprisonment.

2. It was done without authority.

Diff: 2 Type: ES Page Reference: 40g Skill: Recall 36) Regarding the tort of false imprisonment, will anything short of complete restraint amount to imprisonment?

Answer: Yes, when one person surrenders to the control or authority of another voluntarily, thinking that he or she has no choice, an imprisonment has taken place even though there is no physical restraint.

Feedback: Yes, when one person surrenders to the control or authority of another voluntarily, thinking that he or she has no choice, an imprisonment has taken place even though there is no physical restraint.

Diff: 2 Type: ES Page Reference: 40h Skill: Applied

..

15

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

37) Although nothing at all had been stolen, the store detective thought that Al and Ed had stolen some CDs. After they exited the store, the detective said to both of them, "Hold it! You'll have to wait right here for the police; you'll be charged with theft!" While Ed stopped and protested, Al hurried off and drove away. Ed felt compelled to submit to the detective. After some time, the police finally arrived. It was only then that the detective realized that no crime had been committed. Ed was released. On these facts, which of the following is true? a. Both Al and Ed could sue for assault and battery. b. Both Al and Ed could sue for the tort of false imprisonment because both had been falsely accused of committing a crime. c. Neither Al nor Ed could sue because neither was confined in a closed space. d. Both Al and Ed could sue for the tort of false imprisonment because there had been no crime committed. e. Only Ed has a cause of action for false imprisonment (i.e., a legal right to sue).

Answer: e Diff: 2 Type: MC Page Reference: 40i Skill: Applied 38) Joe went to Sam the barber for a haircut. When Sam finished, Joe looked in the mirror and was horrified; he refused to pay and got up to leave. Sam refused to let him go, this being the third customer that day who had tried to leave without paying. Sam insisted that Joe stay while he phoned the police. Joe did so. When the police arrived and Sam explained the situation to them, the police told him that they wouldn't arrest Joe, and that Sam would have to pursue other remedies. Joe later sued Sam for false imprisonment. Explain the likely outcome.

Answer: Joe would win. The time during which he was held by Sam, waiting for the police, was an imprisonment without authority. This was a civil dispute, and unless it can be shown that Joe never intended to pay for the haircut, Sam had no right to arrest or hold him but was limited to an action of breach of contract.

Feedback: Joe would win. The time during which he was held by Sam, waiting for the police, was an imprisonment without authority. This was a civil dispute, and unless it can be shown that Joe never intended to pay for the haircut, Sam had no right to arrest or hold him but was limited to an action of breach of contract.

Diff: 2 Type: ES

..

16

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

Page Reference: 40j Skill: Applied 39) Which of the following is true related to a private citizen’s authority to make an arrest and false imprisonment? a. False imprisonment must involve some type of physical restraint. b. A private citizen’s power to arrest is the same as the power held by border guards and security personnel in most cases. c. Private citizens do not have the power to arrest. d. A private citizen’s power to arrest is likely to be expanded in the future. e. A private citizen’s power to arrest is likely to be more restricted in the future.

Answer: d Diff: 1 Type: MC Page Reference: 40k Skill: Recall 40) In order to sue for trespass to land, what two elements must be established?

Answer: First, it must be established that there was intrusion onto somebody's land, either personally or with some object. Second, it must be established that it was done without authority.

Feedback: First, it must be established that there was intrusion onto somebody's land, either personally or with some object. Second, it must be established that it was done without authority.

Diff: 2 Type: ES Page Reference: 41a Skill: Recall 41) A person could be liable for the tort of trespass: a. For attending the "garage sale" at the designated time b. For leaving packages in the wrong person's garage c. For sleeping in the garage with the owner's permission

..

17

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

d. For leaving the wrong packages in the right person's garage e. For accidentally knocking down the garage in a car out of control Answer: b Diff: 1 Type: MC Page Reference: 41b Skill: Applied 42) Joe wandered onto Sam's land, not realizing that he had crossed the property line.

Sam found him there and sued him for trespassing. Explain the likely outcome.

Answer: It is no excuse to say that you didn't know that you were on the other person's land, as long as you intended to be where you were; it is trespass if you were on another's land without authority.

Feedback: It is no excuse to say that you didn't know that you were on the other person's land, as long as you intended to be where you were; it is trespass if you were on another's land without authority.

Diff: 2 Type: ES Page Reference: 41c Skill: Applied 43) Joe was chased onto Sam's land by a group of ruffians and hid behind Sam's rose bush to escape them, causing some damages. Sam sued for trespass; will he win?

Answer: Yes, he will; this was a voluntary act, and Joe is responsible for the damages he has caused.

Feedback: Yes, he will; this was a voluntary act, and Joe is responsible for the damages he has caused.

Diff: 2 Type: ES Page Reference: 41d, 42d Skill: Applied

..

18

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

44) A person can be sued for trespass when he or she accidentally crashes into another person's property after losing control of his or her car. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 41e Skill: Recall 45) Which of the following actions would not result in a successful tort action by the person suing? Assume that all persons involved learn these facts. a. An accountant made an error in financial statements that he knew would be given by his client to a potential investor, Mr. Ling. The investor, relying on the erroneous statements, invested $20 000 and lost it all. Ling sued the accountant. b. When Manjeet accidentally dropped a board and broke Al's toe, Al threw a rock at Manjeet, but Manjeet saw it coming and moved in time to avoid being hit. Al sued; Manjeet counterclaimed. c. A waiter, and then the police, detained a restaurant patron because he did not want to pay for wine that was brought to the table but was cloudy and undrinkable. The patron sued for false imprisonment. d. Mr. Simpson wrote a letter to the editor of the Vancouver Province in which he falsely stated that the mayor took a bribe. The editor and 10 others on staff read it but decided not to print it. The mayor sued Mr. Simpson. e. Jayne was doing aerobic exercises. She looked up and saw the gas meter reader in the backyard. She sued him for trespass.

Answer: e Diff: 2 Type: MC Page Reference: 41f Skill: Applied 46) Some people have implied permission to be on your land. a. True b. False Answer: a Diff: 1

..

19

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

Type: TF Page Reference: 41g Skill: Recall 47) A person could be liable for the tort of trespass: a. If he delivered a package to the owner at poolside as instructed by the owner b. If, in the middle of the night, he was carried onto the neighbour's property and thrown in the pool c. If he lost control of his bike and accidentally went onto his neighbour's property and into the pool d. If he stood in the lane and threw a tire in the pool e. If he swam in the pool with the owner’s permission Answer: d Diff: 2 Type: MC Page Reference: 42a Skill: Recall 48) A person could commit a trespass even without coming onto your land. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 42b Skill: Recall 49) You cannot trespass in a public mall. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 42c Skill: Recall

..

20

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

50) A continuing trespass can be remedied by damages. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 42e Skill: Recall 51) Give three examples where tort standards have been modified by legislation.

Answer: 1. Occupiers’ Liability Act 2. Defamation 3. Innkeepers’ Act 4. In some circumstances, human rights legislation 5. Motor Vehicle Act 6. Consumer protection acts Feedback: 1. Occupiers’ Liability Act 2. Defamation 3. Innkeepers’ Act 4. In some circumstances, human rights legislation 5. Motor Vehicle Act 6. Consumer protection actsDiff: 2 Type: ES Page Reference: 42e, 43n, 51b, 52a,b, 56c Skill: Recall 52) Explain what is meant by a continuing trespass.

Answer: Some building or other structure permanently encroaching onto another's property would amount to a continuing trespass.

..

21

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

Feedback: Some building or other structure permanently encroaching onto another's property would amount to a continuing trespass.

Diff: 2 Type: ES Page Reference: 42g Skill: Recall 53) After the McLeans filled their swimming pool, recently built in their backyard, swarms of bees came regularly for water. The bees stung everyone, including the dog, and made it impossible for the McLeans to enjoy the use of their pool. Unknown to the McLeans when they had the pool installed, their neighbour Springborn had beehives on his property. On these facts, which of the following is true? a. The McLeans have an action against Springborn for nuisance. b. The McLeans have an action against Springborn for assault. c. Springborn would successfully use the defence of absolute privilege. d. The McLeans have an action against Springborn under the Occupiers' Liability Act. e. The McLeans have an action against Springborn for nuisance and also under the Occupiers' Liability Act. Answer: a Diff: 3 Type: MC Page Reference: 43a Skill: Applied 54) After the Leans began to use their new swimming pool, they found that they could not enjoy it because of the smell coming from their neighbour's chicken coop. They knew of the chickens when they moved in, but had no idea that the smell could be so overpowering, especially during the summer. Which of the following is true with regard to the legal position of the parties? a. The Leans would have to sue in nuisance if they hope to succeed. b. The Leans could sue for assault. c. The Leans can sue for trespass. d. This is an example of strict liability and there is nothing the neighbour can do to avoid liability in these circumstances. e. There is nothing the Leans can do.

Answer: a

..

22

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

Diff: 2 Type: MC Page Reference: 43b Skill: Applied 55) Read the following and indicate the true statement. a. If falling over boxes wrongfully left in a garage by a delivery company injured a person, the cause of action could be breach of contract. b. If a person suffers damage because of wiring improperly installed by John for his employer, World Wires Ltd., only John could be sued for negligence. c. If the odour from a neighbour's smokehouse makes it impossible for you to use your pool, the proper action is nuisance. d. If a person is given a blood transfusion after making it clear that she doesn’t want one, the cause of action would be negligence. e. If a person suffers a loss because a salesperson knowingly made a false statement that he knew the other would rely on to his detriment, the cause of action could be defamation.

Answer: c Diff: 2 Type: MC Page Reference: 43c Skill: Recall 56) Under what circumstances would one sue for nuisance?

Answer: This is a tort action available where property adjoining or nearby is used in such a way that it interferes with someone's enjoyment of their own property. For example, where noise, noxious fumes, water, toxic substances, etc., escape, making it difficult to enjoy your property, you would sue that adjoining property owner for private nuisance.

Feedback: This is a tort action available where property adjoining or nearby is used in such a way that it interferes with someone's enjoyment of their own property. For example, where noise, noxious fumes, water, toxic substances, etc., escape, making it difficult to enjoy your property, you would sue that adjoining property owner for private nuisance.

Diff: 2 Type: ES Page Reference: 43d ..

23

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

Skill: Recall 57) Rob bet Joe $300 that the Chicago Bears would beat the San Francisco 49ers. The day after the Bears lost, Joe went to Rob's office and created quite a scene. Joe got the $300 and yelled nasty remarks about the Bears and the team’s coach. Rob was furious.

He lied to the onlookers by saying that Joe claimed to be an accountant but that he had never passed the required exams and had forged the documents. Joe lost several clients because of Rob's false statements. On these facts, which of the following is true? a. Joe could successfully sue Rob for defamation. b. If Joe sues Rob for defamation, Rob would be able to use successfully the defence of qualified privilege. c. Rob could sue Joe for nuisance. d. Rob could successfully sue Joe for defamation because of the statements Joe made about the Bears and the team’s coach. e. Rob's statements about Joe were defamation by innuendo.

Answer: a Diff: 2 Type: MC Page Reference: 43e Skill: Applied 58) A published true statement that injures the reputation of the person it concerns is called defamation. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 43f Skill: Recall 59) If a television broadcaster makes disparaging remarks about all immigrants in Canada, the broadcaster could be sued successfully for defamation by any immigrant in Canada. a. True b. False Answer: b

..

24

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

Diff: 1 Type: TF Page Reference: 43g Skill: Recall 60) Define defamation.

Answer: Defamation is a false statement about someone to his or her detriment that is shared with a third party.

Feedback: Defamation is a false statement about someone to his or her detriment that is shared with a third party.

Diff: 2 Type: ES Page Reference: 43h Skill: Recall 61) Explain what is meant by innuendo.

Answer: An innuendo involves a hidden meaning that makes a basically innocent statement defamatory because of this hidden meaning.

Feedback: An innuendo involves a hidden meaning that makes a basically innocent statement defamatory because of this hidden meaning.

Diff: 2 Type: ES Page Reference: 43j Skill: Recall 62) Words that are basically innocent such as "Mary had a baby yesterday" can become defamatory when combined with information that the hearer has, such as the fact that Mary is a Catholic nun. This hidden meaning is referred to as ________.

Answer: Innuendo Feedback: Innuendo Diff: 2

..

25

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

Type: ES Page Reference: 43k Skill: Recall 63) Distinguish between libel and slander.

Answer: Libel is written defamation and slander is spoken defamation. (In some jurisdictions, libel includes any form of broadcasted defamation.)

Feedback: Libel is written defamation and slander is spoken defamation. (In some jurisdictions, libel includes any form of broadcasted defamation.)

Diff: 2 Type: ES Page Reference: 43l Skill: Recall 64) The plaintiff, M, quit her job because her then-employer, Mr. C, made unwelcome sexual advances and her career was not advanced as promised. Subsequently, Mr. C, on his own initiative, called her past employer, her present employer, and an instructor at vocational school and said that M was a thief, a false statement. As a result of that call, M lost her new job. Which of the following is true? a. Mr. C's statement is defamatory by innuendo. b. Mr. C could be sued successfully for defamation even though the defamatory words were not written down. c. Technically, M could sue Mr. C for libel. d. Mr. C could successfully use the defence of fair comment. e. Mr. C could successfully use the defence of qualified privilege.

Answer: b Diff: 2 Type: MC Page Reference: 43m Skill: Applied 65) Explain in what circumstances the defence of absolute privilege is available in defamation action.

Answer:

..

26

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

Absolute privilege is available in relation to trial proceedings, statements made on the floor of the legislature or Parliament, and in senior government committees.

Feedback: Absolute privilege is available in relation to trial proceedings, statements made on the floor of the legislature or Parliament, and in senior government committees.

Diff: 2 Type: ES Page Reference: 44a Skill: Applied 66) Explain under what circumstances qualified privileges are available.

Answer: When defamatory communications are made pursuant to an obligation or duty such as employment (e.g., a job reference) or public position, they can be protected by qualified privileges.

Feedback: When defamatory communications are made pursuant to an obligation or duty such as employment (e.g., a job reference) or public position, they can be protected by qualified privileges.

Diff: 2 Type: ES Page Reference: 44b Skill: Applied 67) Explain the difference between qualified and absolute privilege.

Answer: Where absolute privilege is involved, it doesn't matter what the motivation is, whether the person knew what he or she was saying was false, or how damaging the statement is. It is absolutely privileged and no defamation action can be taken. With qualified privilege, however, that privilege can be lost if it can be demonstrated that malice was intended in making the statement, that the statement was published too broadly, or that the person who made the statment did not believe it was true.

Feedback: Where absolute privilege is involved, it doesn't matter what the motivation is, whether the person knew what he or she was saying was false, or how damaging the statement is. It is absolutely privileged and no defamation action can be taken. With qualified privilege, however, that privilege can be lost if it can be demonstrated that malice was intended in making the statement, that the statement was published too broadly, or that the person who made the statement did not believe it was true.

..

27

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

Diff: 2 Type: ES Page Reference: 44c Skill: Applied 68) Explain when the defence of fair comment would be available.

Answer: Where someone is a public figure or some event, such as a play, a movie, etc., becomes a matter of public interest, people are entitled to have opinions about that public matter and express them. It must be clear that the comment is the expression of an opinion based on a fact that is available to the public. Also, the opinion must be stated without malice.

Feedback: Where someone is a public figure or some event, such as a play, a movie, etc., becomes a matter of public interest, people are entitled to have opinions about that public matter and express them. It must be clear that the comment is the expression of an opinion based on a fact that is available to the public. Also, the opinion must be stated without malice.

Diff: 2 Type: ES Page Reference: 45a Skill: Applied 69) Following a broadcast on the TV station the night before about a particular city councillor having been pulled over for drunk driving, Joe, a political cartoonist, drew a cartoon of the councillor, obviously drunk and with his clothes in disarray, having difficulty walking a straight line on the road with a sober police officer looking on. This was published the next day in the paper for which Joe works. The city councillor involved had had disagreements with Joe in the past and disliked him intensely. It turned out that the story published on TV was an error, but the city councillor chose not to sue the TV reporter and the station; rather, he sued Joe for defamation. What would Joe's best defence be? Indicate the likely outcome.

Answer: Joe's best defence would be fair comment. Unfortunately for Joe, the fact on which the comment or opinion is made must be correct; here it was not, and so Joe would be liable for defamation. It doesn't matter that the city councillor chose to sue Joe instead of the TV station; he has that right. It would be no defence for Joe that the city councillor was motivated by malice against him, because the councillor was defamed.

Feedback: Joe's best defence would be fair comment. Unfortunately for Joe, the fact on which the comment or opinion is made must be correct; here it was not, and so Joe would

..

28

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

be liable for defamation. It doesn't matter that the city councillor chose to sue Joe instead of the TV station; he has that right. It would be no defence for Joe that the city councillor was motivated by malice against him, because the councillor was defamed.

Diff: 3 Type: ES Page Reference: 45b Skill: Applied 70) Explain the defence of “reasonable communication” and its importance in the area of defamation.

Answer: The Supreme Court of Canada made an extremely important change to the law of defamation with respect to the balance between freedom of speech and protection of reputation. It adopted the defence of “responsible communication,” stating that as long as a publication was on a matter of public interest, was reasonable in the circumstances, and there was a diligent attempt to verify the facts, the publisher may be protected even where the comments are false and derogatory. This gives journalists greater protection than they had in the past.

Feedback: The Supreme Court of Canada made an extremely important change to the law of defamation with respect to the balance between freedom of speech and protection of reputation. It adopted the defence of “responsible communication,” stating that as long as a publication was on a matter of public interest, was reasonable in the circumstances, and there was a diligent attempt to verify the facts, the publisher may be protected even where the comments are false and derogatory. This gives journalists greater protection than they had in the past.

Diff: 2 Type: ES Page Reference: 45c Skill: Applied 71) Which of the following is an intentional tort? a. Negligence b. Breach of contract c. Defamation d. Frustration e. Duress and undue influence Answer: c ..

29

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

Diff: 2 Type: MC Page Reference: 46a Skill: Recall 72) Joe is a publisher of a newspaper and relied on Harry's account when he published an article stating that a councillor, Sam, had been caught making indecent telephone calls. It turned out that Joe had misunderstood, and someone else had made the calls. Sam sued for defamation. Will he succeed?

Answer: Yes, mistake is no defence to a defamation action.

Feedback: Yes, mistake is no defence to a defamation action.

Diff: 2 Type: ES Page Reference: 46b Skill: Applied 73) With regard to the law of tort, which of the following is false? a. A negligent person causing physical injury to another is responsible to the full extent of the injury suffered, even though the injured person suffered more than would reasonably be expected because of a special weakness. b. If the court finds the plaintiff contributorily negligent, causing 20% of his loss, he must suffer that portion of the loss and will not be compensated for it by the defendant. c. An act must be intentional to be classified as a tort. d. Although a signed consent form appears to be a defence to a claim of battery, the court will look to see if it was informed consent, that is, if the person was told all relevant facts that would allow a reasonable person to make a decision. e. Although a person was not careless and intended no harm, he could still be sued successfully by someone harmed by a dangerous substance that escaped from his property.

Answer: c Diff: 2 Type: MC Page Reference: 46c Skill: Recall

..

30

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

74) Which of the following does not describe a crime? a. An act prosecuted by the state b. A serious injury inflicted on a person by the unintentional act of another c. A charge laid by the police d. An act that can be punished by imprisonment e. A serious offence against the state Answer: b Diff: 2 Type: MC Page Reference: 46d Skill: Recall 75) The provincial government thought that the only way to make businesses competitive with those from other countries was to make more information available to them about market conditions, currencies, etc. around the world. It began a program of incentives that included a government office that would give people not only business information but also advice on how the businesses could link to the government's database that held the information. Mr. Su relied on some information given to him by Alex Chec, an employee of the government. The information was wrong due to a mistake made by an operator entering data. It was Chec's job to cross-check that information before it was released to the public. He forgot to do this. Su suffered a $10 000 loss because of the error. Which of the following is true? a. The court must find only one party liable and that party must pay for all damages. b. The operator may be found liable for negligence if Su, the plaintiff, can prove, among other things, that she owed him a duty of care. c. Su could not take any action because he had not entered into a contract with the government for this information. d. Su could not take any action because he suffered no physical injury. The case deals only with information. e. If Su sues the government on the principle of vicarious liability, he cannot also sue the employee, or employees, at fault.

Answer: b Diff: 2 Type: MC Page Reference: 46e Skill: Applied

..

31

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

76) A 70-year-old woman, while using the escalator at the airport, dropped a glove.

When she attempted to pick it up, she lost her balance and fell. As a result of the accident, she suffered a fractured vertebra (back bone). In an action by her against the company that was responsible for maintaining the escalator, the defendant company would argue which of the following for its best defence? a. Provocation b. There were no damages suffered. c. It was not below the standard of care. d. It did not owe her a duty of care. e. Qualified privilege Answer: c Diff: 1 Type: MC Page Reference: 46f Skill: Applied 77) Mr. Reasoner was looking out his living room window and saw his next-door neighbour, Jon Bon, trying to burn leaves. Bon threw gasoline on the damp leaves, and when he lit a match, there was an explosion that sent flames in every direction. Luckily, no one was around, and the flame that shot onto Reasoner's property caused no harm whatsoever. Reasoner was upset by this carelessness and sued Bon for negligence. Which of the following is the best argument for the defendant Bon? a. There were no damages suffered. b. Reasoner had voluntarily assumed the risk. c. Bon didn't owe the plaintiff a duty of care. d. Bon was not below the standard of care. e. Reasoner was contributorily negligent.

Answer: a Diff: 1 Type: MC Page Reference: 46g Skill: Applied 78) Sam and John drank beer and watched the Olympics for hours. When John left, he did not feel impaired, but the alcohol in his system affected his driving. He lost control of his car, which crashed through Mr. Mitsu's fence and into Mr. Mitsu's garage. Mitsu's neighbour, Mr. Watson, called the police. John was charged with driving while impaired

..

32

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

and was found guilty in criminal proceedings. Given these facts, which of the following is true? a. Because John was charged with an offence, Mitsu cannot sue him in a civil action for compensation. One court action is all that is allowed. b. Since no one was physically injured, there could be no civil action. c. Mitsu could sue John for negligence. d. Watson, the neighbour, could sue John for negligence. e. If Mitsu sued John, he would be entitled only to punitive damages.

Answer: c Diff: 2 Type: MC Page Reference: 46h Skill: Applied 79) Mrs. Stare was looking out her living room window when she saw her neighbour, Mr. Phast, get in his new car and try to go from 0 to 100 kilometres per hour in just 10 seconds, like the manufacturer's ad on TV. It was a careless thing to do in this residential neighbourhood; Phast just missed hitting a child on his bike who was traveling in the same direction and couldn’t see Phast's car coming. No one was hurt. Stare was angry at Phast’s recklessness. On these facts, which of the following is false? a. The test to be applied to determine the standard of care owed is the reasonable person test (i.e., how a reasonable person would have driven the car). b. Since there were no damages and the conduct was careless, Phast could not successfully be sued. c. The boy could successfully sue Phast for negligence. d. Stare could not successfully sue Phast for negligence. e. Phast owes a duty of care to the boy on the bike.

Answer: c Diff: 2 Type: MC Page Reference: 46i Skill: Applied 80) A recent case involved a fight that broke out at the Commodore, a dance hall. During a break in the music, the master of ceremonies was attacked. When the Commodore’s security team failed to appear, the plaintiff, Mr. Jeffrey, a patron, joined other patrons who intervened. Jeffrey was hit from behind with a chair and punched in the jaw. He sued

..

33

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

Commodore Cabaret Ltd., the company that managed the premises and entertainment, on these facts. Which of the following is false? a. The company has a duty under the Occupiers' Liability Act to take reasonable steps to ensure that patrons are reasonably safe. b. If the defendant argued and the court found that Jeffrey was contributorily negligent, Jeffrey would receive some damages for compensation. c. Jeffrey could have successfully sued the person who punched him in the jaw for the tort of negligence. d. Jeffrey's cause of action against the company could be framed in negligence because he could argue that the company owed him a duty of care, fell below the standard of care, and caused him foreseeable damage. e. If the defendant argued and the court found that Jeffrey had volunteered to take both the physical and the legal risk, Jeffrey would lose and receive no damages.

Answer: c Diff: 2 Type: MC Page Reference: 46j, 51a, 53c, 54c Skill: Applied 81) Tom is complaining about the carelessness of his neighbour and asks you if you think he could sue the neighbour for negligence and win. Explain what a plaintiff must prove in order to sue successfully for the tort of negligence and have the defendant pay 100% of his loss.

Answer: Tom would have to prove that a duty was owed by his neighbour to him, that the neighbour failed to live up to that duty, and that this failure caused an injury or loss to Tom. Also, if brought up by the neighbour, Tom would have to show that the damage was not too remote and that there was no contributory negligence or voluntary assumption of risk on his part.

Feedback: Tom would have to prove that a duty was owed by his neighbour to him, that the neighbour failed to live up to that duty, and that this failure caused an injury or loss to Tom. Also, if brought up by the neighbour, Tom would have to show that the damage was not too remote and that there was no contributory negligence or voluntary assumption of risk on his part.

Diff: 3 Type: ES Page Reference: 46k, 53b

..

34

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

Skill: Applied 82) What elements must be established in order to succeed in a negligence action?

Answer: 1. A duty of care owed to the plaintiff.

2. Breach of that duty (i.e., failure to live up to the standard of care).

3. Causation (physical and legal—not too remote).

4. Damage.

Feedback: 1. A duty of care owed to the plaintiff.

2. Breach of that duty (i.e., failure to live up to the standard of care).

3. Causation (physical and legal—not too remote).

4. Damage.

Diff: 2 Type: ES Page Reference: 46l Skill: Recall 83) Joe was driving his automobile when Sam came out from a side street and went through a stop sign without stopping, almost causing an accident. Joe swerved to avoid Sam and was successful in doing so. He wrote down Sam's licence plate number and sued Sam for his negligent driving. Indicate the expected result.

Answer: He will fail because there was no material loss; there was no accident.

Feedback: He will fail because there was no material loss; there was no accident.

Diff: 2 Type: ES Page Reference: 46m Skill: Applied 84) Explain what must be established in order to succeed in a negligence action.

Answer: Here, students are expected to outline the elements that must be present for negligence.

They should show that a duty of care exists, explaining reasonable foreseeability and the

..

35

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

modernization through the Anns case. They should explain how to determine the standard applicable. This is the reasonable person test, and they should indicate that it is the reasonable person in the circumstances (i.e., reasonable doctor, etc.). The action must show that the conduct of the defendant fell below this standard and caused the injury complained of. Whether the damage was caused by the conduct complained of is determined by applying the "but for" test. The injury or damage that resulted now can be emotional and economic injury. Students should also note the effect of contributory negligence and voluntarily assuming the risk. They can also deal with the problem of remoteness, although this is likely dealt with today through the Anns case tests.

Feedback: Here, students are expected to outline the elements that must be present for negligence. They should show that a duty of care exists, explaining reasonable foreseeability and the modernization through the Anns case. They should explain how to determine the standard applicable. This is the reasonable person test, and they should indicate that it is the reasonable person in the circumstances (i.e., reasonable doctor, etc.). The action must show that the conduct of the defendant fell below this standard and caused the injury complained of. Whether the damage was caused by the conduct complained of is determined by applying the "but for" test. The injury or damage that resulted now can be emotional and economic injury. Students should also note the effect of contributory negligence and voluntarily assuming the risk. They can also deal with the problem of remoteness, although this is likely dealt with today through the Anns case tests.

Diff: 2 Type: ES Page Reference: 46n-50 Skill: Applied 85) A reasonable person is one who is prudent and careful. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 47a Skill: Recall 86) Explain what is meant by the "reasonable person" test.

Answer: This test is used in many areas but is especially important in determining the standard against which the defendant's conduct is measured in a negligence action. The reasonable

..

36

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

person here is a careful, prudent person going about the activities, not the average person.

The test is analogous to par in the game of golf. Par is not what an average golfer would obtain as a score, but the score one would expect from a good golfer having a good day.

Feedback: This test is used in many areas but is especially important in determining the standard against which the defendant's conduct is measured in a negligence action. The reasonable person here is a careful, prudent person going about the activities, not the average person. The test is analogous to par in the game of golf. Par is not what an average golfer would obtain as a score, but the score one would expect from a good golfer having a good day.

Diff: 2 Type: ES Page Reference: 47b Skill: Recall 87) Indicate why the Donoghue v. Stevenson case (the snail in the ginger beer bottle) was so important in the development of negligence law.

Answer: Here, students should display an understanding of what happened in the case and should explain how the reasonable foreseeability test was developed. The concept of a duty owed to your neighbour was modified so that you owe a duty to take steps not to injure anyone you could anticipate might be harmed by your actions. Good students will also discuss how the case expanded the law, particularly with respect to product liability.

Good students will go on to explain how this has since been further developed by the Anns case, which is good law in Canada.

Feedback: Here, students should display an understanding of what happened in the case and should explain how the reasonable foreseeability test was developed. The concept of a duty owed to your neighbour was modified so that you owe a duty to take steps not to injure anyone you could anticipate might be harmed by your actions. Good students will also discuss how the case expanded the law, particularly with respect to product liability.

Good students will go on to explain how this has since been further developed by the Anns case, which is good law in Canada.

Diff: 2 Type: ES Page Reference: 47c-48 Skill: Applied 88) Al bought a case of beer because his friends were coming over to watch the Grey Cup. During the game, Al opened a beer, poured about a third of it into Bob's glass, and handed the can to Chuck. Bob noticed the strange orange colour of the beer and called

..

37

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

everyone's attention to it; unfortunately, Chuck had drunk most of the beer from the can before he heard Bob. There had been a small battery in the can that had contaminated the beer. Chuck was seriously injured. On these facts, which of the following is true? a. Since Chuck did not buy the beer, he has no cause of action against anyone. b. Bob could sue Al successfully for negligence, because Al poured the contaminated beer into Bob's glass. c. Chuck could sue Al successfully for negligence, because Al handed the contaminated beer to Chuck. d. Bob could successfully sue the manufacturer for negligence because he need only prove that the manufacturer owed him a duty of care and need not prove damages. e. Because Chuck did not buy the beer, he could not sue the seller for breach of contract, but he could sue the beer manufacturer in tort.

Answer: e Diff: 2 Type: MC Page Reference: 47d Skill: Applied 89) A principle established in Donoghue v. Stevenson is the test used to determine the standard of care that must be exercised by the defendant to escape liability. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 47e Skill: Recall 90) We owe a duty to anyone we can reasonably anticipate might be harmed by our conduct. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 47f Skill: Recall ..

38

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

91) A duty is owed when: a. It would be apparent to a prudent person that the conduct was likely to cause injury b. A person undertakes to rescue someone in danger c. A person making a misstatement knew that it would be relied on by a member of a group d. A visitor comes on your property e. All of the above Answer: e Diff: 1 Type: MC Page Reference: 47g, 51c, 57b Skill: Recall 92) Explain how the courts determine whether a duty of care exists in a negligence action.

Answer: The test of reasonable foreseeability applies; that is, could a reasonable person have anticipated that his conduct could cause harm to another? If the answer is yes, the duty exists. However, note that today, because of the Anns case, there may be some factors to reduce or alter the nature of that duty.

Feedback: The test of reasonable foreseeability applies; that is, could a reasonable person have anticipated that his conduct could cause harm to another? If the answer is yes, the duty exists. However, note that today, because of the Anns case, there may be some factors to reduce or alter the nature of that duty.

Diff: 2 Type: ES Page Reference: 48 Skill: Applied 93) If a person attempts to help, there is no duty to exercise reasonable care. a. True b. False Answer: b Diff: 1

..

39

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

Type: TF Page Reference: 50a Skill: Recall 94) Which of the following statements best describes the standard used by the courts to measure socially acceptable behaviour? a. When you cause injury, you are always liable b. An average person acting normally c. The best possible response to the circumstance d. A careful person acting to the best of his or her ability e. A reasonably prudent person acting in a careful manner Answer: e Diff: 2 Type: MC Page Reference: 50b Skill: Recall 95) An investor who wanted to build a duplex asked the city zoning officer whether Lot A of Plan 16, known as 1 Street, was zoned for a single-family house or a duplex. The zoning officer was distracted by a news report on the radio and accidentally gave the investor a printed copy of the zoning for the wrong lot that said "duplex," although 1 Street was only zoned for single-family houses. After the investor began building a duplex, the city stopped him for building contrary to the zoning by-laws. He lost $50 000.

On these facts (assuming all can be proven), which of the following is true? a. The employer of the zoning officer could not be sued since the employer did no wrong. b. The zoning officer can be sued even though the investor did not have a contract with him (i.e., he didn't pay for the information). c. A person can be sued only for actions that cause physical injury. d. The zoning officer could not be sued successfully since he had no intention of hurting anyone; his error was an accident. e. The cause of action most likely to be taken by the investor in this case is "deceit."

Answer: b Diff: 3 Type: MC Page Reference: 50c Skill: Applied

..

40

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

96) The court determines the standard of care required and whether or not there was a failure to live up to that standard. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 50d Skill: Recall 97) You and your friend recently bought a duplex. You rent out the downstairs and live in the upstairs suite. As the owner and occupier, you have acquired certain rights and responsibilities. Which of the following statements about the law relating to land is true? a. If you bring something onto your property that is inherently dangerous and it escapes and causes damage to others, you will be liable even if you were very careful and did not intend to harm anyone. b. The use of your property is partly governed by fiduciary duty. c. If there was an accident out front and a car was knocked into your yard, you could sue the driver in that car for trespass. d. You could sue for the tort of negligence if someone used his or her property in such a way that it interfered with the use and enjoyment of your property. e. Your tenants have no duty to take reasonable steps to make sure that any person is reasonably safe when in their suite.

Answer: a Diff: 2 Type: MC Page Reference: 50e Skill: Applied 98) Which of the following statements describes the standard expected of experts? a. They require skills and abilities expected of an average person. b. They must exercise skill with the degree of care expected of a reasonable person in that profession. c. Inexperience excuses incompetence. d. The standard of an expert needs to be perfection. e. Common practice always sets the appropriate standard.

..

41

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

Answer: b Diff: 2 Type: MC Page Reference: 50f Skill: Recall 99) In which of the following would the plaintiff not succeed in an action for negligence? a. A real estate agent accidentally forgot to lock the back door of the house he had just shown. Before the owner returned, someone broke in and stole the TV. The owner sued the agent. b. Dr. Zotsky used the skill of a reasonable doctor in that field, but the patient did not respond to the treatment and lost sight in one eye. She sued the doctor. c. May was made sick by drinking a contaminated cola bought for her by her friend Fred.

She sued the manufacturer. d. A real estate agent failed to check the zoning and assured the purchasers that they could build a duplex on the property. Relying on that statement, they purchased the property. e. Nick was hurt when the driver of a Gino's pizza truck carelessly ran through a yellow traffic light on his way to deliver a pizza. Nick sued the driver and Gino, the driver’s employer, although Gino wasn't in the truck.

Answer: b Diff: 2 Type: MC Page Reference: 50g Skill: Applied 100) The standard of care that is required of a professional in a negligence action is that he or she acts to the best of his or her ability. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 50h Skill: Recall

..

42

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

101) Discuss the role of insurance, especially compulsory insurance, and how it relates to tort law.

Answer: This is a little more difficult, requiring that students understand that tort law is based on finding one party at fault and requiring that party to pay damages. Insurance, on the other hand, is based on the principle of sharing the risk. Students should discuss the disadvantage of torts placing overwhelming and ruinous financial liability on one party, and how insurance can avoid that outcome. This leads to compulsory insurance, especially in motor vehicle cases, and the introduction of no-fault systems. Students could also discuss the requirement of insurance for professionals. They should mention that some professional organizations are self-insured, incorporating substantial fees to cover potential losses. However, even in this case, there will usually be backup arrangements for insurance coverage for extraordinary claims.

Feedback: This is a little more difficult, requiring that students understand that tort law is based on finding one party at fault and requiring that party to pay damages. Insurance, on the other hand, is based on the principle of sharing the risk. Students should discuss the disadvantage of torts placing overwhelming and ruinous financial liability on one party, and how insurance can avoid that outcome. This leads to compulsory insurance, especially in motor vehicle cases, and the introduction of no-fault systems. Students could also discuss the requirement of insurance for professionals. They should mention that some professional organizations are self-insured, incorporating substantial fees to cover potential losses. However, even in this case, there will usually be backup arrangements for insurance coverage for extraordinary claims.

Diff: 3 Type: ES Page Reference: 52c, 59 Skill: Applied 102) Which of the following is true with regard to the torts of assault and battery? a. The amount of damages paid to Joe, injured by another's battery, will be an amount to cover the extent of injury suffered by a normal person regardless of Joe's actual injuries. b. For consent to be an effective legal defence to a claim of battery, the person hit must have been surprised by the incident. c. A person will always succeed with the defence of self-defence even if he or she used excessive force. d. Both torts are "actionable per se"; that is, a person can successfully sue without having to prove damages. e. Assault is the threat of interference viewed as harmful by the victim.

..

43

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

Answer: d Diff: 2 Type: MC Page Reference: 52d Skill: Recall 103) With intentional torts such as assault and battery, false imprisonment, or trespass, it is necessary that actual damage be shown. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 52e Skill: Recall 104) Mary was driving down the road when Sam came out from a side road, went through a stop sign without stopping, and struck the side of her car. Upon later examination of Mary's car, it was determined that the brakes were worn down beyond the point of safety. Sam sued her for negligence. Explain the likely result.

Answer: If Mary didn't notice Sam and didn't touch the brakes, then her poor brakes had absolutely nothing to do with the accident and did not cause it. It was Sam's negligence that caused the accident when he went through the stop sign. If, however, Mary did see Sam coming through the stop sign and was unable to stop because of her defective brakes, she at least contributed to the accident by her negligence.

Feedback: If Mary didn't notice Sam and didn't touch the brakes, then her poor brakes had absolutely nothing to do with the accident and did not cause it. It was Sam's negligence that caused the accident when he went through the stop sign. If, however, Mary did see Sam coming through the stop sign and was unable to stop because of her defective brakes, she at least contributed to the accident by her negligence.

Diff: 2 Type: ES Page Reference: 52f, 53d Skill: Applied 105) After the courts conclude a presumption of negligence, it is up to the defendant to produce evidence that he or she was not negligent.

..

44

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

a. True b. False Answer: a Diff: 2 Type: TF Page Reference: 53a Skill: Recall 106) Stella bought a cup of coffee at the drive-through window at a coffee shop. Holding the cup between her knees and attempting to take off the lid to add cream, she spilled the coffee. She suffered burns to her thighs. If this happened in Canada, which of the following is true? a. To succeed with the defence that Stella volunteered to take the risk, the coffee shop would have to prove that Stella deliberately spilled the coffee. b. If the court finds the plaintiff contributorily negligent, causing 60% of her loss, Stella must suffer that portion of the loss and will not be compensated for it by the defendant. c. If the coffee shop claims there was no way to reasonably foresee that Stella would be harmed, the plaintiff's case would be dismissed even though Stella suffered burns. d. If Stella sues the coffee shop for negligence, she will only have to prove that the company owed her a duty of care. e. If Stella sues the coffee shop, the company's best argument is that it didn't owe her a duty of care.

Answer: b Diff: 2 Type: MC Page Reference: 54a Skill: Applied 107) Which of the following statements with regard to the tort of negligence is true? a. A possible defence to the plaintiff's claim of negligence is that the plaintiff volunteered to take the risk. b. If physical injury can be foreseen as the result of a person's actions, the wrongdoer will not be liable for all injury suffered. c. If the court finds contributory negligence, the defendant has no liability at all. d. If a person is injured by a defective product that he himself did not purchase, he cannot sue the manufacturer for negligence.

..

45

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

e. The test used to determine whether a duty of care is owed is this: Would a belowaverage person foresee that the plaintiff could be affected by the acts of the defendant?

Answer: a Diff: 2 Type: MC Page Reference: 54b Skill: Recall 108) Pete and John were hired by the same computer consulting company. They worked a three-hour shift and walked to a pub, where they had several beers. John said he'd drive Pete home. Pete knew John had been drinking but agreed to go with him anyway. The alcohol affected John's driving. He lost control of the car, which crashed through Mr. Britt's fence and garage. Pete was injured. John was not injured. Britt's neighbour, Mr. Watson, called the police. John was charged with the offence of driving while impaired and was found guilty in the criminal proceedings. Given these facts, which of the following is true? a. One court action is all that is allowed. b. Since Britt was not physically injured, he could not sue. c. Watson, the neighbour, could successfully sue John for negligence. d. The principle of vicarious liability is relevant here because John was an employee at the time of the accident. John was charged with an offence; no one could sue him in a civil action for compensation. e. Pete could sue John for negligence, but if the court held that Pete volunteered to take the risk, Pete would get no award of damages.

Answer: e Diff: 2 Type: MC Page Reference: 54d Skill: Applied 109) Explain under what circumstances the defence of remoteness can be used in a negligence action.

Answer: Where some sort of injury or damage was reasonably foreseeable, but in fact the way that the injury took place was strange to the point of being completely unexpected or unusual so that the type of damage itself was not foreseeable, then the injury may be too remote and therefore not actionable.

..

46

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

Feedback: Where some sort of injury or damage was reasonably foreseeable, but in fact the way that the injury took place was strange to the point of being completely unexpected or unusual so that the type of damage itself was not foreseeable, then the injury may be too remote and therefore not actionable.

Diff: 2 Type: ES Page Reference: 54e Skill: Applied 110) A person has to prove only that another caused his or her injury to succeed in a negligence action. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 55a Skill: Recall 111) As a result of careless driving, Mr. Boz accidentally knocked Mr. Alder, a 70-yearold man, off his bike. Alder broke an arm and collarbone. Because of a rare disease, there was little likelihood that the breaks would heal properly, if at all. In effect, unlike most who would suffer those breaks, Alder lost the use of his right arm. Alder sued Boz for negligence. The court held Boz liable. With regard to the question of the amount of damages to be paid by the defendant, which of the following is correct? a. An amount to cover the extent of injury that would have been suffered by the average 70-year-old man, because a reasonable man would not have foreseen the extent of injury actually suffered b. An amount to cover the extent of injury that would have been suffered by a reasonable man c. An amount to cover the full extent of the injury suffered d. An amount to cover the extent of injury that would have been suffered by the average man e. No compensation at all because of Alder's rare condition Answer: c Diff: 3 Type: MC

..

47

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

Page Reference: 55b Skill: Applied 112) Sarah Iris, a middle-aged woman, was struck down as she crossed the street at 41st and Knight, by a car whose driver accidentally went through a red light. She was not killed, but was badly injured. Unfortunately, she was suffering from osteoporosis, a condition in which her bones had lost most of their mass and were fragile and brittle.

Consequently, the bones in her legs were not expected to heal. She lost the use of her legs. She successfully sued the driver for negligence. With regard to the amount of damages to be paid by the defendant, which of the following is correct? a. An amount to cover the extent of injury that would have been suffered by the average middle-aged woman, because a reasonable person would not have foreseen the extent of injury actually suffered b. Special damages only c. An amount to cover the full extent of the injury suffered d. Maximum of $75 000, the legal limit in personal injury cases e. An amount to cover the extent of injury that would have been suffered by the average person Answer: c Diff: 2 Type: MC Page Reference: 55c Skill: Applied 113) Which of the following is true with respect to the law of tort? a. With assault and battery, a person can successfully sue only if he or she can prove damages. b. A person will always succeed with the defence of self-defence even if he or she used excessive force. c. A negligent person causing physical injury to another is responsible to the full extent of the injury suffered even though the injured person suffered more than would reasonably be expected because of a special weakness. d. A customer battered by an employee on the job can sue only the employee, not the employer, because it was the employee who did the wrong. e. For fair comment to be an effective legal defence to a claim of defamation, the comment must have been made in Parliament or in court.

Answer: c

..

48

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

Diff: 2 Type: MC Page Reference: 55d Skill: Recall 114) Joe, a concert pianist, was walking down the street when he was struck by Harry, a careless skateboarder, knocking him down and crushing his hand. When Joe sued Harry for his negligence, claiming the loss of income from his profession (he could never play piano again), Harry countered with the defence that there is no way he could have anticipated that the person he was going to hit was a concert pianist. Explain Harry’s likelihood of success in raising this defence.

Answer: You take your victim the way you find him or her, and the fact that the damages are unusual because of the special circumstances of the victim is no defence. This is called the thin skull rule.

Feedback: You take your victim the way you find him or her, and the fact that the damages are unusual because of the special circumstances of the victim is no defence.

This is called the thin skull rule.

Diff: 2 Type: ES Page Reference: 55e Skill: Applied 115) Discuss the requirement to mitigate damages in a negligence action.

Answer: The requirement to mitigate means the plaintiff must take all reasonable steps to keep damages as low as possible. If he or she fails to do this, the damages will be reduced to the amount he or she would have received had he or she properly mitigated.

Feedback: The requirement to mitigate means the plaintiff must take all reasonable steps to keep damages as low as possible. If he or she fails to do this, the damages will be reduced to the amount he or she would have received had he or she properly mitigated.

Diff: 2 Type: ES Page Reference: 55f Skill: Applied

..

49

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

116) For his Super Bowl party, Jack bought, among other things, some Francisco mustard. Even before the game began, one of Jack’s guests, Fred, made himself a sandwich using that mustard. When Fred saw another guest, Tad, making a sandwich with that mustard, Fred warned him that the sandwich did not taste right and that he (Fred) didn't feel too well. Tad ate everything else on his plate, but left the sandwich.

Fred became quite ill and had to go to the hospital. It was determined that the mustard had been contaminated when it was made. Jack had bought the mustard just an hour before game time from Big Store, which had purchased it from DB Distributors Ltd., which had purchased it from the manufacturer New Foods Ltd. On these facts, which of the following is true? a. Fred could successfully sue the distributor for negligence because the distributor delivered the case of mustard to Big Store. b. Tad could successfully sue Jack for negligence. c. Since Fred did not buy the mustard himself, he must suffer his loss (i.e., he cannot sue anyone). d. Fred could successfully sue Jack for negligence because Jack bought the mustard. e. Fred could successfully sue the manufacturer New Foods Ltd. for negligence but could not successfully sue Big Store for negligence.

Answer: e Diff: 2 Type: MC Page Reference: 56a Skill: Applied 117) In Canada, in order for a manufacturer to be held liable for injury caused by its product to an ultimate consumer, what must be shown?

Answer: That there was a duty to be careful in manufacturing that product, and that there was a failure to live up to the standard of a reasonable person in that manufacturing process (assuming, of course, that some sort of injury had resulted and the injury resulted from the normal use of the product).

Feedback: That there was a duty to be careful in manufacturing that product, and that there was a failure to live up to the standard of a reasonable person in that manufacturing process (assuming, of course, that some sort of injury had resulted and the injury resulted from the normal use of the product).

Diff: 2 Type: ES Page Reference: 56b

..

50

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

Skill: Applied 118) Which of the following situations could result in a successful action for negligence? a. A doctor, acting in the best interest of his patient Alex (who had lost blood after a serious cut), gave him a transfusion even though Alex told him explicitly not to do so. b. An employee of the bank mistakenly wrote to Sean saying that the bank had approved his loan. Relying on that letter, Sean made contracts he could not honour when the bank refused to forward the money. Sean lost $10 000 because of the bank's carelessness. c. George deliberately broke an expensive camera when he yanked on a large cable. d. When Eric was setting up the lighting in a backyard rented for a night shoot, he fell into a hole and broke his leg. The owner had previously notified the director that he had been digging a hole to plant an apple tree. e. Dr. Jones used the skill of a reasonable doctor in that field, but the patient did not respond to the treatment and lost sight in one eye. The patient sued the doctor.

Answer: b Diff: 2 Type: MC Page Reference: 57a Skill: Applied 119) An employee prepared an appraisal of a property for his real estate development company. The employee had been told that the appraisal would be used by the company to attract a potential investor, Mr. Jones, for the company's client, Mr. Lee. Because the appraiser carelessly forgot to check the recent changes in the zoning by-laws, the appraisal was not accurate. Mr. Jones was misled about the value of the land and suffered a financial loss of $20 000. On these facts, which of the following is true? a. To win in an action against the appraiser, Jones must prove that the appraiser owed him a duty of care, fell below the standard of care owed, and thereby caused him a foreseeable loss because of his reliance on the information. b. Jones could not take any action because he had no contract with the company or the appraiser. c. A person cannot be sued for words that cause loss, only for actions that cause physical injury. d. If Jones sues the appraiser, he cannot also sue the employer. e. The cause of action most likely to be taken by the investor is defamation.

Answer: a Diff: 2

..

51

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

Type: MC Page Reference: 57c Skill: Applied 120) A land appraiser prepared an appraisal of a property for a real estate development company. The appraiser had been told that the appraisal would be used by the company to attract potential investors. Because the appraiser forgot to check the recent changes in the zoning by-laws, the appraisal was not accurate; the investor, a party unknown to the appraiser, was misled about the value of the land and, consequently, suffered a financial loss. On these facts, which of the following is true? a. A land appraiser owes a duty of care to his client and to potential investors only if he knows the name of the investor. b. The investor may sue the appraiser for negligent misstatement that resulted in economic loss. c. The investor must suffer his own loss, because an investor takes the risk and so must take care. d. A land appraiser owes a duty of care to his client and the company, but not to any potential investors. e. A person cannot be sued for words that cause loss, only for actions that cause physical injury.

Answer: b Diff: 2 Type: MC Page Reference: 57d Skill: Applied 121) Explain how the standard of care imposed varies when particular expertise is involved (e.g., a doctor).

Answer: The reasonable person test is really the reasonable person in the circumstances; therefore, the standard imposed with medical malpractice is what a reasonable doctor would have done in those circumstances. With other professions, what would a reasonable accountant or a reasonable plumber or electrician have done in the circumstances?

Feedback: The reasonable person test is really the reasonable person in the circumstances; therefore, the standard imposed with medical malpractice is what a reasonable doctor would have done in those circumstances. With other professions, what would a reasonable accountant or a reasonable plumber or electrician have done in the circumstances?

..

52

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

Diff: 2 Type: ES Page Reference: 58a Skill: Applied 122) How are professionals treated differently under the rules of negligence?

Answer: The standard required of a professional or expert in his or her field is much higher; that is, he or she must live up to the standard of a reasonable accountant, a reasonable lawyer, a reasonable doctor, etc.

Feedback: The standard required of a professional or expert in his or her field is much higher; that is, he or she must live up to the standard of a reasonable accountant, a reasonable lawyer, a reasonable doctor, etc.

Diff: 2 Type: ES Page Reference: 58b Skill: Applied 123) To win an action in negligence against a professional person, the plaintiff must prove, among other things, that the defendant's conduct was below an acceptable standard of care. Which of the following is the legal standard of care demanded of a professional person? a. That he or she act sincerely and as may reasonably be expected of a skilled professional b. That he or she act as a reasonably prudent person c. That he or she act as may reasonably be expected of the normally skilled professional in that class d. That he or she act sincerely and with goodwill e. That he or she act to the very best of his or her ability Answer: c Diff: 1 Type: MC Page Reference: 58c Skill: Recall

..

53

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

124) To have its schools valued for insurance purposes, a school district hired a firm of surveyors to give it a statement of value. To prepare the report, the surveyors took the relevant measurements, which were then given to a statistical tabulating company that does calculations based on the measurements. Surveyors always use the services of such tabulating companies. An error was made in the calculations, so the surveyors' report was wrong. Therefore, the buildings were underinsured. When one of the school buildings was destroyed by fire, the school district did not get sufficient funds from the insurance company to rebuild it. On these facts, which of the following is true? (Assume that the school district has the ability to sue and be sued in court.) a. The school district could successfully sue the surveyors for nuisance, for subcontracting the calculations. b. The school district can successfully sue the statistical tabulating company for negligent misstatement, causing economic loss. c. The insurance company can successfully sue the statistical tabulating company for nuisance. d. The statistical tabulating company cannot be sued by the school district. e. This action would most likely be commenced in Small Claims Court.

Answer: b Diff: 2 Type: MC Page Reference: 58d Skill: Applied 125) To win an action in negligence against a professional person, the plaintiff must prove, among other things, that the defendant's conduct was below an acceptable standard of care. Which of the following is the legal standard of care demanded of a professional person? a. That he or she act to the very best of his or her ability b. That he or she act sincerely and with goodwill c. That he or she act as may reasonably be expected of the normally skilled professional in that class d. That he or she act sincerely and as may reasonably be expected of a skilled professional e. That he or she act as a reasonably prudent person Answer: c Diff: 1 Type: MC Page Reference: 58e ..

54

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

Skill: Applied 126) Professionals cannot be sued for negligence as long as they have been proven to be abiding by their own professional rules of conduct. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 58f Skill: Recall 127) Jack works as a financial planning consultant for Adco Ltd., a company that provides financial advice to its clients. At a three-martini lunch with Benson, one of Adco's clients, and Carson, a friend of Benson, Jack mistakenly advised Benson to buy shares of Moose Jaw Mining because he thought that Adco had investigated the prospects of the company. In fact, Adco had investigated Goose Jaw Mining and was recommending it to its clients. As it turned out, Benson ignored Jack's advice but Carson bought a lot of Moose Jaw shares and lost all of his money when the mining operation went broke. Which one of the following statements accurately describes Carson's legal situation? a. Because there was no contractual connection between Carson and anyone else, he has no legal right to compensation. b. Jack cannot be held liable for Carson's loss, but Adco can be because it employed Jack. c. Jack cannot be held responsible for Carson's loss because someone who is incapacitated at all by alcohol cannot be held liable in tort for actions while incapacitated. d. Carson will have to sue Benson and then Benson can turn around and sue Jack under the principles of vicarious liability. e. Jack can be held liable only if Carson can establish that Jack owed him a duty to be careful.

Answer: e Diff: 3 Type: MC Page Reference: 58g Skill: Applied 128) If a director on the board of ABC Corp. has shares in Company XYZ and the directors of ABC Corp. are considering the acquisition of Company XYZ, that director

..

55

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

must disclose his interest; he is still permitted to participate in discussions that influence the decision, but he may not vote on the decision. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 58h Skill: Applied 129) Negligence cannot constitute a crime under the Criminal Code of Canada; it is the domain of civil courts. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 60a Skill: Recall 130) Explain when negligence can constitute a crime under the Criminal Code.

Answer: Negligence can constitute a crime under the Criminal Code where a person in the performance of a duty does or neglects to do something that “shows wanton or reckless disregard for the lives or safety of other persons.”

Feedback: Negligence can constitute a crime under the Criminal Code where a person in the performance of a duty does or neglects to do something that “shows wanton or reckless disregard for the lives or safety of other persons.”

Diff: 1 Type: ES Page Reference: 60b Skill: Recall 131) The tort of deceit involves: a. Use of the criminal justice system to improperly attack a competitor b. A negligent misstatement by a professional ..

56

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

c. Misleading the public as to the origin of a particular good d. When a person intentionally misleads another, cheating him or her out of money e. The intentional misappropriation of the property of another Answer: d Diff: 1 Type: MC Page Reference: 61a Skill: Applied 132) When a person intentionally misleads another, cheating that person out of money, this is known as fraud or deceit; thus, it may be a tort or criminal conduct. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 61b Skill: Recall 133) When a company puts extensive pressure on another to breach its employment relationship with a long-term employee, damages may be awarded for: a. Injurious falsehood b. Passing-off c. Deceit d. Inducing breach of contract e. Conversion Answer: d Diff: 1 Type: MC Page Reference: 61c Skill: Applied 134) If a person persuades another to breach a contract with a third person, this may constitute inducing breach of contract. a. True

..

57

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

b. False Answer: a Diff: 1 Type: TF Page Reference: 61d Skill: Recall 135) Marco is a clothing designer whose business is failing. He believes that he will be able to sell more of his clothing and accessories if he puts a Calvin Klein label on them.

Why is this not a good idea? a. Marco could be sued for passing-off. b. Marco could be sued for a negligent misstatement. c. Marco could be sued for trade slander. d. Marco could face an action in conversion. e. Marco could face an action in injurious falsehood.

Answer: a Diff: 1 Type: MC Page Reference: 62a Skill: Applied 136) Slashing a truck tire would be an example of trespass to chattels. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 62b Skill: Recall 137) If someone sells imitation Seiko watches without permission, for what can that person be sued by Seiko?

Answer: Passing-off Feedback: Passing-off ..

58

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

Diff: 1 Type: ES Page Reference: 62b Skill: Recall 138) When someone intentionally scratches your car, for what can you sue?

Answer: Trespass to chattels Feedback: Trespass to chattels Diff: 1 Type: ES Page Reference: 62c Skill: Recall 139) Intentionally depriving another of the possession or use of his or her personal property can give rise to an action in: a. Conversion b. Product defamation c. Trade slander d. Passing-off e. Deceit Answer: a Diff: 1 Type: MC Page Reference: 62d Skill: Applied 140) The primary purpose of tort law is to punish wrongdoers. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 62e Skill: Recall

..

59

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

141) In tort, damages as a remedy attempt to put the victim in the position he or she would have been in had the tort never taken place. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 62f Skill: Recall 142) A civil court can assess only compensation and not punitive damages. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 62g Skill: Recall 143) Discuss the various kinds of remedies that are available in tort actions. In your answer, discuss any limitations on the availability of those remedies.

Answer: The primary remedy is damages (i.e., monetary compensation), but students should point out that these damages are usually designed to compensate the person for his or her loss as a result of the tort. In rare circumstances, where conduct was deliberate, punitive damages may also be granted where the object is to punish the wrongdoer rather than to simply compensate the victim. Also, where a monetary award would not be appropriate (e.g., usually the case where a passing-off action is involved), the court may award an injunction ordering the offending conduct to stop. Sometimes an accounting may be ordered, requiring the wrongdoer to disclose any profits made and pay them to the victim.

Students should also discuss the effect of contributory negligence that will reduce the damages payable on the basis of apportioned responsibility for the loss. Voluntary assumption of risk should also be discussed. Here students should indicate that the defendant must demonstrate that the plaintiff voluntarily assumed the legal risk, not just the physical risk, and that in the few cases where this is present, this will be a complete bar to recovery.

Feedback: The primary remedy is damages (i.e., monetary compensation), but students should point out that these damages are usually designed to compensate the person for

..

60

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

his or her loss as a result of the tort. In rare circumstances, where conduct was deliberate, punitive damages may also be granted where the object is to punish the wrongdoer rather than to simply compensate the victim. Also, where a monetary award would not be appropriate (e.g., usually the case where a passing-off action is involved), the court may award an injunction ordering the offending conduct to stop. Sometimes an accounting may be ordered, requiring the wrongdoer to disclose any profits made and pay them to the victim. Students should also discuss the effect of contributory negligence that will reduce the damages payable on the basis of apportioned responsibility for the loss. Voluntary assumption of risk should also be discussed. Here students should indicate that the defendant must demonstrate that the plaintiff voluntarily assumed the legal risk, not just the physical risk, and that in the few cases where this is present, this will be a complete bar to recovery Diff: 2 Type: ES Page Reference: 62h Skill: Recall 144) Discuss strategies and practices that a business person (or a company) might use to avoid being a defendant in a tort action.

Answer: Students may discuss a wide range of possible strategies and practices. Examples might include the following: 1. Have a good understanding of the law and ensure that events or conduct that might give rise to tort action do not occur.

2. Select employees carefully and train them well on safety and other tort-related matters.

3. Perform internal and external audits.

4. Create an atmosphere that engages all employees in being alert to risks that may be present and removing them or reporting them.

Some students may suggest a more aggressive approach that companies may use when faced with a tort action wherein they launch their own lawsuits, usually claiming defamation with the goal of reducing criticism and disabling potential plaintiffs (through significant expenses and loss of time). These are called SLAPPs (strategic lawsuits against public participation) and they are sometimes effective, although the ethics related to them are questionable. They are often considered to be an abuse of the legal system.

Feedback: Students may discuss a wide range of possible strategies and practices.

Examples might include the following: 1. Have a good understanding of the law and ensure that events or conduct that might give rise to tort action do not occur.

2. Select employees carefully and train them well on safety and other tort-related matters. ..

61

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 2: Torts and Professional Liability

3. Perform internal and external audits.

4. Create an atmosphere that engages all employees in being alert to risks that may be present and removing them or reporting them.

Some students may suggest a more aggressive approach that companies may use when faced with a tort action wherein they launch their own lawsuits, usually claiming defamation with the goal of reducing criticism and disabling potential plaintiffs (through significant expenses and loss of time). These are called SLAPPs (strategic lawsuits against public participation) and they are sometimes effective, although the ethics related to them are questionable. They are often considered to be an abuse of the legal system.

Diff: 2 Type: ES Page Reference: 63 Skill: Applied

..

62

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

1) Why is an understanding of contract law important for a business person?

Answer: Most commercial transactions have contracts at their base.

Feedback: Most commercial transactions have contracts at their base.

Diff: 1 Type: ES Page Reference: 68a Skill: Applied 2) A contract is a single promise, made by one person to another, enforceable in court. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 68b Skill: Recall 3) Which of the following is an ingredient necessary to form a contract? a. Exemption clauses b. Fairness c. Privity d. Capacity e. Assignment Answer: d Diff: 1 Type: MC Page Reference: 68c Skill: Recall 4) List the five ingredients necessary to form a contract.

Answer:

..

1

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

Consensus (including offer and acceptance), consideration, capacity, legality, and intention. Writing is not a requirement.

Feedback: Consensus (including offer and acceptance), consideration, capacity, legality, and intention. Writing is not a requirement.

Diff: 1 Type: ES Page Reference: 68d Skill: Recall 5) All contracts must be in writing to be enforceable. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 68e Skill: Recall 6) All contracts must be written to be binding. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 68f Skill: Recall 7) All commercial contracts must be evidenced by writing to be enforceable. a. True b. False Answer: b Diff: 2 Type: TF Page Reference: 68g Skill: Recall

..

2

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

8) Contracts may be in writing, under seal, verbal, or even implied. a. True b. False Answer: a Diff: 2 Type: TF Page Reference: 68h, 87h Skill: Recall 9) Discuss the requirement of consensus in the formation of contract. In your answer, consider the role of offer and acceptance, and also look at the degree of understanding required between the parties.

Answer: Consensus is the first element discussed that must be present for a contract to exist.

Usually most attention is focused on offer and acceptance, and to answer this question, students should show a good understanding of these requirements. This discussion should include the difference between an offer and an invitation to treat, as well as an understanding that it is the offer that contains the terms of the contract and that all major terms must be clear in that offer, although some minor ones can be implied. As far as acceptance is concerned, it should be clear that students know that consensus is not effective until communicated, thus completing the connection between the minds of the parties. They should also show an understanding of the operation of the post-box rule.

But a vital component of the answer should relate to the concept of the meeting of the minds between the parties. It is not necessary that all parties understand the agreement or even that they have read the agreement, only that the terms are clear and that, had they read it, they could have understood it. This is an objective rather than a subjective test.

They then will discuss how the court deals with a mistake over the terms where both parties have a different understanding. Here, the court will apply the principle that the reasonable expectations of the parties are to be enforced.

Feedback: Consensus is the first element discussed that must be present for a contract to exist. Usually most attention is focused on offer and acceptance, and to answer this question, students should show a good understanding of these requirements. This discussion should include the difference between an offer and an invitation to treat, as well as an understanding that it is the offer that contains the terms of the contract and that all major terms must be clear in that offer, although some minor ones can be implied. As far as acceptance is concerned, it should be clear that students know that consensus is not effective until communicated, thus completing the connection between the minds of the parties. They should also show an understanding of the operation of the post-box rule. But a vital component of the answer should relate to the concept of the meeting of the minds between the parties. It is not necessary that all parties understand

..

3

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

the agreement or even that they have read the agreement, only that the terms are clear and that, had they read it, they could have understood it. This is an objective rather than a subjective test. They then will discuss how the court deals with a mistake over the terms where both parties have a different understanding. Here, the court will apply the principle that the reasonable expectations of the parties are to be enforced.

Diff: 2 Type: ES Page Reference: 68i, 69b, 70a Skill: Recall 10) "For a contract to be binding, both parties must have a clear understanding of all terms of that agreement." Discuss the accuracy of this statement.

Answer: It's only necessary that the terms of the agreement are clear and unambiguous. One party's failure to read or understand the clear provisions of a contract will not affect the validity of that agreement.

Feedback: It's only necessary that the terms of the agreement are clear and unambiguous.

One party's failure to read or understand the clear provisions of a contract will not affect the validity of that agreement.

Diff: 2 Type: ES Page Reference: 69a Skill: Applied 11) Distinguish between an offer and an invitation.

Answer: An invitation to treat is an advertisement or other form of inducement to encourage someone to come and deal or negotiate and has no legal significance. An offer is a clear indication by one of the parties that he or she is willing to be bound by certain terms if the other party accepts. The offer is the first stage of the creation of the contract, whereas the invitation to treat is merely the communication process that takes place to bring the parties to the point where one makes the offer.

Feedback: An invitation to treat is an advertisement or other form of inducement to encourage someone to come and deal or negotiate and has no legal significance. An offer is a clear indication by one of the parties that he or she is willing to be bound by certain terms if the other party accepts. The offer is the first stage of the creation of the contract,

..

4

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

whereas the invitation to treat is merely the communication process that takes place to bring the parties to the point where one makes the offer.

Diff: 2 Type: ES Page Reference: 69c, 70f Skill: Applied 12) An ad in the morning paper reads: "Brand new 2012 Ford Escorts $16 499. No payment until January 2012. We make your first payment." This is an example of which of the following? a. Invitation to treat b. Gratuitous promise c. Offer d. Unilateral contract e. Bilateral contract Answer: a Diff: 1 Type: MC Page Reference: 70b Skill: Applied 13) Four days ago, Pete was reading the newspaper and saw the following: "Best offer in town! Zenith XX Laser Printer – $1000!” When he went to the store this afternoon and said he wanted one, the employees replied that they didn't have any left, nor could they get any. On these facts, which of the following is true? a. Pete could sue for breach of an option contract. b. The offer by the store had lapsed before Pete tried to accept it. c. The wording in the newspaper was merely an invitation to the public to do business, and no contract was formed. d. The store had revoked the offer before Pete tried to accept it. e. Pete could sue the store for breach of contract because he was accepting the offer in the newspaper.

Answer: c Diff: 2 Type: MC Page Reference: 70c

..

5

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

Skill: Applied 14) Which of the following is an offer as opposed to an "invitation to treat"? a. A notice in the catalogue from the gift shop of the Edmonton Aquarium: "15% off the price of all jewellery until January." b. A notice in the Toronto Star: "I will pay $100 to whomever finds and returns my lost female calico cat who answers to the name Marx." c. The display of goods on the shelves of Safeway. d. A sweater displayed in the window of a shop with the price tag attached and showing. e. An ad in a real estate paper: "Best offer in Vancouver! 3-bedroom home in Kitsilano for only $350 000!"

Answer: b Diff: 3 Type: MC Page Reference: 70d, 75f Skill: Applied 15) An invitation to treat is an offer published in the newspaper. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 70e Skill: Recall 16) In the Pharmaceutical Society case, it was decided that goods displayed on the shelf in a self-service merchandising situation were an invitation to treat, rather than an offer.

Discuss.

Answer: This question gives students the opportunity to deal with the subject of offer and acceptance, including invitation to treat in the bargaining process. In fact, it is very difficult to determine at what point an invitation ends and an offer starts. It can be argued that the Pharmaceutical Society case goes too far, that the judge's reasoning was flawed, and that these goods should have been an offer, not an invitation. In any case, students should distinguish between an invitation and an offer, clearly indicating that an invitation is simply a method of encouraging the prospective customer to enter the bargaining

..

6

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

process, bestowing no rights on the parties. The offer, on the other hand, is the first stage of the process bestowing on the offeree a legal power he or she didn't have before—that is, the right to accept and create a binding contract. Students should indicate that they know what difference it makes if the goods on the shelf are an invitation or an offer. This essay question is less difficult, but it does give students an opportunity to demonstrate that they understand the essential elements of the bargaining process.

Feedback: This question gives students the opportunity to deal with the subject of offer and acceptance, including invitation to treat in the bargaining process. In fact, it is very difficult to determine at what point an invitation ends and an offer starts. It can be argued that the Pharmaceutical Society case goes too far, that the judge's reasoning was flawed, and that these goods should have been an offer, not an invitation. In any case, students should distinguish between an invitation and an offer, clearly indicating that an invitation is simply a method of encouraging the prospective customer to enter the bargaining process, bestowing no rights on the parties. The offer, on the other hand, is the first stage of the process bestowing on the offeree a legal power he or she didn't have before—that is, the right to accept and create a binding contract. Students should indicate that they know what difference it makes if the goods on the shelf are an invitation or an offer. This essay question is less difficult, but it does give students an opportunity to demonstrate that they understand the essential elements of the bargaining process.

Diff: 2 Type: ES Page Reference: 70g Skill: Applied 17) Which of the following would best satisfy the requirements for a good legal offer? a. "I'll drive you to Seattle on Saturday." b. On a flyer (placed on your windshield):"We have the best offer in town! A mint 1956 Chevrolet for $20 000." c. "I'll give you $1 for your new green bike." d. "I'll pay you at least $300 for your horse, Blackie, and even more if the horse is lucky." e. "The purchaser will pay $10 for one of the seller's laser printers, the exact model to be determined at a later date."

Answer: c Diff: 2 Type: MC Page Reference: 70h Skill: Applied

..

7

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

18) Only the essential terms of a contract must be set out in the offer. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 70i Skill: Recall 19) All of the essential terms of a contract except for consideration must be clearly specified. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 70j Skill: Recall 20) What must be present in an offer before it qualifies as such?

Answer: All of the important terms of the offer must be stated. The lesser terms can be implied, providing that there is nothing in the offer indicating that something has been left out.

Usually the important terms involve a description of the parties involved, the price involved, and the property or item.

Feedback: All of the important terms of the offer must be stated. The lesser terms can be implied, providing that there is nothing in the offer indicating that something has been left out. Usually the important terms involve a description of the parties involved, the price involved, and the property or item.

Diff: 2 Type: ES Page Reference: 70k Skill: Recall 21) Only the person or group to whom an offer is made can accept it. a. True

..

8

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

b. False Answer: a Diff: 1 Type: TF Page Reference: 70l Skill: Recall 22) Joe drove his car to a shopping mall and parked it there to attend a movie. The place where he parked was designated as a one-hour parking space on a sign at the entrance where Joe drove in. There were many similar signs around the shopping mall stating that people were parking their cars at their own risk. But this particular sign said that the time limit for parking there was one hour, and as a term of the contract anyone parking over this one-hour limit would have to pay a fee of $60. When Joe got out of the movie, he found a ticket on his car (a demand for payment of the $60). He refused to pay and was sued. What would be Joe's defence in these circumstances?

Answer: Joe would claim either that there was no contract or that, if there was, these terms did not bind him, as they had not been properly brought to his attention. The sign at the entrance to that area of the parking lot was too similar to the other signs, and he had no reason to suppose that what was set out on it was different. The owners should have known that he'd be driving past and couldn't take the time to stop and look; therefore, he's not bound by the terms and doesn't have to pay the $60.

Feedback: Joe would claim either that there was no contract or that, if there was, these terms did not bind him, as they had not been properly brought to his attention. The sign at the entrance to that area of the parking lot was too similar to the other signs, and he had no reason to suppose that what was set out on it was different. The owners should have known that he'd be driving past and couldn't take the time to stop and look; therefore, he's not bound by the terms and doesn't have to pay the $60.

Diff: 2 Type: ES Page Reference: 71a Skill: Applied 23) Joe offered to sell Harry his car and agreed to hold the offer open for one week, expiring Saturday at noon. The following Sunday, Harry phoned Joe to tell him that he had decided to accept the offer and purchase Joe’s car. Joe said at that time that he had decided to keep the car and was just about to phone Harry to revoke the offer. Harry said, "Too bad," and demanded performance of the contract. Explain the legal responsibilities of the parties.

..

9

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

Answer: There is no contract. The offer expired at the end of a specified time (Saturday at noon) before there was an attempt to accept it.

Feedback: There is no contract. The offer expired at the end of a specified time (Saturday at noon) before there was an attempt to accept it.

Diff: 2 Type: ES Page Reference: 71b Skill: Applied 24) Which one of the following will cause an offer to end? a. The purchase of an option to hold the offer open for a designated period of time b. The expiration of a reasonable time if the offeror did not specify that the offer would end at a definite time or upon the happening of a specific event c. The arrival of 4:00 p.m., if the offeror specified that the offer would end at 5:00 p.m. d. The sale of the object of the offer to someone other than the original offeree e. The communication of a revocation to the offeree after acceptance Answer: b Diff: 2 Type: MC Page Reference: 71c Skill: Recall 25) Sylvia had contracted with Produce Palace to sell it her entire crop of elephant garlic (100 kilograms) and her entire crop of tomatoes (100 kilograms). On the day for delivery, Produce Palace took the garlic but not the tomatoes. In an effort to mitigate her loss, Sylvia called the owner of Val's Veggies and offered her the tomatoes at a reduced price with the words, "Let me know quickly; they are ripe and must be moved out today." That afternoon, Val sent Sylvia a letter accepting the offer. On these facts, which is the most likely outcome? a. There is no contract between Sylvia and Val because the offer has probably lapsed before the acceptance was received by Sylvia. b. There is a contract between Sylvia and Val the moment Val drops the letter of acceptance in the postbox. c. There is a contract between Sylvia and Val on the day the letter of acceptance is received by Sylvia.

..

10

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

d. If the post-box rule does not apply, there would be a contract as soon as Val mails the letter unless Sylvia had sold the tomatoes to someone else. e. There is no contract between Sylvia and Val because Sylvia had revoked the offer.

Answer: a Diff: 2 Type: MC Page Reference: 71d Skill: Applied 26) Franz bought a round-trip ticket to Germany to visit relatives. Unfortunately, a week before flight time, he broke his leg. He offered his co-worker, Joe, the ticket for 80% of the full price, offer to remain open until 10:00 p.m. on December 15. Indicate to Joe which of the following is true with regard to the law of offer and acceptance. a. If Franz sells to someone else, it is too late for Joe to accept the original offer. b. A letter of acceptance is always effective when it is dropped in the mailbox. c. If Joe makes a counter-offer of 50% of the full price, and Franz rejects the counteroffer, Joe can still accept the original offer. d. Franz could revoke the offer at any time before acceptance, even before 10:00 p.m. on December 15. e. To create a contract, an offer must be in writing.

Answer: d Diff: 3 Type: MC Page Reference: 72a Skill: Applied 27) If an offer is made by mail and an acceptance by mail is requested, when does a letter revoking the previous offer actually take effect? a. At the time it is posted b. At any time before a letter of acceptance is received by the offeror c. At the time it is received, if before acceptance d. Never. A revocation must be done in person. e. At any time before actual performance of the contract has begun Answer: c Diff: 2

..

11

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

Type: MC Page Reference: 72b Skill: Recall 28) If an offeror makes an offer that states "This offer to be open until noon tomorrow," which of the following ends the offer? a. An inquiry by the offeree b. The insanity of the offeree c. Revocation of the offer by the offeror before the time specified (i.e., before "noon tomorrow") d. A counter-offer by the offeror e. The selling of the item to someone else before noon tomorrow Answer: c Diff: 2 Type: MC Page Reference: 72c Skill: Applied 29) Even though a person promises to hold an offer open for a specified period of time, the offeror can revoke that offer before that time if he or she feels like it. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 72d Skill: Recall 30) Once a person has promised to hold an offer open for a specified period of time, she cannot change her mind. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 72e

..

12

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

Skill: Recall 31) A letter of revocation takes effect when received by the offeree. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 72f Skill: Recall 32) Jones was a caterer; Smith was a florist. Jones won a contract to provide a banquet for a convention of florists. He wanted to decorate the hall with flowers. He sent a letter to Smith, describing what he wanted and asking for a price quote. Smith responded in a letter dated January 5, offering to supply the flowers for $5000. Jones received the letter on January 10 and responded on the same date, saying the price was too high and that he would pay $4500. While that letter was in the mail, but before it had been received by Smith, Jones learned that the convention was on artificial flowers and the organizers wanted no real flowers on display. On January 13, Jones quickly sent another letter telling Smith to ignore the letter of January 10 and that he wouldn't need any flowers at this time. This letter of the January 13 was received on January 18. Smith had received the letter of January 10 on January 15 and sent a letter of acceptance on the same day, and had placed orders with his suppliers for the flowers. The letter of acceptance was received by Jones on January 20. Is there a contract between Jones and Smith? Explain.

Answer: Because the parties are communicating by mail, acceptance by this method is appropriate.

The revocation sent January 13 was effective only when received on January 18. The acceptance of the counter-offer sent on January 15 was effective when mailed; hence, a contract existed as of that time.

Feedback: Because the parties are communicating by mail, acceptance by this method is appropriate. The revocation sent January 13 was effective only when received on January 18. The acceptance of the counter-offer sent on January 15 was effective when mailed; hence, a contract existed as of that time.

Diff: 2 Type: ES Page Reference: 72f, 75p Skill: Applied

..

13

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

33) A revocation of an offer is effective only when it has been communicated to the offeree. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 72g Skill: Recall 34) If the mail is a reasonable means for accepting an offer, is a contract formed when the offeror drops a letter of revocation in the mailbox at the very same instant that the offeree drops a letter of acceptance in the mailbox? Explain.

Answer: The revocation is effective only when received; however, the acceptance is effective when mailed because of the post-box rule. Hence, this is a binding contract.

Feedback: The revocation is effective only when received; however, the acceptance is effective when mailed because of the post-box rule. Hence, this is a binding contract.

Diff: 1 Type: ES Page Reference: 72h, 75o Skill: Applied 35) Joe made an offer to sell his car to Harry, promising to keep the offer open for a week. However, he changed his mind, sold the car to someone else, and phoned Harry to inform him that he was withdrawing the offer because he had sold the car to someone else. Harry was angry and said that he wanted the car and was going to hold Joe to his promise to hold the offer open for a week. He sued for breach of contract. Will he win?

Explain.

Answer: No, he won't. The offer was effectively revoked before the acceptance was made. The promise to hold the offer for a week is not binding unless there is some added consideration making it an option.

Feedback: No, he won't. The offer was effectively revoked before the acceptance was made. The promise to hold the offer for a week is not binding unless there is some added consideration making it an option.

..

14

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

Diff: 2 Type: ES Page Reference: 72j Skill: Applied 36) Harry saw Joe in his classic Buick at a local drive-in restaurant, and told Joe that he'd like to buy the car. He offered Joe $1500. Joe said he had to think about it and that he'd let Harry know. Two days later, Joe decided that he needed the money and couldn't afford to keep the car. He wrote Harry a letter accepting the offer and mailed it that afternoon.

The next day, Harry phoned Joe, saying that he'd changed his mind and that he needed the money for something else. Joe told Harry about the letter, and in fact Harry received the letter later that day. Joe insisted on going through with the deal. Explain the legal liability of the parties.

Answer: This can go both ways. If it was reasonable to respond by mail in these circumstances, then the post-box rule applies. The contract came into existence when the letter was posted, and there is a binding contract. If it wasn't reasonable to respond by mail, then the acceptance must be communicated, and so the acceptance would not be effective until received, which was after the attempted revocation. Therefore, there would be no contract.

Feedback: This can go both ways. If it was reasonable to respond by mail in these circumstances, then the post-box rule applies. The contract came into existence when the letter was posted, and there is a binding contract. If it wasn't reasonable to respond by mail, then the acceptance must be communicated, and so the acceptance would not be effective until received, which was after the attempted revocation. Therefore, there would be no contract.

Diff: 2 Type: ES Page Reference: 72k, 75r Skill: Applied 37) Harry saw Joe in his classic Buick at a local drive-in restaurant and talked about wanting to buy the car. Joe offered to sell it to him for $1500. Harry said he needed some time to think about it and that he would send Joe a letter. The next day, Joe changed his mind and mailed Harry a letter of revocation. The day after that, before Harry had received the letter of revocation, he sent a letter of acceptance to Joe. The next day, the two letters arrived at their respective destinations, Joe receiving Harry's letter of acceptance just after Harry received Joe's letter of revocation. Explain the legal liabilities of the parties.

..

15

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

Answer: There is a legally binding contract here. Although the letter of revocation was sent before the letter of acceptance, the letter of revocation cannot be effective until received.

Because the parties understood that they'd be communicating by mail, the letter of acceptance is effective when dropped in the mailbox, because of the post-box rule.

Therefore, the contract came into existence at that time, before any letter of revocation was received.

Feedback: There is a legally binding contract here. Although the letter of revocation was sent before the letter of acceptance, the letter of revocation cannot be effective until received. Because the parties understood that they'd be communicating by mail, the letter of acceptance is effective when dropped in the mailbox, because of the post-box rule.

Therefore, the contract came into existence at that time, before any letter of revocation was received.

Diff: 2 Type: ES Page Reference: 72l, 75s Skill: Applied 38) Mary bought a new Macintosh computer and advertised her old computer system for sale for $1500. Mr. Jones offered to pay $1000. Mary said no, that she wanted $1500. Mr. Jones offered $1250. Mary rejected that offer and said she wanted $1500, but then said, "I withdraw my offer, I've decided to give it to a school and apply for the tax benefit."

Mr. Jones said, "All right, I'll accept your offer of $1500." Which of the following is true? a. There is a contract and Mr. Jones has to pay a reasonable price for Mary's old computer. b. There is a contract, because once a seller makes an offer she cannot change her mind; she is bound to receive an acceptance. c. There is no contract because Mary revoked the offer before Mr. Jones attempted to accept it. d. There is a contract because at some point in time Mary was willing to sell and Mr. Jones was willing to buy the computer system for $1500. e. There is no contract because the last offer had lapsed.

Answer: c Diff: 3 Type: MC Page Reference: 72m Skill: Applied

..

16

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

39) The owner of a new building wanted four maple trees, each six metres tall, planted on the north side of the building. Lloyd Landscaper submitted his offer of four six-metre maples planted for $800. The owner said he would pay $600 for that. Lloyd said that for $600 he would supply four smaller, five-metre trees. The owner said, "$600 for fivemetre trees plus a Christmas tree for my kids." Lloyd was disgusted and said, "Forget it. I don't need this job." As he was leaving, the owner said, "All right, I'll accept your offer of $600 for the five-metre maples planted." Lloyd kept on walking. Which of the following is true? a. There is no contract because Lloyd's last offer had been rejected by a counter-offer. b. There is no contract because Lloyd's last offer was revoked. c. There is no contract because there is a presumption in law in these circumstances that the parties did not intend to create a legal relationship. d. There is no contract because Lloyd's last offer had lapsed after a reasonable time. e. There is a contract because at one point in the conversation Lloyd was willing to sell and the owner was willing to buy four trees.

Answer: a Diff: 3 Type: MC Page Reference: 72n Skill: Applied 40) Sarah wanted an antique lamp for the bedroom. While in a second-hand shop, she saw a lamp that she really wanted marked $100. She offered the owner $75 for it. He said, "I'll take $95." She answered, "$80!" He said, "Lady, you're pushing me a bit, aren't you? I'll take $90, that's it." She said "Okay, I'll pay $90 if you throw in this old 'Votefor-Trudeau' button." He said, "Forget it, lady, my shop is closed," and asked her to leave.

She said, "Okay, I accept your offer of $95." He made no response. If she sues for breach of contract, which of the following is true? a. There is no contract because the owner’s offer to sell the lamp for $95 was rejected by counter-offer, and Sarah’s offer to buy it for $95 wasn't accepted. b. There is a contract because at one time the owner offered to sell the lamp for $95 and Sarah accepted it. c. There is a contract because the owner wanted to sell the lamp for $95 and Sarah was willing to pay that much. d. There is no contract because the owner’s offer to sell for $95 lapsed after a reasonable time. e. There is no contract because the owner’s offers to sell the lamp for $95 and $90 were revoked and he didn't accept Sarah’s offers.

..

17

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

Answer: a Diff: 3 Type: MC Page Reference: 72o Skill: Applied 41) Ann was offered a job that would pay $20 000, that would provide for 18 days of vacation after one year of employment, and that would begin one week after her graduation. She wrote back that she would accept the job, but that she would not begin until three weeks after graduation and needed at least 21 days of vacation after the first year of work. On these facts, which of the following is true? a. There is no contract because an acceptance must be unconditional, and Ann’s counteroffer has not been accepted. b. There is a contract as soon as Ann drops her letter in the mailbox. c. If Ann had not responded, there would have been a contract because silence is the standard form of acceptance. d. Ann is still free to reconsider and take the original offer even after the prospective employer receives her letter. e. Since Ann accepted the offer, there is a contract.

Answer: a Diff: 2 Type: MC Page Reference: 72p Skill: Applied 42) Joe offered to sell Harry his car for $500, but Harry said he needed some time to think about it. A couple of days later, Harry phoned Joe to say that he'd give Joe $450 for the car. Joe refused to take this. Then Harry said, "All right, I'll accept your offer for $500." Joe said that he'd changed his mind and refused to go through with the deal. Harry sued. Explain Joe's legal liability.

Answer: In this case, when Harry said he'd give Joe $450, that was a counte-roffer, which wiped out the original offer. It was too late for Harry to accept the original $500 offer, since it had lapsed. At most, his supposed "acceptance" was another offer to purchase for $500, which was not accepted by Joe.

..

18

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

Feedback: In this case, when Harry said he'd give Joe $450, that was a counter-offer, which wiped out the original offer. It was too late for Harry to accept the original $500 offer, since it had lapsed. At most, his supposed "acceptance" was another offer to purchase for $500, which was not accepted by Joe. Diff: 2 Type: ES Page Reference: 72q Skill: Applied 43) Which one of the following will not end an offer? a. The offeror communicates a revocation of the offer. b. The offer is said to be open for three weeks and the three weeks expire. c. The offeror sells the goods being offered to someone else. d. The offeror dies. e. The offeree makes a counter-offer.

Answer: c Diff: 1 Type: MC Page Reference: 72r Skill: Recall 44) Martin offered to buy a property for $200 000, "offer to remain open until 5:00 p.m. on Thursday, January 21." Which one of the following situations will not cause the offer to end? a. A counter-offer from the offeree b. Death of the offeror c. Insanity of the offeror before the offer is accepted d. Martin sells the property to another party before the expiration of the period stipulated and before hearing from the offeree e. The offeree has not accepted and the stipulated time has expired Answer: d Diff: 2 Type: MC Page Reference: 72s Skill: Applied

..

19

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

45) Last week, Chris offered to sell her printer to a classmate for $200. Her offer included these exact words: "This offer to be open until noon, February 20." She now has second thoughts and thinks she should give or sell it to her brother, who has gone back to school.

She wants to end the offer. Which of the following would not end the offer? a. Chris's death before acceptance b. The sale of the printer to her brother before acceptance c. Revocation of the offer by Chris before acceptance d. Expiration of the offer at noon on February 20 if there has been no acceptance e. A counter-offer by an offeree Answer: b Diff: 2 Type: MC Page Reference: 72t Skill: Applied 46) An offer will end when the subject matter of the offer is sold to someone else. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 72u Skill: Recall 47) Jed, who lives on Cape Breton Island, needed money for a trip to France. He decided to sell his electric guitar. On Monday, October 29, he called the owner of a music store in Halifax and offered to sell his Fender Stratocaster guitar for $400, the offer to be open until Friday at noon, November 2. Jed told the store owner to send a letter of acceptance since Jed would be away for a few days. The store owner examined his inventory and mailed a letter of acceptance on Thursday, November 1. When Jed returned home on Saturday, November 3, the letter had not yet arrived, so that afternoon he sold the guitar to a music teacher in his town. The store owner in Halifax sued for breach of contract.

Which of the following is true? a. Sending a letter by mail was not a reasonable method of acceptance. b. The acceptance was effective before the offer lapsed, so there was a contract between Jed and the store owner. c. The offer lapsed before the store owner accepted. ..

20

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

d. The offer was revoked before the store owner accepted. e. The letter of acceptance was effective when it was received, and by then Jed had sold the guitar, so there was no contract.

Answer: b Diff: 2 Type: MC Page Reference: 72v, 75j Skill: Applied 48) Carlos visited Vancouver last summer and instead of going back to Ontario he stayed and enrolled at Simon Fraser University. He needed money but didn't need things left in Ontario, including his car. In mid-December, he wrote a friend and offered to sell the car for $4000 and told him to send him a letter with his answer. His friend received the letter on January 2, checked his financial situation, and sent a letter of acceptance on January 3.

Meanwhile Carlos, short of cash and not having heard from his friend, sold the car to Mr. Reno on December 31. Carlos received his friend's letter on January 8. On these facts, which of the following is true? a. In order for there to be a binding contract, there must be an offer and receipt of the letter. b. All methods of acceptance are effective upon receipt by the offeror. c. The letter of acceptance was effective when it was received, and by then Carlos had sold the car, so there was no contract. d. The acceptance was effective before it was received, so there was a contract between Carlos and his friend. e. Sending an acceptance by mail was not a reasonable method of acceptance in this situation.

Answer: d Diff: 2 Type: MC Page Reference: 72w, 75m Skill: Applied 49) Joe offered to sell Harry his car for a specific price, and Harry indicated that he needed some time to think about it. Two days later, Joe sold the car to a third party. That afternoon, Harry phoned Joe and told him that he had decided to accept the offer and that he'd buy the car. Joe told Harry that it was too late; he had sold the car to someone else.

Harry said that it had been offered to him first, and he insisted that Joe go through with the contract. Explain the legal liability of the parties.

..

21

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

Answer: This is a binding contract, assuming that the offer had been accepted within a reasonable time. The fact that the car was sold to someone else does not automatically revoke the offer. Such a revocation by conduct must still be communicated to be effective.

Feedback: This is a binding contract, assuming that the offer had been accepted within a reasonable time. The fact that the car was sold to someone else does not automatically revoke the offer. Such a revocation by conduct must still be communicated to be effective.

Diff: 2 Type: ES Page Reference: 72x Skill: Applied 50) Jon was developing a computer program for use by owners of track clubs, which would aid them in keeping records of the members, their runs, times, injuries, etc. Eager to finish the program, Jon, in Edmonton, called his friend Sam, in Calgary, and offered him $2000 to help: five hours per working day, five days per week, for five weeks. Sam said that he would have to think about it. Jon told Sam that he was eager to get going, but that he would hold the offer open until Friday, February 6, at noon. Which of the following is true? (Read each separately.) a. If Jon revokes his offer before Friday at noon, Sam could sue him for breach of contract because Jon had promised to hold the offer open. b. If the court held that acceptance by mail was reasonable in the circumstances and if Sam accepts by mail, the place of contract is Edmonton. c. If Jon goes ahead and hires Betsy from Edmonton at noon on February 3, it would be too late for Sam to accept. d. If Sam wants to ensure that the offer will remain open until noon on February 6, he should give Jon some consideration (that is, purchase an option agreement). e. If Sam accepts by phone within the time specified in the offer, the place of contract would be Calgary.

Answer: d Diff: 2 Type: MC Page Reference: 73a Skill: Applied 51) Which of the following is true with regard to contract law?

..

22

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

a. An option is a contract in which one person is buying a period of time within which he may accept the offer contained within the option. b. A newspaper notice offering to pay a reward for the return of lost kittens is an invitation to treat. c. A revocation is effective only when sent. d. An important criterion for determining the place of the contract is the place where the offer is mailed. e. A counter-offer does not end an offer.

Answer: a Diff: 2 Type: MC Page Reference: 73b Skill: Recall 52) Which of the following is true with regard to the offer and acceptance necessary to form a contract? a. An ad in the newspaper that reads "Best offer in town! A new 2012 Honda Civic for only $15 999!" is considered an offer. b. If a seller offers to sell for $100 and the buyer makes a counter-offer of $90 that is rejected by the seller, the buyer can accept the original offer of $100 and bind the seller in contract. c. A purchased option that states "This offer to be open until noon tomorrow" prohibits the offeror from revoking the offer before that time. d. A person can accept an offer after it has lapsed. e. Where the acceptance is effective is not an important factor in determining the place of contract.

Answer: c Diff: 2 Type: MC Page Reference: 73c Skill: Recall 53) Roberts has the chance to buy three adjacent city lots zoned as "duplex." The most profitable return would be the building of four townhouses across the three lots, but that would necessitate getting permission from the city, and that procedure takes time. If Roberts buys a 60-day option from the seller of the properties for $400, which of the following is true?

..

23

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

a. By buying the option, Roberts has bought a period of time during which she must accept the land offer. b. If Roberts does not exercise the option during the option period, she can later force the seller to sell that property to her at that price. c. If Roberts does not exercise the option, she will get her $400 back because she didn't get what she was bargaining for. d. The seller is bound by contract neither to sell the property to any other party nor to revoke the offer within the option period. e. The offer for the properties will expire before the end of the designated 60-day period if another person offers a higher price.

Answer: d Diff: 2 Type: MC Page Reference: 73d Skill: Applied 54) When you pay for an option, this prevents a person from revoking an offer before the expiration of the specified time. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 73e Skill: Recall 55) The City issued a request for bids for the construction of an events centre with the closing stated as June 15 at 4:00 p.m of the current year. The tender stated that no changes could be allowed to bids after submission. XYZ Construction submitted its bid a week in advance of the closing date. However, on June 12, XYZ Construction advised the City that it needed to increase the price of the events centre project in its bid, as it had discovered a major calculation error in its bid submission. The City refused to allow a change to XYZ’s bid. After the specified close date, the City awarded the construction contract to XYZ Construction, as it was the lowest bidder. XYZ Construction refused to perform the work. This caused the City to award the contract to the company with the second-lowest bid, thus increasing the City’s cost for the project. The City sued XYZ Construction. What is the legal position of the parties? a. XYZ will win, as it advised the City in advance of the closing date that it needed to revise its bid.

..

24

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

b. XYZ will win, as it had only bid on the construction job but had not signed a construction contract to build the events centre. c. XYZ will win, as bidders are not obligated to accept a contract based solely on the fact that they have bid on it. d. The City will win because the lowest bidder is always selected and obligated to perform. e. The City will win, as XYZ was bound by a subsidiary agreement when it submitted its bid.

Answer: e Diff: 2 Type: MC Page Reference: 73f, 74a Skill: Applied 56) Explain what is meant by a tendering process and discuss the tender agreement.

Answer: When a company wants to undertake a project that requires the services of others, it will often put out a request for bids on the job. This is called putting a job out to tender. When a bid is submitted, a special contractual relationship is created called a tender agreement, which is independent of the ultimate contract to do the job. Both the company putting the job out to tender and the bidders must follow certain rules in the process, and both parties are bound to the subsidiary tender agreement, which is enforceable in court.

Feedback: When a company wants to undertake a project that requires the services of others, it will often put out a request for bids on the job. This is called putting a job out to tender. When a bid is submitted, a special contractual relationship is created called a tender agreement, which is independent of the ultimate contract to do the job. Both the company putting the job out to tender and the bidders must follow certain rules in the process, and both parties are bound to the subsidiary tender agreement, which is enforceable in court.

Diff: 2 Type: ES Page Reference: 73g, 74b Skill: Recall 57) A company put a job out to tender. The tendering process requires the company to follow certain rules typically associated with this process. Which of the following is most likely not a requirement in a tendering process?

..

25

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

a. The company must disclose all relevant information affecting the project. b. The company must accept only bids that comply with the terms of the tender. c. The company must accept the lowest bid price. d. The company must not accept bids after the specified closing date. e. The company must treat all parties equally and in good faith.

Answer: c Diff: 1 Type: MC Page Reference: 73h Skill: Applied 58) The City issued a request for bids for the construction of an events centre; the terms stated that the closing would be June 30 at 4:00 p.m. of the current year. At 4:15 p.m. on June 30, a representative of Joe’s Construction arrived at the City offices to submit a bid.

There was discussion about the fact that the stated deadline had passed, but the person from Joe’s Construction said that the submission was being made on June 30 while the City offices were still open, and the only reason there had been a delay was a problem locating the company managers who needed to sign the bid. Which of the following statements is true? a. If Joe’s Construction’s bid is the most competitive bid, the City will be obligated to accept it and award the contact to Joe’s Construction. b. The City must still consider the bid from Joe’s Construction as it is required to treat all parties equally and in good faith. c. If Joe’s Construction has worked for the City previously and this is the first time there has been a problem with a late submission, the City should consider the bid in good faith. d. The bid from Joe’s Construction cannot be considered, as it does not comply with the terms of the tender. e. The City should confirm that there was a problem getting the signatures and, if so, consider the bid from Joe’s Construction as having been submitted on time.

Answer: d Diff: 2 Type: MC Page Reference: 73i Skill: Applied 59) Explain typical rules associated with the tendering process.

..

26

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

Answer: The party requesting the bid must follow certain rules as set out in the tender, such as disclose all relevant information affecting the project; accept only bids that are compliant with the terms of the tender; not accept bids submitted after the specified closing date; accept the most competitive bid (usually); and treat all parties equally and in good faith.

A bidding party accepts the subsidiary offer binding both parties to the rules set out in the bidding process. The party that bids is also bound to not change the bid once it is submitted.

Feedback: The party requesting the bid must follow certain rules as set out in the tender, such as disclose all relevant information affecting the project; accept only bids that are compliant with the terms of the tender; not accept bids submitted after the specified closing date; accept the most competitive bid (usually); and treat all parties equally and in good faith. A bidding party accepts the subsidiary offer binding both parties to the rules set out in the bidding process. The party that bids is also bound to not change the bid once it is submitted.

Diff: 1 Type: ES Page Reference: 73j, 74c Skill: Recall 60) Explain why standard phrases are used by lawyers to create legal documents.

Answer: Lawyers use standard phrases and clauses with known legal effects so the interpretation of the legal agreement can be certain from the outset. Over time, such phrases have been litigated, so lawyers on both sides know exactly what they mean and how they will be enforced in court if it becomes necessary to go to court.

Feedback: Lawyers use standard phrases and clauses with known legal effects so the interpretation of the legal agreement can be certain from the outset. Over time, such phrases have been litigated, so lawyers on both sides know exactly what they mean and how they will be enforced in court if it becomes necessary to go to court.

Diff: 1 Type: ES Page Reference: 74d Skill: Recall 61) For standard types of contracts (e.g., insurance), lawyers are likely to use a standard form contract. a. True

..

27

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

b. False Answer: a Diff: 1 Type: TF Page Reference: 74e Skill: Recall 62) Sam had been a friend of Joe for a considerable period of time and had often accompanied him as he sailed his classic yacht. Sam had often communicated to Joe how much he would like to have the boat. On Friday night, a friend told Sam that Joe had suffered some business reverses and was going to have to get rid of the yacht. Sam immediately wrote Joe a letter offering to purchase the yacht for $25 000. Unknown to Sam, Joe had written Sam a similar letter offering to sell the yacht for $25 000. These two letters passed in the mail. Joe received Sam's letter at about noon on Saturday, and Sam received Joe's letter at about 2:30 p.m. on Saturday. Are these people bound in contract? Explain.

Answer: No, they are not. There must be a meeting of the minds. These letters merely indicate that one is willing to sell and the other is willing to buy. There must be an indication that both understand that the deal has been made. There must be an offer and an acceptance. Here there is just an exchange of offers.

Feedback: No, they are not. There must be a meeting of the minds. These letters merely indicate that one is willing to sell and the other is willing to buy. There must be an indication that both understand that the deal has been made. There must be an offer and an acceptance. Here there is just an exchange of offers.

Diff: 2 Type: ES Page Reference: 74f Skill: Applied 63) Which of the following is true with regard to contract law? a. An exchange of promises is not adequate consideration to form a contract. b. A contract for a $50 000 boat must be evidenced in writing to be a valid contract. c. To form a contract, there must be an offer that is accepted unconditionally. d. The parties to a contract can always go to court and have the court declare a contract void if the consideration is not adequate (i.e., fair).

..

28

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

e. A contract is void if it is required to be evidenced in writing under the Statute of Frauds, and is not.

Answer: c Diff: 2 Type: MC Page Reference: 74g Skill: Recall 64) Joe offered to sell Harry his car for $500. Harry responded by saying, "I accept, provided you install a new radio in that car." Explain the legal relationship between the two parties.

Answer: This is not a contract. The acceptance was qualified or conditional; therefore, it was a counter-offer and not an acceptance. Joe is free to accept it or reject it.

Feedback: This is not a contract. The acceptance was qualified or conditional; therefore, it was a counter-offer and not an acceptance. Joe is free to accept it or reject it.

Diff: 2 Type: ES Page Reference: 75a Skill: Applied 65) Generally, acceptance must be communicated to the offeror to be effective unless there has been a history of similar relations between the parties. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 75b Skill: Recall 66) An acceptance of an offer applies when and where it is received except when it is communicated by telephone. a. True b. False

..

29

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

Answer: b Diff: 1 Type: TF Page Reference: 75c Skill: Recall 67) Which of the following is an example of a unilateral contract? a. Sam orders a meal in a restaurant. b. Joe agrees to paint Sam's house for $500. c. C returns a lost dog and claims the $50 reward. d. Joe promises to give Harry his old boat when he gets his new one. e. Joe pays $50 for groceries at a grocery store.

Answer: c Diff: 1 Type: MC Page Reference: 75d Skill: Applied 68) Sam placed an announcement in the newspaper as follows: "$200 reward for the return of two lost Siamese kittens." Joe read the ad, found the kittens, and returned them.

This is an example of which of the following? a. Bilateral contract b. Invitation to treat c. Offer d. Gratuitous promise e. Unilateral contract Answer: e Diff: 2 Type: MC Page Reference: 75e Skill: Applied 69) An ad in the newspaper providing for a reward for return of a lost dog is an example of an invitation to treat. a. True

..

30

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

b. False Answer: b Diff: 1 Type: TF Page Reference: 75g Skill: Recall 70) Mary received a non-solicited selection of compact discs in the mail, with a letter informing her that she was now a member of the CD of the Month Club. It also said that if she didn't want these CDs, she could simply send them back; otherwise, she would be billed $10 for each CD at the end of the month. She put the CDs away, and did not respond. The club continued to send her CDs each month until she had received 100 of them over a period of 10 months. The club then sent her a letter demanding payment; otherwise, it would take legal action. Explain Mary’s legal obligation in these circumstances.

Answer: There is no contract under these circumstances. Mary’s silence was not an acceptance.

Had she already joined the CD of the Month Club, however, and then failed to send back CDs she didn't want, she likely would have been liable because of the ongoing relation she had established.

Feedback: There is no contract under these circumstances. Mary’s silence was not an acceptance. Had she already joined the CD of the Month Club, however, and then failed to send back CDs she didn't want, she likely would have been liable because of the ongoing relation she had established.

Diff: 2 Type: ES Page Reference: 75h Skill: Applied 71) Which of the following is correct with respect to the operation of the post-box rule? a. If the post-box rule applies, the acceptance is effective at the point of mailing. b. For the post-box rule to apply, the offer must be made by mail. c. For the post-box rule to apply, the offeror must make that clear when the offer is made. d. If the post-box rule applies, the only way for an acceptance to be effective is to send it by mail. e. If the post-box rule applies, an acceptance must be communicated and heard by the offeree before it is effective.

..

31

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

Answer: a Diff: 2 Type: MC Page Reference: 75i Skill: Recall 72) Jones is a caterer; Smith is a florist. Jones won a contract to provide a banquet for a convention of florists. He wanted to decorate the hall with flowers. He sent a letter to Smith describing what he wanted and asked for a price quote. Smith responded in a letter dated January 5, offering to supply the flowers for $5000. Jones received the letter on January 10 and responded on the same date, saying Smith’s price was too high and that he would pay $4500. While that letter was in the mail but before it had been received by Smith, Jones learned that the convention was on artificial flowers and the organizers wanted no real flowers on display. On January 13, Jones quickly sent another letter telling Smith to ignore the letter of January 10 and that he wouldn't need any flowers at this time. This letter of January 13 was received on the January 18. Smith had received the letter of January 10 on January 15 and had sent his letter of acceptance on the same day, and he had placed orders with his suppliers for the flowers. The letter of acceptance was received by Jones on January 20. Which of the following is true? a. If the post-box rule does apply, there is a binding contract. b. If the post-box rule applies, there is no contract because the letter of revocation was mailed before the letter of acceptance. c. If the post-box rule does not apply, there is a binding contract. d. Jones's offer in the letter of January 10 lapsed before acceptance. e. The post-box rule is irrelevant; there is no contract simply because Jones cannot use the fresh flowers.

Answer: a Diff: 3 Type: MC Page Reference: 75k Skill: Applied 73) Which of the following is correct with respect to the post-box rule? a. Because of modern advances in communication, the post-box rule no longer applies. b. The post-box rule applies to emails as well as to the mail. c. The post-box rule applies only when response by mail is appropriate. d. The post-box rule applies to communications via fax, postal service, and telegrams.

..

32

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

e. When acceptance is mailed, it is effective when and where it is received.

Answer: c Diff: 1 Type: MC Page Reference: 75l Skill: Recall 74) The post-box rule makes it clear that, when people choose to communicate by mail, they take the risk of delay or loss, and the acceptance as a result will be binding only when or if received. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 75n Skill: Recall 75) Explain the nature of the post-box rule.

Answer: When it is appropriate to respond by mail, the acceptance is effective when and where dropped in the mailbox.

Feedback: When it is appropriate to respond by mail, the acceptance is effective when and where dropped in the mailbox.

Diff: 2 Type: ES Page Reference: 75q Skill: Recall 76) Explain the post-box rule and discuss its relevancy in the modern business world.

Answer: This question requires students to demonstrate an understanding of the post-box rule, and in the process also demonstrate a clear understanding of how the bargaining process works and the elements of offer and acceptance. Students should demonstrate an understanding of the rule itself: it only applies to an acceptance, and when applied, it

..

33

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

makes the acceptance effective when and where sent, as opposed to the normal requirement that an acceptance is effective only where communicated to the offeror. It should also be clear that students understand that the rule can affect not only when a contract comes into existence (especially the problem of whether the offer was accepted before it expired) but also where the contract was made (which can determine what law applies and whether a court has jurisdiction). Students must show an understanding that the post-box rule is an exception, and that it likely only applies to an acceptance. In any case, it clearly will not apply to other communication from the offeror, such as a revocation (Henthorn v. Fraser). I would expect students to give an indication of how the rule arose—that it was simply to facilitate the needs of business when communicating at a distance, giving certainty to their dealing—and is not buried in some great principle of jurisprudence. Students should show that they understand that the rule only applies when it is appropriate to respond by mail, not every time the postal service is used. It is vital that students discuss the implications of the rule in our modern electronic society. They should indicate an understanding that, where instantaneous communications such as the telephone are in use, the rule will not apply. It is highly unlikely that the post-box rule will be applied to fax and email, even though it was extended to telegrams in the past.

Feedback: This question requires students to demonstrate an understanding of the postbox rule, and in the process also demonstrate a clear understanding of how the bargaining process works and the elements of offer and acceptance. Students should demonstrate an understanding of the rule itself: it only applies to an acceptance, and when applied, it makes the acceptance effective when and where sent, as opposed to the normal requirement that an acceptance is effective only where communicated to the offeror. It should also be clear that students understand that the rule can affect not only when a contract comes into existence (especially the problem of whether the offer was accepted before it expired) but also where the contract was made (which can determine what law applies and whether a court has jurisdiction). Students must show an understanding that the post-box rule is an exception, and that it likely only applies to an acceptance. In any case, it clearly will not apply to other communication from the offeror, such as a revocation (Henthorn v. Fraser). I would expect students to give an indication of how the rule arose—that it was simply to facilitate the needs of business when communicating at a distance, giving certainty to their dealing—and is not buried in some great principle of jurisprudence. Students should show that they understand that the rule only applies when it is appropriate to respond by mail, not every time the postal service is used. It is vital that students discuss the implications of the rule in our modern electronic society. They should indicate an understanding that, where instantaneous communications such as the telephone are in use, the rule will not apply. It is highly unlikely that the post-box rule will be applied to fax and email, even though it was extended to telegrams in the past.

Diff: 3 Type: ES Page Reference: 75t, 76a, 77a Skill: Applied

..

34

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

77) When the post-box rule applies, the place of mailing of the acceptance may determine the place of the contract. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 76b Skill: Recall 78) For the post-box rule to apply, the offer must be made by mail. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 76c Skill: Recall 79) The post-box rule applies when which of the following means of communication is used? a. Mail b. Electronic mail c. Fax d. Messenger e. Telephone Answer: a Diff: 2 Type: MC Page Reference: 76d Skill: Recall 80) One of the requirements in a contract is that there must be an exchange of consideration between the parties. Explain what is meant by consideration.

..

35

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

Answer: Consideration is usually thought of as the price one pays for what has been bargained for in the contract. Both sides must pay a price and both sides must receive a benefit. But consideration is better thought of as the commitment of the parties to pay that price, whether it is in the form of money or some other benefit.

Feedback: Consideration is usually thought of as the price one pays for what has been bargained for in the contract. Both sides must pay a price and both sides must receive a benefit. But consideration is better thought of as the commitment of the parties to pay that price, whether it is in the form of money or some other benefit.

Diff: 2 Type: ES Page Reference: 77b, 78f Skill: Recall 81) Discuss the requirement of consideration and its role and value in the formation of contracts. In your answer, make sure to deal with the issue of fairness in the bargaining process.

Answer: Here, students should deal with the nature of consideration. The essential nature of a bargain is that parties negotiate, eventually reaching a point where they are willing to exchange commitments that are to their mutual advantage. This is the heart of the marketplace, and contract law and the concept of consideration are key. A free bargaining process and the role of bargaining in the marketplace require that the courts don't try to make bargains for the parties. The courts can't interfere, or it would disrupt that market function. The courts, as a general rule, won't concern themselves with whether or not a bargain was fair, or worry about the adequacy of the consideration given; that is the objective of bargaining. But if there is no consideration at all, it is clear there has been no bargain struck, and so the courts will find no contract. Students' answers should show an understanding of this bargaining nature of contract law and also an understanding of why consideration is required but that it does not have to be fair. But there are exceptions.

Where a transaction is grossly one-sided, the courts will look at an allegation of fraud or the claim of incapacity and the fairness of the consideration. But this relates to a breakdown in the market system, where the parties bargaining are not functioning at the same level, and so there is a consistency in the courts' approach to the need for consideration even in these exceptions.

Feedback: Here, students should deal with the nature of consideration. The essential nature of a bargain is that parties negotiate, eventually reaching a point where they are willing to exchange commitments that are to their mutual advantage. This is the heart of the marketplace, and contract law and the concept of consideration are key. A free bargaining process and the role of bargaining in the marketplace require that the courts

..

36

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

don't try to make bargains for the parties. The courts can't interfere, or it would disrupt that market function. The courts, as a general rule, won't concern themselves with whether or not a bargain was fair, or worry about the adequacy of the consideration given; that is the objective of bargaining. But if there is no consideration at all, it is clear there has been no bargain struck, and so the courts will find no contract. Students' answers should show an understanding of this bargaining nature of contract law and also an understanding of why consideration is required but that it does not have to be fair. But there are exceptions. Where a transaction is grossly one-sided, the courts will look at an allegation of fraud or the claim of incapacity and the fairness of the consideration. But this relates to a breakdown in the market system, where the parties bargaining are not functioning at the same level, and so there is a consistency in the courts' approach to the need for consideration even in these exceptions.

Diff: 2 Type: ES Page Reference: 77c, 78e Skill: Recall 82) Which of the following can be used as consideration? a. A promise to give up a legal right b. A kilogram of green beans c. A promise to deliver three tonnes of steel d. 50 cents e. All of the above Answer: e Diff: 1 Type: MC Page Reference: 77d Skill: Recall 83) With regard only to the requirement of consideration, which one of the following would be a binding contract? a. An agreement between a contractor and a home owner that the home owner will pay an additional $1000 if the contractor completes the existing contract according to all its terms b. A promise by Tom to drive a co-worker to Timmins, Ontario c. A promise to give $10 exchanged for a promise to give a can of pop d. A written promise, but not under seal, to give John $50 on Saturday

..

37

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

e. A promise by Mr. Brent to pay $25 to John, who found and returned Brent's wallet, which Brent didn't even know he had lost until John delivered it Answer: c Diff: 2 Type: MC Page Reference: 77e Skill: Recall 84) For the requirement of consideration to be satisfied, at least one of the parties must have performed what was promised. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 77f Skill: Recall 85) Which of the following is not an example of a contract? a. A verbal agreement for the sale of a car where neither the money nor the car has yet changed hands b. A verbal agreement to work for someone starting next week c. An implied promise to pay for a meal when you order it d. An agreement not to sue someone for negligence in exchange for their promise to pay you a specified amount e. A written promise to give your husband a ring for Christmas Answer: e Diff: 1 Type: MC Page Reference: 77h Skill: Recall 86) Assume that all other requirements for a valid contract are present and indicate which of the following would not be a binding agreement because of a problem with consideration?

..

38

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

a. Laura promises to pay a carpenter, who is renovating the living room of her home, an additional $100 if he will install an extra cabinet to store her files. b. Smith sold a valuable watch to Sarah for only $1. c. John tells his neighbour, Eric, that he will give him $30 to show his gratitude for Eric's extraordinary work for Little League. d. Mr. N promises to give $50 to the cystic fibrosis society and makes that promise under seal. e. Jones agrees to accept $80 as full payment of a $100 debt if Kahn, the debtor, agrees to pay the $80 a week before the due date.

Answer: c Diff: 2 Type: MC Page Reference: 77i Skill: Applied 87) Which one of the following is enforceable? a. An ad in the paper promises to pay $5 for the return of a lost ring, but the person who finds and returns the ring never saw the offer in the newspaper. b. Mr. Baker was so sick of an old chair that, when Mr. Venson offered him $10 for it, he agreed (i.e., promised to sell it to him), although the market value of the chair was $80. c. Ms. Jones promised to pay an additional $1 to Mr. Wood if he finished the existing contract on time, according to the terms of the contract. d. Mr. Ho promised to give his needy friend, Mr. Jahn, $1. e. Ms. Goode promised to send $10 to Mr. Paul, who kindly came and warned her when he saw a tow truck approach her car.

Answer: b Diff: 2 Type: MC Page Reference: 77j Skill: Applied 88) Read the following and indicate which agreement would be a binding contract.

Assume that all other requirements for a binding contract have been met. a. Mary promised to give Planned Parenthood a donation of $1.

..

39

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

b. John, late for work, found that his car battery was dead. He flagged down a passing truck and told the driver "he would be in his debt forever" if he would agree to do him the favour of jump-starting the car. The driver of the truck agreed. c. Mr. Kooner sold a farm valued at $190 000 to his nephew for only $50 000. d. Peter agreed to pay Ace Computers Ltd. $50 above the contract price if the company would have his new computer ready on the date specified in the original contract. e. Len agreed to sell and Karen agreed to buy four of Len's records for "some money."

Answer: c Diff: 2 Type: MC Page Reference: 77k Skill: Applied 89) Which of the following is correct with respect to consideration? a. It must be specific. b. It is binding even though a duty to so act already exists. c. It is to compensate for an act that happened in the past. d. It must be reasonable. e. At least some money must be involved.

Answer: a Diff: 2 Type: MC Page Reference: 77l Skill: Recall 90) "One of the basic precepts in contract law is that any bargain struck must be fair to be enforceable." Explain the accuracy of this statement.

Answer: It's only necessary that the consideration involved has some value. It's not necessary that it be fair or reasonable.

Feedback: It's only necessary that the consideration involved has some value. It's not necessary that it be fair or reasonable.

Diff: 2 Type: ES

..

40

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

Page Reference: 77m, 78a Skill: Recall 91) In contract cases, the court generally: a. Attempts to punish the party in breach of the contract by imposing a sentence b. Does not look to see if the bargain is fair c. Will require the recipient of a service to pay a reasonable price where it is determined that the agreed-upon price was too low d. Will rewrite an agreement for the parties if their existing agreement did not include all essential terms e. Will enforce all promises Answer: b Diff: 2 Type: MC Page Reference: 78b Skill: Recall 92) Which of the following is correct with respect to the adequacy of consideration? a. Need not be legal if both parties clearly consent b. Both parties must be present if the agreement is under seal c. May be only love and affection d. Need not be fair, unless there are extenuating circumstances (i.e., insanity or fraud) e. Existing duty: a change in the contract requires no new consideration Answer: d Diff: 2 Type: MC Page Reference: 78c Skill: Recall 93) The courts never enforce an unfair bargain, even if there is a case of mental incapacity. a. True b. False Answer: b

..

41

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

Diff: 1 Type: TF Page Reference: 78d Skill: Recall 94) Indicate the correct statement about consideration. a. Consideration is "the price for which the promise (or the act) of the other is bought." b. In a unilateral contract, the performance of the promisee provides no consideration to the promisor. c. In a bilateral contract, the exchange of promises does not provide consideration for both parties. d. An altered course of action (e.g., forbearance) is not good consideration. e. The common law holds that consideration must be adequate to ensure that contracts are fair bargains.

Answer: a Diff: 2 Type: MC Page Reference: 78g Skill: Recall 95) When Mr. Adams tells the local Boys and Girls Club that he will give them $5000 if they promise to use the funds for their summer camping program, this is an example of which one of the following? a. Promissory estoppel b. When accepted by the club, a bilateral contract c. When accepted by the club, a unilateral contract d. Gratuitous promise e. Inadequate consideration Answer: b Diff: 2 Type: MC Topic: 78h Skill: Applied

..

42

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

96) Joe, a university student, parked his car near Harry's garage and went to attend classes. Harry had noticed that there was glass on the street when he came to work that morning and was not surprised when he saw that several of the students' cars parked in that location subsequently had flat tires. He went around to each of those cars when he had time during the day, fixed the tires, and put a bill on each vehicle charging $15 for the service. Joe had returned to his car during the day and had noticed the flat tire, and when he returned again that evening he was grateful that it had been fixed. He went over to the garage to thank Harry and told him that he would be happy to pay the $15, but he couldn't do it until next week. In fact, he failed to pay the money, and Harry sued him for breach of contract. Explain the likely outcome.

Answer: Harry would lose. This is an example of past consideration, and past consideration is no consideration. At the time the work was done, no bargain had been struck.

Feedback: Harry would lose. This is an example of past consideration, and past consideration is no consideration. At the time the work was done, no bargain had been struck.

Diff: 1 Type: ES Page Reference: 78i Skill: Applied 97) Joe contracted with Sam, agreeing to pay Sam $400 if Sam would build him a bookcase. The essential terms included the type and quality of the wood, the dimensions, and the date of completion February 14, 2011. The work went more easily than expected and Sam said to Joe, "If you pay me another $50, I will have this finished and be out of here by February 8." Joe agreed. If the bookcase were done to specifications by the February 8 but Joe refused to pay anything, Sam would be entitled in law to: a. $450 b. $400 plus damages c. Only $50 d. Nothing e. $400 Answer: a Diff: 2 Type: MC Page Reference: 79a Skill: Applied

..

43

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

98) George contracted with Bob to have a racing bike modified for him to be delivered on February 20, for a race on February 22. The price for the modification was agreed on $100. About February 10, George became nervous about the bike being finished on time and went to see Bob. Bob said that he was very busy, but if he really wanted to be sure that it would be finished on time, George would have to pay him an extra $25 so he could pay his employees overtime. George agreed and Bob completed the modifications as requested, on time. How much does George legally owe? a. Only $100 because Bob had an existing duty to modify the bike and the price was settled b. $25 because past consideration is no consideration c. $125 because Bob gave consideration for George's promise to pay the additional $25 d. $100 plus whatever it cost for the overtime e. A reasonable amount only Answer: a Diff: 2 Type: MC Page Reference: 79b Skill: Applied 99) Joe owed Sam $500. Two days before the money was due, Joe came to Sam and told him he couldn't pay the $500, but if Sam would accept $300 right then, in full satisfaction of the debt, he would pay him that amount. Sam agreed, then later sued for the other $200. Will he win?

Answer: He received payment two days early; this is sufficient consideration to support the lower payment.

Feedback: He received payment two days early; this is sufficient consideration to support the lower payment.

Diff: 2 Type: ES Page Reference: 79c Skill: Applied 100) XYZ Company, a distributor of auto parts, is in debt to the bank for $35 000 due on February 25. The company is having difficult times and wants to negotiate with the bank

..

44

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

to pay only $33 000 as payment in full. With these facts in mind, which of the following statements of the law is true? a. If the bank agrees to accept the $33 000 as payment in full if paid early, by February 15, and the company does as requested, the bank could later sue for the remainder because the company gave good consideration for the bank's forgiveness of the debt. b. Even if the bank takes the $33 000, the bank can still sue for the entire amount plus punitive damages. c. If the company obtained from the bank the bank's promise to forgive the $2000 under seal, the bank could later sue for the remainder. d. A statutory provision provides that the creditor who accepts less than full payment as payment in full cannot later sue for the remainder. e. At common law, if the bank accepted the $33 000 as payment in full, even absent additional consideration, it could not later sue for the remainder because such promises are always binding.

Answer: d Diff: 2 Type: MC Page Reference: 79d Skill: Applied 101) Which of the following would be resolved by a contract and would not need the use of promissory estoppel? Assume that all facts given can be proven. a. The contract called for the band to play for 3 hours, but the club owner agreed to pay the same price for only 2.5 hours of play. Later, the club owner sued for breach of contract. b. The painter contracted with Frank to paint the kitchen for $400. When the painter found the job more difficult than he had expected, Frank said he would still pay $400 but that the painter didn't have to do all the work agreed upon; he didn't have to paint inside the cabinets. After the job was completed, Frank sued the painter for breach of contract. c. The landlord forgave a tenant half of his October rent because the tenant had had an accident at work. Two days ago, the landlord sued for the unpaid rent on the grounds that his promise to forgive it was gratuitous. d. Jon negotiated with the bank, which agreed to take $18 000 in full satisfaction of an overdue debt of $20 000. A week after Jon paid the $18 000, he was sued by the bank for the balance. e. Kent loaned $3000 to Joan, who promised to pay back $3300 on January 3. Kent then called Joan and said that he would settle for $3000 if she would repay it that day, November 28. She paid on the 28th. On January 5, Kent sued Joan for the other $300.

..

45

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

Answer: e Diff: 3 Type: MC Page Reference: 79e Skill: Applied 102) Explain the principle of promissory estoppel and how it relates to the requirement of consideration in contract law. In your answer, explain any limitations on its availability.

Answer: Here, students are expected to show an understanding of the requirement of consideration in the law of contract. Consideration requires that commitments or promises be made by both parties in order for there to be a binding contract. Where only one of the parties makes a commitment, this is a gratuitous promise and is not enforceable as a contract.

Promissory estoppel provides that in some limited circumstances a person might be bound even by his or her gratuitous promise. Usually this is best illustrated by example.

The vital point to make is that, in Canada at least, promissory estoppel can be used only as a defence, not as a cause of action. It is difficult to come up with a situation where it can be used because it requires that the person suing must be the person who made the promise to be enforced. This can only happen where some prior legal obligation exists between the parties that was modified by the gratuitous promise and then the person making the promise is ignoring that promise and trying to sue to enforce the original right prior to the modification by the promise. Usually this is simply a situation where a prior contractual right is being discharged or modified by the gratuitous promise. It will take a bright student to explain this properly, but a very bright student should also indicate that promissory estoppel can only be used where the person using it relied on the promise in some way that they will suffer a detriment if it is not honoured. The essentials are that the student demonstrate that this principle will only be used where there is a one-sided promise and where it is being used as a defence, not as a cause of action.

Feedback: Here, students are expected to show an understanding of the requirement of consideration in the law of contract. Consideration requires that commitments or promises be made by both parties in order for there to be a binding contract. Where only one of the parties makes a commitment, this is a gratuitous promise and is not enforceable as a contract. Promissory estoppel provides that in some limited circumstances a person might be bound even by his or her gratuitous promise. Usually this is best illustrated by example. The vital point to make is that, in Canada at least, promissory estoppel can be used only as a defence, not as a cause of action. It is difficult to come up with a situation where it can be used because it requires that the person suing must be the person who made the promise to be enforced. This can only happen where some prior legal obligation exists between the parties that was modified by the gratuitous promise and then the person making the promise is ignoring that promise and trying to sue to enforce the original right prior to the modification by the promise. Usually this is simply a situation where a prior contractual right is being discharged or modified by the

..

46

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

gratuitous promise. It will take a bright student to explain this properly, but a very bright student should also indicate that promissory estoppel can only be used where the person using it relied on the promise in some way that they will suffer a detriment if it is not honoured. The essentials are that the student demonstrate that this principle will only be used where there is a one-sided promise and where it is being used as a defence, not as a cause of action.

Diff: 3 Type: ES Page Reference: 79f-80a Skill: Applied 103) Which of the following shows the use of the doctrine of promissory estoppel? a. Lam contracted to supply Jones with steel. Before the steel was delivered, Lam's supplier increased the price. Lam could use the doctrine to force Jones to pay more to Lam. b. Lee, a defendant, can use this doctrine as a defence against a plaintiff insisting on his full legal right when he had promised to forgive Lee some of Lee's legal obligation and Lee had relied on that promise. c. This doctrine can be used by a plaintiff to enforce a written promise that has been signed and sealed (i.e., a seal has been affixed next to the signature of the promisor). d. Val told Jim that she would give him her printer. If she doesn't, Jim could use the doctrine to force her to do so. e. George rented a video and watched it with Elaine. She thought the movie was great and said that she'd pay half the rental price. George could use the doctrine to force her to pay as she promised.

Answer: b Diff: 2 Type: MC Page Reference: 80b Skill: Applied 104) Indicate which one of the following is the correct statement about the effect of promissory estoppel on a promisor. a. Promissory estoppel can be used only “as a sword and not as a shield.” b. When a victim relies on the promise and suffers injury, he or she can sue the promisor for compensation even where no consideration has been given in return for that promise. c. Promissory estoppel has no effect on a promisor because it relates only to statements of fact, not to promises.

..

47

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

d. If you agree to pay a contractor an extra $10 000 to complete a contract as originally agreed and you actually pay him, you can later sue successfully for the return of the additional $10 000. e. Promissory estoppel can be used as a defence only against a promisor who reneges on his or her promise.

Answer: e Diff: 2 Type: MC Page Reference: 80c Skill: Recall 105) Which of the following shows the use of the doctrine of promissory (equitable) estoppel? a. This doctrine can be used by a plaintiff to endorse a written promise signed and sealed (i.e., a seal has been affixed next to the signature of the promisor). b. George told Hans that he would give him his printer. If he doesn't, Hans could use the doctrine to force him to do so. c. George wants to force Elaine to honour her promise to pay him $2. After he paid for a video they watched, she was so moved by the movie she said she would pay half of the rental cost. d. If Lam requests services from Jones and there is no mention of price and if Lam doesn't pay Jones, this doctrine can be used to force Lam to pay a reasonable amount. e. Lee, a defendant, can use this doctrine as a defence against a plaintiff insisting on his full legal right when he had promised to forgive Lee some of Lee's legal obligation and Lee had relied on that promise.

Answer: e Diff: 3 Type: MC Page Reference: 80d Skill: Applied 106) Joe was a contractor and he hired subtrades to help build his houses. Sam was a framer and had agreed to frame four houses for Joe for a set price. Joe was to supply the materials. After two houses were completed, Joe's suppliers increased the cost of lumber, and Joe told Sam that he could no longer pay him the amount on which they'd agreed.

Sam agreed to take 15% less for the other two jobs, which were then completed. During this time, regular payments were made from Joe to Sam, but the total amount received was 15% lower than the originally agreed-upon price for the last two jobs. Sam sued Joe

..

48

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

for the original contract price, claiming that he'd received no consideration for his agreement to take less for the last two jobs. Explain what defences may be available to Joe under these circumstances and his likelihood of success.

Answer: Promissory estoppel. Sam agreed to take less for the services that were performed on the last two jobs. This promise was relied on by Joe; therefore, he can use Sam's promise as a defence.

Feedback: Promissory estoppel. Sam agreed to take less for the services that were performed on the last two jobs. This promise was relied on by Joe; therefore, he can use Sam's promise as a defence.

Diff: 2 Type: ES Page Reference: 80e Skill: Applied 107) A person is required to honour a gratuitous promise if made under seal. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 80f Skill: Recall 108) Mr. Goode, a neighbour of your parents, offered to sell you his house for $200 000, a bit below market value. You are definitely interested but would like to see if your employment contract will be renewed and check on financing. Mr. Goode says that he'll hold the offer open for you until May 1. On these facts, which of the following is true? a. Mr. Goode will be bound to hold the offer open until May 1. b. Mr. Goode's promise to hold the offer open is sufficient; the offer is safe until May 1, when it will expire. c. Mr. Goode will be bound to hold the offer open indefinitely. d. If Mr. Goode sells the property to someone else before May 1 and informs you of that, you can still sue him. e. Mr. Goode will be bound to hold the offer open until May 1 if his promise to do so was written and under seal.

..

49

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

Answer: e Diff: 2 Type: MC Page Reference: 80g Skill: Applied 109) Assume that all other requirements for a valid contract are present and indicate which of the following would be a binding agreement. a. Mr. Ng promises to give $25 to the Canadian Cancer Society and makes that promise under seal. The association accepts but gives him nothing in return. b. John, so grateful that Jim returned a lost computer disk on which John had saved a term project, promised to give Jim $50. Jim stated that he deserved $100. c. Len offered to sell his $300 snowboard to Chuck for $400. Chuck said no. d. Joe offered to pay a florist to put flowers on Marilyn's grave once a week for a whole year for $500. The florist agreed to the terms of the offer but only for 10 weeks. e. Nervous that the programmer would not finish the project by the time specified in the contract, the owner of the company promised to give the programmer an extra $400 if he would complete the work according to the contract. The programmer agreed.

Answer: a Diff: 2 Type: MC Page Reference: 80h Skill: Applied 110) Which of the following statements is correct with respect to the law of consideration? a. Consideration must have some value but need not be specific. b. For a contract to be binding, something valuable must have changed hands. This consideration may have been paid before the agreement (past consideration) or at the time of the agreement (present consideration), but future consideration is no consideration. c. Without consideration or a seal, there can be no contract. d. The amount of consideration to be paid in a contract must be reasonable (that is, fair) from the point of view of each party. e. Consideration need not be specific, but both parties must get something out of the deal.

Answer: c Diff: 1

..

50

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

Type: MC Page Reference: 80i Skill: Recall 111) What is the age of majority in your province?

Answer: The age of majority is 18 or 19, depending on the province.

Feedback: The age of majority is 18 or 19, depending on the province.

Diff: 1 Type: ES Page Reference: 81a Skill: Recall 112) Which one of the following correctly indicates the position of the parties in respect to contracts involving minors? a. Contracts with minors are void, except beneficial contracts of service. b. Contracts with minors are unenforceable by the minor against the adult and by the adult against the minor. c. An adult cannot sue the minor on the contract even if the minor affirms the contract after reaching the age of majority. d. All contracts with minors are void. e. A minor can enforce a contract made by an adult with him despite the fact that he is a minor.

Answer: e Diff: 2 Type: MC Page Reference: 81b Skill: Recall 113) In which of the following situations would one of the parties not be bound on the basis of incapacity? a. An adult man sells his home to his mother. b. An Ontario corporation sells land it owns for the construction of a shopping mall. c. A merchant sells a new stereo to a minor.

..

51

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

d. A person who is drunk but appears sober sells his car to another customer at a bar. e. A minor paid a reasonable price for a bike needed for work.

Answer: c Diff: 2 Type: MC Page Reference: 81c, 82a Skill: Recall 114) Whenever an adult enters into a contract with a minor, the adult is bound. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 81d Skill: Recall 115) Neither party is bound by a contract with a minor. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 81e Skill: Recall 116) Clem had wanted a piano for a long time. Although he was a minor, his mom gave him $300 and he took this with some savings and made a $500 down payment on a $3000 piano. The balance was to be paid over a three-year period. His mom signed the contract as a guarantor. Clem made the first three payments, but he damaged the piano while trying to move it from the living room to his upstairs bedroom. He didn't have the money to get it fixed. He quit playing piano, lost interest, and quit making his payments. On these facts, which of the following is false? a. Although the contract is unenforceable against Clem, if he affirms the contract after he reaches the age of majority, the seller will be able to sue him for breach of contract. b. Clem's mother will be liable on the guarantee only if it is in writing.

..

52

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

c. If Clem's mother guaranteed the deal, she would be liable on her guarantee even if the contract is unenforceable against Clem. d. Unless Clem affirms the contract or partly performs the contract after he reaches the age of majority, the seller cannot get any compensation from him. e. Because Clem is a minor, he cannot sue the seller, even if the piano is defective.

Answer: e Diff: 2 Type: MC Page Reference: 81f Skill: Applied 117) Distinguish between a void contract and a voidable contract.

Answer: A void contract never was a contract and the agreement is simply of no effect. A voidable contract is a binding contractual agreement, but one of the parties has the right to get out of it. Until that right is exercised, it is binding. This can have a significant effect on the position of a third party.

Feedback: A void contract never was a contract and the agreement is simply of no effect.

A voidable contract is a binding contractual agreement, but one of the parties has the right to get out of it. Until that right is exercised, it is binding. This can have a significant effect on the position of a third party.

Diff: 2 Type: ES Page Reference: 81g Skill: Recall 118) Ted, a 17-year-old high school student, was hired to perform in four episodes of a TV series filmed in Vancouver. To keep up with his schoolwork, he contracted with Mr. Tech, of Technoland, for a $3000 laptop computer. He agreed to pay $500 as a down payment and the balance in monthly payments of $250. Read each of the following separately and indicate which is true. a. If Ted doesn't make his payments, Tech can sue Ted's parents, because parents are liable for the debts of their minor children. b. If this contract is in writing and Ted doesn't make his payments, Tech can sue Ted for breach of contract. c. This contract is a legal contract enforceable against Ted. d. This contract is a legal contract enforceable by Ted. ..

53

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

e. This contract is void; therefore, Tech can repossess the laptop, which is technically still his whether or not Ted makes the payments.

Answer: d Diff: 2 Type: MC Page Reference: 81h Skill: Applied 119) Explain the legal position of an infant who enters into a contract with an adult.

Answer: Varies by province. In most provinces, infants are only bound to honour contracts involving necessities or beneficial contracts of service. In B.C., all contracts with infants are unenforceable except those made specifically enforceable by statutes (e.g., student loans).

Feedback: Varies by province. In most provinces, infants are only bound to honour contracts involving necessities or beneficial contracts of service. In B.C., all contracts with infants are unenforceable except those made specifically enforceable by statutes (e.g., student loans).

Diff: 2 Type: ES Page Reference: 82b Skill: Recall 120) Indicate what types of contracts are binding on infants.

Answer: Necessaries and beneficial contracts of service (except in B.C., where all contracts with infants are unenforceable, except those that may be enforceable by statute) Feedback: Necessaries and beneficial contracts of service (except in B.C., where all contracts with infants are unenforceable, except those that may be enforceable by statute) Diff: 2 Type: ES Page Reference: 82c Skill: Recall 121) Distinguish between an infant's liability for torts and for contracts. ..

54

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

Answer: Infants are only bound by contracts for necessities and beneficial contracts of service (note difference in B.C.), but they are responsible for any torts they commit. Note, however, that an adult cannot get around the protection given infants in contract law by suing in tort instead.

Feedback: Infants are only bound by contracts for necessities and beneficial contracts of service (note difference in B.C.), but they are responsible for any torts they commit. Note, however, that an adult cannot get around the protection given infants in contract law by suing in tort instead.

Diff: 2 Type: ES Page Reference: 82d, 83a Skill: Recall 122) In his last year of high school, Larry, a minor, saw a friend's computer and felt that the word processing function would help him get through high school. He visited Computer Heaven Ltd. and contracted for an Apple Macintosh, printer, paper, and the program. The total cost was $4000. He paid $1800 as a down payment and promised to pay another $300 on July 3, his birthday; the remainder would be paid in monthly installments of $100. Larry made the July 3 payment and some of the monthly payments, but by then had graduated, thanks to his passing mark in English, and didn't have a use for the computer anymore. Furthermore, he wanted to save his money for a down payment on a compact disc player and speakers. When he stopped making payments to Computer Heaven, the balance outstanding was $1700. On these facts, which of the following is true? a. Computer Heaven must suffer the loss because all contracts with minors are void. b. Computer Heaven can enforce the contract even though Larry is a minor because Larry has paid over half of the agreed-upon price. c. Computer Heaven can sue Larry for breach of contract if it sues Larry after he reaches the age of majority. d. If the July 3 payment was made after he reached the age of majority, Computer Heaven can successfully sue Larry for breach of contract. e. Computer Heaven's only chance for any money would be if Larry accidentally causes the computer to break down. In that instance, it could sue Larry for negligence to get around the difficulties in contract law.

Answer: d Diff: 2 Type: MC

..

55

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

Page Reference: 82e Skill: Applied 123) In his last year of high school, Larry saw a friend's computer and felt that the word processing function would help him get through high school. He visited Computer Heaven Ltd. and contracted for an Apple Macintosh, printer, paper, and the program. The total cost was $2500. He paid $500 as a down payment and promised to pay another $500 on July 3, when he reached the age of majority, with the remainder to be paid in monthly installments of $250. By July 3, Larry had graduated, thanks to his passing mark in English, and he had no more use for the computer. Furthermore, he wanted to use his $500 birthday/graduation present for a down payment on a compact disc player and speakers. He failed to make his July 3 payment or any other payment to Computer Heaven. The balance outstanding at the time he stopped making payments was $2300, including unpaid interest. On these facts, which of the following is true? a. Although the contract is unenforceable against Larry, if he affirms the contract after he reaches the age of majority, the seller will be able to sue him for breach of contract. b. Computer Heaven can sue Larry for breach of contract if it sues Larry after he becomes an adult. c. If Larry doesn't pay, Computer Heaven can sue Larry's parents because parents are liable for the debts of their minor children. d. Because a contract with a minor is void, Computer Heaven has never passed title and can retrieve the computer, printer, paper, and program even if these goods have been resold to someone else. e. None of the above Answer: a Diff: 2 Type: MC Page Reference: 82f Skill: Applied 124) An adult can sue a minor in tort to get around the minor's contractual incapacity. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 83b Skill: Recall

..

56

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

125) Which one of the following categories of persons has their capacity to enter into contracts limited? a. Divorced women b. Married women c. Landed immigrants d. Refugees e. Insane or intoxicated persons Answer: e Diff: 1 Type: MC Page Reference: 83c Skill: Recall 126) A person who has voluntarily become intoxicated by drugs or alcohol cannot escape a contract on the basis of his incapacity. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 83d Skill: Recall 127) Joe was in a bar and saw his friend Sam. Sam had a considerable amount to drink and then offered to sell Joe his Porsche automobile for only $15 000. Joe made sure to have Sam sign a written agreement to that effect. The next day, Joe went to pick up the car, but Sam didn't remember anything about it. Even when Joe showed Sam the written agreement signed by him, Sam refused to deliver the car. Joe sued. Which of the following correctly states the legal position of the parties? a. Sam has to show he was legally intoxicated and he will not be bound. b. As long as Joe can produce the agreement in writing, there is nothing Sam can do to get out of the deal. Once Sam has signed the document, he is responsible for its contents. c. If Joe can show that there was no indication that Sam was drunk, even though Sam was completely incapacitated, Sam will be required to go through with the deal. d. Sam will not have to go through with the deal because no money has yet changed hands.

..

57

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

e. Being drunk is no excuse; the contract is binding.

Answer: c Diff: 2 Type: MC Page Reference: 83f Skill: Applied 128) One afternoon while Mr. Reston was going home on the bus, his neighbour, Mr. Outovit, offered to sell Reston his car for $4000, a bit below the market value. Reston said, "You might change your mind on that. Better not be too hasty with your offers."

Outovit answered, "I want to sell it quickly," and wrote on the back of an envelope: "I hereby offer my neighbour, Reston, my 2011 Chevrolet for $4000 in cash." Outovit then signed his name. Reston wrote, "I accept." The next day, Reston went to his neighbour's house to pay the money and get the car. He learned that Outovit was in the hospital suffering from a reaction to medicines given to him the day before. If Outovit (or his legal representative) refuses to honour the contract on the basis of mental incapacity, which of the following is true? a. If it is established that Reston didn't know Outovit was incapacitated at the time of contract and that the deal was fair, Outovit will be bound by the contract even if he didn't understand the nature and quality of his act. b. If Reston can show the written contract, Outovit has no argument and will be bound to honour the contract. c. Outovit need only prove that he didn't understand the nature and quality of his act to void the contract. d. Outovit won't be bound by the contract because there hadn't yet been payment for, or delivery of, the car. e. To get out of a contract on the basis of insanity, you have to be institutionalized.

Answer: a Diff: 2 Type: MC Page Reference: 83g Skill: Applied 129) An insane person can escape a contract on the basis of incapacity only if the other person knew or ought to have known of the insanity. a. True b. False

..

58

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

Answer: a Diff: 1 Type: TF Page Reference: 83h Skill: Recall 130) Requirements of a contract include capacity of the parties to contract, legality, and intention of the parties to be legally bound. Which of the following is true with regard to these elements? a. A seller that contracts with an infant can avoid the difficulties of enforcing the contract by suing him in tort instead of breach of contract. b. A person with mental incapacity may still be held to a contract even if, at the time of the contract, he didn't understand the nature and quality of his act. c. The court can presume the intention of the parties to be legally bound, in which case, a party to the contract cannot bring forward contrary evidence to rebut the presumption. d. A restrictive covenant prohibiting one party to the contract from competing with the other is not enforceable. e. If an adult cannot sue the other party to the contract because the other party is a minor, neither can the infant sue the adult.

Answer: b Diff: 2 Type: MC Page Reference: 83i Skill: Recall 131) Because of the Charter of Rights and Freedoms, status Indians no longer have their capacity to contract limited. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 85a Skill: Recall 132) Which of the following contracts is void? a. A contract to sell a crop of marijuana growing in a particular field

..

59

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

b. A contract containing an exculpatory clause limiting the liability of one of the parties c. A contract with an insane person for a TV, where the insane person, or his legal representative, can prove that he was insane at the time of the contract but cannot prove anything else about the incident. d. A contract with an insane person for necessaries such as food and shelter. e. Any contract with a status Indian.

Answer: a Diff: 2 Type: MC Page Reference: 85b Skill: Recall 133) Only contracts that involve the commission of a crime or tort are void on the basis of illegality. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 85c Skill: Recall 134) Joe owned a classic Buick automobile, and he agreed to trade it to Sam for a specified amount of cocaine. Sam took the car and, three days later, before he could deliver the cocaine to Joe, his cocaine was seized by the police and he was arrested. Joe is now bringing an action claiming that he's entitled to the car. Indicate what arguments are available to Joe and the likelihood of him obtaining his car.

Answer: Joe would claim either that the contract was breached and therefore he is entitled to his automobile, or that the contract was illegal and therefore there was no contract and he's never given up title to his Buick. It's likely, however, that the courts will consider this is an illegal contract, since both parties knew that they were involved in an illegal act, and refuse to assist Joe in obtaining the return of his automobile.

Feedback: Joe would claim either that the contract was breached and therefore he is entitled to his automobile, or that the contract was illegal and therefore there was no contract and he's never given up title to his Buick. It's likely, however, that the courts will

..

60

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

consider this is an illegal contract, since both parties knew that they were involved in an illegal act, and refuse to assist Joe in obtaining the return of his automobile.

Diff: 2 Type: ES Page Reference: 85d Skill: Applied 135) Contracts to commit a crime or a tort are void. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 85e Skill: Recall 136) Which one of the following contracts is an example of an illegal contract, not binding on the parties? a. A contract between camera dealers and distributors whereby they agree to sell a specific model of camera b. A contract whereby one person agrees to perform services for another, but payment will be made at the end of the contract c. A contract whereby one person agrees to buy a car from another person d. A contract whereby one person agrees to sell a desk to another e. The act of paying for sexual favours (prostitution) Answer: e Diff: 1 Type: MC Page Reference: 85f Skill: Recall 137) Contracts involving activities that, while not illegal, are considered immoral or contrary to public interest, may also be void. a. True b. False Answer: a

..

61

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

Diff: 2 Type: TF Page Reference: 85g Skill: Recall 138) "Some contracts are considered illegal even though the conduct involved is not prohibited by any law." Explain the accuracy of this statement.

Answer: It's true that some types of conduct, such as prostitution, are considered to be against public policy, even though they are not prohibited by law.

Feedback: It's true that some types of conduct, such as prostitution, are considered to be against public policy, even though they are not prohibited by law.

Diff: 2 Type: ES Page Reference: 85h Skill: Recall 139) Give three examples of contracts that would be considered void because of illegality.

Answer: Contracts to commit a tort or crime; contracts to obstruct justice; contracts involving immoral acts; contracts to sell government secrets or to bribe officials; some contracts that restrain trade or restrict competition unduly Feedback: Contracts to commit a tort or crime; contracts to obstruct justice; contracts involving immoral acts; contracts to sell government secrets or to bribe officials; some contracts that restrain trade or restrict competition unduly Diff: 2 Type: ES Page Reference: 85i Skill: Recall 140) Assuming that all other elements of a contract are present, which of the following would most likely be held to be a binding contract, considering only the requirement that the object of a contract must be legal and not contrary to the public interest? a. A provision in a contract of employment where the employee agrees that, upon leaving, he or she will not work in a similar business anywhere for five years ..

62

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

b. A life insurance policy bought by Harvey insuring the life of his neighbour Kneival without Kneival's consent c. An agreement to pay $500 to Mildred if Mildred spreads the false rumour that Helen, a nurse, has AIDS d. An insurance policy paid by a shareholder to insure the business premises of a company in which he holds shares e. An agreement among city-wide gas station owners to set a common price for gas Answer: d Diff: 2 Type: MC Page Reference: 85j Skill: Applied 141) Explain how an insurance contract avoids being void as a wager.

Answer: The insured must have an insurable interest in the thing insured and not obtain a windfall when the insured-against event takes place.

Feedback: The insured must have an insurable interest in the thing insured and not obtain a windfall when the insured-against event takes place.

Diff: 2 Type: ES Page Reference: 85k Skill: Recall 142) All contracts to restrict competition are void. a. True b. False Answer: b Diff: 3 Type: TF Page Reference: 85l Skill: Recall 143) Contracts that unduly restrict competition are void. a. True

..

63

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

b. False Answer: a Diff: 1 Type: TF Page Reference: 85m Skill: Recall 144) Contracts that unduly restrict competition are void. a. True b. False Answer: a Diff: 2 Type: TF Page Reference: 85n Skill: Recall 145) A provision in a contract for the sale and purchase of a business reads as follows: "The vendor (Jones) shall not, directly or indirectly, in any capacity whatsoever, carry on a similar business in any location for one year." Six months later, Kates (the buyer) found that Jones was competing directly by opening up a similar business, contrary to the contract drafted by Kates. Kates sued Jones for breach of contract, namely, breach of the restrictive covenant. Which of the following best describes the legal position of the parties? a. This provision is in restraint of trade and causes the whole contract to be void. b. Agreements such as these are always binding, being the result of a free bargain between the parties. c. Although this type of provision is illegal, this particular one would be enforceable because it is reasonable between the parties and not contrary to public policy. d. Such provisions are always void, being an illegal restraint of trade. e. Although this provision would be void, the remainder of the contract for the sale of the business would be enforceable.

Answer: e Diff: 3 Type: MC Page Reference: 85o Skill: Applied

..

64

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

146) Joe sold Harry his barbershop, but Harry wanted a commitment on Joe's part that he would not open another barbershop in the area after he received payment. Explain how the parties could include a clause in their agreement, to that end, without it being void as a restraint of trade.

Answer: As long as the provision goes no farther than is necessary to protect the value of the goodwill—that is, there is a reasonable time restriction and a reasonable geographic limitation, and the public interest is not harmed—such a provision would be valid.

Feedback: As long as the provision goes no farther than is necessary to protect the value of the goodwill—that is, there is a reasonable time restriction and a reasonable geographic limitation, and the public interest is not harmed—such a provision would be valid.

Diff: 2 Type: ES Page Reference: 85p Skill: Applied 147) Smith runs a software-design business. He needed someone to handle some product demonstrations, so he hired Janet to do this work. In the employment contract, Smith insisted that Janet promise that if she left the firm, she would not work for Smith's competitors within a stated period of time and within a stated geographical region. If Janet now wishes to leave the job, indicate the statement that accurately describes the likely effect of her promise. a. Such promises are in restraint of trade and thus the courts invariably hold them to be invalid. b. If the court thinks that such a promise is reasonable between the employer and employee and that the public interest will not be damaged, it will enforce it. c. Such promises are valid only if given under seal. d. Such promises are invariably held to be valid when they are part of the terms of employment and thus are given in consideration for getting the job. e. If the court holds such a promise to be invalid, the whole employment contract is necessarily void as well.

Answer: b Diff: 3 Type: MC Page Reference: 86a Skill: Applied

..

65

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

148) If a person says that he had not intended to be bound by an agreement when he entered it, there can be no contract. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 86b Skill: Recall 149) Which of the following is correct with respect to the law of intention? a. In commercial arrangements, there is always an intention to be bound by agreements no matter what the parties state to the contrary. b. In domestic agreements, there is a presumption that there is no intention to be legally bound. c. Since domestic relationships are serious, the parties to such relationships are always bound by their contracts with each other. d. Since domestic relationships are serious, there is a legal presumption that in such relationships there is an intention for the parties to be legally bound by their agreements. e. Where intention is the issue, there is never any presumption for or against intention; the courts will always apply the reasonable person test.

Answer: b Diff: 2 Type: MC Page Reference: 87a Skill: Recall 150) Contracts involving domestic relationships are presumed to be binding. a. True b. False Answer: b Diff: 3 Type: TF Page Reference: 87b Skill: Recall

..

66

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

151) "A person's intention to be bound by contracts is presumed." Discuss the accuracy of this statement.

Answer: It is inaccurate. Where contracts involve people in domestic relationships, an intention not to be bound is presumed.

Feedback: It is inaccurate. Where contracts involve people in domestic relationships, an intention not to be bound is presumed.

Diff: 2 Type: ES Page Reference: 87c Skill: Recall 152) Mrs. Johnson is thinking of selling some property to her son. Which of the following is correct with respect to intention when entering into such a contract? a. In domestic agreements, there is a presumption that there is no intention to be legally bound. b. Commercial contracts are always binding, no matter what the stated intention. c. When intention is the issue, there is never any presumption for or against intention; the courts will always apply the reasonable person test. d. Since domestic relationships are serious, there is a legal presumption that in such relationships there is an intention for the parties to be legally bound by their agreements. e. In commercial arrangements, there is always an intention to be bound by agreements no matter what the parties state to the contrary.

Answer: a Diff: 2 Type: MC Page Reference: 87d Skill: Applied 153) A necessary element of a contract is that the parties must have the intention to be legally bound. Which of the following is true with regard to this element of a contract? a. Family members can never have the intent to be legally bound in their agreements because family matters are private matters. b. The court always presumes an intention to be legally bound, so this is never an issue in a contract case.

..

67

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

c. The court can presume the intention to be legally bound, but a party to the contract can bring forward contrary evidence to rebut that presumption. d. If the parties fail to state expressly in their contract their intention to be legally bound, there is no contract. e. In contract cases, the court hears evidence as to what the parties actually had in their minds at the time of contract.

Answer: c Diff: 2 Type: MC Page Reference: 87e Skill: Recall 154) Which of the following is true with regard to the intention of the parties to an agreement to enter into a legal relationship? Where appropriate, assume that all other elements necessary to form a contract are present. a. Since family matters are private matters, an agreement between a husband and wife to transfer property from the husband to the wife could not be a contract even if all other elements of a contract are present. b. The court will presume that there is always an intent to be legally bound in family situations. c. The court makes presumptions about the intention of parties to be bound; whether that presumption may be rebutted by evidence to the contrary makes no difference to the court. d. An intention to be legally bound is not a necessary element of a contract. e. Parties may expressly state their intention to be legally bound, in which case the court need not rely on presumptions.

Answer: e Diff: 2 Type: MC Page Reference: 87f Skill: Applied 155) A formal contract is one that is signed and sealed. a. True b. False Answer: a Diff: 1 ..

68

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

Type: TF Page Reference: 87g Skill: Recall 156) "A verbal contract is every bit as binding as a written one." Discuss the validity of this statement.

Answer: The Statute of Frauds requires that contracts for things such as interests in land, etc., must be evidenced in writing. Otherwise, the statement is correct.

Feedback: The Statute of Frauds requires that contracts for things such as interests in land, etc., must be evidenced in writing. Otherwise, the statement is correct.

Diff: 2 Type: ES Page Reference: 87i Skill: Recall 157) "Contracts must be in writing to be enforceable." Discuss the accuracy of this statement.

Answer: This statement is not accurate. Verbal contracts are as binding as written ones. It is a good idea to put them in writing, but this is not required. Having the agreement in writing will constitute evidence of the actual terms of the agreement. Only contracts specifically required to be evidenced in writing by statute, such as the Statute of Frauds, need be evidenced in writing.

Feedback: This statement is not accurate. Verbal contracts are as binding as written ones. It is a good idea to put them in writing, but this is not required. Having the agreement in writing will constitute evidence of the actual terms of the agreement. Only contracts specifically required to be evidenced in writing by statute, such as the Statute of Frauds, need be evidenced in writing.

Diff: 1 Type: ES Page Reference: 87j Skill: Recall

..

69

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

158) Discuss the Statute of Frauds as it relates to contract law. In your answer, consider the justification of requiring some contracts to be evidenced in writing, and changes related to the Statute of Frauds in several jurisdictions.

Answer: One of the mistakes made most often about contract law is the assumption that there is only a contract if it is in writing. It should be clear that students understand conceptually that the contract is the relationship and obligations between the parties embodied in the agreement, and that the written document is just the evidence of that agreement. Students might examine whether unwritten contracts ought to be required to be in writing and then discuss the Statute of Frauds, which requires that some contracts actually must be evidenced in writing. They should point out which types of contracts must be evidenced in writing, indicating that this varies from province to province and that some provinces have eliminated this requirement. The main discussion ought to centre on whether there is any justification for keeping this rule, especially since the way the courts approach the subject is to first determine if there is a contract and then to see if it is enforceable due to no writing. Using this approach, if they ever apply the statute, it will be to refuse to enforce a contract that they are sure exists. This leads to more wrong than it corrects. This discussion should do more than simply list what satisfies the requirement of writing and what types of contracts are covered. Students should go beyond this by providing the justification for such rules.

Feedback: One of the mistakes made most often about contract law is the assumption that there is only a contract if it is in writing. It should be clear that students understand conceptually that the contract is the relationship and obligations between the parties embodied in the agreement, and that the written document is just the evidence of that agreement. Students might examine whether unwritten contracts ought to be required to be in writing and then discuss the Statute of Frauds, which requires that some contracts actually must be evidenced in writing. They should point out which types of contracts must be evidenced in writing, indicating that this varies from province to province and that some provinces have eliminated this requirement. The main discussion ought to centre on whether there is any justification for keeping this rule, especially since the way the courts approach the subject is to first determine if there is a contract and then to see if it is enforceable due to no writing. Using this approach, if they ever apply the statute, it will be to refuse to enforce a contract that they are sure exists. This leads to more wrong than it corrects. This discussion should do more than simply list what satisfies the requirement of writing and what types of contracts are covered. Students should go beyond this by providing the justification for such rules.

Diff: 2 Type: ES Page Reference: 87k-88a Skill: Applied

..

70

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

159) Mr. Buyer, the plaintiff in the action, was attempting to enforce a contract in which the defendant, Mr. Seller, agreed to sell to the buyer his property, Blackacre, for $100 000. Which of the following, by itself, would be sufficient to allow Mr. Seller to get out of the contract? a. At the time of the contract, unknown to Mr. Buyer, Mr. Seller did not understand the quality and nature of this act because of mental incapacity. b. The $100 000 was not enough (i.e., not fair). c. Although both parties agreed to this, no money had actually been paid on the contract, not even a deposit or a down payment. d. Mr. Buyer referred to essential terms in a letter sent to Mr. Seller. e. There was only a verbal agreement between Mr. Seller and Mr. Buyer.

Answer: e Diff: 2 Type: MC Page Reference: 87l Skill: Applied 160) Given the provisions of the Statute of Frauds, which of the following contracts should be evidenced in writing? a. Domestic agreements b. A sale of goods involving $4 c. A sale of land d. An employment contract e. A retainer with a lawyer Answer: c Diff: 2 Type: MC Page Reference: 87m Skill: Recall 161) Which of the following agreements has to be made in writing under the original Statute of Frauds in order to be enforceable? a. An agreement for the sale of a farm animal b. A lease of a vehicle for a term commencing on November 1, 2012, and expiring on October 31, 2013

..

71

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

c. An agreement to sell a car on January 1 of the following year d. An agreement for the sale of a building lot e. An agreement by a creditor to accept $800 in full satisfaction of a debt in the amount of $1000 Answer: d Diff: 2 Type: MC Page Reference: 87n Skill: Recall 162) Only contracts involving significant sums of money must be in writing to be enforceable. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 87o Skill: Recall 163) In Canada, most provinces have either repealed or severely limited the application of their versions of the Statute of Frauds. a. True b. False Answer: a Diff: 2 Type: TF Page Reference: 87q Skill: Recall 164) An unwritten contract that the Statute of Frauds requires to be evidenced in writing is still valid; it is merely unenforceable by the courts. a. True b. False Answer: a Diff: 2

..

72

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

Type: TF Page Reference: 88b Skill: Recall 165) If a contract is not evidenced in writing (but is required by law to be in writing), this does not make it void, only unenforceable. a. True b. False Answer: a Diff: 2 Type: TF Page Reference: 88c Skill: Recall 166) Negotiations between Dave and Mary resulted in the following agreement: Dave would sell his property to Mary for the sum of $150 000, closing date to be August 10, 2004. When the two completed their discussion, Mary paid Dave $5000 as part payment of the purchase price and received a receipt. The contract was not in writing. On August 10, Mary tendered the remainder of the money, but Dave refused to convey the property.

Mary sued Dave for breach of contract. On these facts, which of the following is true?

(Assume that all facts can be proved.) a. Mary can enforce this contract if the receipt specified that the part payment was for the property in question. b. Mary cannot enforce the agreement because all of the consideration was not paid. c. Mary cannot enforce this contract because the contract was not evidenced in writing. d. Mary cannot enforce this contract because the contract was not in writing. e. Mary cannot enforce the agreement because she had not paid Dave all of the money.

Answer: a Diff: 2 Type: MC Page Reference: 88d Skill: Applied 167) What must a person establish in order to escape contractual obligations on the basis of insanity?

Answer:

..

73

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 3: Formation of Contracts

That the person was insane at the time of the contract, to the extent he or she didn't know what he or she was doing; that the other person knew or ought to have known of that insanity; and that the contract was repudiated quickly on regaining that person's senses.

Feedback: That the person was insane at the time of the contract, to the extent he or she didn't know what he or she was doing; that the other person knew or ought to have known of that insanity; and that the contract was repudiated quickly on regaining that person's senses.

Diff: 2 Type: ES Page Reference: 150e Skill: Recall

..

74

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

1) Often, costs can be considerably reduced by including provisions in a contract for all disputes to be handled through mediation and arbitration. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 94a Skill: Recall 2) Discuss what happens when the parties to a contract make mistakes with respect to what they have agreed.

Answer: This question requires a review of the whole area of mistake and also an examination of the requirement of consensus in forming a contract. Students can even include a discussion of misrepresentation when misleading statements induce the mistake. Students should distinguish the different forms of mistake, including shared mistake, misunderstandings, and one-sided mistakes, indicating the court's approach when each happens. The court will apply a reasonable person test and apply the most reasonable interpretation when there is a disagreement over what the terms of a contract mean. Only where both explanations are reasonable will the court declare the contract void for lack of consensus. Where a shared mistake takes place-that is, where both parties make the same mistake-it is only where the mistake is important, such as a mistake about the existence of the subject matter, that it will be void. As far as a one-sided mistake, the principle of caveat emptor usually applies, and the person who made the mistake is out of luck.

However, the principle of non est factum is available in limited circumstances, and students should explain what this means and when non est factum is not available.

Students should also explain what happens when that one-sided mistake is induced by misrepresentation on the part of the other party.

Feedback: This question requires a review of the whole area of mistake and also an examination of the requirement of consensus in forming a contract. Students can even include a discussion of misrepresentation when misleading statements induce the mistake. Students should distinguish the different forms of mistake, including shared mistake, misunderstandings, and one-sided mistakes, indicating the court's approach when each happens. The court will apply a reasonable person test and apply the most reasonable interpretation when there is a disagreement over what the terms of a contract mean. Only where both explanations are reasonable will the court declare the contract void for lack of consensus. Where a shared mistake takes place-that is, where both parties make the same mistake-it is only where the mistake is important, such as a mistake about the existence of the subject matter, that it will be void. As far as a one-sided mistake, the principle of caveat emptor usually applies, and the person who made the mistake is out of luck. However, the principle of non est factum is available in limited circumstances, and students should explain what this means and when non est factum is not available.

..

1

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

Students should also explain what happens when that one-sided mistake is induced by misrepresentation on the part of the other party.

Diff: 3 Type: ES Page Reference: 94b-95a Skill: Applied 3) Which one of the following mistakes voids a contract? a. Two parties contract for a shipload of coal, but unknown to both parties, at the time of the contract the ship had sunk and the coal had been lost. b. Two parties contracted for the sale and purchase of a painting for the price of $800.

When the contract was written up, the price was incorrectly stated as $900. c. Sally and Mary had a serious misunderstanding about a term in the contract; the court found that the more reasonable interpretation was that of Sally. d. When Mr. and Mrs. Houston put their property up for sale, Sam, without speaking to the Houstons or to their agent about the land, offered close to the asking price because he thought it was suitable for growing wheat. After his offer was accepted, he learned it was not suitable for wheat. e. Sam bought three gallons of paint, but found he had made a mistake; two would have been sufficient.

Answer: a Diff: 3 Type: MC Page Reference: 94c Skill: Applied 4) On September 1, Beeton contracted to sell $4000 worth of specified Kenyan lumber to Cairns. Beeton expected the arrival of the lumber soon, so the delivery date was set for September 8. On September 5, Beeton assigned, in writing, his contractual right to receive the $4000 to his bank, which was pressing him to reduce his $17 000 debt. The bank sent a written notice to Cairns instructing him to forward the $4000 to the bank and not to pay Beeton directly. Unknown to either Beeton or Cairns, the lumber had been lost at sea in August, before they had even entered the contract. On these facts, which of the following is true? a. The time for determining the "equities between the parties" is always the time that notice of the assignment is given. b. This assignment was not a statutory assignment (i.e., it failed to satisfy the statutory requirements for enforcement by the assignee against the debtor). c. The assignee would receive whatever the assignor had assigned to him, namely, the $4000. d. Because the assignment was made by Beeton to his bank in good faith, Cairns must pay the bank $4000. e. Because the goods bargained for had perished before the parties had contracted for them, the court would hold the contract void.

..

2

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

Answer: e Diff: 3 Type: MC Page Reference: 94d Skill: Applied 5) In which of the following instances would the court most likely hold the contract to be void on the basis of a mistake? a. Carson and Leno had a serious misunderstanding about a term in the contract; the court found that the more reasonable interpretation was that of Leno. b. Barry and Mary contracted for the sale and purchase of a boat for the price of $1200.

When the contract was written up, the price was incorrectly stated as $1700. c. Although the seller said nothing to the buyer about the characteristics of the answering machine, the buyer bought it, thinking it would tell him the date and time of the call.

Later, he learned that it did not perform that function. d. Sarah bought three rolls of wallpaper, but found she had made a mistake; two would have been sufficient. e. Two parties contracted for a shipload of fish, but unknown to both parties, at the time of the contract the ship had sunk and the fish had been lost.

Answer: e Diff: 2 Type: MC Page Reference: 94e Skill: Applied 6) Which of the following will have the likely consequence of the court's finding the contract void on the grounds of mistake? a. Ms. Hunt bought some property erroneously thinking that the province was planning to put a highway nearby, even though the seller had never made any such suggestion. She wants out of the contract. b. The parties signed a document that stated the consideration as $1100 instead of the $900 that the buyer and seller had contracted for, but the buyer cannot prove the terms of the original contract. c. Annette bought a suit thinking she would be invited back for a second interview. She wasn't and now wants to return the suit on the basis of mistake. d. Mary contracted to buy "the Acura car" from a collector of cars. He was selling his 1994 model but she thought she was buying the 1990 model. The court, looking at all evidence, found that the collector's interpretation was the more reasonable. e. Mr. Armstrong accepted the offer by Sidhu, who was selling a "computer program," but learned that they had a different understanding of what program was meant. The court cannot say that one interpretation is better than the other.

Answer: e Diff: 2 Type: MC

..

3

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

Page Reference: 94f Skill: Applied 7) In which of the following would the court find that the contract is void (i.e., not a binding agreement)? a. Two parties contracted for a tanker of oil, but unknown to either of them at the time of the contract, the tanker had caught on fire and all the oil had burnt. b. Kramer, thinking that the city was going to build a new school in the area, offered to buy a house. She had not talked with the seller or his agent about the possibility of a school. After the offer was accepted, she learned that there would be no such new school. c. Ry and Ali, two parties to a contract, each had a different understanding about the term royalties in the contract. The court found Ali's interpretation the more reasonable. d. After some negotiation, Paul accepted Monafo's offer to sell him the painting for $5000. When the contract was put in writing, the price was incorrectly stated as $500.

Monafo could prove the terms of the oral contract. e. Joe bought pizzas, but after eating one he realized that purchasing them was a big mistake.

Answer: a Diff: 2 Type: MC Page Reference: 94g Skill: Applied 8) The court will not allow the careless party to escape responsibility when a shared mistake is the result of the negligence of one of the parties. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 94h Skill: Recall 9) The equitable remedy of rectification is granted by the courts in which of the following situations? a. The seller made a fraudulent misrepresentation that induced the buyer to buy. b. The parties to a contract disagree as to the meaning of a term in their contract. c. The seller of goods has made an innocent misrepresentation that persuaded the buyer to buy. d. A person buys something that he later learns he already owned. e. Because of a mistake, a written document does not include a corrected term to which the parties had orally agreed.

Answer: e

..

4

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

Diff: 2 Type: MC Page Reference: 95b Skill: Recall 10) Which of the following situations gives rise to the application of the equitable remedy of rectification? a. The defendant has a justifiable defence of non est factum. b. A written instrument, because of an obvious mistake, does not embody the unchanged terms of an original oral agreement. c. The two parties to a contract have made a mutual mistake and one of these parties is asking the court to choose the more reasonable meaning of the terms in question. d. The contract is one requiring "utmost good faith." e. Both parties to a contract agree that they want to change some of its terms and thus apply jointly to the court to have the relevant terms altered.

Answer: b Diff: 2 Type: MC Page Reference: 95c Skill: Recall 11) When there is clear evidence that both parties agreed to something different than what was in the written document, the courts will rectify the document. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 95d Skill: Recall 12) Misunderstanding occurs when each party has a different understanding of the terms of the agreement, in which case the courts apply a reasonable interpretation of the contract. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 95e Skill: Recall

..

5

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

13) Jones offers to sell Smith his car. Smith thinks Jones is selling his 2009 Toyota, and Jones thinks he is selling his 2012 Pontiac. This is an example of which of the following? a. A mistake b. Fraudulent misrepresentation c. Shared mistake d. Misunderstanding e. One-sided mistake Answer: d Diff: 1 Type: MC Page Reference: 95f Skill: Applied 14) When two parties are involved in a misunderstanding as to the meaning of a term of the contract, which of the following is usually applied by the court to settle the matter? a. The court will find that there is no contract because there is no meeting of the minds. b. Non est factum c. The most reasonable interpretation of the terms d. The equitable remedy of rectification e. Caveat emptor Answer: c Diff: 1 Type: MC Page Reference: 95g Skill: Recall 15) Rules of interpretation are guidelines used by the court to correct simple misunderstandings in relation to the contract. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 95h Skill: Recall 16) Clive and Bill were not friends but worked in the same firm. Both worked with computers and had computers at home. They entered a contract in which Clive agreed to sell Bill his "Apple, printer, and a compatible word processing program for $3000."

When Bill went to take delivery of the goods, he realized that there had been a great mistake. He thought Clive was selling his Apple Macintosh. By "Apple" Clive meant his Apple IIe. Furthermore, unknown to both of them at the time of the contract, the program disk had been destroyed by some coffee accidentally spilled on it by a friend of Clive's

..

6

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

wife. Bill refused to go through with the deal. On these facts, which of the following is true if Clive sues Bill? a. This is an example of caveat emptor and the purchaser has no remedy. b. With regard to which computer is the subject matter of the contract, the court will determine which computer was meant to be sold by the seller and declare that one to be the subject matter of the sale. c. With regard to the program disk, since all elements of a contract exist (i.e., offer, acceptance, consideration, etc.), Bill must pay for it. d. With regard to which computer is the subject matter of the sale, the court will examine which interpretation is the more reasonable; if they are equally reasonable, that part of the contract, at least, will be void. e. Since the parties to the contract have a different understanding as to the subject matter of the sale, they can ask the court for rectification, that is, for the court to rewrite the contract.

Answer: d Diff: 2 Type: MC Page Reference: 95i Skill: Applied 17) Mr. Frank, a foreman supervising 43 employees, was asked by his secretary to sign a form requesting additional supplies needed on the factory floor. He was not careless when he examined the form, but his secretary had cleverly arranged the signature line so that instead of signing a request for supplies, he signed a cheque payable to his secretary.

What plea, if any, would be used to defend against her action on the cheque? a. Non est factum b. Mistake c. Illegality of object d. Rescission e. Rectification Answer: a Diff: 2 Type: MC Page Reference: 95j Skill: Applied 18) To avoid a contract on the basis of non est factum, the mistake must have gone to the entire nature of the agreement, not just to some aspect of it. a. True b. False Answer: a Diff: 1 Type: TF

..

7

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

Page Reference: 95k Skill: Recall 19) The longer Adolph stayed on this job, the more he hated it. He thought the boss was too demanding. He especially disliked being reprimanded for being late. One afternoon, he was asked by a secretary to take a letter to the boss for his signature. The boss had had an eye operation and was recuperating at home. Adolph got two signatures, one on the letter and one on a note promising to pay Adolph $1000 in consideration for services rendered. The boss was not careless, but couldn't read the papers. What plea or argument, if any, could the boss use to avoid paying on the promissory note? a. Unconscionability b. Duress c. Shared mistake d. Rectification e. Non est factum Answer: e Diff: 2 Type: MC Page Reference: 95l Skill: Applied 20) Len was behind in his work at the office. He decided to go in for a few hours on Sunday to catch up. He asked a secretary to come in for four hours. He turned on his office TV. Just then, his secretary came in and asked him to sign four letters that she said concerned general office matters. He carelessly signed them without taking his eyes off the TV screen. One of the "letters" was, in fact, a cheque for $500 payable to the secretary. The secretary cashed the cheque at her bank, and when her bank presented the cheque for payment, Len instructed his bank not to honour it. He said that he had been tricked and that his signing it was a big mistake. On these facts, which of the following is true? a. Undue influence would be Len's best defence on these facts. b. Because Len did not know what he was signing, he cannot be held liable. c. Len could avoid his obligation on the cheque on the basis of duress. d. Len could avoid his obligation on the cheque on the basis of unconscionability. e. Len's carelessness in failing to read what he was signing will likely defeat any claim of non est factum.

Answer: e Diff: 2 Type: MC Page Reference: 95m Skill: Applied 21) Mr. and Mrs. H were induced to sign a mortgage in favour of M Co. Ltd. by Johnston, a man living with their daughter. Johnston led them to believe that the

..

8

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

document was an unimportant amendment to an existing mortgage, when in reality it was a second substantial mortgage of their home. Neither read the document nor questioned it. When the payments were in arrears, the mortgagee took an action for foreclosure (to take Mr. and Mrs. H's home). Which of the following is correct with respect to the legal position of the parties? a. Mr. and Mrs. H will likely have to honour the mortgage contract even though they didn't read it. b. If the court finds that Johnston has committed a fraudulent misrepresentation, Mr. and Mrs. H will not have to honour the mortgage. c. If the court finds that this is an example of undue influence by Johnston, Mr. and Mrs. H will not have to honour the mortgage. d. If the court finds that this is an example of duress by Johnston, Mr. and Mrs. H will not have to honour the mortgage. e. If Mr. and Mrs. H can show they didn't read the document, they will not have to honour the mortgage contract.

Answer: a Diff: 3 Type: MC Page Reference: 95n Skill: Applied 22) Non est factum is available as a defence even when there is negligence on the part of the person claiming it. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 95o Skill: Recall 23) The facts of a case heard by the Supreme Court of Canada are as follows: Mr. and Mrs. H were induced to sign a mortgage in favour of M.C.R. Ltd. by Johnston, a man living with their daughter. Johnston led them to believe that the document was an unimportant amendment to an existing mortgage when, in reality, it was a substantial second mortgage on their home. Neither read the document nor questioned it. When the payments were in arrears, the mortgage company took an action for foreclosure (to take the home). Mr. and Mrs. H. pleaded non est factum. Would this defence succeed? If so, why; if not, why not?

Answer: The defence would not succeed as Mr. and Mrs. H were careless and as a result cannot claim non est factum.

..

9

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

Feedback: The defence would not succeed as Mr. and Mrs. H were careless and as a result cannot claim non est factum.

Diff: 2 Type: ES Page Reference: 95p Skill: Applied 24) Often a party to a contract wants to avoid his or her obligations by arguing that the contract was entered into because of a mistake, misrepresentation, undue influence, or duress. Which of the following is true with regard to these areas of the law? a. A buyer could not be awarded the equitable remedy of rescission if the seller honestly believed that his or her misrepresentation, which persuaded the buyer to buy, was true. b. Independent legal advice given to a person is good evidence of undue influence. c. If a seller persuades a person to buy something by an innocent misrepresentation, the buyer could ask for rescission and damages for the tort of deceit. d. Where a written document embodies the original oral agreement, a party to the contract could ask the court for the equitable remedy of rectification. e. An illiterate or blind person might successfully argue non est factum and avoid his or her obligations under a contract only if he or she was misled about the very nature of the document and was not careless.

Answer: e Diff: 3 Type: MC Page Reference: 95q Skill: Applied 25) Which of the following will have the likely consequence of the court finding the contract void on the grounds of mistake? a. Mr. Ideer bought some property, erroneously thinking that the province was planning to put a highway nearby, even though the seller had never made any such suggestion. b. Mr. Twigg carelessly signed a mortgage for $24 000, which he was told was a mortgage for only $14 000. This was assigned to Mr. Jones. c. The parties signed a document that stated the consideration as $1200 instead of the $1100 that the buyer and seller had contracted for, but the buyer cannot prove the terms of the original contract. d. Mr. Ille (a blind man), although using due care, signed a cheque for $100 in favour of his caretaker, who had told him it was a receipt for money received. e. Mr. Jones, without reliance on a salesperson, purchased a palm organizer from a store, thinking it ran the regular Windows operating system.

Answer: d Diff: 3 Type: MC Page Reference: 95r Skill: Applied

..

10

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

26) Len's new secretary asked him to sign four letters that she said concerned general office matters. One of the "letters" was, in fact, a cheque for $500, payable to the secretary. The secretary cashed the cheque at her bank, and when her bank presented the cheque for payment, Len refused to pay it. He said he had been tricked and it was all a mistake. On these facts, which of the following is true? a. Len would be obligated to honour the cheque no matter how careful he had been. b. Even if Len had been careless, he will not have to honour the cheque. c. Len may be able to avoid his obligation on the cheque on the basis of duress. d. Len may be able to avoid his obligation on the cheque on the basis of unconscionability. e. Len may be able to avoid his obligation on the cheque on the basis of non est factum.

Answer: e Diff: 2 Type: MC Page Reference: 95s Skill: Applied 27) John and Sam entered into a contract whereby John would sell auto parts from his junkyard to Sam's Auto Repair. However, they ended up in a dispute over the condition of the parts to be sold and could not agree on the meaning of terms used in the sales contract. John was invoicing Sam's Auto Repair for considerably more money than Sam thought appropriate for the used and often seriously damaged parts. When Sam paid less than the invoice amount, they ended up in a legal dispute and asked the court to interpret their contract. Which of the following is false regarding approaches the court might use to interpret the contract terms in dispute? a. If the terms are clear and there is no ambiguity, the court might look at dictionaries for literal meanings of the terms. b. If the terms are clear and there is no ambiguity, the court might look at the common usage of the industry for meanings of the terms. c. Where there is ambiguity, the court might look at the rest of the contract to try to discern the intention of the parties. d. The court will supply missing terms and prices that are necessary for the contract to exist. e. Where there is ambiguity, the court might look to other dealings between the parties.

Answer: d Diff: 2 Type: MC Page Reference: 95t-96a Skill: Applied 28) When there is disagreement over the meaning of a term in a contract, the normal approach taken by the courts is to apply the most reasonable interpretation, although the courts will refuse to imply terms into the agreement that the parties have left out.

..

11

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 96b Skill: Recall 29) Mr. Rice purchased software online from a major software company based in Ontario, accepting the terms of the standard-form contract when he clicked on "Agree."

When the software failed to perform as advertised, Rice complained but his complaints were ignored. When he threatened the software company with legal action, it was then pointed out to him that the contract contained a number of exemption clauses that would preclude Rice from winning in any legal action. Rice filed a lawsuit in Ontario. What is the court's likely approach to this situation? a. The court would likely refuse to interfere with the terms of the contract based on the "principle of freedom to contract." b. The courts would consider this a fundamental breach if it found the clauses to be "unconscionable, unfair, and unreasonable." c. The court would determine that Rice had equal bargaining power and therefore the court could not support his position. d. The court would support the software company's policy due to "an overriding policy reason." e. The court is likely to interpret the exemption clauses very narrowly due to the nature of standard-form contracts.

Answer: e Diff: 2 Type: MC Page Reference: 97a, 98a Skill: Applied 30) With regard to exemption clauses, which of the following is true? a. When exemption clauses appear unfair, courts generally will not allow them. b. Courts are generally reluctant to interfere with exemption clauses, even when they may appear unfair. c. When an exemption clause leads to an "unconscionable, unfair, or unreasonable result," the doctrine of fundamental breach would apply. d. To overrule an exemption clause, the courts first consider whether there exists some "overriding policy" on the part of the defendant. e. Courts are more likely to interfere with a contract in a commercial relationship than with a contract in a consumer relationship.

Answer: b Diff: 2

..

12

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

Type: MC Page Reference: 97b, 98b Skill: Recall 31) The contract for the Surrey property had been signed by both parties. Which of the following is necessary for the contract to be set aside on the grounds of misrepresentation? a. The misrepresentation must have been a false statement of a fact; false statements of opinion are never misrepresentations. b. The misrepresentation must have been in writing. c. The misrepresentation must have been a term of the contract. d. The misrepresentation must have been made recklessly or wilfully. e. The misrepresentation must have induced the party to enter the contract.

Answer: e Diff: 2 Type: MC Page Reference: 98c Skill: Applied 32) It came to your attention that your great-grandmother had signed a contract pursuant to which she would be paying $5000 for an electronic organ that retails in reputable stores for $3000. Furthermore, the interest being charged is 18%, even though today's rate fell to a 20-year low. This debt is totally out of line with her pension income. It is apparent that she was misled by the door-to-door salesperson who came to her home. On these facts, which of the following laws is the most likely to help her? a. Non est factum b. Misrepresentation only c. Unconscionability only d. Both unconscionability and misrepresentation e. Undue influence only Answer: d Diff: 2 Type: MC Page Reference: 98d, 104m Skill: Applied 33) Explain what remedies are available to the victim where misrepresentation becomes a term of the contract.

Answer: Normal contractual remedies, including damages, injunctions, specific performance Feedback: Normal contractual remedies, including damages, injunctions, specific performance

..

13

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

Diff: 1 Type: ES Page Reference: 98e, 117a, 119d Skill: Recall 34) With regard to the law concerning misrepresentation, which of the following is true? a. A statement of opinion can be a one-sided mistake. b. The case law provides a remedy for a wildly exaggerated claim, such as "This is the best car ever built." c. A buyer could not be awarded the equitable remedy of rescission if the seller honestly believed that the misrepresentation was true. d. For fraudulent misrepresentation, the buyer could ask only for the equitable remedy of rescission. e. A misrepresentation can be a false assertion of fact that induces (persuades) the party to contract, and need not be an assertion about a term of the contract.

Answer: e Diff: 2 Type: MC Page Reference: 99a Skill: Recall 35) For a misrepresentation to be actionable, it must become a term of the contract. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 99b Skill: Recall 36) In order to succeed in suing for a misrepresentation, that misrepresentation must have been in writing. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 99c Skill: Recall 37) A misrepresentation must be a false statement of fact unless it is a statement by an expert. a. True

..

14

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

b. False Answer: a Diff: 1 Type: TF Page Reference: 99d Skill: Recall 38) Sam agreed to buy property from Joe to build a store of a certain design. Joe, the vendor, was aware of the design and knew that an easement across the back of the property would prevent such a building being erected, but said nothing. Sam purchased the property, later discovered the easement, and learned that Joe knew about it. He sued for misrepresentation. Discuss the likely outcome.

Answer: Sam will lose. Joe was under no obligation to tell Sam about the mistake. Silence or nondisclosure will not amount to a misrepresentation unless some sort of specialized obligation or relationship exists between the parties, which is not the case here.

Feedback: Sam will lose. Joe was under no obligation to tell Sam about the mistake.

Silence or non-disclosure will not amount to a misrepresentation unless some sort of specialized obligation or relationship exists between the parties, which is not the case here.

Diff: 3 Type: ES Page Reference: 99e Skill: Applied 39) Distinguish between innocent and fraudulent misrepresentation, indicating why the distinction is important.

Answer: Innocent misrepresentation is involved where the person who made the misleading statement honestly believed it to be true. Fraudulent misrepresentation is involved where the person making the statement knew it was false or didn't believe it was true. The distinction is important, since with innocent misrepresentation the only remedy is rescission, whereas with fraudulent misrepresentation the victim may obtain rescission and/or damages.

Feedback: Innocent misrepresentation is involved where the person who made the misleading statement honestly believed it to be true. Fraudulent misrepresentation is involved where the person making the statement knew it was false or didn't believe it was true. The distinction is important, since with innocent misrepresentation the only remedy is rescission, whereas with fraudulent misrepresentation the victim may obtain rescission and/or damages.

Diff: 2

..

15

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

Type: ES Page Reference: 100a-101g Skill: Applied 40) Jenny went to the store and asked to see an AM-FM clock radio with a tape deck. The salesman brought out a clock radio that he said had all of the features that she wanted.

After looking at the price tag and little else, Jenny said she would think about it. The salesman said that this was the most popular model sold, that they sold 1000 of them during the World Series alone, that it had the highest rating in Consumer Reports, and that he only had that one left. Jenny bought it. Later, she found out that all of the statements made to her by the salesman were false, including the one that the clock had all of the features she wanted, because it did not have an AM band. Which of the following is true? a. The equitable remedy of rescission is available only if Jenny is able to restore the clock radio to the seller. b. Jenny would only have a remedy for breach of contract (namely, the clock radio did not have an AM band) because none of the other statements was about the clock radio itself. c. The statements of the salesman are negligent only if the salesman knew they were false. d. Jenny could obtain the remedy of rescission only if the statements made to induce her to contract were fraudulent. e. Jenny could return this clock radio to the seller only if she could prove undue influence.

Answer: a Diff: 2 Type: MC Page Reference: 100b Skill: Applied 41) Which of the following is false with regard to misrepresentation? a. If the seller induces the buyer to buy by making a misrepresentation that she honestly thought was true, the buyer has no remedy in equity. b. A misrepresentation can be made about a term of a contract and result in an award of damages. c. For fraudulent misrepresentation, the buyer can be granted the equitable remedy of rescission. d. Fraudulent misrepresentation can result in the seller being sued for damages for the tort of deceit. e. In law, a misrepresentation is a false statement of fact that persuades someone to enter into a contract.

Answer: a Diff: 2 Type: MC

..

16

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

Page Reference: 100c Skill: Recall 42) Mrs. Sharp, the owner of a restaurant, induced the Morissons to buy the business by a misrepresentation; the invoices made her costs appear less than they actually were, and thus her profits more than they actually were. On these facts, which of the following is false? a. The court could award the equitable remedy of rescission if the evidence showed she had fraudulently misrepresented the costs. b. The court could not award the equitable remedy of rescission if evidence showed that Mrs. Sharp really believed the invoices were accurate. c. The court could not award the equitable remedy of rectification because the argument is not about rectifying an erroneous written version of a previous oral contract. d. The court could terminate the contract for breach of contract if the accurate statement of costs and profit were essential terms of the contract. e. The cause of action could be for the tort of deceit, if there was evidence that Mrs. Sharp intended to deceive the Morissons.

Answer: b Diff: 2 Type: MC Page Reference: 100d Skill: Applied 43) The victim of innocent misrepresentation can sue for damages but cannot ask for rescission. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 100e Skill: Recall 44) Mr. Copperfield, a collector of movie memorabilia, bid $50 000 on the Batmobile.

After taking delivery, he discovered that the car was not the one actually used in the film Batman; it was merely one of five cars used to promote the film. He is suing the seller, Mr. Eisenberg. If Copperfield could prove any of the following, which would entitle him to return the Batmobile and get his money back? a. Innocent misrepresentation by Eisenberg b. Fraudulent misrepresentation by Eisenberg c. Breach of contract by Eisenberg d. Negligent misrepresentation by Eisenberg e. All of the above

..

17

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

Answer: e Diff: 2 Type: MC Page Reference: 100f, 101j and n, 116f Skill: Applied 45) Where the misrepresentation is innocent, explain the remedies available to the victim.

Answer: Rescission is the only remedy available where the misrepresentation is innocent.

Feedback: Rescission is the only remedy available where the misrepresentation is innocent.

Diff: 1 Type: ES Page Reference: 100g Skill: Recall 46) "Where fraudulent misrepresentation is involved, the victim can obtain rescission and/or damages, but where innocent misrepresentation is involved, the only remedy is damages." Discuss the accuracy of this statement.

Answer: It's incorrect. With innocent misrepresentation, the remedy is rescission, not damages.

Feedback: It's incorrect. With innocent misrepresentation, the remedy is rescission, not damages.

Diff: 2 Type: ES Page Reference: 100h Skill: Applied 47) Discuss the various remedies that are available where one of the parties to the contract is a victim of misrepresentation.

Answer: Students should show how misrepresentation applies primarily where one party is induced to enter a contract, not just when the misrepresentation becomes part of the contract. They should point out that, when the misrepresentation is innocent, the remedy available is limited to the contract remedy of rescission, and they should explain what that means. Where the misrepresentation has been intentional (i.e., fraudulent), the victim can seek rescission of the contract or damages for the tort of deceit, or both. Similarly, in the case of negligent misrepresentation, the victim may seek rescission or damages or both. Where the misrepresentation becomes a term of the contract, the remedies are the normal contract remedies including damages. Good students might point out that the damages awarded in contract law may be different than the damages awarded in tort law.

..

18

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

That is, with tort law you are put into the position you would have been in had the misrepresentation not taken place (looking backward), whereas in contract law you are put into the position you would be in had the contract been properly performed (looking forward). Good students will also note that punitive damages may be available in exceptional cases involving "malicious, oppressive, and high-handed misconduct that offends the court's sense of decency."

Feedback: Students should show how misrepresentation applies primarily where one party is induced to enter a contract, not just when the misrepresentation becomes part of the contract. They should point out that, when the misrepresentation is innocent, the remedy available is limited to the contract remedy of rescission, and they should explain what that means. Where the misrepresentation has been intentional (i.e., fraudulent), the victim can seek rescission of the contract or damages for the tort of deceit, or both.

Similarly, in the case of negligent misrepresentation, the victim may seek rescission or damages or both. Where the misrepresentation becomes a term of the contract, the remedies are the normal contract remedies including damages. Good students might point out that the damages awarded in contract law may be different than the damages awarded in tort law. That is, with tort law you are put into the position you would have been in had the misrepresentation not taken place (looking backward), whereas in contract law you are put into the position you would be in had the contract been properly performed (looking forward). Good students will also note that punitive damages may be available in exceptional cases involving "malicious, oppressive, and high-handed misconduct that offends the court's sense of decency."

Diff: 2 Type: ES Page Reference: 100i, 101r and m, 116g, 118a Skill: Recall 48) What is rescission?

Answer: This is an equitable remedy. This involves the court attempting to restore the parties to a contract (in dispute) to their original positions.

Feedback: This is an equitable remedy. This involves the court attempting to restore the parties to a contract (in dispute) to their original positions.

Diff: 2 Type: ES Page Reference: 100j Skill: Recall 49) With regard to damages, which of the following is false? a. Where a loss can be calculated, such as where wages already lost are involved or where more money had to be paid to accomplish a contractual purpose, this is referred to as special damages.

..

19

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

b. Where damages have to be estimated, as in compensation for pain and suffering or an estimate of future lost earnings, this is referred to as general damages. c. In a breach of contract case for punitive damages to be awarded, there must be standalone wrongful conduct present. d. An example of damages would be a case of rescission where a buyer would return a car to the seller and the seller would return the purchase price as well as any incidental repair expenses. e. Normally, punitive damages designed to punish the breaching party rather than compensate the victim for the loss are not available for breach of contract.

Answer: d Diff: 2 Type: MC Page Reference: 100k, 117d, 118b Skill: Recall 50) Indicate under which circumstances the remedy of rescission may not be available.

Answer: Where the victim of the misrepresentation has affirmed the contract; where it's impossible to restore the parties to the original positions; where some third party is involved who might be harmed by the rescission; or where the victim of the misrepresentation has done something inappropriate, such as causing unreasonable delay or having cheated or misled the other party Feedback: Where the victim of the misrepresentation has affirmed the contract; where it's impossible to restore the parties to the original positions; where some third party is involved who might be harmed by the rescission; or where the victim of the misrepresentation has done something inappropriate, such as causing unreasonable delay or having cheated or misled the other party Diff: 2 Type: ES Page Reference: 100l Skill: Recall 51) Which of the following constitutes a misrepresentation that would not allow the courts to award the equitable remedy of rescission? a. A man who contracted for an insurance policy did not state on the application form that he had been treated for cancer. He died from the cancer two months later. b. The seller concealed the broken drawer of the desk from the buyer. He would not be able to see it until he got it home. c. The seller persuaded the buyer to buy the car by misrepresenting it as having just been serviced and passing the air care test. Neither had been done, but the seller honestly believed that both had been done.

..

20

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

d. The buyer was persuaded by the seller to buy the car by a misrepresentation that it had the fewest repairs of any car of its class. After the buyer learned the truth, he kept the car for three weeks to get some benefit from it before taking it back. e. None of the above Answer: d Diff: 2 Type: MC Page Reference: 100m Skill: Applied 52) With regard to the law concerning misrepresentation, which of the following is true? a. If the buyer realizes the seller persuaded him to contract by a misrepresentation, he will not be able to get the remedy of rescission if he was tainted with wrongdoing himself (i.e., not coming with "clean hands"). b. Damages as a remedy are not available where the misrepresentation becomes part of the contract. c. A misrepresentation can be a true assertion of fact that induces (persuades) the party to contract. d. Rescission is available as a remedy for misrepresentation only if it is innocent misrepresentation. e. The case law allows a remedy for an opinion given by a non-expert.

Answer: a Diff: 2 Type: MC Page Reference: 100n Skill: Recall 53) Damages as a remedy will not be available in which of the following situations? a. Jones makes a negligent misstatement, persuading Smith to enter a contract with him. b. Jones, although being careful, makes an innocent misrepresentation, persuading Smith to enter a contract with him. c. Jones makes a fraudulent misrepresentation, persuading Smith to enter a contract with him. d. A false statement made by Jones becomes a term of the contract. e. None of the above Answer: b Diff: 1 Type: MC Page Reference: 101a Skill: Applied 54) A computer salesman innocently misrepresented a fact about a Macintosh computer to a customer. Although this fact was not about a term of the contract, it did induce the

..

21

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

customer to buy the computer. The customer has now learned the true facts and wants to return the computer. If the store refused to take it back, the customer would ask the court for which equitable remedy? a. Rescission b. Restitution c. Injunction d. Damages e. Rectification Answer: a Diff: 1 Type: MC Page Reference: 101b Skill: Applied 55) The office manager of a real estate agency was at an office supply store to replace a filing cabinet when he saw a demonstration of a new Xerox copier. Undoubtedly, the agency would benefit from the copier, especially since it had the capability of enlarging the original-a good feature when dealing with the small print of contracts. The next day, he called the manager of the store to discuss the machine further. The seller said that it was "10 years ahead of the competition," that it "was rated as maintenance-free by an independent consumer research group," and that he had "sold five to other real estate agencies in this area" and "had only one left." The agency, relying on these statements, asked to have it delivered. When it arrived, the office manager had learned that every statement made by the seller had been false; furthermore, the seller did not send out the machine discussed, but the older model. Which of the following is true? a. The agency would have a remedy for breach of contract, but no remedy for other statements that merely persuaded it to enter the contract. b. The agency could have returned the machine even if it had been the right model, since the remedy of rescission was available to it for misrepresentations made. c. Had the office supply store sent the right model, the agency would have had no remedy. d. The agency would have to keep the machine, but could sue the seller for damages for the tort of deceit. e. This is a "buyer beware" situation and the buyer has no remedy.

Answer: b Diff: 2 Type: MC Page Reference: 101c Skill: Applied 56) Keri went to Crandon's computer outlet with her brother Paul, who was buying a laser printer. While she was waiting for him, she saw a poster saying that the store was collecting funds for a special computer for a student recently disabled in an accident. The seller induced Paul to buy the model "X" printer by stating as a fact that the printer could

..

22

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

interface with his Macintosh clone. Paul paid $900 for the printer. Also, Keri gave $15 to the student fund after the seller confirmed he was collecting for the student's computer.

Later, Paul and Keri learned that neither statement was true (i.e., the printer didn't interface with Paul's computer and the store was doing nothing for the student), and that the seller didn't believe that the statements were true when he made them. On these facts, which of the following is true? a. Only Keri has a remedy because she had been fraudulently misrepresented. b. Paul could sue for damages due to an innocent misrepresentation. c. Keri could sue for damages due to a misunderstanding. d. The court would rescind Paul's contract only with proof that the seller knew his statement was false. e. Paul could sue for rescission because of the misrepresentation.

Answer: e Diff: 2 Type: MC Page Reference: 101d Skill: Applied 57) When Gary went into Computer Heaven, Ltd. to get a better manual for the program he was trying to master, he was caught by a demonstration of a computer created by Next, Mr. Job's new firm. He was fascinated by its performance. The salesman, Ross, told Gary that he should have this machine; that "it was the latest computer; no other will ever be better"; that "UBC, Simon Fraser, and BCIT just ordered over 1000 of them"; that he only had "a few left and the demand is so great it will take almost a year for the next shipment to arrive." When Gary said he needed a computer with at least 1000K memory, Ross said this model had 2000K. Gary was persuaded and contracted for the computer.

Later, Gary learned that every statement made by Ross was untrue, including the one about the memory capacity; the model had only 800K. On these facts, which of the following is true? a. Only if Ross knew that all of the statements he made were false could Gary get a remedy. b. Statements that induced Gary to contract, but that are not the terms of the contract, are not significant enough for the courts to award a remedy by case law or by statute. c. The exaggerated claim "it was the latest computer; no other will ever be better" is enough, according to the case law, to allow Gary to get out of the contract. d. Gary could be awarded the equitable remedy of rescission even if Ross honestly believed everything he said was true. e. Such misrepresentations could result in contractual remedies, legal or equitable, but not in tort remedies.

Answer: d Diff: 2 Type: MC Page Reference: 101e Skill: Applied

..

23

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

58) A salesman innocently misrepresented a fact about a new printer to a customer. He honestly believed that his statement was true and was not careless. Although this fact was not about a term of the contract, it did induce the customer to buy that printer. The next day, the customer learned the true facts and wanted to return the printer. If the store refused to take it back and the customer sued, which of the following would be the most likely result? a. The buyer's case would be dismissed b. An injunction c. An order of rescission d. An award of damages e. An order of specific performance Answer: c Diff: 2 Type: MC Page Reference: 101f Skill: Applied 59) Fraudulent misrepresentation is intentionally misleading another person into a contract. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 101h Skill: Recall 60) A fraudulent misrepresentation that induces another person to enter into a contract can result in which of the following remedies? a. Rectification b. Rescission and/or damages c. Rescission only d. Damages only e. There is no remedy available for fraudulent misrepresentation.

Answer: b Diff: 1 Type: MC Page Reference: 101i Skill: Recall 61) What is the significance of determining that the misrepresentation was negligent rather than innocent?

..

24

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

Answer: The remedy of damages will be available as well as rescission.

Feedback: The remedy of damages will be available as well as rescission.

Diff: 2 Type: ES Page Reference: 101l Skill: Recall 62) Mary has a little scam most everywhere she goes; she sells by saying anything. Her buyers just have woes. Which of the following is true with regard to misrepresentation? a. In some types of misrepresentation there are no remedies available. b. If Mary induces the buyer to buy by making a misrepresentation that she honestly thought was true, the buyer has no remedy in law or in equity. c. For fraudulent misrepresentation, the buyer can be granted only the equitable remedy of rescission. d. There are several remedies available in case law for an exaggerated claim made by Mary. e. A misrepresentation can be made about a term of a contract and result in an award of rescission and/or damages.

Answer: e Diff: 2 Type: MC Page Reference: 101o Skill: Applied 63) Which of the following is an example of duress? a. Joe wants to purchase Smith's car from him, and Smith sells it to someone else. b. Joe refuses to sell Harry his car unless Harry offers him more money. c. Joe threatens to smash Harry's car if Harry won't sell it to him. d. Joe, knowing of Harry's financial situation, refuses to sell him his car. e. Joe counter-offers Harry's original offer.

Answer: c Diff: 1 Type: MC Page Reference: 103a Skill: Applied 64) Randal embezzled $6000 of his employer's money and then disappeared. The employer's accountant called at Randal's residence and discovered that his wife had a $3500 term deposit. When the accountant threatened to have her husband arrested and imprisoned if she did not agree to sign over the deposit, she assigned the term deposit to the employer to help to defray the loss from the embezzlement. If the wife were later to

..

25

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

sue for return of the term deposit, what would be her grounds for avoiding the assignment? a. Mistake of law b. Non est factum c. Duress d. Fraudulent misrepresentation e. Undue influence Answer: c Diff: 1 Type: MC Page Reference: 103b Skill: Applied 65) A real estate agent, Mr. Jones, was owed a $7000 commission, having sold property for Mr. Quick. Quick couldn't be found, but Jones did find Quick's wife and learned that she had over $20 000 in treasury bills. Jones told her that if she didn't assign to him $7000 of the $20 000, he would make sure her husband was imprisoned for his debts and "for other crimes" he knew about. If she did make an assignment in writing to Jones of the $7000 but later tried to void the agreement, she would argue which of the following? a. Privity b. Statutory assignment c. Duress d. Mistake e. Non est factum Answer: c Diff: 2 Type: MC Page Reference: 103c Skill: Applied 66) The threat of violence makes a contract voidable. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 103d Skill: Recall 67) Distinguish between duress and undue influence.

Answer:

..

26

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

Duress involves controlling somebody's actions through threat of violence, imprisonment, scandal, damage to property, or inappropriate financial pressure. Undue influence involves controlling that person's actions through abuse of position and influence.

Feedback: Duress involves controlling somebody's actions through threat of violence, imprisonment, scandal, damage to property, or inappropriate financial pressure. Undue influence involves controlling that person's actions through abuse of position and influence.

Diff: 2 Type: ES Page Reference: 103e. 104f Skill: Recall 68) When the courts find that undue influence is present, the resulting contract is: a. Binding b. Void c. Illegal d. Voidable e. Unenforceable Answer: d Diff: 1 Type: MC Page Reference: 104a Skill: Recall 69) With respect to having the court set aside a contract on the basis of undue influence, which of the following is false? a. Where undue influence is established, the resulting contract is voidable, not void. b. If the court presumes the existence of undue influence, the person asking for the return of the property will automatically get it back. c. A contract made in favour of a dominant person who exerted undue influence over the weaker party is voidable at the option of the weaker party. d. If you are a dominant person in relation to an aged relative who wants to sell you his house below market value, you should insist that the aged relative receive independent legal advice. e. If a client transferred property to his lawyer and later claimed the transfer was due to undue influence, the law would presume the transfer was due to undue influence.

Answer: b Diff: 3 Type: MC Page Reference: 104b Skill: Recall

..

27

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

70) When it has been clearly established that one of the parties to the contract has been the victim of undue influence, that contract is void. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 104c Skill: Recall 71) What is the effect of a court determining that undue influence has been present in a contractual relationship?

Answer: The contract is voidable.

Feedback: The contract is voidable.

Diff: 2 Type: ES Page Reference: 104d Skill: Recall 72) Undue influence takes place when one person uses violence to force another to enter into a contract. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 104e Skill: Recall 73) You and your parents were both surprised when Grandmother said the doctor told her to come for weekly checkups, because she didn't seem sick. Nevertheless, you dutifully took her to and from her appointments for a period of about six months. She never talked about these sessions, but loved to go. Now she has come to the family and said that she is sorry that she gave the doctor the oil paintings and sold him the farm. On these facts, which of the following is false? a. A presumption of undue influence doesn't mean the weaker party will automatically get her property back. b. If a court held that the property was obtained by undue influence, the contract would be voidable at the option of Grandmother, the weaker person. c. It would be easier for Grandmother to argue duress than undue influence.

..

28

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

d. In a court action, if Grandmother claimed the return of her property on the basis of undue influence, the court would presume undue influence and the doctor would have to prove that the property was freely given. e. If Grandmother had gone to her own lawyer for independent advice before conveying her property to the doctor, she would have more difficulty arguing undue influence.

Answer: c Diff: 2 Type: MC Page Reference: 104g Skill: Applied 74) A woman sought to set aside a mortgage on the grounds of misrepresentation, undue influence, and non est factum. She had been persuaded to enter into that mortgage contract with a mortgage company by her doctor. Which of the following is true with regard to these challenges to the mortgage contract? a. If the court found that there was undue influence by her doctor, who obtained the money from the mortgage, she would not have to repay the mortgage company. b. If she failed to read the mortgage agreement, the mortgage would be void on the basis of non est factum. c. If the person who misled her as to the contents of the mortgage agreement honestly thought what he was stating was correct, she could sue for only damages, not rescission. d. If she were influenced to sign the mortgage by her doctor and the court found undue influence, the mortgage would be void and she wouldn't have to pay the mortgage company. e. If she were influenced to sign the mortgage by her doctor and the mortgage benefited the doctor, the court would presume undue influence.

Answer: e Diff: 2 Type: MC Page Reference: 104h Skill: Applied 75) Indicate three situations where the courts will presume a relationship to involve undue influence.

Answer: An adult with an infant child, the solicitor contract with a client, a doctor contracting with a patient, a religious adviser contracting with a parishioner, a trustee contracting with a beneficiary, and a guardian contracting with a ward Feedback: An adult with an infant child, the solicitor contract with a client, a doctor contracting with a patient, a religious adviser contracting with a parishioner, a trustee contracting with a beneficiary, and a guardian contracting with a ward Diff: 2

..

29

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

Type: ES Page Reference: 104i Skill: Recall 76) An 80-year-old woman signed, in the presence of a solicitor, a contract for land by which she sold property to her daughter. She later asked the court to set the contract aside on the grounds of non est factum (mistake) and undue influence. Which of the following is true with regard to these grounds for the contract? a. She can successfully use the plea of non est factum if she was not misled about the very nature of the document. b. If the aged mother received independent legal advice, it would be good evidence for the daughter that the mother's transferring the property was done freely, without undue influence being exerted. c. If the court presumes that undue influence was used by the adult who gained from the contract with an aged parent, the contract is automatically set aside. d. She can successfully use the plea of non est factum if there is evidence that she was careless when she signed the document. e. If the lawyer were the daughter's husband, his advice would be seen as independent legal advice.

Answer: b Diff: 2 Type: MC Page Reference: 104j Skill: Applied 77) Discuss the development and importance of the principle of unconscionable contracts. In your answer, compare unconscionability to insanity, duress, and undue influence.

Answer: Unconscionable contracts are a relatively recent development in contract law, but are indicative of a modern trend toward protecting disadvantaged parties to a contract.

Students must show a clear understanding that this is not simply a protection given to all consumers who are taken advantage of. Here, there must be some special vulnerability that creates an unequal bargaining position, and even that is not enough. Students also must make it clear that the other party has taken advantage of this vulnerability to the extent that the bargain that has been struck is grossly unfair. It must be clear that the other contracting party has taken advantage of this unique vulnerability. Students should give examples of what constitutes such vulnerability. Examples might be mental impairment (short of insanity) or poverty. Note that students should show that simply taking advantage of a favourable economic situation is not enough to be unconscionable. So where one person is in poverty and the other charges a high rate of interest on a loan because of the risk, that by itself will not be unconscionable. Students should also distinguish unconscionability in contract law developed by the courts from the unconscionable transactions statutes that have been passed in many jurisdictions, which

..

30

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

usually have a much narrower scope, often being limited to loan transactions or mortgages.

Feedback: Unconscionable contracts are a relatively recent development in contract law, but are indicative of a modern trend toward protecting disadvantaged parties to a contract.

Students must show a clear understanding that this is not simply a protection given to all consumers who are taken advantage of. Here, there must be some special vulnerability that creates an unequal bargaining position, and even that is not enough. Students also must make it clear that the other party has taken advantage of this vulnerability to the extent that the bargain that has been struck is grossly unfair. It must be clear that the other contracting party has taken advantage of this unique vulnerability. Students should give examples of what constitutes such vulnerability. Examples might be mental impairment (short of insanity) or poverty. Note that students should show that simply taking advantage of a favourable economic situation is not enough to be unconscionable. So where one person is in poverty and the other charges a high rate of interest on a loan because of the risk, that by itself will not be unconscionable. Students should also distinguish unconscionability in contract law developed by the courts from the unconscionable transactions statutes that have been passed in many jurisdictions, which usually have a much narrower scope, often being limited to loan transactions or mortgages.

Diff: 2 Type: ES Page Reference: 104k Skill: Recall 78) Duress takes place when one person takes advantage of another's vulnerability because of a special relationship with that person. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 104l Skill: Recall 79) Discuss unconscionability with respect to contract law.

Answer: This principle allows the court to modify or set aside the contract on the basis of vulnerability that has allowed one party to the contract to unfairly take advantage of the other party to the contract.

Feedback: This principle allows the court to modify or set aside the contract on the basis of vulnerability that has allowed one party to the contract to unfairly take advantage of the other party to the contract.

..

31

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

Diff: 2 Type: ES Page Reference: 104o Skill: Applied 80) Mr. Ho talked with Mr. Tarr, who ran a business called Roscali Roofing. Ho agreed to pay Tarr $250 for the repair of his roof. In time, Gene Fix, Tarr's employee, came to Mr. Ho's and worked on the roof. Fix used the wrong material in the repairs, which made all his effort worthless; during the next rain, the roof leaked as before. Which of the following is true? a. Ho could successfully sue Fix and Tarr for breach of contract since they were both connected with the job. b. Ho could successfully sue only Fix or Tarr for breach of contract, whichever he chooses, but not both. c. Ho could successfully sue only Tarr for breach of contract. d. Ho could sue only Tarr because he is the one who did a poor job on the roof. e. If Tarr doesn't pay Fix, Fix could sue Ho directly for his pay because he worked on Ho's roof.

Answer: c Diff: 2 Type: MC Page Reference: 104p Skill: Applied 81) With regard to the law governing privity of contract and assignment, which of the following is true? a. A statutory assignment is more difficult to enforce than an equitable assignment. b. A party to a contract for services can assign both his contractual obligations and his contractual rights. c. An employee sent by his employer to do a routine job for one of the employer's customers is not in a contractual relationship with the customer. d. Novation refers to the modifications of the privity of contract rule since it allows a stranger to the contract to receive benefits from the contract. e. Assignments are modifications of the privity of contract rule since they allow ending the original contract and entering into a new contract with changes in terms, such as substituting one party for another.

Answer: c Diff: 2 Type: MC Page Reference: 104q Skill: Recall 82) Kassem is a real estate agent with his own firm. Because his agency is new in a competitive field, he hired the company of Barrett and Barrett Ltd. to advise on an

..

32

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

advertising strategy and to design newspaper ads and brochures. Jack Barrett, senior employee, was handling the market research, and the employee Armstrong was doing the illustrations. When the work was complete, the ads went to press; unfortunately, after the printing, it was discovered that in all of the ads and in every brochure, "Kassem" was spelled "Kassim." Armstrong had made the mistake in his copy. On these facts, which of the following is true? a. For breach of contract, Kassem could successfully sue only the company, Barrett and Barrett Ltd. b. Kassem's only recourse is against Armstrong, the employee who made the mistake. c. Kassem can choose to sue either the company or its employee Armstrong for breach of contract, but not both. d. Kassem can sue both the company and its employee Armstrong for breach of contract, since they were both connected with the job. e. If the company did not pay Armstrong, Armstrong could sue Kassem for his pay because Armstrong did work for Kassem.

Answer: a Diff: 2 Type: MC Page Reference: 104r Skill: Applied 83) Back in the days when people in Vancouver sold houses as houses and not for demolition, Mrs. Reid prepared her house for the market by contracting with Silversteps Ltd. to have her front steps replaced for the sum of $800. Warren, an employee of the company, worked for days framing the stairs and pouring the concrete. Unfortunately, he had done the framing wrong and, in addition, the concrete mix was faulty, so all of his efforts were in vain; the stairs were worthless. On these facts, which of the following is true? a. Mrs. Reid could successfully sue the manufacturer of the cement for breach of contract because the cement was not fit for its purpose. b. Mrs. Reid could successfully sue only Silversteps Ltd. for breach of contract. c. Mrs. Reid could successfully sue Silversteps Ltd. for breach of contract or Warren for breach of contract, but not both. d. If Silversteps Ltd. failed to pay Warren under the employment contract, Warren could sue Mrs. Reid directly for his pay because he worked on her stairs. e. Mrs. Reid could successfully sue both Silversteps Ltd. and Warren for breach of contract because they were both connected with the job.

Answer: b Diff: 2 Type: MC Page Reference: 104s Skill: Applied

..

33

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

84) Tong hired Hocaloski to design an ad for her business. Hocaloski assigned the work to Peppar, her employee. After the ad ran, it was noticed that Peppar made a serious error; he gave the wrong address and phone number of the business. On these facts, which of the following is true? a. Only Peppar is liable since he made the mistake. b. Tong can sue either Hocaloski or Peppar, her employee, for breach of contract, but not both of them. c. If Hocaloski did not pay Peppar, Peppar could sue Tong for his pay because Peppar did do work for Tong. d. For breach of contract, Tong could successfully sue only Hocaloski. e. Tong can sue both Hocaloski and Peppar for breach of contract, since they are both connected with the job.

Answer: d Diff: 2 Type: MC Page Reference: 104t Skill: Applied 85) Privity of contract is a principle that holds that a contract can affect only the immediate parties to it. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 104u Skill: Recall 86) Explain the impact of the principle of privity on contracts.

Answer: When two people enter into a contract, they bestow rights and benefits only on each other. The third parties, who are not party to the contract, cannot enforce the contract.

Feedback: When two people enter into a contract, they bestow rights and benefits only on each other. The third parties, who are not party to the contract, cannot enforce the contract.

Diff: 2 Type: ES Page Reference: 104v Skill: Recall 87) Privity of contract applies in which of the following situations? a. Where an insurance contract is involved

..

34

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

b. Where a trust has been created c. Where a trust is involved d. Where an interest in land is involved e. Where goods are being sold Answer: e Diff: 1 Type: MC Page Reference: 105a Skill: Recall 88) Joe, a student at the local college, had a one-year lease on a suite in a house owned by Sam. Sam sold that house to Jones without telling him about the lease. When Jones discovered Joe in the suite, he demanded that Joe leave. Explain the rights of the parties in terms of privity of contract.

Answer: Joe is not party to the contract between Sam and Jones, but his rights embodied in the lease are said to run with the land, and Jones is bound by that lease and can't evict him.

This is an exception to the privity rule.

Feedback: Joe is not party to the contract between Sam and Jones, but his rights embodied in the lease are said to run with the land, and Jones is bound by that lease and can't evict him. This is an exception to the privity rule.

Diff: 2 Type: ES Page Reference: 105b Skill: Applied 89) Novation is the term used when a new party is substituted for an original party to the contract. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 106a Skill: Recall 90) Explain what is meant by a novation.

Answer: A novation occurs where two parties have a contractual relationship and another comes in, taking the place of one of those parties, but the terms of the contract remain the same.

Note that the agreement of both of the original parties is necessary for such a substitution.

..

35

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

Feedback: A novation occurs where two parties have a contractual relationship and another comes in, taking the place of one of those parties, but the terms of the contract remain the same. Note that the agreement of both of the original parties is necessary for such a substitution.

Diff: 2 Type: ES Page Reference: 106b Skill: Recall 91) Mr. Jans owned a small building with four offices upstairs and a restaurant on the main floor. Jans contracted with a company, Signs Limited, to construct a sign indicating the names of his tenants and their room numbers. The sign was created and installed by John Monet, an employee of Signs Limited. Signs Limited assigned $500 of the $700 contract price to Ms. Franz, its landlord, when she called and pressed for the rent. Ms. Franz gave notice of the assignment in writing to Jans. Read the following statements, independently of one another, and indicate which is the true statement. a. If the contract were completed satisfactorily, Franz could enforce the assignment, although it is a partial assignment. b. Franz cannot enforce this assignment because the assignment was not in writing, and only assignments in writing will be enforced by the courts. c. If Signs Limited fails to pay Monet's salary, Monet is legally entitled to sue Jans for it because Monet did work for Jans. d. If the sign were not done properly, Jans should sue Monet for breach of contract because Monet, as employee, did the work. e. If the assignment is not honoured by Jans, Franz's only recourse is to sue Monet, the employee who actually did the work.

Answer: a Diff: 3 Type: MC Page Reference: 106c Skill: Applied 92) Able Company contracted to sell to Baker Company 400 barrels of chemical C for $1200. Able Company assigned the entire $1200 in writing to Mr. Long, who sent a letter informing Baker Company of the assignment and directing Baker Company to forward money to him instead of Able Company. Unbeknown to both companies, at the time of the contract, the ship carrying the chemical had sunk and all cargo was lost. Which of the following is true? a. The assignment to Mr. Long would fail to be a statutory assignment. b. Mr. Long will receive nothing from Baker Company because nothing is owed to Able Company. c. Mr. Long will receive part payment. d. Mr. Long, the assignee, will receive $1200 from Baker Company.

..

36

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

e. Since Able Company has breached the contract, it pays compensation for the damages of both Baker Company and Mr. Long.

Answer: b Diff: 3 Type: MC Page Reference: 106d Skill: Applied 93) Where one person transfers his or her rights to benefits under a contractual relationship to a third party, this is an example of ________.

Answer: Assignment Feedback: Assignment Diff: 2 Type: FIB Page Reference: 106e Skill: Recall

94) Indicate what must be present in order for an assignment to qualify as a statutory assignment.

Answer: 1. The assignment must be complete and unconditional.

2. It must be in writing.

3. There must be notice to the original debtor.

Feedback: 1. The assignment must be complete and unconditional.

2. It must be in writing.

3. There must be notice to the original debtor.Diff: 2 Type: ES Page Reference: 107a Skill: Recall 95) Which of the following is true with regard to the law of contracts? a. A statutory assignment is easier to enforce than an equitable assignment. b. Assignments are modifications of the privity of contract rule, since they do allow one person to take over the obligations of another. c. The assignor for value of a negotiable instrument may acquire better rights than the assignee has. d. A party to a contract for services can assign both his contractual obligations and his contractual rights. e. An employee sent by his employer to do a routine job for one of the employer's customers is in a contractual relationship with the customer.

Answer: a

..

37

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

Diff: 2 Type: MC Page Reference: 107b Skill: Recall 96) Which of the following is false with regard to privity of contract and assignments? a. Assignments are modifications of the privity of contract rule since they do allow a stranger to the contract to receive benefits from the contract. b. The rules governing negotiation (an assignment of a negotiable instrument such as a cheque) differ from those governing regular assignments; the assignee may take more than the assignor was entitled to receive. c. A statutory assignment is harder to enforce in court than an equitable assignment. d. There is case law confirming the proposition that an employee can have the benefit of an exemption clause in the employer's contract with the customer. e. A computer programmer who signs a contract for services can assign his contractual rights but not his contractual obligations if the contract is silent on the matter of assignments.

Answer: c Diff: 2 Type: MC Page Reference: 107c Skill: Applied 97) What is the significance of an assignment qualifying as a statutory assignment?

Answer: The assignee can sue the original party to the contract directly without involving the assignor as a party to the action.

Feedback: The assignee can sue the original party to the contract directly without involving the assignor as a party to the action.

Diff: 2 Type: ES Page Reference: 107d Skill: Recall 98) With regard to the law governing privity of contract and assignment, which of the following is false? a. Assignments are modifications of the privity of contract rule since they do allow a stranger to contract to receive benefits from the contract. b. Novation refers to the ending of the original contract and entering into a new contract with changes in terms, such as substituting one party for another. c. A statutory assignment is easier to enforce than an equitable assignment. d. A party to a contract for services can assign both his contractual obligations and his contractual rights.

..

38

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

e. The privity of contract rule states that only the parties to the contract have rights and obligations under the contract.

Answer: d Diff: 2 Type: MC Page Reference: 107e Skill: Recall 99) The Weyburn Farmers' Co-op contracted to sell a carload of grain to Mr. Takemori for $2000. The co-op assigned, in writing, its contractual right to receive the $2000 to the Royal Bank, to which it was indebted. The Royal Bank gave written notice of the assignment to Takemori. Unknown to the buyer and the seller, at the time of the contract the grain had been destroyed because of a train derailment caused by the negligence of the train conductor. On these facts, which of the following is true? a. The Royal Bank will receive $2000 from Takemori because there was an assignment in writing and that is the sole test for determining whether the assignee will be paid the amount of the assignment. b. The Royal Bank, the assignee, will receive the $2000 because it could prove privity of contract with Takemori. c. The Royal Bank will receive part payment from Takemori. d. The Royal Bank will receive nothing from Takemori, because Takemori owes nothing to the co-op. e. Because of the conductor's negligence, the railroad will have to honour Takemori's contract with the Royal Bank.

Answer: d Diff: 3 Type: MC Page Reference: 107f Skill: Applied 100) Adam bought a boat from Charlie for $900 payable on November 6. On November 6, when Charlie came for the money, Adam didn't have it. Adam was, however, employed by Ms. Bey to do some market research. He was to be paid $1000 for his report, due on November 12. Charlie wanted an assignment of $900 of the amount Adam expected to receive November 12. Adam wrote out an assignment with all of the essential information and signed it. Charlie gave written notice of the assignment with all pertinent information to Ms. Bey the next day, November 7. On November 12, Adam had not finished his report. The contract provided that he would lose $100 for every week he was late. Adam was two weeks late in submitting his report. Which of the following is true? a. Ms. Bey must honour the notice of assignment by paying out the $900 on the day the notice was received. b. The assignment fails to be an assignment at all because Adam failed to get the consent of Ms. Bey.

..

39

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

c. Charlie, the assignee, would receive $800 from Ms. Bey and have to look to Adam for the other $100 owed. d. Charlie would get nothing because Ms. Bey owed less than the amount assigned. e. This assignment is a statutory assignment.

Answer: c Diff: 3 Type: MC Page Reference: 107g Skill: Applied 101) Mr. Zink hired Bruce Dorne to create a payroll program for his business. Bruce was to be paid $4000 for the program. When Bruce was halfway finished, a creditor to whom he owed $2000 pressed so hard for payment that Bruce assigned him $2000 of the contract price, an amount he felt he had earned already. The creditor, Mr. Pressing, gave written notice that very day to Mr. Zink. On these facts, which of the following is true?

(Read each statement separately.) a. If Bruce bungled the assignment and the court determined that nothing was owed to him, Pressing could still get $2000 from Zink. b. Pressing is entitled to $2000 from Zink when the contract is completed, if at least that much is owed to Bruce by Zink at that time. c. This assignment is a statutory assignment, not an equitable assignment. d. This type of assignment is not recognized by the courts because it is an assignment of contractual obligations. e. Zink must pay $2000 to Pressing on the day the notice was given, because at that time Bruce had done half of the work on the $4000 contract.

Answer: b Diff: 2 Type: MC Page Reference: 107h Skill: Applied 102) Although Zlotnic had been in business for a long time, he had been forced to borrow heavily in the last few years. When his debt reached the limit of his line of credit, $100 000, the manager of Regal Bank called him in for a talk. Subsequently, Zlotnic sold his house for $250 000 to the Johnsons. He contracted to buy another house from the Scotts.

From the proceeds he anticipated receiving from the Johnsons, he assigned $200 000 to the Scotts, the purchase price of their house, and assigned $50 000 to Regal Bank to reduce his debt. The assignment to the Scotts was in writing; the assignment to the bank was not. The Scotts gave written notice of the assignment to the Johnsons on March 1, the day the money was owed to Zlotnic. The Johnsons verified the assignment and paid out the $200 000 to the Scotts. On March 2, Regal Bank gave written notice of its assignment to the Johnsons. Unfortunately, at that time only $45 000 was owing to Zlotnic because the Johnsons had paid $5000 to Canada Revenue Agency for Zlotnic. On these facts, which of the following is true?

..

40

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

a. The assignment to the bank is a statutory assignment. b. Regal Bank has no claim since the Johnsons didn't owe Zlotnic the specified $50 000 at the time of the assignment. c. Regal Bank must take "subject to the equities" between Zlotnic and the Johnsons (i.e., it can't receive the whole $50 000). d. Zlotnic needed the permission of the Johnsons, the debtors, before he could make any assignments. e. The assignment to the bank is not enforceable because it was not in writing.

Answer: c Diff: 3 Type: MC Page Reference: 107i Skill: Applied 103) An assignee is in no better position than the original contractor. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 107j Skill: Applied 104) Joe agreed to paint Sam's house for $1000. Joe then assigned the $1000 claim to Harry, who served notice on Sam about the assignment. When it came time for payment, Harry was informed by Sam that he would not pay because the paint was peeling off his house. Harry said that that was nothing to do with him and demanded payment. Explain the legal position of the parties.

Answer: An assignee is in no better position than was the assignor. In these circumstances, Joe, the original party in the contract, would not have been able to collect because the contract was breached. Harry is in no better position; therefore, Harry cannot collect. He must turn to Joe, the assignor, for any redress.

Feedback: An assignee is in no better position than was the assignor. In these circumstances, Joe, the original party in the contract, would not have been able to collect because the contract was breached. Harry is in no better position; therefore, Harry cannot collect. He must turn to Joe, the assignor, for any redress.

Diff: 2 Type: ES Page Reference: 107k Skill: Applied

..

41

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

105) Which of the following is true with respect to the law of negotiable instruments? a. The Bills of Exchange Act is controlled by both federal and provincial legislation. b. A holder in due course is in a better position than he or she would be as the receiver of contractual rights through assignment. c. A bill of exchange involves two parties. d. The Bills of Exchange Act governs the area of bankruptcy and insolvency. e. Negotiable instruments are controlled by provincial legislation.

Answer: b Diff: 1 Type: MC Page Reference: 108a Skill: Applied 106) When a negotiable instrument is used, the drawer of the instrument cannot use the rule of privity to limit the claim of the holder. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 108b Skill: Recall 107) If Jones receives a promissory note from Smith and passes it on to Green, who qualifies as a holder in due course, Green is the receiver of assigned contractual rights and is in the same position as Jones. a. True b. False Answer: b Diff: 2 Type: TF Page Reference: 108c, 109a Skill: Recall 108) A holder in due course is in the same position as the person from whom a negotiable instrument was received. a. True b. False Answer: b Diff: 2 Type: TF Page Reference: 108d

..

42

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

Skill: Recall 109) "Joe received a cheque from Sam for work he had done painting Sam's house, and Joe passed that cheque to Harry. Harry took it, not knowing that the work done was defective. Because of the principle that an assignee of contractual rights is in no better position than an assignor, Harry would not be able to demand payment on that cheque from Sam." Discuss the accuracy of this statement.

Answer: It is incorrect. Negotiable instruments are an exception to this rule. One of their unique features is that if a negotiable instrument, such as a cheque, gets into the hands of an innocent third party who qualifies as a holder in due course, that person will be able to enforce it even when there is some problem like this to the original contract.

Feedback: It is incorrect. Negotiable instruments are an exception to this rule. One of their unique features is that if a negotiable instrument, such as a cheque, gets into the hands of an innocent third party who qualifies as a holder in due course, that person will be able to enforce it even when there is some problem like this to the original contract.

Diff: 3 Type: ES Page Reference: 108e Skill: Applied 110) Distinguish between a cheque and a bill of exchange.

Answer: Both of these instruments involve three parties. A bill of exchange is used in any situation where one party orders another to pay a third party on demand or sometime in the future.

A cheque is defined as a bill of exchange drawn on a bank and payable on demand.

Feedback: Both of these instruments involve three parties. A bill of exchange is used in any situation where one party orders another to pay a third party on demand or sometime in the future. A cheque is defined as a bill of exchange drawn on a bank and payable on demand.

Diff: 2 Type: ES Page Reference: 109c Skill: Applied 111) A bill of exchange is an order by one person to another to pay money to a third. a. True b. False Answer: a Diff: 2 Type: TF

..

43

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

Page Reference: 109d Skill: Recall 112) When the holder of a negotiable instrument signs his name in the form of an endorsement before passing it on to a subsequent holder, what risk does he take?

Answer: If the note is dishonoured, the payment can be collected from anyone who endorsed the instrument.

Feedback: If the note is dishonoured, the payment can be collected from anyone who endorsed the instrument.

Diff: 2 Type: ES Page Reference: 109e Skill: Applied 113) "In contract law, warranty is a promise by the manufacturer of a product to be responsible to make repairs on that product, if it's defective." Discuss the accuracy of this statement.

Answer: The statement is inaccurate. A warranty is a minor term of the contract, the breach of which does not entitle the victim to treat his or her contractual obligations as ended. The victim is, however, entitled to seek compensation for the imperfect performance.

Feedback: The statement is inaccurate. A warranty is a minor term of the contract, the breach of which does not entitle the victim to treat his or her contractual obligations as ended. The victim is, however, entitled to seek compensation for the imperfect performance.

Diff: 2 Type: ES Page Reference: 110a Skill: Applied 114) Which of the following statements is correct with respect to breach of contract? a. When a contract is repudiated before performance is due, the victim must wait until the time of performance before taking any action. b. When a condition is breached, the victim can treat the contract as ended. c. When a warranty is breached, the victim can treat the contract as ended. d. When a contract for the purchase of goods is breached, the warranty will require that the goods be repaired by the seller. e. When a condition is breached, a person can only sue for damages but must perform his or her part of the contract.

Answer: b

..

44

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

Diff: 1 Type: MC Page Reference: 110b Skill: Recall 115) When a condition is breached, the victim can only sue for damages but must continue to perform his or her obligations under the contract. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 110c Skill: Recall 116) What is the importance of the distinction between a breach of warranty and a breach of condition?

Answer: When one of parties breaches a condition of the contract, the other party is entitled to treat the contract as discharged and not perform its side of the agreement and is also entitled to sue for damages or another remedy. When a breach of warranty takes place, however, the contract is considered to be performed, and there is an obligation on the victim of the breach of warranty to go through with its side of the agreement, although it can still bring an action for compensation for the imperfect performance.

Feedback: When one of parties breaches a condition of the contract, the other party is entitled to treat the contract as discharged and not perform its side of the agreement and is also entitled to sue for damages or another remedy. When a breach of warranty takes place, however, the contract is considered to be performed, and there is an obligation on the victim of the breach of warranty to go through with its side of the agreement, although it can still bring an action for compensation for the imperfect performance.

Diff: 1 Type: ES Page Reference: 110d Skill: Applied 117) A breach of warranty will bring the contract to an end. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 110e

..

45

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

Skill: Recall 118) A breach of warranty allows a victim to sue for damages, but he or she must go through with his or her obligations under the contract. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 110f Skill: Recall 119) If a warranty in a contract is breached, what rights does the non-breaching party to that contract have?

Answer: The contract cannot be ended but the non-breaching party may sue for damages.

Feedback: The contract cannot be ended but the non-breaching party may sue for damages.

Diff: 2 Type: ES Page Reference: 110g Skill: Recall 120) Will anything short of the complete performance of the contractual terms amount to performance of the contract and discharge the agreement?

Answer: Yes. Substantial performance, where an important term is substantially performed, and where breach of warranty or a minor term has taken place. The contract is considered discharged by performance, subject to an action by the other party for compensation for the inadequacies in performance.

Feedback: Yes. Substantial performance, where an important term is substantially performed, and where breach of warranty or a minor term has taken place. The contract is considered discharged by performance, subject to an action by the other party for compensation for the inadequacies in performance.

Diff: 2 Type: ES Page Reference: 110h Skill: Recall 121) Indicate the various ways in which the contractual relationship can come to an end.

..

46

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

Answer: By performing the contractual obligations either as required or substantially as required, by breach of contract, by agreement between the parties, and by frustration Feedback: By performing the contractual obligations either as required or substantially as required, by breach of contract, by agreement between the parties, and by frustration Diff: 2 Type: ES Page Reference: 110i Skill: Recall 122) Joe paid Sam a debt owed of $50 000 by giving him 10 000 $5 bills. Sam refused to accept the payment. Explain this legal position.

Answer: Coins are is not involved here and any number of bills constitutes legal tender; therefore, Sam should have taken the money.

Feedback: Coins are is not involved here and any number of bills constitutes legal tender; therefore, Sam should have taken the money.

Diff: 1 Type: ES Page Reference: 111a Skill: Applied 123) Pat O'Grady owes Robinson $5000 in cash, but resented Robinson talking about O'Grady's debt to mutual acquaintances. O'Grady wants to know which of the following tactics would be legal performance. a. Not pay Robinson until Robinson came for it b. Pay Robinson on time but pay it all in dimes c. Deliver the money to Robinson's house instead of to his office at 3:00 a.m. on the due date d. Pay him on time but with a cheque e. Pay him on time in $5 bills Answer: e Diff: 2 Type: MC Page Reference: 111b Skill: Applied 124) Which one of the following is true with regard to the ending of a contract by performance? a. Legal tender consists of bills or coins in any amount. b. If a person owing money has tendered payment in a reasonable way, at a reasonable time, and it has been refused, he is free from any further obligation to pay.

..

47

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

c. In law, a certified cheque is the same as cash. d. If a person attempts to perform services in accordance with the terms of the contract, and the buyer refuses those services, the person attempting to perform can sue the buyer with no further attempt to perform. e. If a warranty is breached, the victim has no further obligation to perform under the contract.

Answer: d Diff: 2 Type: MC Page Reference: 111c Skill: Recall 125) Which of the following is true with regard to tender of performance? a. If the seller attempts to deliver the contract goods at the time and place designated in the contract, but the buyer refuses delivery, the seller will have to make another attempt to deliver before he can sue for breach of contract. b. If Pete shows up at Valley Service Station to fix the gas pumps on the date and at the time he was supposed to, but Valley's manager tells him to come back later, Pete has no further obligations and can sue for breach of contract. c. If Ivan attempts to pay his $25 debt to Jan in 25-cent pieces, that attempt constitutes a lawful tender of Ivan's obligation. d. If Sam attempts to deliver the truckload of strawberries at Frank's produce plant at 8:00 p.m. on Saturday, the berries cannot be refused as long as delivery was before the specified July 10 deadline. e. If Walt attempts to pay Sarah the $750 debt he owes her with a cheque on the date and at the place designated in the contract, she will have to accept that cheque even though there was no mention of payment by cheque in the contract.

Answer: b Diff: 2 Type: MC Page Reference: 111d Skill: Applied 126) Joe owed Harry $500, but Harry was confused when Joe came to pay it back and refused to take the money for the payment. Explain Joe's legal position.

Answer: Joe must pay, although payment was tendered at the appropriate time and place and refused. Money under such circumstances is still owed, although the creditor must bear the costs of collection in these circumstances.

Feedback: Joe must pay, although payment was tendered at the appropriate time and place and refused. Money under such circumstances is still owed, although the creditor must bear the costs of collection in these circumstances.

..

48

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

Diff: 2 Type: ES Page Reference: 111e Skill: Applied 127) The victim of anticipatory breach has two options available to him. What are they?

Answer: He can either ignore the repudiation and continue to demand performance or treat the contract as discharged and make other arrangements.

Feedback: He can either ignore the repudiation and continue to demand performance or treat the contract as discharged and make other arrangements.

Diff: 2 Type: ES Page Reference: 112a Skill: Recall 128) When an anticipatory breach has taken place (i.e., where a person, before performance is due, states that he or she will not perform the contract): a. The victim may sue immediately and not wait to see whether the contract is performed. b. The victim must wait to see whether the contract is performed, but damages are calculated from the time of the refusal. c. The victim can get someone else to do the job but then cannot sue the original party to the contract if it costs more. d. The victim may not be able to recover damages that occur after the anticipatory breach. e. Such a statement made before performance is due has no effect on the contractual obligations of the parties.

Answer: a Diff: 2 Type: MC Page Reference: 112b Skill: Recall 129) On February 1, Smyth contracted to buy Dupont's van. They agreed that Smyth would pay the price of $7000 on March 1 and take delivery and the risk on that date.

Smyth then contracted to sell the van in Smithers on March 5 for $7600. On February 22, Dupont called Smyth and said he wasn't going to sell the van; he had decided to keep it.

On these facts, which of the following is false? a. Smyth could refuse to acknowledge a breach and press Dupont to complete the contact. b. Smyth could agree to call off the contract; neither of them had yet performed. c. Dupont's call is an express repudiation of the contract and is an anticipatory breach. d. Smyth could acknowledge that Dupont was in breach but has to wait until after the performance date to sue him for breach of contract.

..

49

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

e. Smyth could refuse to acknowledge a breach, but that would result in the possibility that the contract could be breached later.

Answer: d Diff: 2 Type: MC Page Reference: 112c Skill: Applied 130) When a person informs you before performance is due that he or she is not going to perform the contract, you don't have to wait to see if he or she does perform; you can make other arrangements and sue right away. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 112d Skill: Applied 131) Where one party refuses to perform his contractual obligations, what is the risk that the second party runs if he continues to press the first party to perform? a. The first party may expressly repudiate the contract and therefore not be liable for breach. b. The second party may receive more damages for which he or she can't recover compensation. c. The first party may continue to refuse to perform, and there is nothing the second party can do about that. d. The contract may be discharged by frustration. e. The first party may breach a condition subsequent.

Answer: d Diff: 2 Type: MC Page Reference: 112e Skill: Recall 132) What does an innocent party to an anticipatory breach risk should he or she continue to demand performance?

Answer: Some unexpected event such as a natural disaster may make it impossible for the other party to perform and any damages that otherwise may have been recoverable will be forfeited.

..

50

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

Feedback: Some unexpected event such as a natural disaster may make it impossible for the other party to perform and any damages that otherwise may have been recoverable will be forfeited.

Diff: 2 Type: ES Page Reference: 112f Skill: Applied 133) Discuss frustration in contract law and indicate when it is available and how and why it has been modified by statute.

Answer: There are many situations where it simply would not be fair to force one party to live up to a contract when the circumstances have changed to make that essentially impossible through no fault of their own. Frustration discharges a contract where some outside unforeseen uncontrollable event (by either party) makes performance of the contract impossible or something essentially different in its very nature than what was agreed.

Students should show an understanding of this principle, likely giving several examples in the process. The more difficult part is to explain what happens in the event of a contract being discharged by frustration. At common law, it was "Let the loss lie where it falls." Good students might also note that any money due and payable before the frustrating event still had to be paid. This was found to be unworkable in some situations, so the court modified this approach by ordering the return of a deposit. Here, the party that paid the deposit has received no benefit at all. This is the common law position, and students should show an understanding of why this had to be changed by statute. Statutes were passed (the Frustrated Contracts Act) that provided that, where one party received a benefit, it would pay for that benefit received, and where a deposit was paid, some of that deposit could be retained to pay for the costs incurred in preparation for performance of the contract. Students should also indicate that these provisions may vary from jurisdiction to jurisdiction. For example, the B.C. statute allows the courts to order compensation for costs incurred even where no deposit is involved.

Feedback: There are many situations where it simply would not be fair to force one party to live up to a contract when the circumstances have changed to make that essentially impossible through no fault of their own. Frustration discharges a contract where some outside unforeseen uncontrollable event (by either party) makes performance of the contract impossible or something essentially different in its very nature than what was agreed. Students should show an understanding of this principle, likely giving several examples in the process. The more difficult part is to explain what happens in the event of a contract being discharged by frustration. At common law, it was "Let the loss lie where it falls." Good students might also note that any money due and payable before the frustrating event still had to be paid. This was found to be unworkable in some situations, so the court modified this approach by ordering the return of a deposit. Here, the party that paid the deposit has received no benefit at all. This is the common law position, and students should show an understanding of why this had to be changed by statute. Statutes were passed (the Frustrated Contracts Act) that provided that, where one party received a

..

51

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

benefit, it would pay for that benefit received, and where a deposit was paid, some of that deposit could be retained to pay for the costs incurred in preparation for performance of the contract. Students should also indicate that these provisions may vary from jurisdiction to jurisdiction. For example, the B.C. statute allows the courts to order compensation for costs incurred even where no deposit is involved.

Diff: 2 Type: ES Page Reference: 113a, 114a, 115a Skill: Applied 134) Identify the exception in one of the following situations, whereby the contract is discharged by frustration. a. Rudolph is due to appear in a local variety theatre that has just been destroyed in a fire of unknown origin. b. Frank has contracted to ride Emperor, a prize horse, in the Canada Day races on July 1, but on June 28 the horse breaks a leg and has to be destroyed. c. Jack contracts with Bill to build a barn on his one-hectare lot, but before the permit is obtained, a new law prohibits barns on less than three hectares. d. Gregory, a trucker with whom you contracted last month to haul potatoes tomorrow, phones to tell you that his truck has broken down. e. Jerry, a doctor, is due to perform a heart transplant operation on Mary, and the night before the surgery his arthritis becomes so painful that he cannot hold a scalpel.

Answer: d Diff: 3 Type: MC Page Reference: 113b Skill: Applied 135) Ellis agreed to paint Lee's house for a price of $1500. A month before the performance was due, Lee called and told Ellis that she had changed her mind and was going to have her house restuccoed instead. Ellis insisted that they had a contract and that he was going to paint the house anyway. Lee repeated that she was not going to go through with it, but Ellis insisted that the contract was still on. Before further steps could be taken by either party, Lee's house was destroyed by a freak airplane accident. Which one of the following statements describes the law applicable to these facts? a. Ellis will be able to successfully claim as damages the amount that he would have made if the contract had been performed. b. Ellis's conduct amounted to repudiation, and Lee could have sued for breach of contract immediately after the phone call. c. Lee's conduct did not amount to a breach since she told him a month before performance was due that she didn't want the house painted. d. Lee could have accepted Ellis's conduct as an anticipatory breach. e. The contract has been discharged by frustration.

Answer: e

..

52

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

Diff: 2 Type: MC Page Reference: 113c Skill: Applied 136) When an outside, unforeseen event interferes with the performance of a contract, and there is some other way to fulfill the contract, performance is required. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 113d, 114c Skill: Recall 137) For a contract to be frustrated, performance must be impossible. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 113e Skill: Recall 138) Which of the following would most likely result in the court finding that the contract had been discharged by frustration? a. McDonald agreed to buy Thornburn's horse, but unknown to both of them, at the time of the contract the horse was dead. b. McGee contracts to give a lecture at a convention on modern marketing, but the convention was cancelled because of an epidemic. c. Binks agreed to purchase the business from Kealy, but Binks suffered such great losses in the recent stock market crash that he couldn't afford to go through with it. d. Moore, a sculptor, was delivering a $15 000 work when he lost control of the car and the work was crushed. He had been drinking heavily and had not bothered to wrap or box the work. e. Cooper contracts to deliver 10 bushels of ripe tomatoes to Haig's restaurant, and Cooper's tomato crop is destroyed by hail a few days before the delivery date.

Answer: b Diff: 2 Type: MC Page Reference: 113f Skill: Applied

..

53

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

139) Gill, a wholesale fish seller, agreed to provide Blanchet's Restaurant with 1000 kilograms of fresh salmon per week throughout the months of July, August, and September. Things went as planned for July and August. However, Gill was unable to meet the requirements of the contract for the first two weeks of September because his boats simply did not catch enough, although other companies did better and the fish were available for Gill to purchase, but at a higher price than what Blanchet was paying him.

Rather than sell at a loss, Gill simply did not supply during that two-week period. At the end of that period, the Federal Fisheries Department shut down the fishery altogether because of the depletion of fish. After that, no more fresh salmon was available at all.

Blanchet sued Gill for breach of contract with respect to his failure to deliver any fresh salmon in September. Which one of the following statements accurately sets out the legal situation here? a. Gill is liable for breach of contract with respect to the first two weeks of September, but the second two weeks' failure was caused by frustration for which he was not responsible. b. The doctrine of frustration does not apply here because this is a sale-of-goods situation. c. The contract was frustrated for the whole month of September by Gill's inability to obtain fish in the way that he had intended, and thus he is not liable at all. d. By not suing Gill as soon as he failed to deliver in the first two weeks of September, Blanchet lost the right to complain, and then the subsequent governmental closure excused Gill's failure to deliver any fish in September. e. Gill was under a strict obligation to supply the fish and no excuses for failure are allowed.

Answer: a Diff: 2 Type: MC Page Reference: 114b Skill: Applied 140) When one party is responsible for an act that frustrates a contract, it is treated as a breach. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 114d Skill: Recall 141) Smedlap, a trucker, and Dewdney, a farmer, entered into a contract under which Smedlap agreed to haul all of Dewdney's 2012 pumpkin crop to market in time for Halloween sales. However, the day before Smedlap was to pick up the pumpkins, he called Dewdney and told him that, since he had received such a good offer to buy his truck, he had sold it and therefore was not able to haul Dewdney's pumpkins. There was

..

54

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

not enough time for Smedlap to buy another truck, but he was sure that Dewdney could make other arrangements and he hoped that he hadn't unduly inconvenienced him.

Unfortunately, Dewdney was not able to make arrangements in time for the Halloween market, and instead he had to sell his crop to a pie-filling canner for much less than he could reasonably have expected at the market. Furthermore, the market owners were so disappointed by Dewdney's failure to deliver that they refused to give him their usual order for Christmas turkeys, in contrast to previous years, when this had generated his major income for the year. He was forced to find another outlet for his turkeys, and again he ended up selling to commercial processors for a substantially lower price. As a result of these two events, Dewdney was unable to keep up with his mortgage payments on the farm and eventually he lost it to the bank in a foreclosure action. Dewdney is now suing Smedlap to recover these losses. Identify the correct statement with respect to the question of whether Smedlap's conduct was a breach of contract. a. This was a breach that consisted of self-induced frustration. b. Smedlap simply cancelled the contract, which he was entitled to do as long as it was before performance was due. c. This was not a breach because Smedlap did not do it maliciously, and he gave Dewdney what he honestly believed was adequate notice to make other arrangements. d. The contract was discharged by frustration. e. Smedlap is not liable because it was not his fault that Dewdney was unable to make other suitable arrangements.

Answer: a Diff: 2 Type: MC Page Reference: 114e Skill: Applied 142) Simply put, with respect to contracts, what is the outcome of self-induced frustration?

Answer: Breach of contract Feedback: Breach of contract Diff: 2 Type: FIB Page Reference: 114f Skill: Recall 143) All rules of contract formation apply when parties agree to discharge a contract. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 115b

..

55

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

Skill: Recall 144) For a contract to be ended by agreement, there must be consideration as well as agreement on both sides. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 115c Skill: Recall 145) Which of the following is true with regard to ending a contract by agreement? a. A contract can be ended by agreement if one party has performed his obligation and agrees to take something as satisfaction from the other although that other hasn't performed according to the contract. b. A contract can be ended by one party if he finds a better deal (e.g., by cancelling an order that has been accepted) as long as this is done before performance. c. A contract cannot be ended by the happening of a "condition subsequent" provided for in the contract. d. A contract can be ended unilaterally by one party. e. A contract cannot be ended by agreement if neither party to the contract has performed his or her obligation.

Answer: a Diff: 2 Type: MC Page Reference: 115d Skill: Recall 146) Discuss how and why promissory estoppel might come into play when a contract is being discharged or changed by agreement.

Answer: Sometimes parties agree to changes to modify or end a contract that benefit only one side.

In this situation, the party benefited must agree to do something extra for the changes to be binding. This is the process of accord and satisfaction. In the absence of such an arrangement, the person benefitting from the gratuitous promise cannot enforce it. Still, where the person making the gratuitous change to the agreement changes his mind and then brings an action to enforce that original provision, the other party (who has relied on the change) may be able to raise promissory estoppel as a defence.

Feedback: Sometimes parties agree to changes to modify or end a contract that benefit only one side. In this situation, the party benefited must agree to do something extra for the changes to be binding. This is the process of accord and satisfaction. In the absence of

..

56

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

such an arrangement, the person benefitting from the gratuitous promise cannot enforce it. Still, where the person making the gratuitous change to the agreement changes his mind and then brings an action to enforce that original provision, the other party (who has relied on the change) may be able to raise promissory estoppel as a defence.

Diff: 3 Type: ES Page Reference: 115e Skill: Applied 147) A condition precedent is an example of a contract being ended by agreement. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 116a Skill: Recall 148) A condition precedent is a term of a contract that will bring that contract to an end when the specified condition is met. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 116b Skill: Recall 149) A contract is terminated by agreement in which of the following situations: a. Breach b. Unilateral release c. Frustration d. The occurrence of a condition subsequent e. A written statement by one party to cancel an accepted order Answer: d Diff: 1 Type: MC Page Reference: 116c Skill: Recall 150) Which of the following is true with regard to ending a contract by performance, agreement, or breach?

..

57

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

a. If a person properly tenders performance of a service that is rejected by the other party, he is required to try again and again. b. If one party to the contract has paid for a service, but now the other party doesn't want to perform, the contract is ended by agreement as long as both parties agree to call it off. c. A person has legally tendered performance if he pays a $500 debt in 25-cent coins. d. A contract can be ended by breach if there was either a breach of condition or a breach of warranty. e. A contract ends by agreement when the parties include in the contract a "condition subsequent" (i.e., a clause that says the contract will end upon the happening of a specified future event that then takes place).

Answer: e Diff: 2 Type: MC Page Reference: 116d Skill: Recall 151) A condition subsequent is an example of a contract being ended by agreement. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 116e Skill: Recall 152) Sam agreed to purchase and Joe agreed to sell a brand new Chrysler 300M that was displayed in the showroom of Joe's Fine Cars. But instead of delivering the car to Sam, Joe sold it to another customer who offered him more money. Which of the following is the appropriate remedy in these circumstances? a. Specific performance b. Injunction c. Rescission d. No remedy e. Damages Answer: e Diff: 2 Type: MC Page Reference: 117b Skill: Applied 153) The purpose of damages in contract law is to put the victim in the position he or she would have been in had the contract been properly performed. a. True

..

58

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

b. False Answer: a Diff: 1 Type: TF Page Reference: 117c Skill: Recall 154) What are liquidated damages?

Answer: Parties in a contract can agree to limit the amount of damages to be paid in the event of a breach of contract.

Feedback: Parties in a contract can agree to limit the amount of damages to be paid in the event of a breach of contract.

Diff: 2 Type: ES Page Reference: 118c Skill: Recall 155) Which of the following statements is true with respect to the law of damages? a. Damages are awarded for a breach of a condition but not for a breach of warranty. b. If a contract contains a liquidated damages clause, the party who has breached the contract has agreed to pay to the party wronged an amount equal to all the loss that directly and naturally flows from the breach. c. Damages are an order from the court for the breaching party to perform the contract as he or she agreed to do. d. Damages are intended to punish the wrongdoer for breaching the contract. e. A deposit is an amount of money a party to a contract agrees to forfeit if he or she breaches the contract.

Answer: e Diff: 2 Type: MC Page Reference: 118d Skill: Recall 156) Mike contracted to buy Rita's house in a written contract that provided for a deposit of $10 000 to be forfeited in the event of Mike's failing to go through with the deal. This deposit was an honest estimate of the damages Rita would suffer. On these facts, which of the following is true? a. If the contract price agreed upon was $150 000 and Rita, after Mike breaches the contract, sells the house in one week for $138 000, she will still be able to recoup all her losses.

..

59

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

b. If Mike breaches the contract, he would not have to pay $10 000 even if Rita suffered a substantial loss. c. If Mike breaches the contract, he will have to pay Rita all damages that directly and naturally flow from the breach. d. If Mike breaches the contract, he would have to pay $10 000 even if Rita's actual loss was $40 000. e. A clause in a contract that provides for the forfeiture of a deposit is called an exemption clause.

Answer: d Diff: 2 Type: MC Page Reference: 118e Skill: Applied 157) Which one of the following statements accurately describes the effect of a liquidated damages clause on a plaintiff's claim in a breach of contract action? a. The plaintiff will likely be awarded a judgment for all damages that "naturally and directly flow" from the breach. b. The court will likely award the amount set out in the clause if it considers that to be a genuine estimate by the parties of the likely consequences of the breach. c. This clause conclusively determines the amount of damages that the court can award. d. Liquidated damages only apply to losses caused by excess water, such as floods or tidal waves. e. This clause requires the injured party to take all reasonable steps to mitigate (lessen) his or her losses.

Answer: b Diff: 2 Type: MC Page Reference: 118f Skill: Recall 158) Adams signed a contract in which he promised to sell his house to Jefferson for $225 000. The "deposit" to be paid was set at $4000, and the liquidated damages clause provided that the deposit would be forfeited in the event that the buyer breached the contract. The buyer did breach the contract. Because the cost of housing was falling, it was difficult, even after a reasonable time had passed, to find a new buyer. The highest offer was $218 000. Adams accepted. Which of the following is true with regard to Adams's remedies? a. Adams could sue for an injunction to stop Jefferson from buying another house. b. Adams would be entitled to the $4000 only, if the court held that the deposit was an honest attempt of the parties to estimate damages. c. Adams must sue for specific performance, which is the only remedy, an equitable remedy, available to the parties in land transactions. d. Adams would be entitled to damages for money lost-$7000 plus selling costs.

..

60

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

e. Adams could ask the court to order an accounting.

Answer: b Diff: 2 Type: MC Page Reference: 118g Skill: Applied 159) Which of the following is true with regard to remedies for breach of contract? a. An injunction is an equitable remedy that forces a person to comply with the terms of the contract. b. The amount of damages to be given to the victim of the breach may be limited to the amount specified in a liquidated damages clause of the contract. c. A person who breaches a contract is liable for all loss that directly and naturally flows from the breach, no matter how unforeseeable. d. Specific performance is the proper remedy to stop a person from doing something that he or she had promised in the contract not to do (e.g., not to compete, not to disclose secrets, etc.). e. The victim of a breach can recover damages that he could have avoided if he had tried to mitigate his loss.

Answer: b Diff: 2 Type: MC Page Reference: 118h Skill: Recall 160) The victim of a breach cannot recover damages that he or she could have avoided if he or she had made a reasonable effort. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 118i Skill: Recall 161) With respect to breached contract damages awarded, discuss the meaning of duty to mitigate.

Answer: The victim of a breached contract must demonstrate to the court that he or she has taken all reasonable steps to minimize the losses he or she faces (or faced) as a result of the contract breach. Failure to adequately demonstrate this effort will result in a lesser amount awarded in damages.

..

61

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

Feedback: The victim of a breached contract must demonstrate to the court that he or she has taken all reasonable steps to minimize the losses he or she faces (or faced) as a result of the contract breach. Failure to adequately demonstrate this effort will result in a lesser amount awarded in damages.

Diff: 2 Type: ES Page Reference: 118j Skill: Recall 162) Which of the following is true with regard to remedies for breach of contract? a. If the seller has committed a "fundamental breach" of the contract, an exemption clause absolves the seller from liability. b. Non est factum is an equitable remedy forcing a person to comply with the terms of the contract. c. The victim of a breach can recover damages that he could have avoided if he had tried to mitigate his loss. d. Damages are awarded by the court to a person who has suffered loss because of a breach of an essential term of the contract, but are not awarded for a breach of a nonessential term (i.e., a warranty). e. A person who breaches a contract is liable for all foreseeable loss that directly and naturally flows from the breach.

Answer: e Diff: 2 Type: MC Page Reference: 118k Skill: Recall 163) Which of the following is true with regard to ending a contract by performance, agreement, frustration, or breach? a. If the court holds that a contract has been ended by frustration, the damages awarded by the court will be the same as if the contract was ended by a breach. b. A person who breaches a contract is liable for all loss that directly and naturally flows from the breach, no matter how unforeseeable. c. The victim of a breach can recover damages even for the loss he could have avoided if he had tried to. d. A victim of breach can only receive compensation in an amount that was reasonably foreseeable by the breaching party at the time they entered into the agreement. e. If a person owing money has tendered payment in a reasonable way, at a reasonable time, and it has been refused, he is free from any further obligation to pay.

Answer: d Diff: 2 Type: MC Page Reference: 118l

..

62

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

Skill: Recall 164) A person who breaches a contract is responsible for all loss that flows from the breach, no matter how unforeseeable. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 118m Skill: Recall 165) Explain what is meant by the term remote with respect to damages awarded in contract disputes.

Answer: The victim of a breach can only receive compensation in an amount that was reasonably foreseeable by the breaching party at the time they entered into the agreement.

Feedback: The victim of a breach can only receive compensation in an amount that was reasonably foreseeable by the breaching party at the time they entered into the agreement.

Diff: 2 Type: ES Page Reference: 118n Skill: Recall 166) Damages are an example of an equitable remedy. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 119a Skill: Recall 167) Injunction is an example of an equitable remedy. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 119b Skill: Recall

..

63

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

168) Harry agreed to make a new violin for Ted at a particularly attractive price. Before he finished crafting it, however, an opportunity arose to work as a salesman for Joe's Fine Cars. Since it was clear that he could never make a living as a violin maker, Harry took the job and refused to finish the violin for Ted. Which of the following is the appropriate remedy in these circumstances? a. Injunction b. Specific performance c. Rescission d. Damages e. No remedy Answer: d Diff: 2 Type: MC Page Reference: 119c Skill: Applied 169) Indicate any limitations on the availability of specific performance and injunctions.

Answer: These are equitable remedies, and therefore they will not be available where monetary compensation would have proved an adequate remedy. They will also not be available if they cause difficulty to a third party, or where the person seeking the remedy is also guilty of some wrongdoing.

Feedback: These are equitable remedies, and therefore they will not be available where monetary compensation would have proved an adequate remedy. They will also not be available if they cause difficulty to a third party, or where the person seeking the remedy is also guilty of some wrongdoing.

Diff: 2 Type: ES Page Reference: 119e Skill: Recall 170) Which of the following is one of the remedies generally available for a breach of contract? a. Specific performance b. Punitive damages c. Anticipatory breach d. Novation e. Repudiation Answer: a Diff: 1 Type: MC

..

64

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

Page Reference: 119f Skill: Recall 171) Alan entered into a written contract for the purchase of a house owned by Joe. But as the time to move approached, Alan discovered that Joe was refusing to move out and refusing to transfer the property. Apparently a dissatisfied customer had driven through the showroom window of Joe's new car dealership causing him considerable expense. Joe could no longer afford to purchase the new luxury home in Langley to which he had intended to move. Which of the following is the appropriate remedy in these circumstances for Alan, who really wants the house? a. Specific performance b. Damages c. Injunction d. Rescission e. No remedy Answer: a Diff: 2 Type: MC Page Reference: 119g Skill: Applied 172) Specific performance is an equitable remedy that requires the breaching party to perform his or her part of the contract. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 119h Skill: Recall 173) Rick was a talented computer programmer and had agreed to work for Bill in his successful computer software business, signing a one-year contract to that effect. On the day he was to start work, and after a week of training where he learned a considerable amount of confidential information about Bill's operation, Rick phoned Bill and announced that he was going to work for Bill's competitor instead. Which of the following is the appropriate remedy in these circumstances? a. Specific performance b. No remedy c. Rescission d. Accounting e. Injunction Answer: e

..

65

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

Diff: 2 Type: MC Page Reference: 119i Skill: Applied 174) What is an injunction?

Answer: This is an equitable remedy available for the aggrieved party to a contract dispute. An injunction is a court order that requires the end of conduct that is breaching a contract.

Feedback: This is an equitable remedy available for the aggrieved party to a contract dispute. An injunction is a court order that requires the end of conduct that is breaching a contract.

Diff: 2 Type: ES Page Reference: 119j Skill: Recall 175) It should make it easier to obtain an injunction if the terms of the contract set out an injunction as an appropriate remedy in the case of breach. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 119k Skill: Recall 176) One of the remedies available to a victim of a contract dispute is that of an accounting. Define this.

Answer: This is an equitable remedy. An accounting is available to the breached party when profits have been diverted by the other party and it is difficult to determine the financial injury that has taken place. Here, the court can order the breaching party to disclose financial records and dealings, and to pay any profits obtained through wrongdoing to the other party.

Feedback: This is an equitable remedy. An accounting is available to the breached party when profits have been diverted by the other party and it is difficult to determine the financial injury that has taken place. Here, the court can order the breaching party to disclose financial records and dealings, and to pay any profits obtained through wrongdoing to the other party.

Diff: 2

..

66

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 4: Enforcing Contractual Obligations

Type: ES Page Reference: 119l Skill: Applied 177) Quantum meruit is applied where the contract is breached after all work has been done. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 119m Skill: Recall 178) Define the term quantum meruit.

Answer: Quantum meruit is the court requirement for a reasonable amount of money to be paid for work that has been done when no specific consideration has been agreed upon before services have been rendered in a contract that has been breached.

Feedback: Quantum meruit is the court requirement for a reasonable amount of money to be paid for work that has been done when no specific consideration has been agreed upon before services have been rendered in a contract that has been breached.

Diff: 2 Type: ES Page Reference: 119n Skill: Recall

..

67

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 5: Legislation in the Marketplace

1) The principles of freedom of contract and caveat emptor have been completely done away with by the Sale of Goods Act. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 126b Skill: Recall 2) What is the main purpose of the Sale of Goods Act? Answer: To provide missing terms that the parties neglect to include in their sales contracts. These are implied into the agreement.

Feedback: To provide missing terms that the parties neglect to include in their sales contracts. These are implied into the agreement.

Diff: 2 Type: ES Page Reference: 126c Skill: Recall 3) "The Sale of Goods Act imposes terms into the contract that are even and fair, that don't benefit one side over the other." Discuss the accuracy of this statement.

Answer: It's inaccurate. If the parties include terms in their agreement that are inconsistent with the Sale of Goods Act, those terms will override the Sale of Goods Act. Feedback: It's inaccurate. If the parties include terms in their agreement that are inconsistent with the Sale of Goods Act, those terms will override the Sale of Goods Act. Diff: 2 Type: ES Page Reference: 126d Skill: Recall 4) "The Sale of Goods Act is another example of consumer protection legislation."

Discuss the accuracy of this statement. ..

1

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 5: Legislation in the Marketplace

Answer: It's incorrect. The Sale of Goods Act is designed to cover all situations where goods are sold, whether at the wholesale level or at the retail level. Commercial transactions are covered as well.

Feedback: It's incorrect. The Sale of Goods Act is designed to cover all situations where goods are sold, whether at the wholesale level or at the retail level. Commercial transactions are covered as well.

Diff: 2 Type: ES Page Reference: 126e Skill: Recall 5) Often the title of the goods will be transferred to a creditor as security for a loan.

Sometimes this involves the use of a bill of sale, but the nature of the transaction is for the loan to be repaid. In this case, the creditor retains possession of the item used as security. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 126f Skill: Recall 6) Which of the following contracts would be covered by the Sale of Goods Act? a. A contract for the sale of a famous painting b. The trade of a car for a boat involving no money c. The purchase of a house d. A contract for medical services with a doctor e. The sale of corporate shares Answer: a Diff: 1 Type: MC Page Reference: 127c Skill: Recall

..

2

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 5: Legislation in the Marketplace

7) To which of the following transactions would the Sale of Goods Act apply? a. A contract for a boat b. A contract with a warehouse owner to store a Chevrolet car c. A contract for a house d. A contract for a haircut e. A contract to have a dress mended and cleaned Answer: a Diff: 1 Type: MC Page Reference: 127f Skill: Recall 8) Which of the following complaints would lead to a successful action under the Sale of Goods Act? a. "What do you mean you are not going through with the contract to sell me that lot? I have workers ready to start construction one week after the closing date!" b. "I paid a lot of money for this car and this is the third time I've had it back in the first week. Something is seriously wrong with it." c. "I hired you to tutor me for my chemistry exam, not to tell me your personal problems week after week!" d. "I left the car here with orders to adjust the front lights; I did not order a wheel alignment and I don't want to pay for it!" e. "I paid $1000 for government bonds, but you have sent me shares in a private company that I’ve never heard of!"

Answer: b Diff: 2 Type: MC Page Reference: 127g Skill: Applied 9) The Sale of Goods Act applies to all goods and services. a. True b. False Answer: b

..

3

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 5: Legislation in the Marketplace

Diff: 1 Type: TF Page Reference: 127h Skill: Recall 10) The Sale of Goods Act applies to all goods and services. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 127i and p Skill: Recall 11) What types of transactions do the Sale of Goods Act apply to?

Answer: The contract must anticipate the transfer of goods, either now or sometime in the future, for a monetary consideration.

Feedback: The contract must anticipate the transfer of goods, either now or sometime in the future, for a monetary consideration.

Diff: 2 Type: ES Page Reference: 127j, 128h Skill: Recall 12) Which of the following is a statement of facts to which the Sale of Goods Act would apply? a. "Waiter, there is a dead fly in my spaghetti." b. "Today is the closing date and I am willing to tender the full price in cash, namely $70 000, for the farm, and you are now telling me that you have no intention of closing." c. "I agreed to give you a dozen old campaign buttons for that original signature of the prime minister, but received the signature of the governor general." d. "I brought in five shirts to be laundered and you are returning only four to me!" e. "I asked for a trim! You've cut off 5 inches!!!"

..

4

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 5: Legislation in the Marketplace

Answer: a Diff: 2 Type: MC Page Reference: 127k, 130e Skill: Applied 13) Which of the following complaints would lead to a successful action under the Sale of Goods Act? a. "Waiter, there's a spider in my sandwich." b. "I paid $10 for government bonds, but you have sent me shares in a private company that I’ve never heard of!" c. "You are not going to honour our contract for the land?! I planned to build on that lot in the spring!" d. "I left the car here with orders to adjust the front lights; I did not order a tune-up!" e. "I hired you to wait tables, not to stand around doing stand-up comedy routines."

Answer: a Diff: 2 Type: MC Page Reference: 127l, 130g Skill: Applied 14) Which of the following is a statement of facts to which the Sale of Goods Act would apply? a. "I asked for a trim! You've cut off 2 inches!!!" b. "Excuse me; there is a mouse in this beer bottle." c. "Today is the closing date and I am willing to tender the full price in cash, namely $50 000, for the house and you are now telling me that you have no intention of closing." d. "I brought in five shirts to be laundered and you are returning only four to me!" e. "I agreed to give you a dozen old campaign buttons for that original signature of the prime minister, but received the signature of the governor general."

Answer: b Diff: 2 Type: MC Page Reference: 127m, 130h Skill: Applied

..

5

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 5: Legislation in the Marketplace

15) Which of the following is a statement of facts to which the Sale of Goods Act would apply? a. "The deal was this: Fred was to assign to Paul Fred's accounts receivable, and Paul would pay him $5000 cash, but Fred did not honour his promise." b. "We hired you as a bartender, not to join the guests and teach them Texas line dancing!" c. "I paid you to tune the car, but it obviously wasn't done!" d. "Pursuant to the contract, the buyer of the house tendered $50 000 on the closing date, but the seller had changed his mind." e. "There's a small, dead insect in my soup!"

Answer: e Diff: 2 Type: MC Page Reference: 127n, 130f Skill: Applied 16) The transfer of the title and possession of the goods in exchange for money must be intended or anticipated for the Sale of Goods Act to apply. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 127o Skill: Recall 17) Risk refers to potential loss due to damage of the goods. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 127r Skill: Recall

..

6

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 5: Legislation in the Marketplace

18) Explain the relationship between risk and title and how they are dealt with in the Sale of Goods Act. Answer: This is an easier essay topic and requires students to show an understanding of the concept of risk and how it is dealt with in sale of goods transactions. Whoever is assigned the risk will suffer the loss if the goods are damaged or destroyed. The Act first determines that risk follows title, but it is important that students demonstrate that they know this can be changed by agreement. Standardized approaches like CIF contracts, FOB contracts, and COD contracts, as well as the use of bills of lading and other mechanisms, can modify the normal operation of the Sale of Goods Act with respect to risk and title. Students then should demonstrate an understanding of the five rules that apply with respect to who has title to the goods at the various stages of a sale of goods transaction. These are involved rules, especially rule #5, relating to goods that are unascertained at the time of the agreement. See the text for the details of these rules.

Feedback: This is an easier essay topic and requires students to show an understanding of the concept of risk and how it is dealt with in sale of goods transactions. Whoever is assigned the risk will suffer the loss if the goods are damaged or destroyed. The Act first determines that risk follows title, but it is important that students demonstrate that they know this can be changed by agreement. Standardized approaches like CIF contracts, FOB contracts, and COD contracts, as well as the use of bills of lading and other mechanisms, can modify the normal operation of the Sale of Goods Act with respect to risk and title. Students then should demonstrate an understanding of the five rules that apply with respect to who has title to the goods at the various stages of a sale of goods transaction. These are involved rules, especially rule #5, relating to goods that are unascertained at the time of the agreement. See the text for the details of these rules.

Diff: 1 Type: ES Page Reference: 127q, 128b Skill: Applied 19) Under the Sale of Goods Act, the general rule is that risk follows title. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 127s Skill: Recall

..

7

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 5: Legislation in the Marketplace

20) When goods are sold, who normally bears the risk?

Answer: Risk follows title; that is, whoever has title to the goods at any point in the transaction is the one bearing the risk, unless the parties have specified otherwise in their agreement.

Feedback: Risk follows title; that is, whoever has title to the goods at any point in the transaction is the one bearing the risk, unless the parties have specified otherwise in their agreement.

Diff: 1 Type: ES Page Reference: 127t Skill: Recall 21) With FOB contracts, title and risk always transfer at the seller's place of business. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 127v Skill: Recall 22) In which of the following will the title to the goods pass to the buyer at the time of contract? a. ABC Co. buys all chemicals contained in a drum marked "A" but the price has to be ascertained by measuring the number of litres in the drum. b. Williams contracts for the desk he selected at Antiques Unlimited, and he arranges to have it delivered to his office tomorrow and to be paid for in one month. c. Mrs. Jones calls the Bay and asks it to send her the blanket advertised on p. 3 of its flyer. The Bay agrees and takes her credit card number. d. Mary picks out a leather briefcase and leaves it with the seller so that initials can be engraved on it. She pays by cheque. e. While at the Bay, Preston decides to buy the style of sofa he sees on display. He pays by cash and the store arranges to have a sofa sent from its warehouse directly to Preston's home.

Answer: b Diff: 2 ..

8

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 5: Legislation in the Marketplace

Type: MC Page Reference: 128c Skill: Applied 23) The following events occurred before the goods or parts of the goods were destroyed by fire. In which case would the buyer suffer the loss? a. Justin contracted for a piano that had to be tuned before it was in a deliverable state. It was tuned, but Justin had not been notified that it was ready. b. Jaspers contracted for four standard-sized cupboards for the kitchen. The boards had been cut, but they had not been assembled. c. Manchesco chose which of the chairs he wanted and contracted for them, but he had agreed to pay and pick them up the next day. d. McGrady ordered a chainsaw advertised in the Sears catalogue. e. Heinz contracted for all the corn in silo A. The seller still had to weigh the corn to determine the price.

Answer: c Diff: 3 Type: MC Page Reference: 128d Skill: Applied 24) The following events occurred before the goods or parts of the goods were lost or destroyed. In which case would the buyer suffer the loss? a. Heinz contracted for all of the corn in Silo A. The seller still had to weigh the corn to determine the price. b. Al picked out and contracted for a particular computer, and an additional component had to be installed before it was in deliverable state. The component was installed, but Al had not been notified that it was ready. c. Jaspers contracted for four standard-sized cupboards for the kitchen. The boards had been cut, but they had not been assembled. d. George ordered a Pentium computer system with 4 megabytes of RAM and a 105megabyte hard drive advertised by Kicks Computers. e. Yates chose which of the desks he wanted and contracted for it, but he had agreed to pay and pick it up the next day.

Answer: e Diff: 2 Type: MC

..

9

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 5: Legislation in the Marketplace

Page Reference: 128e Skill: Applied 25) If the contract doesn't say who bears the loss if an item is lost or stolen, the Sale of Goods Act says risk goes with title. If the contract doesn't say when the title will pass, the Sale of Goods Act implies when it will pass. In which of the following will the statute imply that title will pass to the buyer at the time of the contract? a. George calls a store and asks it to deliver the table advertised in its catalogue. The store agrees, takes his credit card number, and promises to deliver the table on Friday. b. Azar goes into a store specializing in old woodworking tools. He chooses a $10 tooling machine. The contract provides that it would be delivered to his workshop the next morning and he would pay for it in one month. c. Maureen contracts for Ms. Roberts' next year's pumpkin crop. d. Agro Ltd. buys all chemicals contained in the container marked "A" but the price has to be ascertained by measuring the number of litres in the container. e. While at Sears, Preston decides to buy the style of sofa he sees on display. He pays cash and the store arranges to have one like it, covered in the material he selects, delivered directly to him from the factory.

Answer: b Diff: 2 Type: MC Page Reference: 128f Skill: Applied 26) When a contract of purchase is entered into with regard to specific goods that are to be delivered some time in the future, title always transfers at the point of delivery. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 128g Skill: Recall 27) John walked into Sam's TV store and said, pointing to a particular television, "I'll take that one." They wrote up the deal, and John was to return the next day to pay for it and pick it up. Explain who bears the risk in the meantime.

..

10

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 5: Legislation in the Marketplace

Answer: John bears the risk. Rule #1 applies to this situation, and title transfers immediately upon the transaction taking place.

Feedback: John bears the risk. Rule #1 applies to this situation, and title transfers immediately upon the transaction taking place.

Diff: 2 Type: ES Page Reference: 128i Skill: Applied 28) Jones walked into a new car lot, pointed to a specific car, and said, "I'll take that one."

Sam, the operator of the car lot, explained that there was a certain amount of pre-delivery preparation that had to take place before the car could be delivered, and that it would be ready for the purchaser two days later. It was agreed that the purchase price would be paid at that time. Explain who bears the risk in the meantime.

Answer: The dealer. Rule #2 applies to this situation, and property does not pass on the goods until the buyer has received notice that the work has been done.

Feedback: The dealer. Rule #2 applies to this situation, and property does not pass on the goods until the buyer has received notice that the work has been done.

Diff: 2 Type: ES Page Reference: 128j Skill: Applied 29) Sam went to Joe's garden shop and agreed to purchase a particular bin of bark mulch.

The seller, Joe, agreed and said that he would weigh it, figure out the price, and deliver it tomorrow. In the meantime, who has title to the bark mulch?

Answer: Joe has title to the bark mulch. Rule #3 applies in this situation, as goods have to be weighed or measured to determine the price.

Feedback: Joe has title to the bark mulch. Rule #3 applies in this situation, as goods have to be weighed or measured to determine the price.

Diff: 2 Type: ES

..

11

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 5: Legislation in the Marketplace

Page Reference: 128k Skill: Applied 30) Under the Sale of Goods Act, when no time has been set for the return of goods taken on approval, title passes at the expiration of 48 hours. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 128l Skill: Recall 31) Joe bought a TV "on approval," took it home, and installed it as part of a built-in stereo wall in his renovated recreation room. He discovered, however, that the TV was too small, extracted it from the wall, and took it back to the seller, saying he was not happy with it. The seller asked about the minor scratches on the finish and Joe explained that it had been built into the wall, and the trouble he had experienced to get the TV out again. Has title transferred? Explain.

Answer: Title transferred as soon as Joe did something to those goods that was inconsistent with the seller's continued ownership of them. This is Rule #4.

Feedback: Title transferred as soon as Joe did something to those goods that was inconsistent with the seller's continued ownership of them. This is Rule #4.

Diff: 3 Type: ES Page Reference: 128m Skill: Applied 32) Joe left his car at Harry's tire store, asking Harry to put a particular model of tire from his stock onto the vehicle while Joe went to his office in town. During the day, the tires were installed on the car, and Joe returned that evening to pick up the car. At what point did title on those tires transfer?

Answer: This is Rule #5. Title transfers when the goods have been unconditionally appropriated and there is the assent of the other party of such appropriation. In this case, by leaving the car, knowing that Harry would choose the tires and put them on, Joe had assented to the

..

12

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 5: Legislation in the Marketplace

selection; therefore, title transferred when Harry put the tires on Joe's rims and on the vehicle.

Feedback: This is Rule #5. Title transfers when the goods have been unconditionally appropriated and there is the assent of the other party of such appropriation. In this case, by leaving the car, knowing that Harry would choose the tires and put them on, Joe had assented to the selection; therefore, title transferred when Harry put the tires on Joe's rims and on the vehicle.

Diff: 3 Type: ES Page Reference: 128o Skill: Applied 33) Distinguish between conditions and warranties in a sale of goods contract.

Answer: Conditions are major terms of the contract, whereas warranties are minor terms of the contract.

Feedback: Conditions are major terms of the contract, whereas warranties are minor terms of the contract.

Diff: 1 Type: ES Page Reference: 129a Skill: Recall 34) Which of the following statements is correct with respect to a contract for the purchase of goods? a. Where a breach of a condition is involved, the obligation of the victim of the breach is ended and that person need not perform her side of the agreement. b. The purpose of the inclusion of a warranty in a sale of goods contract is to force the seller of those goods to repair the goods if they are defective. c. The purchaser has a claim against the manufacturer only if the goods purchased are defective. d. Where a breach of a condition is involved, the contract is still in force and the victim of the breach must still perform her side of the agreement. e. Where a breach of a warranty is involved, the obligation of the victim of the breach is ended and that person need not perform her side of the agreement.

..

13

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 5: Legislation in the Marketplace

Answer: a Diff: 1 Type: MC Page Reference: 129b Skill: Recall 35) A warranty under the Sale of Goods Act is a contract term the breach of which will allow the victim of the breach to refuse to go through with his or her side of the agreement. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 129c Skill: Recall 36) Carol went to the mall to purchase a cellphone. After discussing the features of several models with the vendor, she purchased one that suited her requirements.

However, when she tried to use it, she found it would not work on any of the available networks. Which of the following implied term with respect to title under the Sale of Goods Act has been breached by the vendor of the cellphone? a. The implied warranty that requires the vendor to deliver good title b. The implied warranty that the goods would be free of any charge or encumbrance c. The implied warranty that the goods will match the sample d. The implied warranty that requires the seller to provide quiet possession e. The implied warranty that goods must be of merchantable quality Answer: d Diff: 2 Type: MC Page Reference: 129e Skill: Applied 37) The Sale of Goods Act adds a number of implied terms to a sale-of-goods transaction.

Which one of the following statements is not an implied term under the Sale of Goods Act? a. Where goods are sold by sample, the bulk must match the sample.

..

14

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 5: Legislation in the Marketplace

b. The seller promises the buyer good title. c. The buyer is promised satisfaction or the right to get his money back. d. Goods sold by description must be of merchantable quality. e. Where the buyer tells the dealer what he wants them for and relies on the seller to provide them, the goods must be reasonably fit for that purpose.

Answer: c Diff: 2 Type: MC Page Reference: 129f, 130a, d, and m Skill: Recall 38) If you buy a toaster from a second-hand dealer of small appliances, which of the following is true? a. The Sale of Goods Act prohibits the seller from exempting himself from liability in the event that the toaster is not fit for purpose. b. The risk of loss depends on who has possession of the toaster. c. The Sale of Goods Act does not apply. d. Title to the toaster would pass at the time the buyer picked it up the next day. e. There is an implied term of the contract that the seller has good title (i.e., the right to sell it).

Correct: 0 Answer: e Diff: 2 Type: MC Page Reference: 129g Skill: Recall 39) John has been working and saving his money; he wants to buy a car on his 25th birthday. Which of the following is false? a. There will be an implied term in the contract that John will get good title to the car. b. There will be an implied term that payment is to be made by certified cheque. c. There will be an implied term in the contract that John will enjoy "quiet possession." d. An exemption clause may modify certain implied terms. e. There will be an implied term in the contract that the car will be free and clear of encumbrances.

..

15

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 5: Legislation in the Marketplace

Answer: b Diff: 2 Type: MC Page Reference: 129h, m, and r, 130r Skill: Applied 40) Alf bought a car from Mr. Wojchu for $10 000. Shortly afterwards, a bailiff, acting for an unpaid conditional seller, seized the car. The conditional seller had properly registered his claim in time. Alf wants to sue Mr. Wojchu. Which of the following correctly sets out his legal position? a. Alf wins. Mr. Wojchu has failed to deliver good title. b. Wojchu loses. Risk follows title. c. Alf wins. Goods are not of merchantable quality. d. Alf loses. Caveat emptor applies. e. Alf loses. It was his obligation to search the title and he failed to do so.

Answer: a Diff: 2 Type: MC Page Reference: 129i Skill: Applied 41) Which of the following is true with regard to the implied terms of the Sale of Goods Act? a. If you ordered a lamp from a catalogue but it did not match the description when you received it, the seller is in breach of a warranty of the contract. b. The Act does not provide that the goods must be fit for purpose. c. If a buyer places an order for silk after seeing a sample of it, the order must be delivered within 10 days. d. The Act provides that the goods must be of "merchantable quality," and that means that the goods must be without flaw. e. When you buy a car, and the contract speaks only of the car and the price, you are entitled to receive good title, to acquire quiet possession and a car free from any encumbrances (i.e., a claim by a bank).

Answer: e Diff: 2

..

16

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 5: Legislation in the Marketplace

Type: MC Page Reference: 129j, n, and s Skill: Applied 42) The Sale of Goods Act places certain obligations on the seller with respect to conveying the title. What are those requirements?

Answer: First, a condition that the seller conveys good title or has the right to sell the goods at the time the contract is to be performed. Second, a warranty of quiet possession, meaning that the purchaser can use the goods as intended without interference. Finally, a warranty that the goods be free of any lien or encumbrance.

Feedback: First, a condition that the seller conveys good title or has the right to sell the goods at the time the contract is to be performed. Second, a warranty of quiet possession, meaning that the purchaser can use the goods as intended without interference. Finally, a warranty that the goods be free of any lien or encumbrance.

Diff: 3 Type: ES Page Reference: 129k Skill: Recall • • • • • • •

43) Do not modify the shaded cells.

Click here for detailed authoring instructions and examples.

To add more 'Choices', select the last row and use the Word Menu option Table > Insert -> Rows Below.

A score of 0 indicates an incorrect answer. A positive 'Score' indicates a correct answer.

To Shuffle the order of choices, place an ‘X’ or ‘x’ next to the desired selection.

To specify Bloom's Taxonomy, place an 'X' or 'x' next to the desired selection.

Fields in Red are mandatory

44) Quiet possession means that goods have to be usable as intended without interference. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 129o

..

17

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 5: Legislation in the Marketplace

Skill: Recall 45) Quiet possession of the goods means that the goods must be of merchantable quality and free from any inherent defect. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 129p Skill: Recall 46) John bought a new car for $5000. Shortly afterwards, a bailiff acting for an unpaid chattel mortgagee who had properly registered his claim in time seized the car. In which of the following circumstances can John sue the seller? a. If the seller told John that the car was free and clear of any encumbrances after John asked b. If the seller told John that the car was free and clear of any encumbrances even though John didn't ask c. If John forgot to check the registry for liens or encumbrances d. If neither John nor the seller said anything about whether the car was free and clear of encumbrances e. All of the above Answer: e Diff: 2 Type: MC Page Reference: 129q Skill: Applied 47) If goods are purchased by description or by sample and what is actually delivered does not match the description or sample, caveat emptor applies. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 130b ..

18

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 5: Legislation in the Marketplace

Skill: Recall 48) What are the rights of the purchasers when the goods do not match the description?

Answer: This is a breach of condition, and the purchasers are entitled to refuse delivery of the goods and treat their obligation as ended.

Feedback: This is a breach of condition, and the purchasers are entitled to refuse delivery of the goods and treat their obligation as ended.

Diff: 2 Type: ES Page Reference: 130c Skill: Recall 49) Mrs. Quale bought a new sewing machine from Androcles' Sewing Centre because she thought that, as well as using it herself, her daughter, Susan, would also be able to use it for her high school home economics projects. Unfortunately, because of a manufacturing defect, the machine ran wild when Susan was using it and it destroyed her project, sewed the end of her finger, and sprayed oil all over the carpet. Androcles' Sewing Centre had bought the machine from Midmen Distributors Ltd., which had bought it originally from the manufacturer, General Stitchers Inc. Which one of the following statements is false with respect to the available remedies in this situation? a. Midmen Distributors Ltd. has an action against General Stitchers Inc. for breach of an implied condition of merchantable quality. b. Midmen Distributors Ltd. bears no liability here because it was just an intermediary in the distribution chain. c. Androcles' has an action for breach of contract against Midmen Distributors. d. Susan has an action in tort law against General Stitchers Inc. e. Mrs. Quale has an action against Androcles' for breach of an implied condition of reasonable fitness for a particular purpose.

Answer: b Diff: 2 Type: MC Page Reference: 130f Skill: Applied 50) Explain what obligation the Sale of Goods Act puts on the seller with respect to fitness and quality. ..

19

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 5: Legislation in the Marketplace

Answer: The Act requires that when goods are sold by description, those goods must be of merchantable quality (i.e., free of any defects that would render them unusable or interfere with their effectiveness). The Act also provides that when the purchaser relies on a seller’s recommendation for goods that will do a specific job, the goods must be fit for that purpose.

Feedback: The Act requires that when goods are sold by description, those goods must be of merchantable quality (i.e., free of any defects that would render them unusable or interfere with their effectiveness). The Act also provides that when the purchaser relies on a seller’s recommendation for goods that will do a specific job, the goods must be fit for that purpose.

Diff: 3 Type: ES Page Reference: 130j and o Skill: Recall 51) Explain the importance of the provisions of the Sale of Goods Act relating to fitness and quality of the goods.

Answer: One of the most important provisions of the Sale of Goods Act relates to fitness and quality. Students should point out that this implied term might be the only provision in a contract relating to the ability of the product to perform as required or whether it is properly made to do the job. These provisions apply to both new and used goods, and they apply not only to consumer purchases but also to business transactions, including heavy-duty machinery. The Hunter Engineering case is a good example of this provision being applied to the sale of large, expensive, specialized equipment used in mining operations. Students should also point out that in consumer transactions, when dealing with new goods, many jurisdictions impose terms relating to the fitness and quality of the product on the manufacturer and seller. Exemption clauses are an attempt to modify this obligation, as set out in the Sale of Goods Act, but in many jurisdictions those exemption clauses are void in consumer transactions. This question is a good opportunity for students to demonstrate an understanding of not only how the Sale of Goods Act implies terms into the agreement that otherwise would not be included, but also the specific nature of these clauses with respect to fitness and quality, and how they have been expanded into a form of consumer protection legislation.

Feedback: One of the most important provisions of the Sale of Goods Act relates to fitness and quality. Students should point out that this implied term might be the only provision in a contract relating to the ability of the product to perform as required or whether it is properly made to do the job. These provisions apply to both new and used

..

20

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 5: Legislation in the Marketplace

goods, and they apply not only to consumer purchases but also to business transactions, including heavy-duty machinery. The Hunter Engineering case is a good example of this provision being applied to the sale of large, expensive, specialized equipment used in mining operations. Students should also point out that in consumer transactions, when dealing with new goods, many jurisdictions impose terms relating to the fitness and quality of the product on the manufacturer and seller. Exemption clauses are an attempt to modify this obligation, as set out in the Sale of Goods Act, but in many jurisdictions those exemption clauses are void in consumer transactions. This question is a good opportunity for students to demonstrate an understanding of not only how the Sale of Goods Act implies terms into the agreement that otherwise would not be included, but also the specific nature of these clauses with respect to fitness and quality, and how they have been expanded into a form of consumer protection legislation.

Diff: 2 Type: ES Page Reference: 130k, 131d and e Skill: Recall 52) Explain what is meant by merchantable quality.

Answer: That the goods be free from any defect that would render them unusable or interfere with their effectiveness.

Feedback: That the goods be free from any defect that would render them unusable or interfere with their effectiveness.

Diff: 2 Type: ES Page Reference: 130l Skill: Recall 53) Gregory went to Collegiate Sports Ltd. with his dad, who asked for some shoes for Gregory suitable for playing squash. Gregory was given a pair of running shoes suitable only for jogging. His dad paid by cash. That evening, wearing the new shoes while playing squash, Gregory broke his ankle. In the ensuing lawsuit, the statement of claim cited the provisions of the Sale of Goods Act. Which of the following is true if it were proven that the shoes were inappropriate and the cause of the injury? a. This is not a sale of goods situation because Gregory's father paid by cash. b. This is a "buyer beware" situation and there would be no remedy for anyone. c. Only Gregory can sue since he was the only one hurt.

..

21

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 5: Legislation in the Marketplace

d. Gregory's father would be the proper plaintiff in this action and could win on the claim that the goods were not fit for purpose. e. Gregory’s father could win for breach of contract because he made known the purpose for which he wanted the shoes to a shoe dealer.

Answer: e Diff: 2 Type: MC Page Reference: 130n Skill: Applied 54) Which of the following statements is correct with respect to the Sale of Goods Act? a. The parties are restricted to contract out of any of the terms of the Sale of Goods Act. b. The Sale of Goods Act does apply to the sale of land. c. The terms included in the Sale of Goods Act override the terms agreed upon by the parties to such a sale of goods. d. Some of the terms of the Sale of Goods Act are implied in the contract of sale. e. The Sale of Goods Act does apply to the assignment of a contractual claim.

Answer: d Diff: 1 Type: MC Page Reference: 130p Skill: Recall 55) O'Neil bought a new car from a Chevrolet dealer for family use. The contract he signed contained the following clause: "The parties hereto expressly agree that the dealer is not liable for any breach of condition or warranty, express or implied." He also bought a used car radio from the dealer for his old car, which he was keeping. The contract for the radio was not in writing. The car did not run properly; O'Neil had it back in the shop seven times in three weeks. It was finally determined that the problem was due to a faulty transmission. Unfortunately, the car radio didn't work either. On these facts, which of the following is true? a. The contract for the radio is not covered by the Sale of Goods Act because the radio was not new. b. The exemption clause in the contract for the car would succeed in defeating an action

by O'Neil against the dealer for breach of contract. c. The exemption clause does not apply to either because both involve fundamental breaches of contract.

..

22

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 5: Legislation in the Marketplace

d. The contract for the radio is not covered by the Sale of Goods Act because the contract was not in writing. e. O'Neil has an action for breach of contract against the dealer, because the exemption clause does not defeat the dealer's obligation to deliver a properly performing car (fit for use) in a consumer transaction.

Answer: e Diff: 2 Type: MC Page Reference: 131b Skill: Applied 56) In commercial transactions, courts view exemption clauses as having been negotiated terms of the contract with consideration calculated on the basis of the liability associated with the clause and, therefore, are reluctant to overturn these clauses when they are clear and contain no ambiguity. a. True b. False Answer: a Diff: 3 Type: TF Page Reference: 131e Skill: Recall 57) When the sale of goods is involved and a specific price has not been agreed upon, a reasonable price must be paid. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 131f Skill: Recall 58) Where the parties fail to state a price in a sale of goods transaction, what effect will the Sale of Goods Act have on that agreement?

Answer:

..

23

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 5: Legislation in the Marketplace

The Sale of Goods Act contains a provision stating that, in such circumstances, a reasonable price will be paid.

Feedback: The Sale of Goods Act contains a provision stating that, in such circumstances, a reasonable price will be paid.

Diff: 2 Type: ES Page Reference: 131g Skill: Recall 59) Under the Sale of Goods Act, the seller has a lien against the goods and can recover those goods from the purchaser in the event of default. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 131j Skill: Recall 60) With respect to a sale of goods, which one of the following statements is true? a. If the parties do not agree otherwise, the risk of loss stays with the seller until delivery. b. A seller who has been given a cheque that "bounces" (dishonoured for insufficient funds), in payment for goods that he still possesses, has rights against the goods themselves as well as an action for breach of contract against the buyer. c. The Sale of Goods Act also applies to the purchase of real estate and of bonds. d. Legislation allows a seller to override the requirement that goods supplied be fit and of merchantable quality in consumer transactions. e. If the parties do not agree otherwise, the time of payment is 30 days after the time of delivery.

Answer: b Diff: 2 Type: MC Page Reference: 131k Skill: Recall

..

24

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 5: Legislation in the Marketplace

61) Each province has passed an international sale of goods act covering international sales transactions, based on the World Trade Organization trade agreement. a. True b. False Answer: b Diff: 3 Type: TF Page Reference: 131l Skill: Recall 62) Parties to a contract can override the Sale of Goods Act’s implied conditions and warranties related to title, fitness, quality, and nature by including exemption clauses in the form of limited warranties. a. True b. False Answer: a Diff: 2 Type: TF Page Reference: 132a Skill: Recall 63) Tina's Gourmet Catering Ltd. (hereinafter referred to as "Tina's") makes several types of fresh salads, which it packages in sealed containers and sells to various retail outlets.

Grandma Wright, shopping with her daughter Jane, bought one of Tina's salads at the delicatessen at Superdeal Grocers Ltd. (Superdeal). Jane and her grandmother drove to Jane's home, and Jane served the salad to her family for lunch. The salad was contaminated through Tina's carelessness and caused Jane's family to be very sick: the father missed work and the kids missed school for a week. Neither Jane nor her grandmother was sick because neither sat down with the others for lunch. On these facts, which of the following actions would most likely be successful? a. Grandma v. Superdeal for negligence b. Kids v. Tina's for negligence c. Jane v. Tina's for negligence d. Father v. Superdeal for negligence e. Father v. Superdeal for breach of contract Answer: b Diff: 2

..

25

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 5: Legislation in the Marketplace

Type: MC Page Reference: 132d Skill: Applied 64) Unconscionable transactions statutes apply to any transaction where the price paid is not fair or reasonable. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 133a Skill: Recall 65) Which of the following statements accurately states the law with respect to consumer transactions? a. Where the court decides that a transaction was unconscionable, that transaction is unenforceable by the buyer. b. Where a supplier engages in a deceptive or unconscionable act, he is neither subject to fines nor jail. c. In most provinces, legislation makes false or misleading statements in advertising or made by a salesperson an unfair business practice, but this is not actionable as a breach. d. In all consumer transactions, there is a cooling-off period of seven days in which the consumer can call off the deal. e. In most provinces, legislation makes false or misleading statements in advertising or made by a salesperson a term of the contract and, therefore, actionable as a breach.

Answer: e Diff: 2 Type: MC Page Reference: 133b Skill: Recall 66) Which of the following is not a term implied by the Sale of Goods Act? a. The goods are of merchantable quality. b. Where the goods are bought by sample, the bulk will match the sample. c. The statements of the salesperson are part of the contract of sale.

..

26

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 5: Legislation in the Marketplace

d. There are no liens on the goods. e. The goods must match the description given of them.

Answer: c Diff: 2 Type: MC Page Reference: 133c Skill: Recall 67) There is a cooling-off period in all consumer sales transactions where the purchaser of goods has a period of time in which to change his mind. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 133d Skill: Recall 68) The protection of consumers is solely a provincial responsibility. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 136a Skill: Recall 69) Discuss the function of the federal Competition Act and the role it plays in consumer protection.

Answer: The purpose of the federal Competition Act is to “maintain and encourage competition in Canada.” The anticompetitive practices controlled by the Competition Act range from mergers and acquisitions designed to create monopolies and reduce competition to direct interference in the marketplace through price fixing or false advertising.

The statute prohibits conspiracies that lessen competition even where such an agreement might make an industry more efficient. A conspiracy involves businesses getting together

..

27

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 5: Legislation in the Marketplace

and, through agreement, trying to control the market and sales (e.g., agreeing not to sell a product below a certain price, agreeing not to open a store or compete in a certain area).

Bid-rigging, where competitors conspire to control bids on a particular project to control the winning bid and inflate the price, is prohibited. Similarly, price fixing is prohibited, as are representations made to the public that are false or misleading with respect to labelling or promotion of a product.

Pyramid selling (where people pay a fee to participate in a multilevel organization that is not based on the sale of a product) is prohibited, along with deceptive marketing practices, predatory pricing, and any practice that may have an adverse effect on competition in the market.

The Competition Act is supported by the Competition Tribunal Act, which created a tribunal to hear appeals from decisions made by the Competition Bureau, the body responsible for the administration and enforcement of the Competition Act and other related Acts.

The Act also seeks to control certain abusive trade practices, where one company tries to use its position to drive another out of business or otherwise control its share of the market. Predatory pricing is an example of such abusive practices.

The federal Competition Act is very important in the process of protecting consumers from abusive practices by merchants. Students should show an understanding of the breadth of this legislation, as well as indicate some of the methods of implementation and enforcement, including a discussion of the role of the tribunal and the penalties and remedies that can be imposed.

Feedback: The purpose of the federal Competition Act is to “maintain and encourage competition in Canada.” The anticompetitive practices controlled by the Competition Act range from mergers and acquisitions designed to create monopolies and reduce competition to direct interference in the marketplace through price fixing or false advertising.

The statute prohibits conspiracies that lessen competition even where such an agreement might make an industry more efficient. A conspiracy involves businesses getting together and, through agreement, trying to control the market and sales (e.g., agreeing not to sell a product below a certain price, agreeing not to open a store or compete in a certain area). Bid-rigging, where competitors conspire to control bids on a particular project to control the winning bid and inflate the price, is prohibited. Similarly, price fixing is prohibited, as are representations made to the public that are false or misleading with respect to labelling or promotion of a product.

Pyramid selling (where people pay a fee to participate in a multilevel organization that is not based on the sale of a product) is prohibited, along with deceptive marketing practices, predatory pricing, and any practice that may have an adverse effect on competition in the market.

The Competition Act is supported by the Competition Tribunal Act, which created a tribunal to hear appeals from decisions made by the Competition Bureau, the body

..

28

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 5: Legislation in the Marketplace

responsible for the administration and enforcement of the Competition Act and other related Acts.

The Act also seeks to control certain abusive trade practices, where one company tries to use its position to drive another out of business or otherwise control its share of the market. Predatory pricing is an example of such abusive practices.

The federal Competition Act is very important in the process of protecting consumers from abusive practices by merchants. Students should show an understanding of the breadth of this legislation, as well as indicate some of the methods of implementation and enforcement, including a discussion of the role of the tribunal and the penalties and remedies that can be imposed.

Diff: 3 Type: ES Page Reference: 136c, 137a, 138, 139, and 140b Skill: Applied 70) Regarding the Federal Competition Act, which of the following is true with respect to types of prohibited conduct? a. An offence is committed where a merchant sets the price of a product below that of the competition. b. Telemarketers commit an offence when there is failure to disclose the identity of the seller, the nature of the product, and the price. c. Product performance claims based on sound scientific testing are an offence. d. Any advertising or representation to promote a product is prohibited. e. Prohibited conduct includes competitors bidding on a particular project.

Answer: b Diff: 2 Type: MC Page Reference: 137b Skill: Recall 71) Multilevel marketing organizations, where funds distributed are obtained from the sale of products, are otherwise known as pyramid schemes. a. True b. False Answer: b Diff: 1 Type: TF

..

29

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 5: Legislation in the Marketplace

Page Reference: 137c Skill: Recall 72) The Federal Competition Act refers to predatory pricing as “abuse of dominant position.” a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 140c Skill: Recall 73) The Canada Consumer Product Safety Act (2011) gives regulators the power to force the immediate recalls of dangerous products and requires manufacturers to report incidents of products causing injury and to keep detailed records so that sold products can be traced. The passage of this Act also involved major changes to the Hazardous Products Act. a. True b. False Answer: a Diff: 3 Type: TF Page Reference: 141a Skill: Recall 74) In the case of Bernard Madoff, a scheme was created as an investment program in which the early investors were paid out returns on their investments, not from earnings but from funds supplied by later investors, although they thought the earnings were the results of successful investments. Which of the following describes this scheme? a. Ponzi scheme b. Pyramid scheme c. Price fixing scheme d. Conspiracy scheme e. Bait-and-switch scheme Answer: a Diff: 1 ..

30

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 5: Legislation in the Marketplace

Type: MC Page Reference: 141b Skill: Applied 75) Real and personal property can be used to secure a loan. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 141c Skill: Recall 76) Identify which of the following statements is true about secured transactions in provinces having a personal property security act. a. All kinds of security arrangements involving personal property as collateral now come under one statute. b. Only tangible personal property can be used as security. c. An assignment of an account receivable does not qualify as a security arrangement because no tangible property is involved. d. Various kinds of secured transactions, such as conditional sales, chattel mortgages, etc., are regulated by their own distinct statutes. e. This kind of transaction, which formerly was legal, is now prohibited by law in all provinces.

Answer: a Diff: 2 Type: MC Page Reference: 142a Skill: Recall 77) Identify which of the following statements is true about secured transactions in provinces having a personal property security act. a. Various kinds of secured transactions, such as conditional sales, chattel mortgages, etc., are regulated by their own distinct statutes. b. All kinds of security arrangements involving personal property as collateral now come under one statute.

..

31

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 5: Legislation in the Marketplace

c. An assignment of an account receivable does not qualify as a security arrangement because no tangible property is involved. d. This kind of transaction, which formerly was legal, is now prohibited by law in all provinces. e. Only tangible personal property can be used as security.

Answer: b Diff: 2 Type: MC Page Reference: 142b Skill: Applied 78) Attachment takes place: a. When perfection is completed b. Upon registration of the claim c. When a contract is executed d. When the creditor takes possession of the property e. When a debtor receives some value under the contract Answer: e Diff: 1 Type: MC Page Reference: 142c Skill: Recall 79) Distinguish between attachment and perfection under the Personal Property Security Act. Answer: The creditor's rights under the Personal Property Security Act are said to attach against the asset when the contract is executed or partially executed (e.g., money is advanced to the debtor). Perfection, however, gives rights to the creditor against third parties, and that takes place when the secured transaction is registered or where the creditor obtains possession of the thing he or she used as security.

Feedback: The creditor's rights under the Personal Property Security Act are said to attach against the asset when the contract is executed or partially executed (e.g., money is advanced to the debtor). Perfection, however, gives rights to the creditor against third

..

32

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 5: Legislation in the Marketplace

parties, and that takes place when the secured transaction is registered or where the creditor obtains possession of the thing he or she used as security.

Diff: 3 Type: ES Page Reference: 142d, 143b Skill: Recall 80) What purpose is served by requiring the creditor to register his or her secured transaction?

Answer: It notifies other people that the goods are being used as security and protects the creditor so that, once registration is accomplished, he or she has priority over other people who might claim an interest in the property, who are deemed to be notified by the registration.

Feedback: It notifies other people that the goods are being used as security and protects the creditor so that, once registration is accomplished, he or she has priority over other people who might claim an interest in the property, who are deemed to be notified by the registration.

Diff: 2 Type: ES Page Reference: 143a Skill: Recall 81) As the fishing season slowed down in the fall, Bob decided that this might be a good time to find a real bargain in used equipment for his boat. He found a navigation instrument for sale for $15 000, a great price. However, he only had $10 000, so he borrowed the other $5000 from the bank. He also signed a chattel mortgage on the equipment as collateral in favour of the bank, which promptly registered its interest in the Personal Property Registry. Bob made his payments for a while, but things started to go badly for him. He was unable to make any further payments, although he still owed more than $3000. Desperate and not thinking too clearly, Bob sold his boat to his friend Claude for $50 000 and left for Central America with the funds. When the bank realized what Bob had done, it located the boat and demanded that Claude pay off the $3000+ or lose the navigational equipment. Claude was outraged because he had paid Bob in good faith and argued that he had never borrowed anything from the bank and therefore owed it nothing. Which one of the following statements accurately describes the legal situation here? a. Because Bob transferred the boat and equipment to Claude, that was an assignment of his obligations and he no longer owed the debt.

..

33

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 5: Legislation in the Marketplace

b. If the bank does seize the equipment and sells it for $2000, the bank can still sue Claude for the $5000. c. Claude is right, and the bank's only remedy is to sue Bob. d. If Claude is unwilling to pay off the $3000+, the bank has the right to remove the equipment from the boat. e. If the bank had failed to register the chattel mortgage, it would still have a better right to the equipment than Claude, because the mortgage was signed before Bob sold the boat to him.

Answer: d Diff: 3 Type: MC Page Reference: 143c Skill: Applied 82) Which one of the following statements about the Personal Property Security Act is true? a. This legislation applies only to all present transactions where personal property is given as security interest to enforce an obligation. b. If someone suspects that an item of personal property has been given as security by a particular person, he or she can sue on the breach of a condition. c. In a situation where a debtor fraudulently attempts to transfer property that he or she has given as security, the Act is designed to protect both the debtor and the secured creditor. d. If a secured creditor fails to register his security interest in the Personal Property Registry, he loses his rights against the debtor. e. Unless a creditor in a secured transaction covered by this Act takes steps to "attach and perfect" his security interest, he could lose that interest to someone outside the contract.

Answer: e Diff: 3 Type: MC Page Reference: 143d Skill: Recall • • • •

..

83) Do not modify the shaded cells.

Click here for detailed authoring instructions and examples.

To specify Bloom's Taxonomy, place an 'X' or 'x' next to the desired selection.

Fields in Red are mandatory

34

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 5: Legislation in the Marketplace

84) Who is responsible for repossessing goods that have been used to secure a loan that has been defaulted?

Answer: The creditor, himself or herself, usually through his or her agent called a bailiff Feedback: The creditor, himself or herself, usually through his or her agent called a bailiff Diff: 1 Type: ES Page Reference: 144c Skill: Recall 85) When the value of the security is not great enough to cover the debt, the shortfall is still owed by the debtor (but this may not be recoverable in some provinces). a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 144e Skill: Recall 86) Which of the following is not able to file a lien against the property under the Builders' Lien Act? a. Suppliers b. Workers c. Lenders d. Subcontractors e. Contractors Answer: c Diff: 2 Type: MC Page Reference: 145a Skill: Recall

..

35

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 5: Legislation in the Marketplace

87) Joe worked as a subcontractor for Harry in framing a house owned by Sam. When it became apparent to Joe that he was not going to be paid by Harry, what rights did Joe have under these circumstances?

Answer: He could file a builders' lien against the property owned by Sam. Feedback: He could file a builders' lien against the property owned by Sam. Diff: 3 Type: ES Page Reference: 145b Skill: Applied 88) What obligations are placed on the owner of property in respect of builders' liens?

Answer: Under the relevant legislation, the owner retains a percentage of what he would otherwise pay to a general contractor, called the "holdback" (7 to 20 percent of the amount owing to the contractor, depending on the province or territory). This money is available to satisfy claims of subcontractors, workers, or suppliers. Upon payment of the funds held back, an application can be made to the court to have the liens removed, and thus the property owner will have no further obligation even when the amounts claimed exceed the amount of the holdback.

Feedback: Under the relevant legislation, the owner retains a percentage of what he would otherwise pay to a general contractor, called the "holdback" (7 to 20 percent of the amount owing to the contractor, depending on the province or territory). This money is available to satisfy claims of subcontractors, workers, or suppliers. Upon payment of the funds held back, an application can be made to the court to have the liens removed, and thus the property owner will have no further obligation even when the amounts claimed exceed the amount of the holdback.

Diff: 2 Type: ES Page Reference: 145c-146a Skill: Recall 89) With regard to guarantees, which of the following is true? a. A guarantee and an indemnity are very similar in that the debtor and the guarantor stand side-by-side, both obligated under the contract.

..

36

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 5: Legislation in the Marketplace

b. A verbal guarantee is as enforceable as a written one. c. If the creditor and the debtor change the terms of the agreement without permission of the guarantor, the guarantor will not be bound by the new terms, but will still be bound by the original obligations. d. A guarantor has less defence against the creditor that the debtor could use. e. A guarantee involves the guarantor agreeing to be responsible for the debt if the debtor defaults.

Answer: e Diff: 1 Type: MC Page Reference: 146b Skill: Recall 90) What is the difference in terms of legal responsibility between a co-signer and a guarantor of a debt?

Answer: When a party co-signs a debt, this is known as an indemnity; the debtors stand side-byside, both obligated under the contract. With a guarantee, the guarantor stands behind the debtor and only has an obligation when there is a default.

Feedback: When a party co-signs a debt, this is known as an indemnity; the debtors stand side-by-side, both obligated under the contract. With a guarantee, the guarantor stands behind the debtor and only has an obligation when there is a default.

Diff: 2 Type: ES Page Reference: 146c Skill: Recall 91) Owen borrowed money from a credit union, guaranteed by his father, to buy a car.

The credit union also registered a security interest under the Personal Property Security Act against the vehicle. Owen defaulted and, instead of repossessing the vehicle, the credit union demanded payment from the father. Explain the legal position of the father under these circumstances.

Answer: The credit union has every right to demand payment from the father instead of repossessing the car. Once the father pays, however, he steps into the shoes of the credit union and has the right to repossess the car and have it sold, just as the credit union could.

..

37

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 5: Legislation in the Marketplace

Feedback: The credit union has every right to demand payment from the father instead of repossessing the car. Once the father pays, however, he steps into the shoes of the credit union and has the right to repossess the car and have it sold, just as the credit union could.

Diff: 3 Type: ES Page Reference: 147a Skill: Applied 92) Elizabeth gave a guarantee to the bank in support of a loan to Tomasz. Over the next few years, the bank and Tomasz made a number of alterations to the loan agreement. The effect of these changes was to significantly increase the amount owing to the bank.

Elizabeth had no notice or knowledge of these changes, nor did she consent to any such changes. What is the likely result? a. A guarantee is executed under seal, therefore it will be presumed valid regardless of defect. b. Elizabeth is bound by the changes to the loan, because guarantees are, by their nature, continuing. c. Guarantees are a mere formality; only Tomasz has obligations to the bank. d. Elizabeth will not be bound by the new terms and will also be released from the original obligations. e. The failure to notify Elizabeth would release both Elizabeth and Tomasz from their obligations.

Answer: d Diff: 3 Type: MC Page Reference: 147b Skill: Applied 93) Any substantial change in the nature of the contract between the creditor and the debtor without the guarantor's consent will relieve the guarantor of any obligation. a. True b. False Answer: a Diff: 3 Type: TF Page Reference: 147c

..

38

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 5: Legislation in the Marketplace

Skill: Recall 94) “Signing a guarantee is a mere formality.” Comment on this statement.

Answer: While many people may think that signing a guarantee is a mere formality, to do so makes the guarantor responsible for the debt. The reason the guarantee is needed in the first place is usually because the credit of the debtor is not very good and the creditor requires additional security. Therefore, there is a good chance that there will be a default and, in that case, the guarantor will be required to pay.

Feedback: While many people may think that signing a guarantee is a mere formality, to do so makes the guarantor responsible for the debt. The reason the guarantee is needed in the first place is usually because the credit of the debtor is not very good and the creditor requires additional security. Therefore, there is a good chance that there will be a default and, in that case, the guarantor will be required to pay.

Diff: 2 Type: ES Page Reference: 147d Skill: Recall 95) Distinguish between bankruptcy and insolvency.

Answer: Insolvency is simply not being able to pay your debts as they become due, whereas bankruptcy is a legal process whereby the assets of the debtor are transferred to a trustee in bankruptcy.

Feedback: Insolvency is simply not being able to pay your debts as they become due, whereas bankruptcy is a legal process whereby the assets of the debtor are transferred to a trustee in bankruptcy.

Diff: 1 Type: ES Page Reference: 148b Skill: Recall 96) Which of the following is a goal of the Bankruptcy and Insolvency Act? a. Provides alternative to criminal charges b. Protects the interests of debtors c. Allows persons with impossible burdens of debt to discharge all of their debts ..

39

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 5: Legislation in the Marketplace

d. Provides a process to preserve as much of the debtor’s assets as possible for the benefit of creditors e. Helps incorporated companies after discharge to carry on without the same burden of debt Answer: d Diff: 2 Type: MC Page Reference: 148c Skill: Recall 97) Explain the purpose of the bankruptcy process.

Answer: To ensure that creditors realize as much as possible on the debt and, second, to ensure that the debtor is rehabilitated, with the potential to be a productive member of society without the burden of insurmountable debt.

Feedback: To ensure that creditors realize as much as possible on the debt and, second, to ensure that the debtor is rehabilitated, with the potential to be a productive member of society without the burden of insurmountable debt.

Diff: 2 Type: ES Page Reference: 148e Skill: Recall 98) Explain two methods in which a debtor becomes bankrupt.

Answer: Assignment in bankruptcy, where the debtor chooses to go to a trustee in bankruptcy and voluntarily assigns his or her assets to that trustee; and receiving order, where the creditors go to court and obtain a receiving order, whereby the assets of the debtor are forcibly transferred to a trustee in bankruptcy and then distributed to the creditors Feedback: Assignment in bankruptcy, where the debtor chooses to go to a trustee in bankruptcy and voluntarily assigns his or her assets to that trustee; and receiving order, where the creditors go to court and obtain a receiving order, whereby the assets of the debtor are forcibly transferred to a trustee in bankruptcy and then distributed to the creditors Diff: 2

..

40

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 5: Legislation in the Marketplace

Type: ES Page Reference: 148f Skill: Recall 99) When a debtor voluntarily transfers her assets to a trustee in bankruptcy it is called an assignment in bankruptcy. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 148h Skill: Recall 100) Bankruptcy is a wholly voluntary process designed primarily to protect debtors from abusive creditors. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 148i Skill: Recall 101) A businessman knew that he was facing substantial losses from pending litigation.

Shortly before declaring bankruptcy, he transferred his interest in the matrimonial home to his wife. What was the result? a. The court allowed the transfer, determining that the wife was not a co-conspirator. b. The court declined to exercise jurisdiction, because a bankrupt has no status to appear in court. c. The court reversed the transfer, determining that it was a bankruptcy offence under the Bankruptcy and Insolvency Act. d. The court reversed the transfer, because it was unnecessary; the wife would automatically receive the matrimonial home once the bankruptcy took effect. e. The court allowed the transfer, because transfers between spouses are exempt under the Bankruptcy and Insolvency Act. Answer: c ..

41

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 5: Legislation in the Marketplace

Diff: 2 Type: MC Page Reference: 148l Skill: Applied 102) What is a bankruptcy offence? Give an example.

Answer: A bankruptcy offence is some act on the part of the debtor whereby he or she tries to cheat the creditors. This can be by lying, hiding assets, transferring assets to other people, refusing to disclose assets, paying one creditor in preference to another, fleeing the jurisdiction to avoid debts, etc.

Feedback: A bankruptcy offence is some act on the part of the debtor whereby he or she tries to cheat the creditors. This can be by lying, hiding assets, transferring assets to other people, refusing to disclose assets, paying one creditor in preference to another, fleeing the jurisdiction to avoid debts, etc.

Diff: 1 Type: ES Page Reference: 148m, 149c Skill: Recall 103) Explain how the rights of the creditors are protected under bankruptcy legislation.

Answer: A trustee in bankruptcy is appointed and the assets of the debtor are transferred to the trustee, who usually sells them and distributes the proceeds among the creditors on the basis of their entitlement. The trustee may do other things to preserve and protect the value of the assets, such as making repairs, doing maintenance, or actually managing a business.

Feedback: A trustee in bankruptcy is appointed and the assets of the debtor are transferred to the trustee, who usually sells them and distributes the proceeds among the creditors on the basis of their entitlement. The trustee may do other things to preserve and protect the value of the assets, such as making repairs, doing maintenance, or actually managing a business.

Diff: 2 Type: ES Page Reference: 148n Skill: Recall

..

42

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 5: Legislation in the Marketplace

104) Explain why bankruptcy and insolvency are important for a business person.

Answer: First, they are important to avoid one’s own business from becoming insolvent and bankrupt. Second, they are important to avoid the negative consequences of doing business with those who become bankrupt. The most effective means of avoiding this second situation is careful selection of those with whom you do business, making sure all transactions are protected by taking security or with a personal guarantee from parties with significant assets.

To protect one’s own company against insolvency, proactive steps are needed. For example, shareholders should make sure that any funds loaned to the business are secured. One should also avoid signing personal guarantees to support a company’s debts. As an officer or director, there is the risk of personal liability so systems must be in place to ensure that all laws are followed, including the deduction and proper submission to government of CPP, EI premiums, etc. It’s also important to have sufficient funds to cover unpaid wages and adequate insurance to protect oneself as an officer or director.

Feedback: First, they are important to avoid one’s own business from becoming insolvent and bankrupt. Second, they are important to avoid the negative consequences of doing business with those who become bankrupt. The most effective means of avoiding this second situation is careful selection of those with whom you do business, making sure all transactions are protected by taking security or with a personal guarantee from parties with significant assets.

To protect one’s own company against insolvency, proactive steps are needed. For example, shareholders should make sure that any funds loaned to the business are secured. One should also avoid signing personal guarantees to support a company’s debts. As an officer or director, there is the risk of personal liability so systems must be in place to ensure that all laws are followed, including the deduction and proper submission to government of CPP, EI premiums, etc. It’s also important to have sufficient funds to cover unpaid wages and adequate insurance to protect oneself as an officer or director.

Diff: 2 Type: ES Page Reference: 149b Skill: Recall 105) Multiple Choice 106) Which of the following debts continue even after an individual has been discharged from bankruptcy? a. Past family maintenance for dependants b. Unsecured loans

..

43

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 5: Legislation in the Marketplace

c. Secured loans d. Ordinary debt e. Judgment debts Answer: a Diff: 1 Type: MC Page Reference: 150e Skill: Applied 107) Student loans are discharged through the bankruptcy process. a. True b. False Answer: b Diff: 3 Type: TF Page Reference: 150f Skill: Recall 108) Explain the process of receivership.

Answer: Usually, secured creditors of large corporations will include terms in the original contract that give them the right to take over the management of that corporation in the event of default. This is called receivership and it eliminates the need to go through the bankruptcy process. A professional receiver is appointed by the creditor who takes over the business, removing the directors and other managers. No court order or formal process is required; default alone triggers the receivership option.

Feedback: Usually, secured creditors of large corporations will include terms in the original contract that give them the right to take over the management of that corporation in the event of default. This is called receivership and it eliminates the need to go through the bankruptcy process. A professional receiver is appointed by the creditor who takes over the business, removing the directors and other managers. No court order or formal process is required; default alone triggers the receivership option.

Diff: 1 Type: ES Page Reference: 151c Skill: Recall

..

44

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 5: Legislation in the Marketplace

..

45

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

1) An agent owes a fiduciary duty to the third party to act in that third party's best interest. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 72i Skill: Recall 2) Distinguish between an employee and an independent contractor.

Answer: There are two tests for employment. First is the control test-can the employer tell the employee not only what to do but also how to do it? If yes, then an employment relationship exists. Second is the organizational test-if the employee is an integral part of the organization of the employer, he is an employee, even if he has some degree of independence. There is an ongoing relationship and the employee is subject to the specialized rules that govern employment and the employment contract. In contrast, an independent contractor performs a specific service described in a contract and, normally, this is not an ongoing obligation. The contractor works for himself and his relationship with a principal is governed by contract law.

Feedback: There are two tests for employment. First is the control test-can the employer tell the employee not only what to do but also how to do it? If yes, then an employment relationship exists. Second is the organizational test-if the employee is an integral part of the organization of the employer, he is an employee, even if he has some degree of independence. There is an ongoing relationship and the employee is subject to the specialized rules that govern employment and the employment contract. In contrast, an independent contractor performs a specific service described in a contract and, normally, this is not an ongoing obligation. The contractor works for himself and his relationship with a principal is governed by contract law.

Diff: 2 Type: ES Page Reference: 157a, 165c and e Skill: Recall 3) Distinguish between an agent and an employee.

Answer: An employee commits to an employer in an ongoing relationship and is subject to control from the employer and to specialized rules governing employment. An agent, on the other hand, represents another person (the principal) in dealings with a third party (e.g., formation of a contract). An agent may be an employee but doesn't necessarily have to be one.

..

1

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

Feedback: An employee commits to an employer in an ongoing relationship and is subject to control from the employer and to specialized rules governing employment. An agent, on the other hand, represents another person (the principal) in dealings with a third party (e.g., formation of a contract). An agent may be an employee but doesn't necessarily have to be one.

Diff: 3 Type: ES Page Reference: 157b Skill: Recall 4) Which of the following is an example of an agent as opposed to an employee? a. Joe worked as a delivery driver for Smith Textiles Ltd. b. Joe worked as the purchasing agent for Smith Textiles Ltd. c. Joe worked in the mailroom of Smith Textiles Ltd., sorting mail. d. Joe worked as a janitor for Smith Textiles Ltd. e. Joe worked as a mechanic for Smith Used Cars Ltd. Answer: b Diff: 2 Type: MC Page Reference: 157c Skill: Applied 5) Miss Kachur is a training consultant who owns her own business and offers services to public and private organizations. Fortunately, as a result of her effective work, Sigma Corporation contracted with her to develop and provide training at its facilities throughout Canada. What began as a short-term consulting contract was extended for a period of years. Which of the following statements is true? a. Due to her ongoing relationship with Sigma Corporation, Miss Kachur would likely be considered an employee of the corporation. b. Because Miss Kachur operates her own business, she is likely an independent contractor in relation to Sigma Corporation. c. Miss Kachur would be considered an agent of Sigma Corporation. d. Although Miss Kachur operates her own business, she is likely a dependent contractor in relation to Sigma Corporation. e. If Sigma Corporation decided to terminate the contract with Miss Kachur, she would be entitled to employment insurance benefits.

Answer: d Diff: 3 Type: MC Page Reference: 157d Skill: Applied 6) How is an agency relationship created?

..

2

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

Answer: Usually by contract, but it is possible for an agent to act on behalf of a principal gratuitously through actions.

Feedback: Usually by contract, but it is possible for an agent to act on behalf of a principal gratuitously through actions.

Diff: 2 Type: ES Page Reference: 157e Skill: Recall 7) Explain under what circumstances the third party can be sued by the principal in the event of default.

Answer: When the agent has acted within his actual or apparent authority in his dealings with the third party Feedback: When the agent has acted within his actual or apparent authority in his dealings with the third party Diff: 2 Type: ES Page Reference: 158a Skill: Recall 8) Discuss the extent of an agent's authority to bind a principal in dealings with a third party.

Answer: This question simply requires students to display an understanding of the various aspects of an agent's authority to act. They should show that they understand that the actual authority of an agent may be expressed or implied from the job he has been given. In addition to that, the agent may also have apparent authority that is based on the principle of estoppel. Here, the principal does something to hold up the agent as having authority, such as placing him in a job where people would expect the agent to have that kind of authority or specifically telling the third party that the agent has authority without informing that third party of the limitations that have actually been placed on the agent.

Good students should be able to explain the difference between apparent authority and implied authority. The implied authority comes about where the agent has been placed in a position where people would understand that the agent would have this kind of authority and where there has been no instruction to the contrary, that is, about what authority the agent has been given. But with apparent authority, even where the principal has specifically instructed the agent that he doesn't have that specific authority, he can still bind the principal because of estoppel. You can't imply authority where there has been direct instruction to the contrary, but there still can be apparent authority where the

..

3

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

principal can't deny the agent has the authority that the principal has led others to believe that agent has. Students may also go on to discuss the power of the principal to ratify.

This is not needed in response to the question but does complete the discussion of the circumstances under which the conduct of the agent will bind the principal.

Feedback: This question simply requires students to display an understanding of the various aspects of an agent's authority to act. They should show that they understand that the actual authority of an agent may be expressed or implied from the job he has been given. In addition to that, the agent may also have apparent authority that is based on the principle of estoppel. Here, the principal does something to hold up the agent as having authority, such as placing him in a job where people would expect the agent to have that kind of authority or specifically telling the third party that the agent has authority without informing that third party of the limitations that have actually been placed on the agent.

Good students should be able to explain the difference between apparent authority and implied authority. The implied authority comes about where the agent has been placed in a position where people would understand that the agent would have this kind of authority and where there has been no instruction to the contrary, that is, about what authority the agent has been given. But with apparent authority, even where the principal has specifically instructed the agent that he doesn't have that specific authority, he can still bind the principal because of estoppel. You can't imply authority where there has been direct instruction to the contrary, but there still can be apparent authority where the principal can't deny the agent has the authority that the principal has led others to believe that agent has. Students may also go on to discuss the power of the principal to ratify.

This is not needed in response to the question but does complete the discussion of the circumstances under which the conduct of the agent will bind the principal.

Diff: 2 Type: ES Page Reference: 158b-159b and f Skill: Applied 9) A principal is bound in contract with the third party with whom the agent dealt if the agent is: a. Within his implied authority b. Within his express authority c. Within his apparent authority d. Outside his authority but the principal ratified it e. All of the above Answer: e Diff: 2 Type: MC Page Reference: 158c and e, 159h Skill: Recall 10) An agency relationship can be created by: a. Apparent authority

..

4

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

b. Estoppel c. Ratification d. Actual authority e. All of the above Answer: e Diff: 1 Type: MC Page Reference: 158d, i, and w 159d Skill: Recall 11) In the process of assembling land for Ace Construction Ltd. to build a supermarket, Joe entered into a contract with the seller Sam. In which of the following situations would Sam be able to sue the principal, Ace? a. Where Joe exceeded his apparent and actual authority. b. Where Joe revealed that he was acting as an agent, but did not disclose that he was acting for Ace in particular, and exceeded both his apparent and actual authority. Ace did not ratify the contract. c. Where Joe was acting outside his authority and did not disclose that he was acting for Ace. Sam was aware of Joe acting independently at the time he entered into the contract. d. Where Joe exceeded his actual authority but where Ace had led Sam to believe that Joe had the authority. e. Where Joe disclosed that he was acting for Ace but made the contract "subject to ratification."

Answer: d Diff: 2 Type: MC Page Reference: 158f Skill: Applied 12) Where Joe was given authority to do "anything necessarily incidental" to carrying out his agency function of selling vacuum cleaners for the principal, this gave Joe the authority to borrow money to purchase a car to be used in the business. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 158g Skill: Applied 13) Distinguish between the actual authority and the apparent authority of an agent.

Answer:

..

5

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

The actual authority of an agent is determined by the specific authority he or she has been given, either expressed or implied. The apparent authority of the agent is the authority that the principal has led others to believe that the agent has. Apparent authority is an application of the principle of estoppel.

Feedback: The actual authority of an agent is determined by the specific authority he or she has been given, either expressed or implied. The apparent authority of the agent is the authority that the principal has led others to believe that the agent has. Apparent authority is an application of the principle of estoppel.

Diff: 2 Type: ES Page Reference: 158h and j Skill: Recall 14) Apparent authority is determined by the representation of the agent. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 158k Skill: Recall 15) Grant got a job with Ace Computers Co. (Ace) as a salesman. He was given a course in sales by Ace, business cards, and several of the company's order forms and brochures, and he was assigned an area in which he would sell computers door-to-door on behalf of Ace. Grant would be paid on a commission basis. At his first house, he was so excited by the interest shown that he forgot the explicit instructions he had received-only cash sales permitted. As an agent for Ace, he sold a computer on time to a 70-year-old woman. She was to pay $25 per month for eight years because that was all she could afford. When Brown, Ace's sales manager, heard of the deal, he fired Grant and said Ace would not go through with the contract. However, the old woman liked the computer very much and insisted that Ace provide her with one within the week as required by the contract. Which of the following accurately describes the legal position of the parties? a. Ace would not be bound because Grant failed to follow the exact instructions he had received. b. Ace is not bound by the contract because no representations of authority were made by it to the old woman. c. Ace would be bound because Grant acted within his apparent authority. d. Brown is personally liable to the old woman because he is the employee of the company who decided not to honour the contract. e. Grant had implied authority to sell computers on time; selling computers necessitates selling on time, despite the prohibition.

Answer: c

..

6

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

Diff: 2 Type: MC Page Reference: 158l Skill: Applied 16) With respect to duties owed by an agent to his principal, which of the following statements is false with regard to agency law? a. Failure of an agent to obey his principal and to act within the authority given him allows the principal to sue the agent for breach of contract. b. When an agent enters a contract on behalf of his principal but does so in breach of his duties to the principal, the contract is void and cannot bind the principal. c. An agent must use reasonable care, skill, and diligence in the performance of his duties as agent. d. Generally, an agent may not delegate his authority without the authorization of his principal. e. Failure of an agent to perform his duties personally may allow his principal to sue the agent for breach of contract.

Answer: b Diff: 2 Type: MC Page Reference: 158m Skill: Recall 17) Sam hires Joe to negotiate and sign a contract with Ken on Sam's behalf. Which of the following is true? a. If Joe acts outside express, implied, and apparent authority, Sam is not bound by the contract, even if he ratifies the contract. b. If Joe acts within his apparent authority, but outside his express or implied authority, Sam will be bound by the contract. c. If Joe acts outside his express authority and negotiates and signs the contract with Ken, Sam may not be a party to that contract. d. If Joe acts outside his express, implied, and apparent authority, he could be sued by Sam, but not by Ken, because he has no contractual relationship with Ken. e. If Joe acts outside his implied and express authority, Sam will owe him for his services.

Answer: b Diff: 2 Type: MC Page Reference: 158n Skill: Applied 18) In certain cases, a third party can hold a principal to a contract even though the agent acted outside the authorization given him by his principal and even though his principal

..

7

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

elected not to ratify the contract made by the agent. The third party can enforce the contract because of: a. The reasonable agent theory b. The agent's apparent authority c. Agency by express agreement d. Fiduciary duty e. The failure of the principal to register the agency agreement Answer: b Diff: 2 Type: MC Page Reference: 158o Skill: Recall 19) An agent cannot bind the principal in a contract with a third party unless there is an agency contract between the principal and the agent. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 158q Skill: Recall 20) When an agent acts beyond the specific authority given by the principal, that action will not be binding on the principal. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 158r Skill: Recall 21) Apparent authority is the authority the agent has based on what the principal has led the third party to believe. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 158s Skill: Recall

..

8

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

22) Describe what is meant by an agent's apparent authority.

Answer: When a principal has led someone to believe that an agent has particular authority to act on its behalf, then the agent does have that authority, even where the authority actually given to the agent is considerably less. The principal, once it leads someone to believe that the agent has authority, cannot deny it. This is an application of the principle of estoppel.

Feedback: When a principal has led someone to believe that an agent has particular authority to act on its behalf, then the agent does have that authority, even where the authority actually given to the agent is considerably less. The principal, once it leads someone to believe that the agent has authority, cannot deny it. This is an application of the principle of estoppel.

Diff: 2 Type: ES Page Reference: 158t Skill: Recall 23) Explain how the principle of estoppel can be important in an agency relationship.

Answer: The authority of the agent to bind the principal is found not only in the actual authority that the agent has been given, but also in the apparent authority-that is, the authority that the principal has led others to believe the agent possesses. Where the principal has led a third party to believe the agent has authority, the principal cannot later deny that authority.

Feedback: The authority of the agent to bind the principal is found not only in the actual authority that the agent has been given, but also in the apparent authority-that is, the authority that the principal has led others to believe the agent possesses. Where the principal has led a third party to believe the agent has authority, the principal cannot later deny that authority.

Diff: 2 Type: ES Page Reference: 158u Skill: Recall 24) Joe was a salesman, newly hired by Radio Hut. On his first day on the job, he was left in charge of the store while the manager and the other salesmen went to lunch. They specifically told him not to sell anything over $50 but to tell customers to come back in an hour when they would have returned from lunch. While they were at lunch, a customer came in and decided to purchase a new stereo TV set and several accessories. The total sales price was $1600, and the customer couldn't wait. Joe sold her the merchandise at a $400 discount. When the customer returned the next day to pick up the goods, the

..

9

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

manager refused to go through with the deal. Explain the manager's legal obligations in these circumstances.

Answer: Joe had apparent authority and was able to bind the store to the purchase; therefore, the customer had the right to insist that the manager go through with the deal.

Feedback: Joe had apparent authority and was able to bind the store to the purchase; therefore, the customer had the right to insist that the manager go through with the deal.

Diff: 2 Type: ES Page Reference: 158v Skill: Applied 25) With respect to the formation of agency by estoppel, which of the following statements is true? a. If the principal tells an agent specifically not to sell something and the agent, in disobedience of those instructions, sells it anyway, the principal may be bound by the contract because of estoppel. b. The issue of apparent authority arises only if a person acts as an agent when he or she has express or implied authority. c. When a party terminates an express agency agreement with an agent and notifies third parties with whom that agent normally dealt, that party will be liable on a contract made for it by that "fired" agent. d. When a third party suspects that the agent it deals with has no authority, there is no obligation on it to question the agent's alleged authority. e. When a party represents, by words or conduct, that someone is its agent, that party can later deny liability on a contract made for it by that agent on the basis that no express agency agreement existed.

Answer: a Diff: 2 Type: MC Page Reference: 158y Skill: Recall 26) Although Jason had participated in the flower auction for the last nine years as an agent for Thos. Holt's Ltd. (Holt), with the authority to buy whatever he felt the store needed, on this day he was given express instructions to buy only cut flowers. When flats of young camellia bushes with a rare gold flower were being sold, Jason bought them on behalf of the company. Which of the following is true? a. Holt is not bound by the contract, because Jason's authority was expressly restricted. b. Holt is estopped from denying Jason's authority. c. The key to determining whether or not Holt is bound by the contract is this: in the circumstances, should the auctioneer have confirmed with Holt the extent of Jason's authority?

..

10

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

d. Holt is not bound by the contract, because Jason is in breach of his agency agreement. e. Holt is not bound since Holt didn't ratify the contract.

Answer: b Diff: 2 Type: MC Page Reference: 158x Skill: Applied 27) If a third party relies on the principal's representation that the agent has the authority to act, which of the following is true? a. The principal can claim the agent had no authority. b. The principal cannot claim the agent had no authority. c. The principal can claim estoppel. d. The agent is solely liable for the conduct if it results in injury to the third party. e. The agent can sue the principal for breach of contract.

Answer: b Diff: 2 Type: MC Page Reference: 158z Skill: Recall 28) Which of the following is true with respect to the agency relationship? a. An agent acting gratuitously can never bind the principal. b. When a principal has specifically limited the authority of the agent, that agent can never bind the principal in a contract, even if the agent acts outside his authority. c. Actual authority is the authority the principal has implied in conversations with a third party. d. An agent's authority is limited to whatever authority the principal specifically gives the agent. e. An agent's apparent authority may be implied from the position that the agent holds in the employer's organization.

Answer: e Diff: 2 Type: MC Page Reference: 159a Skill: Recall 29) A principal is not bound in contract with the third party with whom the agent dealt if the agent is: a. Outside his authority but the principal ratified it b. Within his express authority c. Outside his actual and apparent authority d. Within his implied authority

..

11

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

e. Within his apparent authority Answer: c Diff: 1 Type: MC Page Reference: 159c Skill: Recall 30) Which of the following statements is false with regard to ratification in agency law? a. A principal cannot ratify a contract if he did not have the capacity to contract at the time the contract was made. b. A principal can ratify a contract inadvertently. c. If an agent exceeds her express authority, ratification is the only means by which the principal would be bound to honour the unauthorized contract. d. Ratification gives the agent authority retroactive to the time of contract. e. A principal cannot ratify a contract if at the time of the ratification he could not have entered into the contract.

Answer: c Diff: 2 Type: MC Page Reference: 159e Skill: Recall 31) Discuss the principle of ratification. In your discussion, consider limitations on its availability.

Answer: This is a more technical discussion and some of the points that students should note are as follows. Ratification of a contract takes place where the agent has no actual or apparent authority to bind the principal to the contract entered into with a third party, and the principal decides that it wants to be bound by the contract in any case. In these circumstances, it is open for the principal to ratify the contract (choose to be bound by it), and the effect is that it will be binding, as if the agent always had the authority to contract on behalf of the principal. The ratification thus acts retroactively. There are some limitations placed on this right to ratify. Ratification must take place within a reasonable period of time. Also, the principal cannot ratify a contract if, at the time of the ratification, it would not be possible to enter into the contract. Similarly, the principal cannot ratify if, at the time that the agent acted on its behalf, the principal could not have entered into the agreement. It should be noted that the principal may also ratify a contract inadvertently by taking some benefit from the agreement.

Feedback: This is a more technical discussion and some of the points that students should note are as follows. Ratification of a contract takes place where the agent has no actual or apparent authority to bind the principal to the contract entered into with a third party, and the principal decides that it wants to be bound by the contract in any case. In these

..

12

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

circumstances, it is open for the principal to ratify the contract (choose to be bound by it), and the effect is that it will be binding, as if the agent always had the authority to contract on behalf of the principal. The ratification thus acts retroactively. There are some limitations placed on this right to ratify. Ratification must take place within a reasonable period of time. Also, the principal cannot ratify a contract if, at the time of the ratification, it would not be possible to enter into the contract. Similarly, the principal cannot ratify if, at the time that the agent acted on its behalf, the principal could not have entered into the agreement. It should be noted that the principal may also ratify a contract inadvertently by taking some benefit from the agreement.

Diff: 3 Type: ES Page Reference: 159g-160b Skill: Applied 32) Which of the following is correct with respect to the ratification of an agent's contracts? a. A principal can ratify a contract where the agent has gone beyond both his actual and apparent authority. b. A contract can only be ratified if the principal was not able to enter into the contract himself at the time of ratification. c. Ratification is always an intentional act and must be performed by the principal. d. When a contract entered into by an agent is ratified by a principal, it commences at the time the principal ratifies the contract. e. A principal can only ratify an agreement entered into by an agent if his name has not been used.

Answer: a Diff: 2 Type: MC Page Reference: 159i Skill: Recall 33) The ratification of a contract by the principal must be done in writing. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 159j Skill: Recall 34) A contract entered into by an agent cannot be ratified inadvertently by the principal. a. True b. False

..

13

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

Answer: b Diff: 1 Type: TF Page Reference: 159k Skill: Recall 35) Joe is a salesman for Harry's Fine Cars Ltd. He had been told specifically that he had no authority to make any sale, take a trade-in, or otherwise deal with the vehicles without the manager's express approval of every deal. Sam, a customer, came in wanting to buy a used Cadillac and agreed to pay the $16 000 asking price. Unfortunately, the manager had left the lot, and so Joe took it upon himself to write up the agreement. When the manager returned, he liked the deal and realized that the customer might change his mind when he realized that the salesman didn't have the authority to bind the seller in contract.

Under these circumstances, what could the manager of the car lot do?

Answer: He can ratify the contract, which in effect gives the agent authority after the fact. The effect is retroactive and the contract is binding.

Feedback: He can ratify the contract, which in effect gives the agent authority after the fact. The effect is retroactive and the contract is binding.

Diff: 2 Type: ES Page Reference: 159l Skill: Applied 36) A chauffeur, going against specific instructions, purchases a new car on behalf of his employer. The employer has done nothing to lead the seller to believe that the chauffeur has authority but is persuaded by the chauffeur to go for a drive before returning the vehicle. Explain the legal position of the parties.

Answer: Ratification is a two-edged sword, and a principal can ratify a contract inadvertently by taking a benefit under it. That is what has likely happened here, and the principal has just bought himself a new vehicle.

Feedback: Ratification is a two-edged sword, and a principal can ratify a contract inadvertently by taking a benefit under it. That is what has likely happened here, and the principal has just bought himself a new vehicle.

Diff: 2 Type: ES Page Reference: 159m Skill: Applied 37) What restrictions are there on a principal's right to ratify?

..

14

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

Answer: The principal can only ratify if it was possible to enter into the contract at the time of the ratification. As well, it must have been possible for the principal to enter into the contract at the time the agent purported to act. Also, the ratification must take place within a reasonable time of the agent's unauthorized conduct.

Feedback: The principal can only ratify if it was possible to enter into the contract at the time of the ratification. As well, it must have been possible for the principal to enter into the contract at the time the agent purported to act. Also, the ratification must take place within a reasonable time of the agent's unauthorized conduct.

Diff: 3 Type: ES Page Reference: 160 Skill: Recall 38) Why is the distinction between employment and an independent contract important? a. An employee can bind the employer in a contract he enters into on behalf of the employer. b. An independent contractor cannot be sure that she will be paid. c. Employees can withdraw their services. d. An employer may be held responsible for torts committed by the employee. e. An employee has the right to wages.

Answer: d Diff: 1 Type: MC Page Reference: 160c Skill: Recall 39) In which of the following situations will Smith be responsible for the tortious conduct of Jones? a. Jones is a salesperson at Watson's Warehouse visiting Smith's grocery store. b. Jones is a computer programmer working for Ace Computer Ltd. and installing new software for Smith's department store. c. Jones is a self-employed vacuum cleaner salesman and Smith manufactures one of the lines he carries. d. Jones is a secretary working in Smith's office. e. Jones is an independent contractor installing drywall for Smith's grocery store.

Answer: d Diff: 2 Type: MC Page Reference: 160d Skill: Applied 40) Discuss the concept of vicarious liability as it relates to employment and agency law.

..

15

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

Answer: Vicarious liability is where one person is held responsible for the wrongful acts of another. In employment law, the employer is held responsible for the torts committed by an employee. There are, however, some restrictions on its availability. The employer is only responsible for harmful acts of an employee done in the course of the employment; if the agent does something that is other than what he was hired to do, the employer will not be liable.

Applying this to agency, agents can clearly bring responsibility on their principals where they are in an employment relationship and those principals are also their employer, and the same principle applies. That is, vicarious liability will follow where the agent was acting within the scope of that employment, doing what he was employed to do even if they were doing it badly. But what of the situation where the agent is independent? Will their conduct ever impose liability on the principal? Clearly, when we are talking about contract law, an agent's conduct will bind the employer wherever they are acting within their authority. But what of tort law? Will a principal be responsible for the torts committed by an independent agent? It is clear that where the agent commits a fraudulent misrepresentation while carrying out his agency responsibility, the principal will be liable. This in fact may be direct liability, since when the agent speaks, it is as if the principal is speaking. In any case, the principal can be responsible. There also may be other situations where a principal is vicariously liable for the torts committed by an independent agent, but they would have to be committed in the very act of carrying out what they had been authorized to do as agent. Students should show a sound understanding of all of these principles in their answers.

Feedback: Vicarious liability is where one person is held responsible for the wrongful acts of another. In employment law, the employer is held responsible for the torts committed by an employee. There are, however, some restrictions on its availability. The employer is only responsible for harmful acts of an employee done in the course of the employment; if the agent does something that is other than what he was hired to do, the employer will not be liable.

Applying this to agency, agents can clearly bring responsibility on their principals where they are in an employment relationship and those principals are also their employer, and the same principle applies. That is, vicarious liability will follow where the agent was acting within the scope of that employment, doing what he was employed to do even if they were doing it badly. But what of the situation where the agent is independent? Will their conduct ever impose liability on the principal? Clearly, when we are talking about contract law, an agent's conduct will bind the employer wherever they are acting within their authority. But what of tort law? Will a principal be responsible for the torts committed by an independent agent? It is clear that where the agent commits a fraudulent misrepresentation while carrying out his agency responsibility, the principal will be liable. This in fact may be direct liability, since when the agent speaks, it is as if the principal is speaking. In any case, the principal can be responsible. There also may be other situations where a principal is vicariously liable for the torts committed by an independent agent, but they would have to be committed in the very act of carrying out

..

16

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

what they had been authorized to do as agent. Students should show a sound understanding of all of these principles in their answers.

Diff: 2 Type: ES Page Reference: 160e Skill: Applied 41) An employer is responsible for all torts committed by his employee. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 160f Skill: Recall 42) Which of the following statements is correct with respect to the employer's liability for the conduct of the employee? a. The employer is always liable for the wrongful conduct of his employee. b. Any employee can bind an employer in contract. c. All employees are agents of the employer. d. An employer is only liable for the wrongful conduct of his employee that takes place during the course of the employment. e. If a person is injured by an employee acting in the course of the job, that person must sue the employer, not the employee.

Answer: d Diff: 2 Type: MC Page Reference: 160g Skill: Applied 43) Explain when an employer can be held liable for the wrongful acts of an employee.

Answer: The employer is responsible for torts committed by an employee during the course of the employment.

Feedback: The employer is responsible for torts committed by an employee during the course of the employment.

Diff: 2 Type: ES Page Reference: 160h Skill: Recall

..

17

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

44) Only employers are responsible for torts committed by their employees during the course of the employment. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 160i Skill: Recall 45) "Joe was working for Sam, using his own car to deliver manufactured parts for Sam's business to a client. In the process, Joe was involved in an automobile accident, causing injury to George, a stranger. In these circumstances, George's only recourse is against the employer." Discuss the accuracy of this statement.

Answer: In fact, George must sue both the employee and the employer, not just the employer.

Since this action was done in the course of employment, if George sues both parties, he will be able to collect against the employer as well (which usually has more assets).

Feedback: In fact, George must sue both the employee and the employer, not just the employer. Since this action was done in the course of employment, if George sues both parties, he will be able to collect against the employer as well (which usually has more assets).

Diff: 2 Type: ES Page Reference: 160j Skill: Applied 46) Joe was an employee of Sam and was using his own car to deliver manufactured goods to a client. Since the client was in North Vancouver, the same area where Joe's girlfriend lived, Joe took time out to visit her for lunch. As he approached her house, he was involved in an automobile accident with George. George sued both Joe and his employer. Explain the likely outcome.

Answer: Joe will be liable as the cause of the accident, assuming he was negligent, but the employer will not be liable. Joe was on a "frolic of his own" and not acting in the course of employment.

Feedback: Joe will be liable as the cause of the accident, assuming he was negligent, but the employer will not be liable. Joe was on a "frolic of his own" and not acting in the course of employment.

Diff: 2 Type: ES

..

18

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

Page Reference: 160k Skill: Applied 47) If an employee was performing some act that he or she was not required to do as part of the job function, the employer would not be vicariously liable for the torts committed while performing that act. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 160l Skill: Recall 48) An employer is responsible for only those torts committed by an employee that take place while the employee is doing what he was employed to do. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 160m Skill: Recall 49) Mr. Snarey devised and conducted a fraudulent scheme while working as an agent of Mutual Life. What would the likely result be? a. Neither the agent nor the company could be liable, because Snarey was only an agent, and the company had no actual knowledge. b. Only the agent was liable, because the action taken was dishonest and therefore outside the scope of the agency relationship. c. Since Snarey was an agent with authority to enter into this general type of transaction, the company was vicariously liable for his conduct. d. The company could be liable only if it were shown Snarey was an employee acting under the direction of a superior. e. The doctrine of caveat emptor was applied.

Answer: c Diff: 3 Type: MC Page Reference: 160n Skill: Applied 50) An employer is vicariously liable for the torts committed on the job by employees and independent contractors.

..

19

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 160o Skill: Recall 51) Explain under what circumstances a principal who is not an employer will be held responsible for the wrongful acts of its agent.

Answer: The principal will only be liable if the tort causing injury or loss took place during the actual exercise of the authority that the principal gave the agent. The agent has to be in the process of actually transacting the business he or she was authorized to do. Usually this is restricted to the tort of fraud and negligent misstatement associated with the negotiation or enactment of the contract itself.

Feedback: The principal will only be liable if the tort causing injury or loss took place during the actual exercise of the authority that the principal gave the agent. The agent has to be in the process of actually transacting the business he or she was authorized to do.

Usually this is restricted to the tort of fraud and negligent misstatement associated with the negotiation or enactment of the contract itself.

Diff: 1 Type: ES Page Reference: 160p Skill: Recall 52) Where an agent has been guilty of fraudulent misrepresentation, the agent must sue the principal. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 160q Skill: Recall 53) Explain under what circumstances an agent can be liable for his conduct rather than the principal being liable.

Answer: This is a reasonably straightforward question, but some students may not appreciate how broad an answer is required. Agents are liable personally in agency law when they exceed

..

20

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

their authority (actual [expressed or implied] or apparent) or where they act as an undisclosed principal. Students should explain what actual authority is and what apparent authority is. They should also explain what an undisclosed principal is. This is where the agent does not disclose the fact that he is acting on behalf of a principal. Where the agent could be acting either way and his conduct is ambiguous, when the third party realizes he is acting as an agent, the third party must make a choice to sue the principal or the agent but not both. Good students will realize that the agent can also be sued personally when his conduct involves the commission of a tort. When the agent is also an employee, both the agent and the principal are responsible for the agent's torts (vicarious liability), but where the agent is independent, the agent alone is responsible for his torts, unless the tort is committed in the very process of performing what he was authorized to do. Then if the agent commits fraudulent misrepresentation, the principal can be sued as well. The question requires students to respond in terms of both contract law and tort law.

Feedback: This is a reasonably straightforward question, but some students may not appreciate how broad an answer is required. Agents are liable personally in agency law when they exceed their authority (actual [expressed or implied] or apparent) or where they act as an undisclosed principal. Students should explain what actual authority is and what apparent authority is. They should also explain what an undisclosed principal is.

This is where the agent does not disclose the fact that he is acting on behalf of a principal.

Where the agent could be acting either way and his conduct is ambiguous, when the third party realizes he is acting as an agent, the third party must make a choice to sue the principal or the agent but not both. Good students will realize that the agent can also be sued personally when his conduct involves the commission of a tort. When the agent is also an employee, both the agent and the principal are responsible for the agent's torts (vicarious liability), but where the agent is independent, the agent alone is responsible for his torts, unless the tort is committed in the very process of performing what he was authorized to do. Then if the agent commits fraudulent misrepresentation, the principal can be sued as well. The question requires students to respond in terms of both contract law and tort law.

Diff: 1 Type: ES Page Reference: 160r, 161c, 162c Skill: Recall 54) Stu hires Jan to negotiate and sign a contract with Ken on Stu's behalf. Which of the following is false? a. If Jan acts outside express, implied, and apparent authority, Stu could still approve the contract and be bound by it. b. If Jan acts within her apparent authority, but outside her express or implied authority, Stu will be bound by the contract but may sue Jan for breach of her agency contract. c. If Jan acts within her implied authority, Stu will owe her for her services. d. If Jan contracts with Ken on behalf of Stu but acts outside her express, implied, and apparent authority, Ken could not sue her for breach of contract because Ken has no contract with her.

..

21

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

e. If Jan acts within her express authority and negotiates and signs the contract with Ken, Jan is not a party to that contract.

Answer: d Diff: 2 Type: MC Page Reference: 161a Skill: Recall 55) A salesman in a men's clothing store has heard rumours that the store is going out of business. The boss is out of the store when a customer who has heard the same rumour comes in and offers to purchase the store's entire stock, the display cases, and the fixtures. The salesman accepts on behalf of the employer. Discuss the legal position of the parties.

Answer: Unless the boss has given specific authorization for this act, which is unlikely, the agent has clearly gone beyond any apparent authority he may have and the contract is not binding on the employer. But the agent, in acting beyond his authority, has exposed himself to an action by the customer. This is one of the few situations where the third party can sue the agent for not having the authority claimed.

Feedback: Unless the boss has given specific authorization for this act, which is unlikely, the agent has clearly gone beyond any apparent authority he may have and the contract is not binding on the employer. But the agent, in acting beyond his authority, has exposed himself to an action by the customer. This is one of the few situations where the third party can sue the agent for not having the authority claimed.

Diff: 2 Type: ES Page Reference: 161b Skill: Applied 56) An agent with no express, implied, or apparent authority to do so identified himself as an agent for his principal, and on behalf of his principal bought a computer. The principal refused to ratify the contract. On these facts, which of the following is true? a. The seller could sue the principal for breach of warranty of authority. b. The principal would have to pay for the computer because the agent was an agent for that principal. c. The agent could be sued by the seller of the computer for breach of his warranty of authority. d. The seller of the computer could sue the agent for breach of contract for saying he was an agent. e. A third party cannot sue an agent even under these circumstances.

Answer: c Diff: 2

..

22

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

Type: MC Page Reference: 161d Skill: Recall 57) Explain what is meant by an undisclosed principal and the significance of such a relationship.

Answer: An undisclosed principal is involved when the agent deals with a third party in such way that the third party is not aware that the agent is acting on behalf of somebody else, the principal. In such circumstances, in the event of a default, the third party can sue either the agent or the principal but is bound by that choice.

Feedback: An undisclosed principal is involved when the agent deals with a third party in such way that the third party is not aware that the agent is acting on behalf of somebody else, the principal. In such circumstances, in the event of a default, the third party can sue either the agent or the principal but is bound by that choice.

Diff: 3 Type: ES Page Reference: 162a Skill: Recall 58) The only situation in which an agent can be sued by a third party is where he has gone beyond his apparent and actual authority. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 162b Skill: Recall 59) When a principal is undisclosed, the third party is restricted to suing the agent. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 162d Skill: Recall 60) When an agent has been dealing with a third party for an undisclosed principal and there is a default, what rights are available to the third party?

..

23

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

Answer: It can sue either the principal or the agent but is bound by this choice.

Feedback: It can sue either the principal or the agent but is bound by this choice.

Diff: 2 Type: ES Page Reference: 162e Skill: Recall 61) Joe is in the process of assembling land for Ace Contractors Ltd. to build a supermarket. He entered into a contract with the seller, Sam. Joe did not disclose that he was acting for someone else when he entered into the contract. Explain Sam's rights when the contract is breached and he learns that Joe was acting for Ace. Answer: This is an example of an undisclosed principal. When Sam learns that Joe was acting as an agent, he has the choice to continue to sue Joe or to sue the principal. Once that choice is made, he cannot change his mind later.

Feedback: This is an example of an undisclosed principal. When Sam learns that Joe was acting as an agent, he has the choice to continue to sue Joe or to sue the principal. Once that choice is made, he cannot change his mind later.

Diff: 2 Type: ES Page Reference: 162f Skill: Applied 62) Generally, a third party is bound to the principal only when it knows that the agent is acting for that principal. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 162g Skill: Recall 63) Which of the following statements is true with regard to an agent's duties? a. A real estate agent may buy property from a third party if it is at a good price and then sell the property to his principal at a higher price. b. An agent must always scrupulously account for money coming into his hands on behalf of his principal. c. An agent need not disclose all relevant information to the principal. d. An agent is not entitled to the agreed-upon commission and reasonable expenses undertaken on behalf of his principal in carrying out his duties.

..

24

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

e. An agent cannot act for two principals even with the knowledge and consent of those principals.

Answer: b Diff: 2 Type: MC Page Reference: 162h Skill: Recall 64) An agent owes a fiduciary duty to act in the best interests of the principal and the third party. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 162j Skill: Recall 65) The fiduciary duty of an agent refers to his obligations to act within the limits of his actual or apparent authority. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 162k Skill: Recall 66) A real estate agent, without disclosing the fact to his client, purchases the house the client is selling for himself. Discuss the legal position of the parties.

Answer: This is clearly a breach of the agent's fiduciary duty to the principal, and the agent will lose his commission and will have to account to the principal for any profits he makes.

Feedback: This is clearly a breach of the agent's fiduciary duty to the principal, and the agent will lose his commission and will have to account to the principal for any profits he makes.

Diff: 1 Type: ES Page Reference: 162l, 163g Skill: Applied

..

25

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

67) List three duties that an agent has to the principal.

Answer: To act in a reasonable manner with competence in fulfilling his duties, to follow the instructions of the principal, to act in the best interests of the principal at all times, to account for any profits that have been made or expenses incurred Feedback: To act in a reasonable manner with competence in fulfilling his duties, to follow the instructions of the principal, to act in the best interests of the principal at all times, to account for any profits that have been made or expenses incurred Diff: 2 Type: ES Page Reference: 162m - 163a Skill: Recall 68) Explain what is meant by an agent's fiduciary duty. Give three examples of how that fiduciary duty can be breached.

Answer: Examples of the agent's fiduciary duty are not taking hidden commissions or kickbacks, always acting in the principal's best interests, not taking advantage of opportunities that come through the agency position, disclosing any conflicts of interest, not acting for two principals, not purchasing client's property being sold without prior disclosure of personal interest, not operating in competition with the principal, communicating to the principal any information acquired with respect to his agency role.

Feedback: Examples of the agent's fiduciary duty are not taking hidden commissions or kickbacks, always acting in the principal's best interests, not taking advantage of opportunities that come through the agency position, disclosing any conflicts of interest, not acting for two principals, not purchasing client's property being sold without prior disclosure of personal interest, not operating in competition with the principal, communicating to the principal any information acquired with respect to his agency role.

Diff: 2 Type: ES Page Reference: 162n-163b Skill: Recall 69) Discuss the extent of the obligations of the agent to the principal based on his fiduciary duty.

Answer: It is very important that students understand the nature of a fiduciary duty, and this question requires them to demonstrate that understanding with respect to the agency relationship. Some of the things they can mention are as follows. The agent must disclose information acquired with respect to transactions involving the principal. There is a duty not to take kick-backs or to work as agent for both sides unless it is disclosed and there is

..

26

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

permission. There is a duty not to act in conflict of interest and so to put the interest of the principal before your own. The agent can't sell things that the agent owns or has an interest in to the principal without disclosing that fact. The agent can't purchase things for himself from the principal without disclosing that fact. The agent can't take advantage of opportunities that come to him because of his position that should be disclosed to the principal. The agent must account for profits that he makes because of a violation of this duty. In short, this is an utmost good faith relationship, and the agent must act in the best interest of the principal, putting his own interests second to those of the principal.

Students may supply other examples of the obligations of a fiduciary.

Feedback: It is very important that students understand the nature of a fiduciary duty, and this question requires them to demonstrate that understanding with respect to the agency relationship. Some of the things they can mention are as follows. The agent must disclose information acquired with respect to transactions involving the principal. There is a duty not to take kick-backs or to work as agent for both sides unless it is disclosed and there is permission. There is a duty not to act in conflict of interest and so to put the interest of the principal before your own. The agent can't sell things that the agent owns or has an interest in to the principal without disclosing that fact. The agent can't purchase things for himself from the principal without disclosing that fact. The agent can't take advantage of opportunities that come to him because of his position that should be disclosed to the principal. The agent must account for profits that he makes because of a violation of this duty. In short, this is an utmost good faith relationship, and the agent must act in the best interest of the principal, putting his own interests second to those of the principal.

Students may supply other examples of the obligations of a fiduciary.

Diff: 2 Type: ES Page Reference: 162o-163c Skill: Recall 70) Identify the true statement concerning the law of principal and agent. a. An agent with no express authority can never bind his principal into a contract with a third party. b. An agent who puts himself in a position where his interests conflict with those of his principal is in breach of his duties even though no actual harm comes to his principal. c. Agency is only created by way of a contract. d. The principal and his agent owe each other the same duties. e. An agent can never be liable to the third party himself while the principal will bear no such liability.

Answer: b Diff: 2 Type: MC Page Reference: 162p Skill: Recall 71) If Matt is an agent for Art, which of the following is false?

..

27

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

a. Matt cannot act as an agent for Art and for the person Art is dealing with at the same time without the permission of both. b. Matt owes a fiduciary duty to Art. c. Matt could act as an agent for Art even if he were not paid to do so. d. Even when Matt is acting as an agent, he need not put the interest of Art above his own. e. Matt must use reasonable care, skill, and diligence in his service to Art. Answer: d Diff: 2 Type: MC Page Reference: 162q Skill: Recall 72) Information that comes to the agent because of his or her position as agent must be passed on to the principal. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 162r Skill: Recall 73) "An agent is free to withhold information from the principal as long as it doesn't hurt the principal." Discuss the accuracy of this statement.

Answer: Any information that comes to an agent in relation to that agency is the property of the principal. It is up to the principal to decide whether the information is of any value to him or not. Failure to disclose such information is a breach of the agent's fiduciary duty.

Feedback: Any information that comes to an agent in relation to that agency is the property of the principal. It is up to the principal to decide whether the information is of any value to him or not. Failure to disclose such information is a breach of the agent's fiduciary duty.

Diff: 2 Type: ES Page Reference: 162s Skill: Recall 74) Which of the following is an example of an agent's breach of fiduciary duty to his principal? a. An agent for the vendor makes a profit on the transaction he negotiated for his vendor above his commission and doesn't tell his principal/vendor.

..

28

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

b. An agent negotiates a higher price than the highest sale price reasonably possible at that time. c. The agent takes presents from the third party and passes them on to the principal. d. An agent for the vendor collects a commission from the purchaser but told his principal and obtained his consent. e. An agent discloses to his principal/vendor that he is giving some of his commission to the purchaser to induce the purchaser to sign the contract that the principal/vendor wants.

Answer: a Diff: 2 Type: MC Page Reference: 163d Skill: Recall 75) Which of the following is correct with respect to an agent's performance of his duties? a. The agent must never compete with the principal. b. The agent must never take advantage of the third party. c. The principal need not reimburse the agent for any reasonable expenses incurred in the process of performing the agency responsibilities. d. When an agent fails to act in the best interest of the principal and is an independent contractor, this is just cause for constructive dismissal. e. The agent may profit at the expense of the principal if the agent acquires some previously unknown information.

Answer: a Diff: 2 Type: MC Page Reference: 163e Skill: Recall 76) Which of the following statements related to an agent's fiduciary duty is correct? a. Despite a recent Supreme Court of Canada decision, it is likely that agents will continue to have a fiduciary duty to their principals, where an agent has agreed to act in the principal's best interest, but only if this agreement is in writing. b. Despite a recent Supreme Court of Canada decision, it is likely that agents will continue to have a fiduciary duty to their principals, where an agent has agreed to act in the principal's best interest. c. As a result of a recent Supreme Court of Canada decision, agents no longer have a fiduciary duty to their principals except in matters involving monetary transactions. d. As a result of a recent Supreme Court of Canada decision, only agents who are also employees have a fiduciary duty to their principals. e. As a result of a recent Supreme Court of Canada decision, only agents who are employees or dependent contractors have a fiduciary duty to their principals.

Answer: b

..

29

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

Diff: 2 Type: MC Page Reference: 163f Skill: Recall 77) If you hire Gnowsky to act as your agent, which of the following is true with regard to the duties he owes to you? a. Gnowsky need not tell you everything relevant to his task that a reasonable person would consider might affect your decision making. b. Gnowsky need not use reasonable care, skill, and diligence in his service to you. c. An agent may delegate his authority without the authorization of his principal. d. Even when Gnowsky is acting as your agent, he need not put your interest above his own. e. Gnowsky's failure to obey you and to act within the authority given him would allow you to sue him for breach of contract.

Answer: e Diff: 2 Type: MC Page Reference: 163h Skill: Recall 78) Chris was a systems analyst hired to determine the best system for a retail china shop.

After a careful analysis of the shop's needs and the available software, Chris presented a written report, which was approved by the owner of the business. Chris was paid his fee and was asked by the owner of the shop if he would act as agent in purchasing the hardware and software recommended in his report. The purchase was not to exceed $40 000 and the commission was to be $1000. Chris agreed. Read each of the following separately and indicate which is true. a. The agreement to act as agent fails to be a valid agency contract because it is not in writing. b. If Chris buys the hardware and software himself for $36 000 and sells it to the owner for $39 000, he is entitled to his commission because the price to the owner is still less than the price allowed. c. Chris will not be in breach of his fiduciary duty if he buys the recommended system from a firm in which he has an interest, even if he does not mention that fact to the owner. d. Chris is entitled to accept a commission from both the seller and the purchaser, as long as the total price paid by the purchaser is less than $40 000 and the hardware and software is comparable to that recommended in the report. e. Chris could be in breach of his duties if he delegated the task to someone else.

Answer: e Diff: 2 Type: MC Page Reference: 163i

..

30

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

Skill: Applied 79) Although enduring powers of attorney are sometimes abused, there appears to be little interest on the part of governments to address the issue and limit the abuse. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 164 Skill: Recall 80) Which of the following is a true statement about the employer-employee relationship? a. An employer cannot impose a duty of confidentiality on an employee, as this is a violation of the Charter of Rights and Freedoms. b. An employee for a company could not also be an agent at the same time for the company. c. The critical factor in this relationship is control; the employer tells the employee not only what to do but also how to do it. d. If an employer contracts to paint Mr. Shore's barn and sends an employee to do the painting, if the employee is not paid he can sue his employer or Mr. Shore for his wages. e. One responsibility of an employer is to provide the employee with lifetime work availability.

Answer: c Diff: 2 Type: MC Page Reference: 165a Skill: Recall 81) Which of the following is true with regard to employment law? a. The traditional test for determining whether or not a person is an employee is to assess the degree of control; an employee could be told not only what to do but also how to do it. b. If a worker is injured on a job covered by the Workers' Compensation Act, he can sue the employer for any injuries he may have suffered. c. A lockout is action taken by employees to prevent the employer from operating as normal. d. Constructive dismissal refers to a breach of the employment contract by the employer in which the employer has discovered that the employee committed theft. e. Employees are allowed to strike only when the employer refuses to honour the collective agreement (a rights dispute).

Answer: a

..

31

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

Diff: 2 Type: MC Page Reference: 165b Skill: Recall 82) Which of the following statements more accurately describes an employee rather than an independent contractor? a. The person provides his or her own tools. b. The person determines his or her own work schedule. c. The person is an essential part of an employer's organization. d. The person has a high level of financial risk. e. The person is free to represent others in the same business.

Answer: c Diff: 1 Type: MC Page Reference: 165d Skill: Recall 83) Tim operated his own business and entered into an employment contract with Kimball Industries to provide services and be paid as an independent contractor. Over an extended period of time, Tim worked exclusively for Kimball under the direction of Mr. Kimbal,l who gave Tim instructions for work he performed each day during established work hours. In the event that Tim committed a tort and a third party filed an action against both Tim and Kimball Industries, how would the court determine who would be held liable for the tort damages?

Answer: The court might well rely on the organization test. Even though Tim was declared independent in the employment contract, owned his own business, and was paid as an independent contractor, the court would look at his relationship with Kimball Industries and might find Tim to be an employee or a dependent contractor. After all, Tim worked exclusively for Kimball for an extended period of time and worked under the direction of Kimball with established work hours. If the court determines that the relationship is not independent, Kimball might be held vicariously liable for the tort committed by Tim, although Tim would share the liability.

Feedback: The court might well rely on the organization test. Even though Tim was declared independent in the employment contract, owned his own business, and was paid as an independent contractor, the court would look at his relationship with Kimball Industries and might find Tim to be an employee or a dependent contractor. After all, Tim worked exclusively for Kimball for an extended period of time and worked under the direction of Kimball with established work hours. If the court determines that the relationship is not independent, Kimball might be held vicariously liable for the tort committed by Tim, although Tim would share the liability.

Diff: 2

..

32

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

Type: ES Page Reference: 166a Skill: Applied 84) What is the significance of determining that an employment relationship exists, aside from the statutory significance, employment insurance benefits, workers' compensation benefits, etc.?

Answer: In common law, the main significance is that an employer is vicariously liable for the wrongful acts of an employee while doing his job, and the principles of termination rights apply.

Feedback: In common law, the main significance is that an employer is vicariously liable for the wrongful acts of an employee while doing his job, and the principles of termination rights apply.

Diff: 2 Type: ES Page Reference: 166b Skill: Recall 85) Indicate three responsibilities of an employer in an employment relationship.

Answer: Provide a safe workplace, appropriate direction, tools where necessary, wages, and reimbursement for expenses.

Feedback: Provide a safe workplace, appropriate direction, tools where necessary, wages, and reimbursement for expenses.

Diff: 2 Type: ES Page Reference: 166c Skill: Recall 86) Indicate three obligations of an employee in an employment relationship.

Answer: Be reasonably competent, have the skills claimed, and be honest, punctual, loyal, and perform the work agreed to Feedback: Be reasonably competent, have the skills claimed, and be honest, punctual, loyal, and perform the work agreed to Diff: 2 Type: ES Page Reference: 166d Skill: Recall

..

33

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

87) Which of the following would likely not be enforceable if included in an employment contract? a. A duty of confidentiality b. A termination notice provision that exceeds the statutory period but is less than common law notice c. A provision for what will happen if duties are changed in the future d. A carefully worded restrictive covenant but without time or geographical limitations e. Provisions for retirement Answer: d Diff: 1 Type: MC Page Reference: 166f, 167f, 175e Skill: Recall 88) Explain the importance of a carefully drawn employment contract and the challenges a business might face in the absence of such an agreement.

Answer: A carefully drawn employment contract can reduce or eliminate employee challenges and complaints after hiring. For example, if the contract anticipates potential changes in economic conditions, the employer can provide for temporary layoffs, reduced compensation, changes in work duties, etc., without facing employee claims of constructive dismissal when such situations arise. Also, if the employer does not do this in the employment contract, but wishes to do so later, it will be obligated to support the change with real consideration. Similarly, the imposition of a duty of confidentiality or fiduciary duty from the point of hiring may reduce or eliminate associated damage to the company. A carefully worded and reasonable restrictive covenant is more likely to be upheld in court, protecting company interests. A properly stated clause related to termination notice (greater than the statutory requirement) could avoid excessive termination payments. There are many other details that could be covered in the employment contract that would help avoid employee problems and financial obligations later.

Feedback: A carefully drawn employment contract can reduce or eliminate employee challenges and complaints after hiring. For example, if the contract anticipates potential changes in economic conditions, the employer can provide for temporary layoffs, reduced compensation, changes in work duties, etc., without facing employee claims of constructive dismissal when such situations arise. Also, if the employer does not do this in the employment contract, but wishes to do so later, it will be obligated to support the change with real consideration. Similarly, the imposition of a duty of confidentiality or fiduciary duty from the point of hiring may reduce or eliminate associated damage to the company. A carefully worded and reasonable restrictive covenant is more likely to be upheld in court, protecting company interests. A properly stated clause related to termination notice (greater than the statutory requirement) could avoid excessive

..

34

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

termination payments. There are many other details that could be covered in the employment contract that would help avoid employee problems and financial obligations later.

Diff: 3 Type: ES Page Reference: 166g, 168d, 174, 175f Skill: Recall 89) Discuss the termination of employees and the notice to which they are entitled.

Answer: This is the main aspect of master/servant law, and students should demonstrate an understanding of not only when notice is required but also how that notice is calculated.

Of course, no notice is required where there is just cause for the termination or just cause for leaving, and students should spend some time on what constitutes just cause. Good students will even examine an area like incompetence and indicate why it is so difficult to terminate a long-serving employee for incompetence.

Second, if there is no just cause and the employment contract specifies how much notice a person is entitled to upon termination, that contractual provision will apply. Good students will note, however, that if this contractual notice is less than the minimum provided for in statute (Employment Standards Act), that contractual provision will be void.

The main thrust of the answer should be aimed at a discussion of the common law requirement of reasonable notice and how this is determined. The reasonableness of the notice is determined with reference to each particular case, considering the nature of the employment, the length of service, the age of the person, the availability of similar employment, and the experience, training, and qualifications of the person. These factors together will determine how much notice is necessary, and this amount of notice can extend to up to two years. Good students will also note that, where the termination involved malicious conduct or defamation on the part of the employer, the practice is to extend the notice period. Of course, the court will always be awarding damages, and these damages are calculated on the basis of the notice the employee should have been given. Note that in these circumstances the employee has a duty to mitigate his loss by finding another job, and the damages awarded will be reduced by this mitigation.

It might also be noted that what the employee will be offered when leaving will usually be considerably less than what the court will be willing to give as compensation. This may still be attractive to the leaving employee because there will be no legal fees attached and no reduction because of mitigation, and the employee will get the money right away. It should also be mentioned that the employee also has an obligation to give notice, but what is reasonable in these circumstances is usually considerably less.

Students should also discuss the operation of the Employment Standards Act provisions and how they only set a minimum amount of notice, and that the common law notice (or that set out in a collective agreement) will prevail.

Feedback: This is the main aspect of master/servant law, and students should demonstrate an understanding of not only when notice is required but also how that notice is

..

35

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

calculated. Of course, no notice is required where there is just cause for the termination or just cause for leaving, and students should spend some time on what constitutes just cause. Good students will even examine an area like incompetence and indicate why it is so difficult to terminate a long-serving employee for incompetence.

Second, if there is no just cause and the employment contract specifies how much notice a person is entitled to upon termination, that contractual provision will apply. Good students will note, however, that if this contractual notice is less than the minimum provided for in statute (Employment Standards Act), that contractual provision will be void.

The main thrust of the answer should be aimed at a discussion of the common law requirement of reasonable notice and how this is determined. The reasonableness of the notice is determined with reference to each particular case, considering the nature of the employment, the length of service, the age of the person, the availability of similar employment, and the experience, training, and qualifications of the person. These factors together will determine how much notice is necessary, and this amount of notice can extend to up to two years. Good students will also note that, where the termination involved malicious conduct or defamation on the part of the employer, the practice is to extend the notice period. Of course, the court will always be awarding damages, and these damages are calculated on the basis of the notice the employee should have been given. Note that in these circumstances the employee has a duty to mitigate his loss by finding another job, and the damages awarded will be reduced by this mitigation.

It might also be noted that what the employee will be offered when leaving will usually be considerably less than what the court will be willing to give as compensation. This may still be attractive to the leaving employee because there will be no legal fees attached and no reduction because of mitigation, and the employee will get the money right away. It should also be mentioned that the employee also has an obligation to give notice, but what is reasonable in these circumstances is usually considerably less.

Students should also discuss the operation of the Employment Standards Act provisions and how they only set a minimum amount of notice, and that the common law notice (or that set out in a collective agreement) will prevail.

Diff: 3 Type: ES Page Reference: 167a and e, 168b, 169e, 175b Skill: Recall 90) Drew got a non-union, senior management job. After the first day, Drew went to his dad to discuss his obligations to his boss and his boss's obligations to him. Which of the following is false? a. The employer owes Drew not only pay, but also some direction. b. Drew must be punctual and obedient. c. Drew owes the employer a fiduciary duty (i.e., a duty to serve the employer's interests above his own). d. If Drew wants to quit, he must give the employer proper notice unless the employer has done some wrong (e.g., given an unreasonable or dangerous order). e. The employer cannot terminate Drew's employment unless Drew does something wrong.

..

36

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

Answer: e Diff: 3 Type: MC Page Reference: 167b Skill: Applied 91) Indicate what kinds of restrictions there are on an employer's right to dismiss an employee.

Answer: The employer must give reasonable notice or pay in lieu of notice in the absence of just cause; it is free to make such a dismissal subject to any collective agreement or contract that states otherwise; and it must not do so in violation of human rights legislation.

Feedback: The employer must give reasonable notice or pay in lieu of notice in the absence of just cause; it is free to make such a dismissal subject to any collective agreement or contract that states otherwise; and it must not do so in violation of human rights legislation.

Diff: 2 Type: ES Page Reference: 167c-168a Skill: Recall 92) On Friday afternoon, Frieda was told not to return to work because her job was gone.

If her employer is in a non-unionized business and had no "just cause" to dismiss her, which of the following is true? a. If the employee sues for wrongful dismissal and the court has to determine the appropriate notice period, it would consider, among other things, Frieda's sex and religion. b. The amount of notice could be set out in the employment contract, and that amount would override the amount set by the common law, unless it was less than the minimum amount set out in the Employment Standards Act. c. Additional notice must be given even if the employer pays Frieda an amount of money equivalent to the amount of money she would have earned during the notice period. d. The amount of notice to be given to Frieda is limited to the employment contract. e. Frieda can elect to have a notice period or to take money in lieu of notice.

Answer: b Diff: 2 Type: MC Page Reference: 167d Skill: Applied 93) Indicate how much notice an employee is entitled to when being dismissed.

..

37

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

Answer: Reasonable notice. This varies under the circumstances but, in the case of long-term employment, it may approach two years.

Feedback: Reasonable notice. This varies under the circumstances but, in the case of long-term employment, it may approach two years.

Diff: 1 Type: ES Page Reference: 168c Skill: Recall 94) When an employee is dismissed for just cause, the employer need give the employee only two months' notice or the equivalent pay in lieu of that notice. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 169a Skill: Recall 95) When an employee is dismissed for just cause, he or she is entitled to reasonable notice or pay in lieu of notice. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 169b Skill: Recall 96) When an employee is dismissed for just cause, he or she is not entitled to reasonable notice or pay in lieu of notice. a. True b. False Answer: a Diff: 2 Type: TF Page Reference: 169c Skill: Recall 97) Under what circumstances can an employee be terminated without notice?

..

38

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

Answer: For just cause Feedback: For just cause Diff: 2 Type: FIB Page Reference: 169d Skill: Recall 98) What constitutes "just cause"?

Answer: Examples are stealing or being otherwise dishonest with the employer, acting immorally, being convicted of some crime that will interfere with the ability to perform the job or that would otherwise harm the employer, disobeying a lawful instruction, committing an actionable wrong on the job, lying on a resumé, and incompetence.

Feedback: Examples are stealing or being otherwise dishonest with the employer, acting immorally, being convicted of some crime that will interfere with the ability to perform the job or that would otherwise harm the employer, disobeying a lawful instruction, committing an actionable wrong on the job, lying on a resumé, and incompetence.

Diff: 2 Type: ES Page Reference: 169f Skill: Recall 99) Dismissal without reasonable notice must be based on employee wrongdoing or a failure to perform the job. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 169g Skill: Recall 100) Which one of the following is just cause for dismissal? a. Absenteeism twice in the last year b. Habitual negligence or incompetence c. Tardiness once in the last two years d. No work to do e. Refusal to work in an unsafe work environment Answer: b Diff: 2 Type: MC Page Reference: 169h

..

39

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

Skill: Recall 101) Joe had worked for Sam's Manufacturing Company for 10 years when Sam told him one day that, because Sam had lost a major contract, he had no work for Joe to do and Joe was fired as of that time. Explain Joe's legal position.

Answer: It is not "just cause" for an employer to dismiss because it has no work for the employee to do. In these circumstances, the employer must still give proper notice. Joe will be able to sue successfully for wrongful dismissal.

Feedback: It is not "just cause" for an employer to dismiss because it has no work for the employee to do. In these circumstances, the employer must still give proper notice. Joe will be able to sue successfully for wrongful dismissal.

Diff: 2 Type: ES Page Reference: 170a Skill: Applied 102) If the place of employment is not unionized and there are no provisions in the employment contract concerning termination of employment, which of the following would not be within the rights of the employer and therefore actionable by the employee? a. An employee is dismissed because there is no more work to do and is given neither notice nor pay in lieu of notice. b. An employee is dismissed because his employer doesn't like his disposition, and he is given reasonable pay in lieu of notice. c. An employee is dismissed because he refused to do a job to which he had just been demoted, and he was given reasonable pay in lieu of notice. d. An employee is dismissed for incompetence and is given neither notice nor pay in lieu of notice. e. An employee is dismissed because he was found stealing goods from his employer, and he was given neither notice nor pay in lieu of notice.

Answer: a Diff: 2 Type: MC Page Reference: 170b Skill: Recall 103) Which of the following would end the employment relationship by breach, thus possibly giving rise to a claim for damages for wrongful dismissal? a. The employee is told he will no longer be needed at the end of the period of employment specified in the contract (e.g., one year). b. The employee is asked to leave after he refuses to do a reasonable but unpleasant task that is part of his employment, when another more junior employee could have been asked to do it.

..

40

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

c. The employee is told he will no longer be needed at the completion of the specific job he was hired to do (e.g., paint a bridge). d. The employee is asked to leave because he consistently arrives to work late as a result of frequent morning traffic jams. e. The employee is asked to leave because a downturn in the economy has resulted in no work for him to do.

Answer: e Diff: 2 Type: MC Page Reference: 170c Skill: Applied 104) If Joe sued Sam for wrongful dismissal and it was established that Joe was not given the proper notice he was entitled to, what factors would the court take into consideration in assessing the damages he will be awarded?

Answer: Joe must mitigate his losses, so the court will take into consideration any income that he's earned during that notice period or, in fact, any income that he should have earned had he tried to find work, and deduct that from the total award given. The court will also take aggravating factors into consideration but only where the employee suffered actual psychological harm as a result or where he has difficulty finding work due to emotional distress. Punitive damages will not be awarded except where a separate tort has been committed (e.g., defamation) and where the punitive damages would not duplicate any aggravated damages already awarded.

Feedback: Joe must mitigate his losses, so the court will take into consideration any income that he's earned during that notice period or, in fact, any income that he should have earned had he tried to find work, and deduct that from the total award given. The court will also take aggravating factors into consideration but only where the employee suffered actual psychological harm as a result or when he has difficulty finding work due to emotional distress. Punitive damages will not be awarded except where a separate tort has been committed (e.g., defamation) and where the punitive damages would not duplicate any aggravated damages already awarded.

Diff: 2 Type: ES Page Reference: 172a, 173a Skill: Applied 105) John had worked for his employer for 15 years when he was terminated without notice or pay in lieu of notice. He filed a lawsuit for wrongful dismissal as he felt there was no just cause for the termination, although he did believe there had been a plot to get rid of him. Which of the following is correct?

..

41

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

a. In the absence of just cause, John would likely be entitled to reasonable pay in lieu of notice, but no punitive damages unless the employer had committed some tort related to John. b. In the absence of just cause, John would likely be entitled to reasonable pay in lieu of notice and punitive damages as he was fired without just cause. c. In the absence of just cause, John would likely be entitled to reasonable pay in lieu of notice and punitive damages due to the employer's malicious and outrageous act. d. John should have filed his lawsuit as a case of constructive dismissal in order to win punitive and aggravated damages. e. Even if there was no just cause, John likely would not be entitled to any compensation as he did not suffer actual psychological harm as a result of losing his job.

Answer: a Diff: 2 Type: MC Page Reference: 172b Skill: Applied 106) Which of the following statements is correct with respect to remedies for wrongful dismissal? a. The court will usually order the employer to take the employee back. b. The damages that are payable to the employee are calculated on the basis of what the employee would have received had he been given reasonable notice whether or not he gets another job. c. The court will issue an injunction to prevent the employer from hiring someone else to take the employee's place. d. If the employee gets another job within the period of notice he should have received, that will affect the amount of damages he will receive. e. It is up to the employee to determine the amount of notice he should have been given.

Answer: d Diff: 2 Type: MC Page Reference: 173b Skill: Recall 107) Vanessa had been a waitress at Joe's Good Eats for seven years. There had always been differences between Vanessa and Joe because they had radically different views on politics, religion, and sports, but Joe had always overlooked these differences because he liked Vanessa and she was a good waitress. However, on one busy day with the restaurant full of customers, Joe began ranting about city politics. Vanessa whispered, "Please, Joe, you know I don't agree." It ended with Joe yelling, "I've had it with your radical ideas. Get out!" So Vanessa left. The employees at Joe's were not unionized. If Vanessa sues for unlawful dismissal, she will be entitled to damages equivalent to which of the following? a. One week's pay (the statutory minimum)

..

42

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

b. Her regular pay until she finds another job c. Nothing d. The amount that would have been paid during a reasonable notice period less any amounts received from other employment e. The amount of pay received in one pay period (e.g., one month if paid monthly) Answer: d Diff: 2 Type: MC Page Reference: 173c Skill: Applied 108) Darren was wrongfully dismissed and filed a lawsuit for compensation. The employer offered to re-employ Darren for the remainder of the notice period. Although there was no animosity and he did not have employment elsewhere, Darren refused to go back to work. Which of the following is correct? a. Since Darren had been wrongfully dismissed, he likely has a right to full compensation for the notice period and does not need to accept the offer of reemployment. b. Darren would likely be entitled to reasonable pay in lieu of notice as well as punitive damages. c. By refusing to return to work, Darren must forfeit all compensation for the wrongful dismissal. d. Darren could now sue the employer for harassment for offering re-employment instead of proper compensation for wrongful dismissal. e. Darren has failed to mitigate his losses, so damages would likely be reduced accordingly.

Answer: e Diff: 2 Type: MC Page Reference: 173d Skill: Applied 109) Workplace violence, including harassment and bullying by other employees or supervisors, can force an employee to quit work. This may amount to wrongful dismissal. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 173e Skill: Recall 110) John Li has worked as manager of a video store for six years. Since the 7-Eleven next door began renting movies for 97 cents per night, Li's business has fallen off

..

43

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

drastically. Accordingly, the owner of the video store told Li that, because the business had fallen on such hard times, he would take over managing and Li would have to assume the counter duties. The present counter clerk would be laid off. The owner also told Li that his wages would be reduced by 15%. When Li came to work the next day, he told the owner that he wouldn't accept the job working at the counter. The owner became angry and said, "If you don't like it, then you can leave! I don't have to put up with your insubordination for one minute!" Li left and then sued the owner for unlawful dismissal.

The owner argued that he had "just cause": economic slowdown and disobedience. Based on the above facts, identify the true statement. a. Li would win the unlawful dismissal action because the owner "dismissed" him by unilaterally changing Li's job without Li's consent and insisting that Li do it. b. The owner cannot dismiss without cause even if he gives proper notice or pay in lieu thereof. c. The owner could fire Li without notice or pay in lieu of notice because Li refused his order to take over the counter. d. If Li were wrongfully dismissed, he does not have to mitigate his losses by looking for a new job until the case has been resolved. e. The owner was justified in firing Li without notice or pay in lieu of notice because of economic slowdown.

Answer: a Diff: 3 Type: MC Page Reference: 173f Skill: Applied 111) For the past seven years, Hudson has worked as vice-president in charge of personnel (a non-union position) for Mountain Enterprises Ltd. As part of a corporate reorganization, the directors of the company decided to downgrade Hudson's position to manager of personnel. Hudson is very upset at this change and consequently refuses to go along with it. The company dismisses him immediately without any notice or pay in lieu thereof, because of his refusal. If Hudson sues for wrongful dismissal, which one of the following statements indicates the most likely outcome of the case? a. Hudson will win because the company breached the employment contract and he does not have to accept that breach. b. The company will win because non-union employees are always subject to dismissal without notice, because there is no collective agreement. c. The company will win because it dismissed Hudson, rather than saying he was "fired." d. The company will win because Hudson's refusal constituted "cause." e. Hudson will win because an employer owes its employees a job, unless the employee is convicted of a theft.

Answer: a Diff: 3 Type: MC Page Reference: 173g

..

44

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

Skill: Applied 112) When an employee leaves the job because of constructive dismissal, his or her only recourse is to complain to the appropriate human rights tribunal. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 173h Skill: Recall 113) Joe worked in Sam's Manufacturing Plant as supervisor for five years, and for five years prior to that had been foreman. Because of a reorganization, the position of supervisor was eliminated and Joe was reassigned to his old job as night foreman. He refused to take it and sued for wrongful dismissal. What would be the outcome?

Answer: This is an example of constructive dismissal, and Joe would be entitled to reasonable notice. Although there is some debate about this, Joe will likely be successful in his wrongful dismissal action.

Feedback: This is an example of constructive dismissal, and Joe would be entitled to reasonable notice. Although there is some debate about this, Joe will likely be successful in his wrongful dismissal action.

Diff: 3 Type: ES Page Reference: 173i Skill: Applied 114) Which of the following statements is false with respect to the employee's obligation to give the employer notice upon quitting? a. The employee is not obligated to give notice to the employer and can leave the job immediately if working conditions are unreasonably dangerous and the employer refuses to take reasonable steps to correct them. b. An employee is not obligated to give the employer notice where the employer gives the employee unreasonable or dangerous orders. c. The employee is obligated to give reasonable notice unless there is just cause for leaving. d. The employee can refuse to give notice and leave immediately if the employer involves the employee in immoral or illegal activities. e. The employee can leave immediately without notice if he has a better job to go to.

Answer: e Diff: 2

..

45

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

Type: MC Page Reference: 175a Skill: Recall 115) When another employer induces someone to leave her current employment, which of the following actions might the current employer pursue? a. Action for theft b. Action for inducing breach of contract c. Action for breach of confidentiality d. Action for unfair competition e. Action for breach of fiduciary duty Answer: b Diff: 1 Type: MC Page Reference: 175c Skill: Recall 116) Which of the following is correct with respect to restrictive covenants included in employment contracts? a. For such a clause to be valid, it is only necessary to show that it was needed to protect the employer's interest. b. Such restrictive covenants are always void and have no place in employment contracts. c. Such restrictive covenants are enforceable in court if reasonable in that they are necessary to protect the employer's interests and go no further than necessary to achieve that goal. d. When employers require employees to enter into such agreements long after the initial hiring, it becomes part of the initial employment contract and does not require new consideration. e. The imposition of such a restriction is at the option of the employer and the employee has no say in the matter.

Answer: c Diff: 3 Type: MC Page Reference: 175d Skill: Recall 117) Trade union activities are controlled by the courts. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 177a

..

46

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

Skill: Recall 118) The explosive confrontations between management and workers attempting to organize themselves to offset the power of the employer led most governments to pass laws that would create and maintain labour peace. Which of the following is false with regard to collective bargaining legislation? a. A lockout is an action taken by the employer to prevent workers from working and earning a wage. b. A contract approved by both the employer and the union is called a collective agreement, and it must set out the method for the settlement of disputes that could arise under the agreement. c. It is an unfair labour practice for an employer to threaten to fire a worker for joining the union. d. Employers can block their workers from organizing themselves as a union as long as they do not use violence or the threat of violence. e. Once a union is certified, the union worker will not bargain for his contract; the union will have a bargaining agent who has the authority to negotiate for a contract that will bind all union workers in that bargaining unit.

Answer: d Diff: 2 Type: MC Page Reference: 177b Skill: Applied 119) A majority of the employees in a workplace must vote in favour of union organization before certification will be granted. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 177c Skill: Recall 120) Certification is notice to a labour relations board that the union intends to go on strike. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 177d Skill: Recall

..

47

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

121) How is certification obtained?

Answer: The union representatives attempt to get the employees to sign up as members of that union. When a certain percentage have joined (e.g., 45% in British Columbia and 40% in Ontario), they can apply for certification. In most instances, a certification vote is held. In some jurisdictions, if the union can show that it has signed up a large number of employees (e.g., over 50% federally and 55% in Ontario), the union can be certified without a vote.

Feedback: The union representatives attempt to get the employees to sign up as members of that union. When a certain percentage have joined (e.g., 45% in British Columbia and 40% in Ontario), they can apply for certification. In most instances, a certification vote is held. In some jurisdictions, if the union can show that it has signed up a large number of employees (e.g., over 50% federally and 55% in Ontario), the union can be certified without a vote.

Diff: 2 Type: ES Page Reference: 177e, 178c Skill: Recall 122) The certification process was introduced to solve which of the following kinds of disputes? a. Interest dispute b. Recognition dispute c. Rights dispute d. Jurisdictional dispute e. Commercial disputes Answer: b Diff: 1 Type: MC Page Reference: 178a Skill: Recall 123) The process by which a particular union achieves the status of bargaining agent for a group of employees is called: a. Certification b. Binding arbitration c. Arbitration d. Conciliation e. Job action Answer: a Diff: 1

..

48

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

Type: MC Page Reference: 178b Skill: Recall 124) Which of the following statements is correct with respect to the process by which a union organizes the workforce of an employer? a. An employer can refuse to recognize a trade union or have any dealings with it. b. In most provinces, a trade union must receive government certification through an employee voting process before it has the right to represent the employees in dealings with the employer. c. A union can call the employees it has organized out on strike to force the employer to recognize and deal with that trade union. d. Once the union has been certified, the employer must consent to what the union demands in the new contract. e. The employer can refuse to have anything to do with the union even after it has successfully completed the certification process.

Answer: b Diff: 2 Type: MC Page Reference: 178d Skill: Recall 125) A certified union has exclusive rights to represent the employees, and individual bargaining unit employees are no longer free to enter into separate contractual arrangements with their employer. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 178e Skill: Recall 126) What is the significance of a union becoming certified?

Answer: Once a union obtains certification, it is the official bargaining agent on behalf of the employees, and the employer must bargain with it to the end that a collective agreement is created.

Feedback: Once a union obtains certification, it is the official bargaining agent on behalf of the employees, and the employer must bargain with it to the end that a collective agreement is created.

Diff: 1

..

49

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

Type: ES Page Reference: 178f Skill: Recall 127) Which of the following is an unfair labour practice? a. A union representative has a conversation with an employee about joining the union. b. An employee is required to join a union as a condition of employment. c. An employer pays higher wages as part of its annual wage increase, as a union is trying to organize the employees. d. An employer threatens to have an employee fired if he joins a union. e. An employer starts another unrelated business that is non-union, as a union tries to organize the employees at the present location.

Answer: d Diff: 2 Type: MC Page Reference: 178g Skill: Recall 128) Give three examples of unfair labour practices on the part of the employer.

Answer: Intimidating or threatening employees to try to interfere with union certification, creating employer-dominated bargaining units, changing pay or conditions of work to undermine a certification drive Feedback: Intimidating or threatening employees to try to interfere with union certification, creating employer-dominated bargaining units, changing pay or conditions of work to undermine a certification drive Diff: 2 Type: ES Page Reference: 178h Skill: Recall 129) Which of the following statements is correct with respect to the process of conciliation/mediation? a. The conciliator or mediator's recommendations cannot be ignored by the parties. b. Conciliation/mediation is a process by which a third party is chosen by the government to impose a settlement on the parties. c. Conciliation/mediation is a process by which a third party is chosen by the parties to impose a settlement on the parties. d. This refers to the requirement that the parties bargain in good faith to reach a contract. e. Conciliation/mediation is a process by which a person is chosen by either the government or the parties, who then tries to bring the parties to an agreement.

Answer: e

..

50

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

Diff: 2 Type: MC Page Reference: 179a Skill: Recall 130) Mediation is third-party intervention in the negotiation process to force an agreement. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 179b Skill: Recall 131) Mediation involves a process whereby some third party tries to help the conflicting parties reach an agreement. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 179c Skill: Recall 132) During bargaining, both parties are required to bargain in good faith. This means they must compromise to reach an agreement. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 179d Skill: Recall 133) Collective agreements must have provisions in them providing for the arbitration of which of the following kinds of disputes? a. Interest dispute b. Recognition dispute c. Jurisdictional dispute d. Commercial disputes e. Rights dispute

..

51

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

Answer: e Diff: 1 Type: MC Page Reference: 179e Skill: Recall 134) A difference of opinion between an employer and a union in the interpretation of terms in their existing contract is called: a. Rights dispute b. Conciliation procedure c. Jurisdictional dispute d. Interest dispute e. Certification Answer: a Diff: 1 Type: MC Page Reference: 179f Skill: Recall 135) Distinguish between a rights dispute and an interest dispute.

Answer: An interest dispute occurs when the employer and the employees disagree as to what ought to be contained in the contract. In effect, they are negotiating for a new contract, and it's only under these circumstances that the parties can strike or lock out. A rights dispute is a dispute that arises over the interpretation or application of the contract, and such disputes must be arbitrated or settled some other way.

Feedback: An interest dispute occurs when the employer and the employees disagree as to what ought to be contained in the contract. In effect, they are negotiating for a new contract, and it's only under these circumstances that the parties can strike or lock out. A rights dispute is a dispute that arises over the interpretation or application of the contract, and such disputes must be arbitrated or settled some other way.

Diff: 2 Type: ES Page Reference: 179g, 180f Skill: Recall 136) While a lockout can only take place during the collective bargaining process when there is no contract in force, the employees can also legally strike when the employer breaches a term of a collective agreement that is in force. a. True b. False Answer: b

..

52

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

Diff: 1 Type: TF Page Reference: 179h Skill: Recall 137) Which of the following is correct with respect to the law of collective bargaining? a. The public has a legal obligation to honour a properly constituted picket line during a lawful strike or lockout. b. Under the Charter of Rights and Freedoms, all employees have the right to belong to trade unions and to strike. c. All employees have the right to individually choose whether they will become members of a union when they are hired. d. A union shop requires that employees become members of the union when they are hired. e. Employees can strike only where the employer has clearly breached the terms of the collective agreement.

Answer: d Diff: 2 Type: MC Page Reference: 180a Skill: Recall 138) A union shop requires that employees become members of the union when they are hired. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 180b Skill: Recall 139) The employee's right to strike is limited to which of the following types of disputes? a. Jurisdictional dispute b. Interest dispute c. Rights dispute d. Commercial disputes e. Recognition dispute Answer: b Diff: 1 Type: MC Page Reference: 180c Skill: Recall

..

53

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

140) Eastside Nurseries Ltd., which had long been a family business, was faced with a demand by its workers that it recognize their new organization, a union, for the purposes of collective bargaining. The union was certified by the appropriate governmental board as the bargaining agent for this bargaining unit, but the parties could not reach an agreement as to what should be included in the new collective agreement. Eventually Eastside Nurseries locked out the employees. This sort of dispute is called: a. Interest dispute b. Recognition dispute c. Rights dispute d. Arbitration dispute e. Jurisdictional dispute Answer: a Diff: 2 Type: MC Page Reference: 180d Skill: Applied 141) The only kind of disagreement between union and employer that can lead to a lawful strike is called: a. Jurisdictional dispute b. Rights dispute c. Certification d. Interest dispute e. Conciliation procedure Answer: d Diff: 1 Type: MC Page Reference: 180e Skill: Recall 142) What conditions must be met first before the employees can go on strike?

Answer: The collective agreement must have expired and the parties must have attempted to bargain in good faith. A specific period of notice must be given (e.g., 72 hours in British Columbia).

Feedback: The collective agreement must have expired and the parties must have attempted to bargain in good faith. A specific period of notice must be given (e.g., 72 hours in British Columbia).

Diff: 1 Type: ES Page Reference: 180g

..

54

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

Skill: Recall 143) Distinguish between a strike and a lockout.

Answer: A strike occurs when the employees withdraw their services. A lockout occurs when the employer refuses to let the employees work.

Feedback: A strike occurs when the employees withdraw their services. A lockout occurs when the employer refuses to let the employees work.

Diff: 1 Type: ES Page Reference: 180h and k Skill: Recall 144) Discuss the role of strikes, lockouts, and picketing, and whether or not they have any place in our present society.

Answer: Students should first explain the difference between a strike and a lockout and demonstrate under what circumstances strikes, lockouts, and picketing can take place.

The only time a strike or lockout is now permitted is at the bargaining stage, where the parties are trying to negotiate the terms of a new collective agreement (i.e., an interest dispute). All other types of disputes are dealt with through the certifications process (i.e., recognition and jurisdictional disputes) or through the arbitration and grievance procedures embodied in the collective agreement itself (i.e., rights disputes).

Even then, when a strike or lockout does take place, what the parties can do is severely limited. Notice has to be given before the strike can commence. Picketing can only be done at certain locations and then can only be persuasive. No violence or physical confrontation or intimidation is permitted (although in fact it often happens).

All of these things restrict strikes and lockouts and picketing (the use of power) to a very limited area, and the potential or threat of its use forms the basis of the power for each side that leads to a negotiated settlement in most cases. Students should discuss all of these factors before giving an opinion of whether strikes and lockouts should be allowed.

They can clearly choose either side in the debate, but it should be clear that they are arguing from a clear understanding of these important factors.

Feedback: Students should first explain the difference between a strike and a lockout and demonstrate under what circumstances strikes, lockouts, and picketing can take place.

The only time a strike or lockout is now permitted is at the bargaining stage, where the parties are trying to negotiate the terms of a new collective agreement (i.e., an interest dispute). All other types of disputes are dealt with through the certifications process (i.e., recognition and jurisdictional disputes) or through the arbitration and grievance procedures embodied in the collective agreement itself (i.e., rights disputes).

Even then, when a strike or lockout does take place, what the parties can do is severely limited. Notice has to be given before the strike can commence. Picketing can only be

..

55

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

done at certain locations and then can only be persuasive. No violence or physical confrontation or intimidation is permitted (although in fact it often happens).

All of these things restrict strikes and lockouts and picketing (the use of power) to a very limited area, and the potential or threat of its use forms the basis of the power for each side that leads to a negotiated settlement in most cases. Students should discuss all of these factors before giving an opinion of whether strikes and lockouts should be allowed.

They can clearly choose either side in the debate, but it should be clear that they are arguing from a clear understanding of these important factors.

Diff: 2 Type: ES Page Reference: 180i and l, 181c Skill: Applied 145) A lockout involves picketing employees prohibiting both management and other employees from crossing the picket line. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 180j Skill: Recall 146) Which of the following statements is correct with respect to picketing? a. Lawful picketing is the process whereby striking employees attempt to persuade people not to do business with their employer. b. Lawful picketing can take place during a rights dispute or a recognition dispute. c. Lawful picketing is an accepted form of protest by workers whether or not a lawful strike is in process. d. Lawful picketing is the process whereby striking employees forcefully prohibit others from doing business with their employer. e. Lawful picketing cannot take place during a lockout, only during a lawful strike.

Answer: a Diff: 2 Type: MC Page Reference: 181a Skill: Recall 147) "Lawful picketing allows employees to block others from entering their employer's place of business." Explain the accuracy of this statement.

Answer: Picketing only allows the picketers to try to persuade others to not enter those premises.

Violence and intimidation are usually not tolerated.

..

56

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

Feedback: Picketing only allows for picketers to try to persuade others to not enter those premises. Violence and intimidation are usually not tolerated.

Diff: 2 Type: ES Page Reference: 181b Skill: Recall 148) In some jurisdictions where public employees are involved, legislation prohibits strikes or lockouts, requiring disputes to be dealt with through binding arbitration. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 181d Skill: Recall 149) Union employees have a legal obligation to honour (that is, to not cross) a properly constituted picket line during a lawful strike or lockout. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 181e Skill: Recall 150) Explain why picketing can be effective.

Answer: There is a strong union tradition (but no legal obligation) that union members will not cross another union's picket lines; thus, a close-down of a business can be very effective.

Feedback: There is a strong union tradition (but no legal obligation) that union members will not cross another union's picket lines; thus, a close-down of a business can be very effective.

Diff: 2 Type: ES Page Reference: 181f-182a Skill: Applied 151) Which one of the following statements is true with respect to workers' compensation?

..

57

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

a. Normally, a worker who is injured on a job that is covered by the Workers' Compensation Act has the choice of suing his employer or claiming under the Act with regard to that injury. b. All of the funds used to pay for injuries suffered on the job come from a fund paid into by the government and employees. c. Normally, a worker who is injured on a job that is covered by the Workers' Compensation Act cannot sue his employer or a fellow employee who caused the injury. d. Workers' compensation is available for physical labourers only. e. While job-related injuries are covered under the Workers' Compensation Act, illness that results from work is strictly the employee's own problem.

Answer: c Diff: 2 Type: MC Page Reference: 182b Skill: Recall 152) Workers' compensation benefits are only available where the employee has been injured because of the fault of the employer. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 182c Skill: Recall 153) Some jurisdictions have introduced "creative sentencing" for offences related to the violation of safety rules under workers' compensation legislation. This usually involves holding corporate officers and directors personally liable, but allowing them to serve jail time on weekends only and giving them credit for implementing new safety practices at work. a. True b. False Answer: b Diff: 3 Type: TF Page Reference: 182d Skill: Recall 154) Explain the practice of "creative sentencing" introduced in some jurisdictions related to health and safety violations.

Answer:

..

58

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

Where a company has violated safety rules set out in workers' compensation legislation, the offending company is charged but, instead of a trial, an agreement is reached. Usually a fine is imposed that is directed to charities involved in safety promotion, like safety courses offered in schools. "Creative sentencing" is a cooperative approach that contributes to the promotion of occupational health and safety.

Feedback: Where a company has violated safety rules set out in workers' compensation legislation, the offending company is charged but, instead of a trial, an agreement is reached. Usually a fine is imposed that is directed to charities involved in safety promotion, like safety courses offered in schools. "Creative sentencing" is a cooperative approach that contributes to the promotion of occupational health and safety.

Diff: 2 Type: ES Page Reference: 182e, 183a Skill: Recall 155) Workplace health and safety standards apply to all employees, but they do not apply to dependent and independent contractors. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 183b Skill: Recall 156) Benefits such as payments for absences due to pregnancy and adoptions are administered through workers' compensation legislation. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 183c Skill: Recall 157) Explain the employer's duty to accommodate employee disabilities under human rights legislation, including some appropriate examples.

Answer: Where an employee has a disability, the employer must make a reasonable effort to do whatever is necessary to accommodate that disability. This may involve building accommodations, such as expanding spaces in work areas to accommodate a wheelchair, ergonomic chairs and work stations for those with back or other physical problems,

..

59

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 6: Agency and Employment

audio signals or large print for the visually impaired, etc. However, the duty to accommodate has limitations in that it is not intended to place an undue hardship on a business. This is a particular concern where the business is small and the cost of accommodation would be unreasonably significant. Also, there may be limitations where an employee cannot be accommodated, as would be the case if a bus driver lost her eyesight.

Feedback: Where an employee has a disability, the employer must make a reasonable effort to do whatever is necessary to accommodate that disability. This may involve building accommodations, such as expanding spaces in work areas to accommodate a wheelchair, ergonomic chairs and work stations for those with back or other physical problems, audio signals or large print for the visually impaired, etc. However, the duty to accommodate has limitations in that it is not intended to place an undue hardship on a business. This is a particular concern where the business is small and the cost of accommodation would be unreasonably significant. Also, there may be limitations where an employee cannot be accommodated, as would be the case if a bus driver lost her eyesight.

Diff: 2 Type: ES Page Reference: 183d-184 Skill: Recall 158) While it may be helpful to include criminal convictions, drug or alcohol addictions, and credit checks in pre-employment screening, this should be done with great care and with the prospective employee’s consent. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 185 Skill: Recall

..

60

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

1) Distinguish between a sole proprietorship and a corporation.

Answer: A sole proprietorship is simply a person going into business on his or her own without going through any formal process like incorporation. The owner is the legal personality.

With a corporation, people own shares in a separate legal personality called the corporation.

Feedback: A sole proprietorship is simply a person going into business on his or her own without going through any formal process like incorporation. The owner is the legal personality. With a corporation, people own shares in a separate legal personality called the corporation.

Diff: 1 Type: ES Page Reference: 198a, 210c, 211d Skill: Recall 2) What are the advantages and disadvantages of being a sole proprietor?

Answer: Disadvantages: unlimited liability, only one person involved (although employees may be hired), income is taxed at the personal tax rate. Advantages: little outside interference, not accountable to others, record and reporting burden is lighter, fewer government regulations.

Feedback: Disadvantages: unlimited liability, only one person involved (although employees may be hired), income is taxed at the personal tax rate. Advantages: little outside interference, not accountable to others, record and reporting burden is lighter, fewer government regulations.

Diff: 2 Type: ES Page Reference: 198b, 199 Skill: Recall 3) A sole proprietor is free from regulatory control. a. True b. False Answer: b Diff: 1

..

1

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

Type: TF Page Reference: 198c Skill: Recall 4) Which of the following is correct with respect to sole proprietorships? a. The sole proprietorship is a separate legal entity. b. A sole proprietorship exists where two or more people carry on business together with a view toward profits. c. The sole proprietor has limited liability. d. The sole proprietor has unlimited liability. e. A sole proprietorship must be incorporated.

Answer: d Diff: 1 Type: MC Page Reference: 198d Skill: Recall 5) Which one of the following statements is correct with respect to sole proprietorships? a. The sole proprietor is restricted to service-type businesses. b. A sole proprietorship involves limited liability. c. The sole proprietor is a society under the Societies Act. d. A sole proprietorship involves unlimited liability for the proprietor. e. A sole proprietorship is a separate legal entity with one shareholder.

Answer: d Diff: 1 Type: MC Page Reference: 198e Skill: Recall 6) The biggest issue for a sole proprietor is unlimited liability. a. True b. False Answer: a Diff: 1

..

2

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

Type: TF Page Reference: 198f Skill: Recall 7) Which one of the following statements is correct with respect to sole proprietorships? a. The sole proprietor has the same extent of liability as a shareholder. b. The sole proprietor must consult with the other owners before making any major decisions regarding the business. c. The sole proprietor is responsible for the torts committed by an employee that take place within the scope of employment. d. The sole proprietor need not adhere to any licensing and government regulations. e. The sole proprietor has limited liability.

Answer: c Diff: 2 Type: MC Page Reference: 198g Skill: Recall 8) A sole proprietor carries on business alone and cannot employ others in the process. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 198h Skill: Recall 9) A sole proprietor is responsible not only for his own conduct but also for the wrongful conduct of any employee done in the course of employment. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 198i Skill: Recall

..

3

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

10) Which one of the following situations will result in a partnership existing? Assume that no corporation has been created. a. Joe and Mary own a house together and share the income from it. b. A lawyer and a real estate agent split a commission. c. Employees are given bonuses because of increased profits. d. Joe pays back a debt to Harry by giving Harry a percentage of the profits from his business. e. Joe and Mary own a shoe store together and share the profits.

Answer: e Diff: 1 Type: MC Page Reference: 200a Skill: Applied 11) Which of the following is the proper definition of a partnership as set out in the Partnership Act? a. Partnership exists where two or more persons carry on business in common with a view to profit. b. A partnership exists only where two or more people enter into a written agreement to be partners. c. A partnership is created where a corporation with shareholders is registered with the federal government. d. A partnership is only created where the partners actually share the profits from a business. e. A partnership exists where any business is carried on with a view toward profits.

Answer: a Diff: 1 Type: MC Page Reference: 200b Skill: Recall 12) Which of the following statements best describes a partnership? a. Partnership involves two or more persons carrying on business with a view toward profits.

..

4

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

b. Partnerships are created when two or more persons specifically agree to be in partnership. c. Partnerships are like any other form of contract; they can only be created when there is consensus between the parties in the form of offer and acceptance to that effect. d. Partnerships involve limited liability. e. Partnerships are only created when they have been properly registered with the government.

Answer: a Diff: 2 Type: MC Page Reference: 200c Skill: Recall 13) Adams was approached by a Mr. McCarthy of XYZ Co., who requested that Adams pay $10 000 to extinguish a debt owed by the partnership of Adams and Jefferson.

Adams denied the partnership and the liability. In asserting his claim, McCarthy cited the following facts, all of which he could prove. Which of these facts is the strongest evidence of the existence of a partnership? a. Adams and Jefferson co-owned property. b. Adams and Jefferson shared gross returns from a business. c. Adams and Jefferson worked together for a non-profit charity. d. Adams received a commission from Jefferson based on the sale price of the goods sold

by Adams for Jefferson. e. Adams and Jefferson shared the profits from a business.

Answer: e Diff: 2 Type: MC Page Reference: 200d Skill: Applied 14) Distinguish between a partnership and a corporation.

Answer: A partnership involves two or more people carrying on business in common with a view to a profit, but no separate legal entity is created. With a corporation, people own shares in a separate legal personality called the corporation.

..

5

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

Feedback: A partnership involves two or more people carrying on business in common with a view to a profit, but no separate legal entity is created. With a corporation, people own shares in a separate legal personality called the corporation.

Diff: 1 Type: ES Page Reference: 200e, 211c Skill: Recall 15) When the partners fail to register their partnership, they can neither sue nor be sued. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 200f Skill: Recall 16) Discuss the advantages and disadvantages of partnership as a method of carrying on business compared to incorporation.

Answer: The main advantages of partnership are its ease of creation and the fact that each partner has a veto over important decisions. Also, each partner participates in the management process. The main disadvantage is unlimited liability. It is a simple matter in this question for students to list the features of incorporation and partnership as outlined in the chapter and state that those features are advantages and disadvantages depending on your point of view. But students showing a good understanding will indicate that many of the advantages of incorporation, like limited liability, are illusory (having to sign a personal guarantee), and that many of the disadvantages of partnerships can be overcome either by a partnership agreement between the partners or by acquiring adequate insurance.

Feedback: The main advantages of partnership are its ease of creation and the fact that each partner has a veto over important decisions. Also, each partner participates in the management process. The main disadvantage is unlimited liability. It is a simple matter in this question for students to list the features of incorporation and partnership as outlined in the chapter and state that those features are advantages and disadvantages depending on your point of view. But students showing a good understanding will indicate that many of the advantages of incorporation, like limited liability, are illusory (having to sign a personal guarantee), and that many of the disadvantages of partnerships can be overcome either by a partnership agreement between the partners or by acquiring adequate insurance.

..

6

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

Diff: 1 Type: ES Page Reference: 200g-222 Skill: Applied 17) Discuss the role of the Partnership Act as it relates to people carrying on joint business activities.

Answer: This question requires students to demonstrate an understanding of the Partnership Act. They should indicate that each common law province has adopted a version of the Partnership Act. They should indicate that it contains provisions that govern the activities of partners with each other and the activities of those partners with outsiders.

Unlimited liability is imposed on partners dealing with outsiders for the commission of torts, for contracts entered into on the partnership's behalf, and for breach of trust. It is important for students to show that such liability to outsiders cannot be changed by the terms of a partnership agreement. As far as the relationship between the partners, the Act sets out a number of responsibilities and obligations between the partners. Examples are the fact that major decisions must be unanimous, and the requirement that profits are to be shared equally. Students should explain others listed in the text. The important point that must be explained is that many of these rights and obligations between partners listed in the Partnership Act can be changed by the terms of a partnership agreement made by those partners. Thus, there can be different classes of partners (senior and junior) who receive a different share of the profits and who have different powers when important decisions are made. They may also be given different roles with respect to participation in the management of the partnership.

Feedback: This question requires students to demonstrate an understanding of the Partnership Act. They should indicate that each common law province has adopted a version of the Partnership Act. They should indicate that it contains provisions that govern the activities of partners with each other and the activities of those partners with outsiders. Unlimited liability is imposed on partners dealing with outsiders for the commission of torts, for contracts entered into on the partnership's behalf, and for breach of trust. It is important for students to show that such liability to outsiders cannot be changed by the terms of a partnership agreement. As far as the relationship between the partners, the Act sets out a number of responsibilities and obligations between the partners. Examples are the fact that major decisions must be unanimous, and the requirement that profits are to be shared equally. Students should explain others listed in the text. The important point that must be explained is that many of these rights and obligations between partners listed in the Partnership Act can be changed by the terms of a partnership agreement made by those partners. Thus, there can be different classes of partners (senior and junior) who receive a different share of the profits and who have different powers when important decisions are made. They may also be given different roles with respect to participation in the management of the partnership.

..

7

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

Diff: 2 Type: ES Page Reference: 200h and l, 203w, 204k, 206c Skill: Applied 18) In which of the following is there not a fiduciary duty owed? a. Officer of a company to the company b. Partners to each other c. Manager to employer d. Agent to her principal e. Director to shareholders Answer: e Diff: 1 Type: MC Page Reference: 200i, 220a Skill: Recall 19) "As in other forms of business, when decisions are to be taken, the majority of the partners must approve the decision." Discuss the accuracy of this statement.

Answer: It's inaccurate. All of the partners must agree to such changes, in the absence of an agreement to the contrary.

Feedback: It's inaccurate. All of the partners must agree to such changes, in the absence of an agreement to the contrary.

Diff: 2 Type: ES Page Reference: 200j Skill: Recall 20) Which one of the following is correct with respect to the rights of partners unless they have agreed otherwise? a. No major decision can be taken without a majority vote agreement of all partners. b. Only the partners that have contributed the largest capital amount have the right to share in management.

..

8

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

c. All profits are shared equally between the partners. d. A partner can sell her share of the partnership to another person without the agreement of the other partners. e. Personal expenses incurred by the partners in the course of business are reimbursed.

Answer: c Diff: 2 Type: MC Page Reference: 200k Skill: Recall 21) Which of the following statements is correct with respect to the Partnership Act? a. When in conflict, the terms of the federal Partnership Act override the provincial partnership acts. b. The Partnership Act is enacted by the federal government and creates a uniform and cohesive system of partnership law for all of Canada. c. The Partnership Act states clearly that a partnership is only created by specific agreement between the partners to that effect. d. The Partnership Act sets out provisions that will govern the relations between the partners unless those partners have agreed otherwise. e. The Partnership Act always overrides any provisions contrary to it set out by the partners in the partnership agreement.

Answer: d Diff: 2 Type: MC Page Reference: 200m Skill: Recall 22) When two people enter into a partnership by agreement but neglect to set out the terms of such agreement, or where the parties becomes partners inadvertently, where are the terms and arrangements of that partnership set out?

Answer: Partnership Act Feedback: Partnership Act Diff: 2 Type: ES Page Reference: 200n

..

9

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

Skill: Recall 23) A partnership is primarily a contractual relationship and can be created verbally or implied by conduct. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 201a Skill: Recall 24) "A partnership can be created by the conduct of the parties." Discuss the accuracy of this statement.

Answer: This is accurate. A partnership is defined as two or more people carrying on business with a view to profits. It doesn't need an agreement and can be implied by conduct.

Feedback: This is accurate. A partnership is defined as two or more people carrying on business with a view to profits. It doesn't need an agreement and can be implied by conduct.

Diff: 2 Type: ES Page Reference: 201b Skill: Recall 25) Chuck, Howard, and Ben decide to start a business venture, developing and distributing educational software. For tax reasons, they do not incorporate. Each contributes $10 000, and Howard also contributes a truck and his programming expertise.

They agree that all three will be actively involved in the day-to-day management of the business. To determine their rights and obligations, they enter into a one-page agreement that provides only that each of Chuck, Howard, and Ben will receive 33.3% of the profits but also states specifically they are not to be viewed as partners. Based on these facts, which of the following statements is true? a. Chuck, Howard, and Ben will not be considered partners because of their express intention in their agreement. b. Chuck, Howard, and Ben will be considered partners in the eyes of the law, because they share profits and are involved in the management of the business.

..

10

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

c. Chuck, Howard, and Ben will be considered partners, but someone claiming against the partnership will only be able to collect 33.3% from any one partner because of the agreement. d. Chuck, Howard, and Ben are not partners because they do not share profits in proportion to their capital contributions. e. Chuck, Howard, and Ben are not partners because to be partners they must be professionals, such as dentists, lawyers, or doctors.

Answer: b Diff: 3 Type: MC Page Reference: 201c Skill: Applied 26) Which of the following is incorrect with respect to the creation of a partnership? a. A partnership can only be created with the consent of the parties. b. The duties and obligations of partners to each other can be modified by agreement. c. The business activity must be continuing in order for it to indicate the existence of a partnership. d. The common method of creating a partnership is by agreement. e. An important indication as to whether a partnership exists is the sharing of the profits of the business activity.

Answer: a Diff: 2 Type: MC Page Reference: 201d Skill: Recall 27) "For a partnership to exist, the parties must have consented to its creation." Comment on the accuracy of this statement.

Answer: It's inaccurate. A partnership is defined as two or more people carrying on business together with a view toward profit. Such a relationship can be created inadvertently.

Feedback: It's inaccurate. A partnership is defined as two or more people carrying on business together with a view toward profit. Such a relationship can be created inadvertently.

..

11

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

Diff: 2 Type: ES Page Reference: 201e Skill: Applied 28) Explain why the law of partnership poses a danger to people carrying on joint business activities.

Answer: Here students must show that they understand that a partnership can be created inadvertently. "People carrying on business together, trying to make a profit" is the definition of a partnership. The danger is that the designation of "partnership" brings with it unlimited liability. Students then would likely explain in what circumstances carrying on business together would create a partnership. The courts will look to see if the activity is a business and if it is an ongoing activity, not just a one-time combined effort. Then the court will look to see if the parties are carrying it on together. The test here is whether the parties are sharing gross returns from the business or the profits (the net return). If they are splitting fees or commissions, before profits, that is not enough to create a partnership; however, if they are sharing the returns after costs have been taken out, that is evidence of a partnership. Students should also point out that the Partnership Act lists a number of activities (such as sharing income from the joint ownership of real property or getting a profit-sharing bonus from work) that will not by themselves be evidence of the existence of a partnership. This is most important when dealing with outsiders who are trying to establish a partnership to impose liability on some party other than the one with whom they have been dealing.

Feedback: Here students must show that they understand that a partnership can be created inadvertently. "People carrying on business together, trying to make a profit" is the definition of a partnership. The danger is that the designation of "partnership" brings with it unlimited liability. Students then would likely explain in what circumstances carrying on business together would create a partnership. The courts will look to see if the activity is a business and if it is an ongoing activity, not just a one-time combined effort. Then the court will look to see if the parties are carrying it on together. The test here is whether the parties are sharing gross returns from the business or the profits (the net return). If they are splitting fees or commissions, before profits, that is not enough to create a partnership; however, if they are sharing the returns after costs have been taken out, that is evidence of a partnership. Students should also point out that the Partnership Act lists a number of activities (such as sharing income from the joint ownership of real property or getting a profit-sharing bonus from work) that will not by themselves be evidence of the existence of a partnership. This is most important when dealing with outsiders who are trying to establish a partnership to impose liability on some party other than the one with whom they have been dealing.

Diff: 1

..

12

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

Type: ES Page Reference: 201f-202a Skill: Applied 29) Which one of the following statements is correct with respect to the creation of a partnership agreement? a. A partnership can be created by an intention to share the revenues between the partners. b. For a partnership to exist, the relationship giving rise to it must be of an ongoing business nature, not a one-time promotion. c. For a person to be a limited partner, there must be at least two general partners. d. A partnership can be created only by contract. e. Where two people agree to enter into a partnership, there is no partnership created unless all elements of a contract are present.

Answer: b Diff: 2 Type: MC Page Reference: 201g Skill: Recall 30) In which one of the following situations will a court find that a partnership exists? a. Joe sells his business to Harry for $10 000 for the assets and a further $20 000 for goodwill, the goodwill portion to be paid at a rate of 20% of the profits from the business until paid. b. Joe is a partner in a shoe store and sells his share of the business to Harry without the consent of his partner. c. Joe and Mary promote several dances at school and split the profits. d. Joe, a partner in a law firm, dies and Joe's widow takes over Joe's share of the profits. e. Joe and Mary, while attending university, purchase a house and share the profits from the rent after deducting expenses.

Answer: c Diff: 2 Type: MC Page Reference: 201h Skill: Applied

..

13

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

31) Joe and Mary promote several dances at school and split the profits. Will this be enough to establish a partnership?

Answer: Yes. The definition of a partnership is two or more people carrying on business with a view to profits. This is an ongoing activity, so it is a business, and they are sharing the profits, so a partnership exists.

Feedback: Yes. The definition of a partnership is two or more people carrying on business with a view to profits. This is an ongoing activity, so it is a business, and they are sharing the profits, so a partnership exists.

Diff: 2 Type: ES Page Reference: 201i Skill: Applied 32) Which of the following will establish the existence of a partnership? a. The goodwill portion of the sale of a business is repaid by a share of the profits. b. An employee receives a profit-sharing bonus. c. The beneficiary of a deceased partner takes that partner's share of the income from the partnership. d. The parties intend to share the expenses of the business. e. A debt is repaid by the creditor taking a share of the profits.

Answer: d Diff: 2 Type: MC Page Reference: 201j Skill: Applied 33) Chan sold a business to Scott and in the process they valued the "goodwill" at $50 000. In the sale contract, it was agreed that this amount would be paid by Scott, giving Chan 15% of the business profits until it was paid. This creates a partnership between them. a. True b. False Answer: b Diff: 1

..

14

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

Type: TF Page Reference: 202b Skill: Applied 34) Joe sold Harry his barber shop for $100 000. He was paid $20 000 in cash, the other $80 000 to be paid by Harry giving Joe 20% of the profits of the business until the amount is paid off. Unfortunately, a customer, Sam, is injured by Harry, who manages to cut off Sam’s right ear while shaving him. Sam sues both Harry and Joe. Explain his likelihood of success.

Answer: There is no partnership here between Joe and Harry. Although Joe is receiving a share of the profits, this is done to pay off the purchase price of the business and is one of the exceptions listed in the Partnership Act. Feedback: There is no partnership here between Joe and Harry. Although Joe is receiving a share of the profits, this is done to pay off the purchase price of the business and is one of the exceptions listed in the Partnership Act. Diff: 3 Type: ES Page Reference: 202c Skill: Applied 35) An example of estoppel is when a person allows himself or herself to be called a partner. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 202d Skill: Recall 36) If Carol introduces Mary to a client as a partner in circumstances where it is reasonable for the client to believe that there is a business relationship between them (although there is not), Mary will not be able to deny it later if the client sues her as a partner because a partnership has been formed by estoppel. a. True b. False

..

15

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

Answer: b Diff: 1 Type: TF Page Reference: 202e Skill: Recall 37) Which of the following statements is correct with respect to unlimited liability? a. Only the partner's share of the partnership assets can be used to satisfy the debt incurred by another partner. b. Each partner can be held responsible for the debts of the partnership no matter how great they are. c. Unlimited liability means the partner can lose what he has invested but no more. d. The partner cannot only lose what she has invested but can also be required to pay an additional amount equal to what she has invested. e. If there are two partners, each partner can be held responsible for an amount equal to but no more than one half of the debts of the partnership.

Answer: b Diff: 1 Type: MC Page Reference: 203a Skill: Recall 38) Discuss the problem of liability with respect to partnership and how this difficulty can be overcome if partnership is chosen as the method of carrying on business.

Answer: Partners have unlimited liability for their own torts and the torts committed by other partners or employees of the partnership. Students should show that they understand that unlimited liability means that each partner is responsible for the whole claim, so if one partner doesn't have the funds to pay his part, the other partners will have to bear the whole burden, and they can lose everything they have. Students should also point out that, in contract law, each partner is an agent for every other partner, so they are responsible for any contractual liability entered into by their partners or by employees exercising an agency function. Again, this is unlimited liability. Partners are also responsible for the breach of trust of their partners.

An important aspect of this question is for students to point out that these problems of unlimited liability can largely be overcome by having adequate insurance coverage. They should also point out that more practical means of good management and careful selection of partners are important. Students should also deal with the possibility of

..

16

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

creating limited partnerships in some situations. Good students may also mention the movement to create limited liability partnerships in applicable cases in some jurisdictions.

Feedback: Partners have unlimited liability for their own torts and the torts committed by other partners or employees of the partnership. Students should show that they understand that unlimited liability means that each partner is responsible for the whole claim, so if one partner doesn't have the funds to pay his part, the other partners will have to bear the whole burden, and they can lose everything they have. Students should also point out that, in contract law, each partner is an agent for every other partner, so they are responsible for any contractual liability entered into by their partners or by employees exercising an agency function. Again, this is unlimited liability. Partners are also responsible for the breach of trust of their partners.

An important aspect of this question is for students to point out that these problems of unlimited liability can largely be overcome by having adequate insurance coverage. They should also point out that more practical means of good management and careful selection of partners are important. Students should also deal with the possibility of creating limited partnerships in some situations. Good students may also mention the movement to create limited liability partnerships in applicable cases in some jurisdictions.

Diff: 2 Type: ES Page Reference: 203b, 204h-206 Skill: Applied 39) With regard to the liability of partners, which of the following is false? a. A general partner has unlimited liability for any loss suffered because of the negligent act (e.g., omission) of one of his partners if there are insufficient funds in the partnership to pay the person who suffered the loss. b. The partnership, and thus the partners, is liable for any loss suffered because of a tort committed by its employee in the course of employment. c. A general partner who retires from the partnership by giving notice of his leaving to the other partners could still be found liable for debt pursuant to a contract made when he was a partner. d. A general partner could not be liable for losses suffered by a client because of misapplication of funds unless he knew about or took part in the misapplication. e. A limited partner is liable only for the amount of his initial investment if he follows the directions set out in the Partnership Act (e.g., not taking part in management).

Answer: d Diff: 2

..

17

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

Type: MC Page Reference: 203c Skill: Recall 40) Which of the following is correct with respect to the law of partnership? a. A partnership cannot be created inadvertently. b. Each partner is vicariously liable for the wrongful acts of their partners committed in the course of the partnership business. c. Partners are only liable for the torts of their partners if they in fact knew that the wrongful conduct was taking place. d. Joint and several liability means that each partner can be sued several times. e. Partners have unlimited liability, meaning that they can lose up to the amount they have invested in the business.

Answer: b Diff: 2 Type: MC Page Reference: 203d Skill: Recall 41) A partner's liability for the torts of his or her partners extends beyond those committed on company business. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 203e Skill: Recall 42) Partners are vicariously liable for the wrongful acts of employees committed on partnership business. a. True b. False Answer: a Diff: 1 Type: TF

..

18

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

Page Reference: 203e Skill: Recall 43) Explain the liability of a partner for another partner's actions.

Answer: Each partner is vicariously liable in tort law for any torts committed by a partner in the course of the partnership. Also, each partner is considered an agent of the other partners for the purposes of contracts entered into by them.

Feedback: Each partner is vicariously liable in tort law for any torts committed by a partner in the course of the partnership. Also, each partner is considered an agent of the other partners for the purposes of contracts entered into by them.

Diff: 2 Type: ES Page Reference: 203g Skill: Recall 44) Fred and Carole were trying to create a list of the pros and cons of sole proprietorship, partnership, and corporation to determine the best structure for carrying on business. Which of the following is true with regard to being a general partner? a. Each partner is an agent for every other partner and for the firm itself, so a partner may be liable for the contracts made by an incompetent partner. b. Every general partner faces limited liability for the debts of the partnership. c. A partner is liable for only the amount that he or she invested in the partnership firm. d. Retiring from a partnership by giving notice to the partners frees a partner from the liabilities he or she faced while being a partner of the firm. e. A partner is liable to pay from his or her personal assets only when the partner has committed a criminal act.

Answer: a Diff: 2 Type: MC Page Reference: 203h Skill: Applied 45) Which one of the following statements is correct with respect to the law of partnership?

..

19

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

a. Partners are responsible for any contracts entered into by the partners related to the partnership business. b. Partners are only responsible for contracts entered into by the partnership if the third party knew that the person it was dealing with was a partner in the partnership. c. A partner is responsible for contracts with third parties entered into by the partners only where it has been clearly stated by the partner to the third parties that he is entering the contract on behalf of the partnership. d. Partners cannot bind their partners in contract without specific written authority. e. Every partner is responsible for every contract entered into by the partnership.

Answer: a Diff: 2 Type: MC Page Reference: 203i Skill: Recall 46) Which of the following is correct with respect to partnership? a. A partnership can be made up of only limited partners. b. Partnership is a separate legal entity. c. Partners are not agents for each other. d. General partners have unlimited liability. e. General partners have limited liability.

Answer: d Diff: 1 Type: MC Page Reference: 203j Skill: Recall 47) Unlimited liability means that an investor can lose everything he or she has invested in a corporation. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 203k

..

20

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

Skill: Recall 48) Explain the limitations of the liability of partners for the acts of other partners.

Answer: Each partner has unlimited liability for the actions of the other partners done during the course of the partnership, unless one of those partners qualifies as a limited partner. The liability of such a limited partner is limited to the amount invested.

Feedback: Each partner has unlimited liability for the actions of the other partners done during the course of the partnership, unless one of those partners qualifies as a limited partner. The liability of such a limited partner is limited to the amount invested.

Diff: 2 Type: ES Page Reference: 203l, 208e Skill: Recall 49) Which one of the following statements is correct with respect to the liability of partners? a. A general partner is responsible, independent of what she has invested, for any losses caused to outsiders through the partnership business if the assets of the partnership are not enough to cover the claim. b. If a third party is injured because of an activity carried on by the partnership, that third party can only go after the personal assets of a partner if the assets of the partnership are not enough to provide compensation and the damage was actually caused by the conduct of that partner. c. When a partner enters into a partnership arrangement, she can only lose what she has invested in that partnership. d. If there are three equal partners in a partnership, an injured third party can only collect one third of the claim from any one partner. e. A partner can protect herself from any liability beyond her investment if one of the other partners specifically agrees in the partnership agreement to be responsible for all such liability.

Answer: a Diff: 2 Type: MC Page Reference: 203m Skill: Recall

..

21

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

50) Joe Smith owns a bookstore as a sole proprietor. He is also a partner in a hotel, which borrowed $100 000 from the bank. Which of the following statements is true? a. The bank can look to the assets of the bookstore to pay off the debt. b. Although the bank can go after Smith's personal assets, it cannot go after the assets of the bookstore because the bookstore is a separate legal entity from Smith. c. The bank can only go after the assets of the bookstore if Smith is the actual person who negotiated the loan with the bank. d. The bookstore’s assets will only be available to the bank if the bookstore is operated

by Smith in conjunction with the hotel. e. Because of the concept of limited liability, Smith can lose only what he has invested in the hotel.

Answer: a Diff: 2 Type: MC Page Reference: 203n Skill: Applied 51) Dave and his sister Chris make unusual kites. They both create the designs and Dave makes the patterns. Friends have always wanted to buy their kites. After Chris completes a post-secondary marketing program, she begins to talk to Dave about going into business selling kites. Ed, a friend of Chris, wants to be involved. He says he could buy the supplies and do other odd chores. They decide to try to make a go of it and to share the profits as follows: Dave, 35%; Chris, 35%; and Ed, 30%. Things go well for seven months. They even hire George to deliver kites to the increased number of stores buying them. Unfortunately for the business, Chris and Ed become romantically involved. This is followed by a heated dispute. Ed disappears with $1300 collected from customers and $600 worth of supplies, which he had bought on behalf of the business from its regular supplier. At about the same time, George negligently breaks a customer's $200 lamp while delivering a kite. On these facts, which of the following is true? a. If the partnership funds are not sufficient to pay the partnership debts, the creditors can look to the individual partners for payment. b. Although George broke the lamp while delivering a kite, the partners are not liable because it was George's own fault. c. When Ed buys supplies for the business on credit, he is acting as an agent for the business and he alone is liable for those debts. d. Only Chris would be responsible for Ed's misapplication of the customers' money. e. Since Dave, Chris, and Ed did not sign a partnership agreement, they are not considered a general partnership.

..

22

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

Answer: a Diff: 3 Type: MC Page Reference: 203o Skill: Applied 52) The unlimited liability of partners means that not only can they lose their entire investment in the business, but their personal assets (such as their homes and cars) are also at risk. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 203p Skill: Recall 53) Joe entered into partnership with two others in the establishment of a real estate sales agency. The other two, Sam and Harry, had considerable experience in the real estate business but no money. Joe, on the other hand, had his own home and several significant assets, and although he didn't have any experience in the real estate business, his monetary contribution made him an equal partner with Sam and Harry. Unfortunately, Harry misused some trust funds that had come into his care as a result of business, investing them in the business of one of his sons rather than in an interest-bearing account. The business of the son went sour and the money was lost. The client sued Harry, Sam, and Joe. Explain the legal position of Joe here.

Answer: Because Joe is a partner with the other two, he is responsible for the wrongful acts of Harry, including this breach of trust. Because Sam and Harry have no money, the client will go after Joe. Joe has unlimited liability and can lose his house and other assets to pay for the debt.

Feedback: Because Joe was a partner with the other two, he is responsible for the wrongful acts of Harry, including this breach of trust. Because Sam and Harry have no money, the client will go after Joe. Joe has unlimited liability and can lose his house and other assets to pay for the debt.

Diff: 2 Type: ES Page Reference: 203q

..

23

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

Skill: Applied 54) Which one of the following statements about general partnerships is false? a. A general partner can limit his liability for the firm's obligations by using the term "limited" after his name on stationery. b. Each partner has unlimited personal liability for the debts of the partnership. c. The Partnership Act can imply contractual terms into a partnership where the partners did not expressly agree on some detail of the relationship. d. Partnership is the relationship that exists between persons carrying on business together with a view to making a profit. e. A partnership can exist even without a written partnership agreement.

Answer: a Diff: 2 Type: MC Page Reference: 203r Skill: Recall 55) The partners can change the terms of their responsibilities to each other in the partnership agreement, but not in relationship to their obligations to third parties. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 203s, 206d Skill: Recall 56) The Partnership Act allows the partners to change their liabilities and obligations to third parties. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 203t Skill: Recall

..

24

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

57) Partners can agree among themselves as to what portion of liability they each will bear, and their losses will be limited to that portion when being sued by outsiders. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 203u-204a Skill: Recall 58) "Partners must make clear in their partnership agreement any limitations on authority they wish to impose on each other when entering into contracts with outsiders." Discuss the accuracy of this statement.

Answer: Partners cannot limit their liability to outsiders by so stating in their partnership agreement. Such provisions can only affect the rights and obligations between the partners. Thus, if the partners set out a term in their partnership agreement that a particular partner would only be responsible for a certain percentage of any liabilities, that partner may still be required to pay more than the specified percentage in the event of a claim against the partnership if the other partners did not have funds. Then he could seek payment from the partners according to the partnership agreement (but they may not have funds to pay him).

Feedback: Partners cannot limit their liability to outsiders by so stating in their partnership agreement. Such provisions can only affect the rights and obligations between the partners. Thus, if the partners set out a term in their partnership agreement that a particular partner would only be responsible for a certain percentage of any liabilities, that partner may still be required to pay more than the specified percentage in the event of a claim against the partnership if the other partners did not have funds. Then he could seek payment from the partners according to the partnership agreement (but they may not have funds to pay him).

Diff: 2 Type: ES Page Reference: 203v-204b Skill: Recall 59) If three partners set out a term in their partnership agreement that John would only be responsible for 10 percent of any losses, yet he has to pay 100 percent of a claim because

..

25

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

the other partners have no funds, John could seek contributions from the other partners according to the partnership agreement. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 204c Skill: Recall 60) Alison told her partners in writing that she would be leaving the law partnership at the current partnership year-end, January 31, 2014. At year-end, Alison's partners bought her partnership interest and agreed that she would no longer be liable for any of the prior or subsequent partnership obligations. In February 2014, one of the remaining partners absconded with $2 million held for Mr. Smith, a long-time client, taken in trust in September 2013. Mr. Smith sued the partnership, the partners, and Alison. Based on the facts described, which of the following statements is true? a. Alison has no right to recover any funds she has to pay from her former partners. b. Mr. Smith can recover on his judgment out of the partnership assets. c. Even if Alison gave Mr. Smith actual notice of her leaving the partnership, and he agreed that she would no longer be obligated for the partnership, she can be held liable to Mr. Smith. d. After the partnership assets are exhausted, Mr. Smith can recover on his judgment from any one of the remaining partners but not from Alison. e. Only the remaining partners, not Alison, have the right to recover anything they have to pay from the absconding partner.

Answer: b Diff: 2 Type: MC Page Reference: 204d Skill: Applied 61) With regard to the liability of partners, which of the following is true? a. A general partner who retires from the partnership by giving notice of his leaving to the other partners could still be found liable for debt pursuant to a contract made when he was a partner. b. A limited partner has unlimited liability beyond the amount of his initial investment.

..

26

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

c. A general partner has limited liability for any loss suffered because of the negligent act (e.g., omission) of one of his partners. d. A general partner could not be liable for losses suffered by a client because of misapplication of funds unless he knew about or took part in the misapplication. e. The partnership, and thus the partners, are liable for any loss suffered because of a tort committed by its employee outside the course of his employment.

Answer: a Diff: 2 Type: MC Page Reference: 204e Skill: Recall 62) Joe R. notified his partners in writing that he would be retiring from the business partnership at the end of 2013. It was acknowledged and agreed upon and, at year-end, the remaining partners paid him for his interest in the partnership. In February 2014, one of the remaining partners misapplied some trust funds that a long-time client had placed in the care of the partnership for the purchase of a hotel. The partnership was sued, but the assets of the partnership were not sufficient to satisfy the judgment. The successful plaintiff went against the personal assets of the partners, including those of Joe R. What is the likely outcome? a. Joe R. is not liable because he had retired from the partnership at year-end and had properly notified his partners. b. Joe R. is not liable because he had nothing whatsoever to do with the misapplication of the trust money. c. Joe R. is not liable since he was not a partner when the misapplication happened. d. Joe R. is only liable for his share of the losses even if the other partners don't have the assets to pay. e. Joe R. is liable if he failed to give proper notice to outsiders, namely, the long-time client whose funds were misapplied.

Answer: e Diff: 2 Type: MC Page Reference: 204f Skill: Applied 63) Explain what a retiring partner should do to ensure that he is no longer liable for the company's obligations.

..

27

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

Answer: To avoid being liable for any future indebtedness, the retiring partner should take steps to ensure that any customers are told of his retirement and that his name is no longer associated with the partnership. Otherwise, he would continue to be liable on the basis of apparent authority. Regarding old obligations and liabilities that occurred before he retired, the retiring partner is still obligated. However, he should try to have the remaining partners agree to indemnify him for any obligations that arise after he leaves.

Feedback: To avoid being liable for any future indebtedness, the retiring partner should take steps to ensure that any customers are told of his retirement and that his name is no longer associated with the partnership. Otherwise, he would continue to be liable on the basis of apparent authority. Regarding old obligations and liabilities that occurred before he retired, the retiring partner is still obligated. However, he should try to have the remaining partners agree to indemnify him for any obligations that arise after he leaves.

Diff: 2 Type: ES Page Reference: 204g Skill: Recall 64) Changes to the Criminal Code in response to the Westray mining disaster in Nova Scotia make partnerships and corporations more responsible for the negligence of their employees when the negligence results in injury or death. a. True b. False Answer: a Diff: 2 Type: TF Page Reference: 204i Skill: Recall 65) Dennis, Sam, George, and Ray were partners in an accounting business, and Ray decided he wanted to retire. He sold his share of the partnership to Leonardo, but Leonardo is not a partner unless the other partners approve the change. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 204j

..

28

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

Skill: Applied 66) The Partnership Act provides that no major decisions can be made that affect the nature of the business itself without unanimous agreement of the partners. Provide three examples of major decisions.

Answer: Admitting a new partner, borrowing or investing money, dissolving the partnership, embarking on a new business venture.

Feedback: Admitting a new partner, borrowing or investing money, dissolving the partnership, embarking on a new business venture.

Diff: 2 Type: ES Page Reference: 204l Skill: Recall 67) Explain how the principle of fiduciary duty works in a partnership relationship.

Answer: It is very important that students understand the nature of a fiduciary duty, and this question requires them to demonstrate that understanding with respect to the agency relationship as well as partnership. Since each partner is an agent of every other partner, he also has a fiduciary duty to the partners. This duty includes acting in the best interests of the partnership, making available to the partnership any business opportunities that come to a partner because of his position, disclosing any conflict of interest, avoiding competition with the partnership, not using partnership property for one’s own purposes, accounting for all expenses, income, and benefits received, etc. Since fiduciary duty was covered in the previous chapter, students may include further details already learned about this concept when they studied agency.

Feedback: It is very important that students understand the nature of a fiduciary duty, and this question requires them to demonstrate that understanding with respect to the agency relationship as well as partnership. Since each partner is an agent of every other partner, he also has a fiduciary duty to the partners. This duty includes acting in the best interests of the partnership, making available to the partnership any business opportunities that come to a partner because of his position, disclosing any conflict of interest, avoiding competition with the partnership, not using partnership property for one’s own purposes, accounting for all expenses, income, and benefits received, etc.

Since fiduciary duty was covered in the previous chapter, students may include further details already learned about this concept when they studied agency.

Diff: 2

..

29

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

Type: ES Page Reference: 205a Skill: Applied 68) Which of the following is an example of a breach of a fiduciary duty? a. A partner in a firm learned of a business forced to sell some heavy equipment.

Although the partnership could have used the equipment, he bought and sold it at a substantial profit before the partnership was given a chance to buy it. b. A shareholder of ABC Ltd., a trucking corporation whose shares are listed on the Vancouver Stock Exchange, is working as an employee for ABC Ltd.'s competitor, Jonstone Trucking. c. A shareholder of a corporation voted in favour of an acquisition by the corporation at the annual general meeting because he secretly had an interest in the corporation being purchased. d. The directors of the corporation, contrary to a request made by the shareholders, refused to declare dividends. e. A promoter of a corporation sold property to the corporation for four times what he had paid for it after he made full disclosure of his interest to an independent board of directors, which voted for the purchase.

Answer: a Diff: 2 Type: MC Page Reference: 205b Skill: Applied 69) Jones is a partner in a law firm in a small town, and he is also doing legal work out of his home in the evenings for himself. Explain the rights of his partners in this situation.

Answer: Jones is in the business of practising law and that is what he is doing in the evenings, so unless he has the consent of his partners, he is in violation of his fiduciary duty. In that case, he would have to pay over the profits he makes to the partnership.

Feedback: Jones is in the business of practising law and that is what he is doing in the evenings, so unless he has the consent of his partners, he is in violation of his fiduciary duty. In that case, he would have to pay over the profits he makes to the partnership.

Diff: 2 Type: ES Page Reference: 205c

..

30

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

Skill: Applied 70) Joe and Sam were in business school together, and after they graduated they decided to open an ice cream store in a mall. They had skipped the classes in which they were taught about different methods and forms of carrying on business and so gave no thought to how they would structure their relationship. Which of the following is true with respect to the legal positions of Joe and Sam? a. If a customer were injured because of poorly kept food and Sam did not have the assets to pay his half, Joe would only have to pay his half of the damages suffered. b. If Sam were to find a great deal on anchovy ice cream and purchase 2000 litres of it, only Sam would be liable for the debt incurred as a result of the purchase. c. If Sam opens another ice cream store in another mall in a nearby city without telling Joe, he must share any profits he makes with Joe. d. Sam and Joe are not in a partnership since they have not specifically agreed to be. e. If Sam opens another ice cream store in another mall in a nearby city without telling Joe, Joe would be liable for any losses Sam suffered (along with Sam).

Answer: c Diff: 2 Type: MC Page Reference: 205d Skill: Applied 71) Joe, Sam, and Harry set up an accounting partnership in a small town. To earn money on the side, Harry did some accounting for friends at night, for which he received a fee.

When Joe and Sam found out about this, they demanded that the fees received be paid into the partnership business. Explain Harry’s legal position.

Answer: Harry owes a fiduciary duty to the other two partners, and when he is carrying on business as an accountant, he is acting in the partnership capacity. Therefore, he must pay over these fees to the partnership.

Feedback: Harry owes a fiduciary duty to the other two partners, and when he is carrying on business as an accountant, he is acting in the partnership capacity. Therefore, he must pay over these fees to the partnership.

Diff: 2 Type: ES Page Reference: 205e Skill: Applied

..

31

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

72) Which of the following is a violation of the fiduciary duty of a partner? a. Where one partner carries on a business unrelated to the partnership with the permission of the partners b. Where a partner uses the partnership property for partnership business c. Where one partner learns of an investment opportunity in the field of the partnership and tells the partners. The partners decline on the opportunity, so he takes advantage of it himself. d. Where one partner uses information that he has gained from the partnership for the advantage of the partnership e. Where one partner starts another business, without the consent of the other partners, that is the same as or in competition with the partnership business Answer: e Diff: 1 Type: MC Page Reference: 205f Skill: Recall 73) In which one of the following situations has the duty between partners not been breached? a. X, Y, and Z have a partnership in a restaurant business in Winnipeg. Unknown to his partners, Z is the major shareholder in a corporation that opens a restaurant in the same city. b. X, Y, and Z have a partnership in a restaurant business in Winnipeg. Unknown to his partners, Z owns 50% of the shares in the company that supplies the restaurant with its food supplies. c. X, Y, and Z have a partnership in a restaurant business in Winnipeg. Unknown to his partners, Z runs a catering business in the evenings using the restaurant's facilities. d. X, Y, and Z have a partnership in a restaurant business in Winnipeg. Unknown to his partners, Z opens a shoe store in Regina as well. e. X, Y, and Z have a partnership in a restaurant business in Winnipeg. Unknown to his partners, Z opens up a restaurant in the same city as a sole proprietorship.

Answer: d Diff: 2 Type: MC Page Reference: 205g Skill: Applied

..

32

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

74) Jones is a partner in a law firm in a small town, and he is also doing legal work out of his home in the evenings for himself. Which of the following statements is correct with respect to his responsibility for the money he earns? a. Jones has a duty to tell the other partners, but the money is his and he can continue the extra work regardless of the other partners’ consent. b. Jones has no responsibility; the money he makes through this extra work is his. c. Such conduct will automatically dissolve the partnership, but Jones can keep what he has made. d. If Jones did not have the consent of his partners, he must pay over all money he makes through his business at home to the partnership. e. If Jones is a one-third partner in the law firm, he need only pay over a third of what he makes on the side.

Answer: d Diff: 2 Type: MC Page Reference: 205h Skill: Applied 75) Jed Wimsey, after auditing the books of various businesses around town, was talking to you, his best friend, about certain practices that he thought were improper. Which of the following practices mentioned by Jed would be a breach of fiduciary duty? a. An officer of a corporation took advantage of an opportunity he learned about as an officer of the corporation, but took steps to determine that the corporation was not interested in it and received permission to do so from the board of directors. b. A shareholder belongs to a group that directly opposes the policy of the corporation with regard to its logging and mining operations. c. A director of a corporation profited $25 000 from a contract between the corporation and sellers of some property in which the director had an interest, after the director made full disclosure of his interest to the board of directors and abstained from the vote. d. A partner of a firm that sold hospital supplies had, without the knowledge or consent of his partners, started a competing business that he ran from his own home. e. The directors failed to declare a dividend for the fourth year in a row.

Answer: d Diff: 2 Type: MC Page Reference: 205i

..

33

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

Skill: Applied 76) It is possible through a partnership agreement to create different classes of partners. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 206a Skill: Recall 77) Shareholders in a closely held corporation can control the rights and responsibilities they have to each other through a shareholders' agreement. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 206b Skill: Recall 78) A partnership enjoys tax advantages not available to a sole proprietor. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 206e Skill: Recall 79) When a partnership dissolves, which of the following is not one of the causes? a. The partnership is dissolved when one of the partners dies. b. The partnership is dissolved when one of the partners starts a business in competition with the partnership business. c. The partnership is dissolved when one of the partners goes bankrupt.

..

34

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

d. The partnership is dissolved when one of the partners serves notice on the other partners to that effect. e. A partnership can be dissolved by order of the court.

Answer: b Diff: 1 Type: MC Page Reference: 206f, 207a and c Skill: Recall 80) Explain under what circumstances a partnership can come to an end.

Answer: Usually by notice, but it may be by the expiration of a specified time or because the activity becomes illegal, or where one of the partners dies or becomes bankrupt or insane, or by court order. However, it should be noted that partnership acts vary by jurisdiction and partners may include provisions for dissolution in a partnership agreement that differ from the applicable act.

Feedback: Usually by notice, but it may be by the expiration of a specified time or because the activity becomes illegal, or where one of the partners dies or becomes bankrupt or insane, or by court order. However, it should be noted that partnership acts vary by jurisdiction and partners may include provisions for dissolution in a partnership agreement that differ from the applicable act.

Diff: 2 Type: ES Page Reference: 206g-207b Skill: Recall 81) A partnership can always be brought to an end by the service of notice on the other partners, no matter what the partnership agreement says. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 206h Skill: Recall

..

35

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

82) Which of the following statements is true with respect to the obligations in a partnership relationship? a. In the absence of agreement to the contrary, the partnership is dissolved when one of the partners serves the others with notice to the effect that he wishes to continue. b. When a partnership is dissolved, its resources must be used to pay its debts and liabilities; if its assets are insufficient to do this, the partners must use personal resources to meet those obligations. c. When a partnership is dissolved, each partner can only be forced by a creditor to pay a portion of the debt equal to his share of the capital contributed. d. A partnership can be dissolved only by court order. e. In the absence of agreement to the contrary, when one of the partners is injured, the partnership is dissolved.

Answer: b Diff: 1 Type: MC Page Reference: 207d, 208a Skill: Recall 83) Which of the following is true with regard to the characteristics of corporations? a. The shareholders would be vicariously liable for any damage caused by a employee of the corporation carrying out his or her duties. b. The corporation is a separate legal person, but neither can sue nor be sued. c. Directors are responsible for the shareholders of the corporation. d. Shareholders are liable for the debts and other obligations of the corporation. e. A shareholder's liability is limited to the amount he or she paid for the shares.

Answer: e Diff: 2 Type: MC Page Reference: 208b Skill: Recall 84) Which of the following is correct with respect to limited partnerships? a. Limited partnership refers to the fact that no more than five people are allowed to be partners in such partnerships. b. Limited partnership refers to the fact that the partnership can only issue common shares.

..

36

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

c. Limited partnership refers to the fact that some partnerships are only created for a limited period of time. d. Limited partnership refers to the fact that limited partnerships can only carry on certain kinds of businesses. e. Limited partnership refers to the fact that some partners have limited liability.

Answer: e Diff: 1 Type: MC Page Reference: 208c Skill: Recall 85) Which of the following is true with regard to partnership? a. The terms of the Partnership Act will be implied in a partnership agreement that includes provisions on the same point. b. Sharing gross receipts is sufficient evidence of the existence of a partnership. c. A general partner is not an agent of the firm and the other partners. d. No partnership can be formed unless the parties intended to create a partnership. e. A limited partnership is an arrangement in which a partner may limit liability to his capital contribution.

Answer: e Diff: 2 Type: MC Page Reference: 208d Skill: Recall 86) If a person wants to invest in a partnership but avoid the obligations associated with partnership, what can she do?

Answer: She can invest as a limited partner. To do this, she must not participate in the management or business of the partnership, she must not allow her name to be associated with the partnership, and she must register with the appropriate government official.

Feedback: She can invest as a limited partner. To do this, she must not participate in the management or business of the partnership, she must not allow her name to be associated with the partnership, and she must register with the appropriate government official.

Diff: 2

..

37

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

Type: ES Page Reference: 208f-209e Skill: Applied 87) Discuss the principle of limited liability, why it arises in the law governing corporations, and its significance.

Answer: This is a relatively straightforward question but an important one, since the principle is at the heart of corporate law. Limited liability refers of course to the principle that shareholders in corporations and limited partners in partnerships are not liable generally for the debts of the corporation. Their liability is limited because they can lose only what they have invested in the business; their whole personal fortune is not at stake. In partnership, the limited partner is a creature of statute. Limited liability comes from the fact that the corporation is a separate legal person from the shareholders who make it up.

The debts and obligations incurred are the debts and obligations of the corporation, not the shareholders. This was finally established in the case of Solomon v. Solomon in 1897.

Unlimited liability of course exposes the investor to claims for all who have a claim against the business, whether that is because of problems in the operation of the business or because of debts owed. Much of this problem can be solved with appropriate insurance, and often the advantage of limited liability is lost when shareholders are required to sign personal guarantees when the corporation borrows money. It is important that students put the advantages and disadvantages of limited liability into perspective and show that they understand that the advantages are often illusory.

Feedback: This is a relatively straightforward question but an important one, since the principle is at the heart of corporate law. Limited liability refers of course to the principle that shareholders in corporations and limited partners in partnerships are not liable generally for the debts of the corporation. Their liability is limited because they can lose only what they have invested in the business; their whole personal fortune is not at stake. In partnership, the limited partner is a creature of statute. Limited liability comes from the fact that the corporation is a separate legal person from the shareholders who make it up. The debts and obligations incurred are the debts and obligations of the corporation, not the shareholders. This was finally established in the case of Solomon v.

Solomon in 1897. Unlimited liability of course exposes the investor to claims for all who have a claim against the business, whether that is because of problems in the operation of the business or because of debts owed. Much of this problem can be solved with appropriate insurance, and often the advantage of limited liability is lost when shareholders are required to sign personal guarantees when the corporation borrows money. It is important that students put the advantages and disadvantages of limited liability into perspective and show that they understand that the advantages are often illusory.

Diff: 2 Type: ES

..

38

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

Page Reference: 208g, 214h, 227g Skill: Applied 88) Which of the following statements is correct with respect to limited partnerships? a. There can be no limited partnerships in Canada. If limited liability is desired, a corporation must be created. b. A limited partner can lose his status as a limited partner if he participates in the management of the business. c. There can only be one limited partner in any partnership, no matter how many partners are involved. d. A limited partner is totally protected and can lose no money. e. A limited partnership is created where all partners state in the partnership agreement that they will not be responsible for debts arising out of the partnership business and register as such with the government.

Answer: b Diff: 2 Type: MC Page Reference: 208h-209a Skill: Recall 89) Norma and Janet decide to form a partnership to sell gourmet picnic baskets. To raise sufficient capital, they convince their mothers to invest $5000 each as limited partners.

Norma's mother is an experienced restaurateur and watches the new business with great interest. On several occasions, she advises Norma and Janet on the business and contacts former business associates to buy surplus stock. She even fills in by taking orders in the office when needed. A customer who was made ill by eating contaminated food from a tin can supplied in one picnic basket sues. What would be the liability, if any, of the mothers? a. Janet's mother would be liable for $10 000, twice the amount invested, because she failed to take part in the management of the business. b. A limited partner has her liability limited to the amount of her initial investment; therefore, neither mother has any further liability. c. Because one mother lost her limited liability status, they both do. d. Norma's mother would have unlimited liability because she took part in the management of the business and thus becomes a general partner. e. Both mothers would have unlimited liability because they contributed money but not services as required.

..

39

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

Answer: d Diff: 3 Type: MC Page Reference: 208i-209b Skill: Applied 90) Joe and Sam set up an import/export business in partnership, but they need extra money. Harry is invited to invest as a limited partner. Unfortunately, the business begins to lose money because of the poor business sense of Joe and Sam. Harry has the business expertise to turn the business around, or at least he thinks so. What would your advice be to Harry in these circumstances?

Answer: Not to get involved in the management of the firm. If he does so, he will become a general partner and lose his limited liability status.

Feedback: Not to get involved in the management of the firm. If he does so, he will become a general partner and lose his limited liability status.

Diff: 2 Type: ES Page Reference: 208j-209c Skill: Applied 91) Explain what must be done to create a limited partnership.

Answer: Limited partners invest in the partnership but do not participate in the management or the business with the general partners. They can't let their surname be associated with the partnership, and they have to register their limited partnership with the appropriate government official.

Feedback: Limited partners invest in the partnership but do not participate in the management or the business with the general partners. They can't let their surname be associated with the partnership, and they have to register their limited partnership with the appropriate government official.

Diff: 2 Type: ES Page Reference: 209d Skill: Recall

..

40

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

92) Explain how a person's status as a limited partner could be lost.

Answer: If the limited partner fails to register, participates in the business or the management of the business, or allows his surname to be associated with the partnership, he can lose his status as limited partner.

Feedback: If the limited partner fails to register, participates in the business or the management of the business, or allows his surname to be associated with the partnership, he can lose his status as limited partner.

Diff: 2 Type: ES Page Reference: 209g Skill: Recall 93) Which of the following is correct with respect to limited partnerships? a. Limited partnership refers to the fact that some partnerships are only created for a limited period of time. b. Limited partnership refers to the fact that some partners have limited liability. c. Limited partnership refers to the fact that no more than five people are allowed to be partners in such partnerships. d. Limited partnership refers to the fact that limited partnerships can only carry on in certain kinds of businesses. e. Limited partnership refers to the fact that the partnership can only issue common shares.

Answer: b Diff: 1 Type: MC Page Reference: 209f Skill: Applied 94) "Partners in a limited liability partnership (LLP) are not liable for the liability of the partnership." Discuss the accuracy of this statement.

Answer: This statement is not accurate. Professionals carrying on business through an LLP do have limited liability, but this shield does not extend to liability caused by a partner's own negligence, or by the negligence of someone under his or her control. Further, the limited

..

41

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

liability applies only to negligence. (See the applicable legislation in your province for further details.)

Feedback: This statement is not accurate. Professionals carrying on business through an LLP do have limited liability, but this shield does not extend to liability caused by a partner's own negligence, or by the negligence of someone under his or her control.

Further, the limited liability applies only to negligence. (See the applicable legislation in your province for further details.)

Diff: 2 Type: ES Page Reference: 210a Skill: Recall 95) A corporation is a fiction that does not exist in reality. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 210b Skill: Recall 96) Which of the following is considered to be a separate legal person in law? a. A corporation b. A sole proprietorship c. An agency d. A partnership e. A professional practice Answer: a Diff: 1 Type: MC Page Reference: 211a Skill: Recall 97) A corporation is considered to be a separate legal entity from the shareholders who make it up.

..

42

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 211b Skill: Recall 98) There is one common method of creating corporations used across Canada. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 211e Skill: Recall 99) Explain the significance of the determination that a corporation is a broadly held corporation as opposed to a closely held corporation.

Answer: There are more significant reporting and accounting obligations on a broadly held corporation. These corporations are usually traded on the stock exchange or involve a great number of shareholders. A closely held corporation is more like an incorporated partnership with fewer obligations of reporting and accounting.

Feedback: There are more significant reporting and accounting obligations on a broadly held corporation. These corporations are usually traded on the stock exchange or involve a great number of shareholders. A closely held corporation is more like an incorporated partnership with fewer obligations of reporting and accounting.

Diff: 2 Type: ES Page Reference: 212a Skill: Recall 100) A broadly held corporation has fewer and less stringent reporting and accounting requirements than a closely held corporation. a. True

..

43

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

b. False Answer: b Diff: 1 Type: TF Page Reference: 212b Skill: Recall 101) Shareholders in a closely held corporation are entitled to sell their shares to whomever they want without restriction. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 212c Skill: Recall 102) Explain under what circumstances a shareholder will not be permitted to sell his shares.

Answer: Closely held corporations usually have a prohibition against a shareholder selling his shares to other parties without permission of the other shareholders.

Feedback: Closely held corporations usually have a prohibition against a shareholder selling his shares to other parties without permission of the other shareholders.

Diff: 2 Type: ES Page Reference: 212d Skill: Applied 103) Indicate the main disadvantages to incorporation.

Answer: In a closely held corporation, there are restrictions on the transferability of shares. A broadly held corporation faces much more regulation and controls, requiring more reporting and related expenses. Also, the power of shareholders in a large corporation is diluted due to the large number of shareholders.

..

44

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

Feedback: In a closely held corporation, there are restrictions on the transferability of shares. A broadly held corporation faces much more regulation and controls, requiring more reporting and related expenses. Also, the power of shareholders in a large corporation is diluted due to the large number of shareholders.

Diff: 2 Type: ES Page Reference: 212e and g, 213a Skill: Recall 104) Explain the power of a minority shareholder in decision-making situations.

Answer: The majority prevails, and an outvoted minority shareholder has no say in the operation of the business. This is an example of the tyranny of the majority.

Feedback: The majority prevails, and an outvoted minority shareholder has no say in the operation of the business. This is an example of the tyranny of the majority.

Diff: 2 Type: ES Page Reference: 212f Skill: Recall 105) Preferred shareholders usually get preference when dividends are declared, but receive no vote. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 213b Skill: Recall 106) Explain what is meant by a preferred share.

Answer: A preferred share is one where special rights and/or restrictions have been placed on the share. Usually holders of preferred shares have a claim to a set dividend and no right to vote unless that dividend is not paid.

..

45

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

Feedback: A preferred share is one where special rights and/or restrictions have been placed on the share. Usually holders of preferred shares have a claim to a set dividend and no right to vote unless that dividend is not paid.

Diff: 2 Type: ES Page Reference: 213c Skill: Recall 107) Joe is a shareholder of XYZ Corporation, an extremely profitable corporation in the software business, and was upset when the directors of the corporation refused to declare a dividend again, putting the money back into research and development. Joe sued, along with several other shareholders, claiming that there was no excuse for withholding dividends under these circumstances. Explain the likely outcome.

Answer: A shareholder has no right to a dividend and Joe will lose this action.

Feedback: A shareholder has no right to a dividend and Joe will lose this action.

Diff: 2 Type: ES Page Reference: 213d Skill: Applied 108) If dividends are not paid, preferred shares usually convert to voting shares. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 213e Skill: Recall 109) What is the significance of a corporation being classed as a separate legal entity?

Answer: As a separate legal person, it is responsible for its own debts, liabilities, and other obligations, thus creating limited liability for those behind the corporation. It does not

..

46

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

die; management and ownership are separated; it has the capacity to contract (with some exceptions); and it can employ others, be an agent, or even be a partner.

Feedback: As a separate legal person, it is responsible for its own debts, liabilities, and other obligations, thus creating limited liability for those behind the corporation. It does not die; management and ownership are separated; it has the capacity to contract (with some exceptions); and it can employ others, be an agent, or even be a partner.

Diff: 1 Type: ES Page Reference: 213f, 214a Skill: Applied 110) Indicate three significant results of a corporation being classed as a separate legal personality.

Answer: 1. Limited liability 2. It doesn't die 3. Separate management and ownership Feedback: 1. Limited liability 2. It doesn't die 3. Separate management and ownership Diff: 2 Type: ES Page Reference: 214b, 216b and e Skill: Recall 111) Indicate three advantages to incorporation.

Answer: Limited liability; reduced taxes under some circumstances; ease of transferability; the corporation does not end with the death or bankruptcy of a shareholder; the shareholders are free to carry on their activities without obligation to the corporation; management is separated from ownership; majority vote of the shareholders prevails Feedback: Limited liability; reduced taxes under some circumstances; ease of transferability; the corporation does not end with the death or bankruptcy of a shareholder; the shareholders are free to carry on their activities without obligation to

..

47

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

the corporation; management is separated from ownership; majority vote of the shareholders prevails Diff: 2 Type: ES Page Reference: 214c, 215c, 216c, f, and k Skill: Recall 112) Jack Kihn incorporated and put $20 000 into the corporation by way of a shareholder's loan and took back a chattel mortgage on the corporation's equipment. The corporation created decorative boxes. An employee of the company delivered some boxes to a customer, who complained about the colour used. The employee became so angry that he shoved the customer, who fell into a glass display case, causing $30 000 damage to the customer and the case. On these facts, which of the following is false? a. The employee is liable for his tort and his employer is also liable. b. Although Kihn is the sole shareholder of the corporation, he is not responsible for company debts. c. Kihn himself is vicariously liable for the damage caused by the employee. d. The employee is liable for the tort of battery. e. If the corporation went bankrupt, Kihn himself would be a secured creditor.

Answer: c Diff: 2 Type: MC Page Reference: 214d Skill: Applied 113) Where a corporation borrows money, only the corporation is responsible for that debt, not the shareholders. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 214e Skill: Recall 114) Where a corporation is not able to pay the debts it owes, the creditors can turn to the shareholders for payment.

..

48

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 214f Skill: Recall 115) Explain what is meant by limited liability related to corporations.

Answer: In a corporation, the corporation itself, not the shareholders, is responsible for the debts, liabilities, and obligations of that corporation. The shareholder can only lose what he or she has invested.

Feedback: In a corporation, the corporation itself, not the shareholders, is responsible for the debts, liabilities, and obligations of that corporation. The shareholder can only lose what he or she has invested.

Diff: 1 Type: ES Page Reference: 214g Skill: Recall 116) In 2011, Rambolin incorporated Rambolin Industries Ltd. and became its sole shareholder. He loaned the corporation $10 000 and took a chattel mortgage from the corporation as security for repayment of the loan. He became director, president, and secretary of the corporation. The corporation prospered. Last year, you began supplying the corporation with office supplies. You were paid at the end of each month for supplies delivered during that month. For the last six months, however, you have not been paid.

You learn that other suppliers also have not been paid because sales have dropped drastically, apparently due to Rambolin's nasty temper caused by ill health. Which of the following is true? a. If this corporation were placed into bankruptcy, Rambolin would be in a better position than you for receiving proceeds realized from the sale of the assets of the corporation. b. Shareholders have a statutory obligation to manage the corporation, so Rambolin, as shareholder, must exercise care in that task. c. You could take an action under the pre-emptive right provisions under the relevant legislation. d. If you decided to sue for the debt, you could sue Rambolin because he is the sole shareholder and his nasty temper caused all of the trouble.

..

49

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

e. If Rambolin dies, his corporation would automatically die too, and there wouldn't be any person to sue.

Answer: a Diff: 3 Type: MC Page Reference: 214i Skill: Applied 117) A secured creditor has first claim against assets used as security. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 214j Skill: Recall 118) A real estate agent, by virtue of his fiduciary duty to his principal, is not allowed to buy the property being sold by his principal without full disclosure to and consent from his principal. The real estate agent does not want to disclose that he is the buyer of the property, so he forms a corporation and takes an offer to his principal from the corporation. Based on these facts, which of the following is true if the principal finds out that the corporation/buyer is owned by the real estate agent and objects to the contract? a. The court would enforce the contract because the corporation is a separate legal entity in the eyes of the law. b. The court would not enforce the contract and would "lift the corporate veil." c. The court would enforce the contract because this is not a direct breach of the agent's fiduciary duty. d. The court would dissolve the corporation. e. The court would enforce the contract, but the principal would be able to claim any profits from the agent when he took them out of the corporation.

Answer: b Diff: 2 Type: MC Page Reference: 215a Skill: Applied

..

50

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

119) Explain "lifting the corporate veil."

Answer: This is where the courts will look to impose responsibility on the shareholders of a corporation as opposed to the normal situation where liability is limited to the corporation itself. This is usually restricted to situations where the corporation is being used by a shareholder to commit a crime, fraud, etc.

Feedback: This is where the courts will look to impose responsibility on the shareholders of a corporation as opposed to the normal situation where liability is limited to the corporation itself. This is usually restricted to situations where the corporation is being used by a shareholder to commit a crime, fraud, etc.

Diff: 2 Type: ES Page Reference: 215b Skill: Recall 120) Kent incorporated Dynamite Data Ltd., which worked with small businesses in developing graphs and charts from their data for presentations to bankers, shareholders, etc. Kent loaned the company $25 000 by way of a shareholder's loan and took as security computers, plotters, and printers under a chattel mortgage document. An employee of the corporation, Jack, while delivering some graphs to a customer, Roth, got into an argument with Roth, who complained that the graph was in red and not in pink as requested. It ended with Jack punching Roth, who fell onto a microscopic camera. The damage to Roth’s nose and the camera totalled $35 000. Which of the following is true? a. The corporation is not liable for the damage caused by the action of its employee, Jack. b. If the corporation went bankrupt but owed creditors (other than Roth), Kent would be in a worse position than unsecured creditors to collect proceeds realized from the sale of the corporation's assets. c. Kent is liable for the damage to Roth and the camera if neither Jack nor the employer/corporation has sufficient funds. d. Roth's action against Jack is for the tort of assault. e. Even if Kent, the only shareholder, died, the corporation would not die and would still owe its outstanding debts.

Answer: e Diff: 3 Type: MC Page Reference: 216a

..

51

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

Skill: Applied 121) Which of the following is an advantage of incorporation? a. Shareholders owe a duty to the corporation. b. Shareholders are liable for debts of the corporation. c. Shares are easily transferred. d. Shareholders can veto the decisions of directors. e. There are no tax advantages as compared to a sole proprietorship.

Answer: c Diff: 2 Type: MC Page Reference: 216d Skill: Recall 122) "In modern business practice, the shareholders of a corporation own that corporation." Explain the accuracy of this statement.

Answer: A corporation is a separate legal person. The shareholders do not technically own the corporation or its assets. Shareholders make up the membership of the corporation and have certain rights to control it through voting and have a claim against the assets upon dissolution. In a practical sense, however, this usage is correct.

Feedback: A corporation is a separate legal person. The shareholders do not technically own the corporation or its assets. Shareholders make up the membership of the corporation and have certain rights to control it through voting and have a claim against the assets upon dissolution. In a practical sense, however, this usage is correct.

Diff: 2 Type: ES Page Reference: 216g Skill: Applied 123) Shareholders do not owe a duty to the corporation. a. True b. False Answer: a Diff: 1

..

52

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

Type: TF Page Reference: 216h Skill: Recall 124) A shareholder has an obligation not to compete with the corporation. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 216i Skill: Recall 125) Joe is an environmental activist and he acquired shares in MacMillan Bloedel (a forestry corporation), only for the purpose of undermining MacMillan Bloedel, speaking against its practices at annual shareholders' meetings, and getting access to confidential information. Joe spoke against MacMillan Bloedel at every opportunity. Explain his legal obligations to the corporation under these circumstances.

Answer: He has none. As a shareholder, he is free to speak against the corporation if he so wants.

Feedback: He has none. As a shareholder, he is free to speak against the corporation if he so wants.

Diff: 2 Type: ES Page Reference: 216j Skill: Applied 126) Contrast the obligations and duties of directors and shareholders of a corporation.

Answer: Basically, the shareholders of a corporation owe no duty to the corporation or to other shareholders. This is one of the major advantages of a corporation. The shareholder is free to compete with and even try to destroy the corporation and there can be no complaint from the corporation or the other shareholders. The only duty that may arise is where the shareholder owns enough shares to be classed as an insider, and then there is an obligation under the securities regulations not to use insider knowledge in trading shares of the business. Other duties may be created by a shareholders' agreement between the shareholders when a small or private corporation is created.

..

53

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

As far as the directors are concerned, they have a significant duty to the corporation to act in its best interest and to act competently as a reasonably prudent business person. This is a fiduciary duty, and it is owed to the corporation, not to the other shareholders, although the shareholders (even a minority shareholder) have the right to bring a representative (derivative) action on behalf of the corporation against a director who breaches that duty, when the other directors fail to do so. The directors have other duties as well. These are imposed by statute and relate to obligations with respect to the environment, to withholding taxes and other payments to government bodies, to paying wages to employees, as well as obligations with respect to consumer protection legislation, human rights, and other statutes that put penalties on the directors for violations of the corporation in these areas. Students should take this well beyond the recognition that the shareholders have little duty and the directors have significant duties.

Feedback: Basically, the shareholders of a corporation owe no duty to the corporation or to other shareholders. This is one of the major advantages of a corporation. The shareholder is free to compete with and even try to destroy the corporation and there can be no complaint from the corporation or the other shareholders. The only duty that may arise is where the shareholder owns enough shares to be classed as an insider, and then there is an obligation under the securities regulations not to use insider knowledge in trading shares of the business. Other duties may be created by a shareholders' agreement between the shareholders when a small or private corporation is created.

As far as the directors are concerned, they have a significant duty to the corporation to act in its best interest and to act competently as a reasonably prudent business person.

This is a fiduciary duty, and it is owed to the corporation, not to the other shareholders, although the shareholders (even a minority shareholder) have the right to bring a representative (derivative) action on behalf of the corporation against a director who breaches that duty, when the other directors fail to do so. The directors have other duties as well. These are imposed by statute and relate to obligations with respect to the environment, to withholding taxes and other payments to government bodies, to paying wages to employees, as well as obligations with respect to consumer protection legislation, human rights, and other statutes that put penalties on the directors for violations of the corporation in these areas. Students should take this well beyond the recognition that the shareholders have little duty and the directors have significant duties.

Diff: 3 Type: ES Page Reference: 216l, 218i, 219b, 220f, 221e,222a, 226a Skill: Applied 127) Explain under what circumstances a shareholder's right to dissent arises.

Answer:

..

54

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

Where a corporation, usually in the form of the directors, makes a decision that will have the effect of benefiting the corporation as a whole, but won't particularly help the position of a minority shareholder. In some jurisdictions, that minority shareholder has the right to dissent, and to have his or her shares purchased at a fair price.

Feedback: Where a corporation, usually in the form of the directors, makes a decision that will have the effect of benefiting the corporation as a whole, but won't particularly help the position of a minority shareholder. In some jurisdictions, that minority shareholder has the right to dissent, and to have his or her shares purchased at a fair price.

Diff: 2 Type: ES Page Reference: 217a Skill: Recall 128) Explain under what circumstances a shareholder's right to sue against oppression arises.

Answer: Where the directors of the corporation make a decision with the objective of hurting the position of the minority shareholder as opposed to benefiting the rest of the corporation.

This is an abuse of their position, and the minority shareholder can sue for relief from oppression. The power of the courts in these circumstances extends to putting the corporation into receivership or having it dissolved.

Feedback: Where the directors of the corporation make a decision with the objective of hurting the position of the minority shareholder as opposed to benefiting the rest of the corporation. This is an abuse of their position, and the minority shareholder can sue for relief from oppression. The power of the courts in these circumstances extends to putting the corporation into receivership or having it dissolved.

Diff: 3 Type: ES Page Reference: 217b Skill: Recall 129) John and two friends incorporated a closely held corporation. Each bought an equal number of common shares in the corporation. Each became a director, an officer, and an authorized agent of the corporation. Which of the following is true? a. Each of them, as a director, owes a fiduciary duty to the others, as shareholders. b. As director, each owes a fiduciary duty to the creditors of the corporation.

..

55

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

c. The corporation is more highly regulated and less free of government regulations and control than a broadly held corporation would be. d. If the affairs of the corporation are being conducted in a manner that is unfairly prejudicial to any one shareholder, that shareholder could seek relief from such oppression from the court. e. Since the corporation is a legal fiction, all of its activities must be carried out through principals.

Answer: d Diff: 3 Type: MC Page Reference: 217c Skill: Applied 130) Explain what is meant by pre-emptive rights.

Answer: Depending on the legislation and the jurisdiction, a shareholder has the right to maintain his percentage of the shares outstanding from a corporation. This means that if new shares are issued, he has to be offered an amount whereby he will maintain his share of the overall shares outstanding, if he purchases them.

Feedback: Depending on the legislation and the jurisdiction, a shareholder has the right to maintain his percentage of the shares outstanding from a corporation. This means that if new shares are issued, he has to be offered an amount whereby he will maintain his share of the overall shares outstanding, if he purchases them.

Diff: 3 Type: ES Page Reference: 218a Skill: Recall 131) ABC Ltd. is a closely held corporation. Two of the shareholders serve as directors.

As directors, they voted to issue themselves more shares to increase their voting control of the corporation. Which of the following provisions would aid the other shareholders? a. Indoor-management rule b. Pre-emptive right provisions c. Derivative-action provisions d. Relief-from-oppression provisions e. Dissent procedure

..

56

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

Answer: b Diff: 1 Type: MC Page Reference: 218b Skill: Applied 132) Three classmates incorporated about a week after graduation. The authorized capital was 500 000 common no-par-value shares. Each classmate took one share, and each was a director. If the directors decide to issue more shares from the treasury to raise more capital, which of the following provisions ensures that they keep their proportionate holdings? a. Relief-from-oppression provision b. Dissent procedure c. Pre-emptive right provision d. Indoor-management rule e. Derivative-action provision Answer: c Diff: 1 Type: MC Page Reference: 218c Skill: Applied 133) You have been asked by two fellow graduates to join them in incorporating a closely held corporation that would commence a consulting business. One was in your class, so you know him quite well, but the other is graduating from a different school.

You have been discussing the law to review the protection it gives you. Read each of the following statements separately and indicate which is true. a. If you have pre-emptive rights and the directors decide to issue a new allotment of shares, the corporation must offer you a portion of the new issue to allow you to keep your proportional share of the corporation. b. A shareholder's agreement allows shareholders and not officers to manage the corporation. c. As a shareholder, you will have the right to vote for the officers of the corporation. d. If you were voted out as a director by the others, who could show that it was in the best interest of the corporation, you could sell your shares to any interested buyer without interference from the other directors.

..

57

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

e. If you each take one-third of the first allotment of the shares, you will necessarily be a minority shareholder, and have no voting rights in electing the directors of the corporation.

Answer: a Diff: 2 Type: MC Page Reference: 218d Skill: Applied 134) Smith, director of ABC Ltd., intercepted a corporate opportunity for his own benefit and thereby caused the corporation to miss a $45 000 profit. A shareholder urged the board of directors to take action against him. The other directors, all close friends of Smith from school days, did not take any action against him, although they did voice their dissatisfaction with his move. Which of the following provisions would aid the shareholder? a. Dissent procedure b. Representative action (derivative-action) provision c. Indoor-management rule d. Pre-emptive right provision e. Relief-from-oppression provision Answer: b Diff: 1 Type: MC Page Reference: 218e Skill: Applied 135) If a corporation was wronged by negligent and fraudulent acts committed by one of its directors and consequently suffered a $45 000 loss, and if the board of directors will not take any action on behalf of the corporation against the wrongdoer, which of the following is true? a. A representative (derivative) action allows a shareholder to commence an action on behalf of the corporation. b. If the company failed to commence an action through its authorized agents (e.g., its directors), no action could be taken, because a corporation is merely a legal concept and must act through its authorized agents. c. The shareholders could proceed under the "dissent" procedure and force the corporation to pay them a fair market value for their shares.

..

58

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

d. The shareholders could sue the corporation for oppression. e. The shareholders could force the directors to start the action on the basis of their "preemptive right."

Answer: a Diff: 2 Type: MC Page Reference: 218f Skill: Applied 136) Andrea agreed to form a corporation with two friends, but lay awake last night rethinking her decision. They agreed that they all wanted to be directors and officers and that they all would have signing authority with the bank from whom the corporation is borrowing the money. Nevertheless, Andrea began to review her assumptions. Which of the following is true? a. When Andrea signs the promissory note at the bank on behalf of the corporation, she can just sign her own name; she will not be personally liable as long as she intended to sign on behalf of the corporation. b. Andrea would be able to ask the court for "relief from oppression" if she disliked a decision passed by the majority of the directors. c. Andrea would be able to bring an action on behalf of the company if one of the directors breached his or her fiduciary duty to the corporation and the other directors refused to do anything about it. d. As a major shareholder, Andrea would be elected as a director every year even without such a provision in the shareholders' agreement. e. As a shareholder, Andrea is free to compete with the company even if she is a director as well.

Answer: c Diff: 2 Type: MC Page Reference: 218g Skill: Applied 137) Shareholders have a right to bring an action against the directors on behalf of the company when the directors fail in their duty to the corporation. a. True b. False Answer: a

..

59

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

Diff: 1 Type: TF Page Reference: 218h Skill: Recall 138) If a director fails in his duty to the corporation, what rights does a minority shareholder have to hold him accountable?

Answer: The minority shareholder can bring a derivative (representative) action on behalf of the corporation to hold the director accountable for his breach of duty.

Feedback: The minority shareholder can bring a derivative (representative) action on behalf of the corporation to hold the director accountable for his breach of duty.

Diff: 2 Type: ES Page Reference: 219a Skill: Recall 139) Explain the standard of care that a director must live up to in carrying out his duty toward the corporation.

Answer: He must exercise the care, diligence, and skill of a reasonably prudent person in carrying out his director responsibilities. Note that this will vary with the jurisdiction.

Feedback: He must exercise the care, diligence, and skill of a reasonably prudent person in carrying out his director responsibilities. Note that this will vary with the jurisdiction.

Diff: 2 Type: ES Page Reference: 219c Skill: Recall 140) Which of the following is a fiduciary relationship? a. Directors of the corporation and the corporation b. Officer of the corporation and the shareholders c. Agent and the third party d. Shareholders and the corporation

..

60

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

e. Director of the corporation and the shareholders of the corporation Answer: a Diff: 2 Type: MC Page Reference: 220b Skill: Recall 141) In which of the following relationships is a fiduciary duty owed? a. The officers of a corporation to the shareholders b. The director of a corporation to the corporation c. The director of a corporation to the shareholders d. A principal to his agent e. An employer to his or her employees Answer: b Diff: 2 Type: MC Page Reference: 220c Skill: Recall 142) Directors owe a fiduciary duty to the shareholders. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 220d Skill: Recall 143) To whom does the director owe the duty to be careful?

Answer: To the corporation itself Feedback: To the corporation itself Diff: 1

..

61

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

Type: ES Page Reference: 220e Skill: Recall 144) Explain the nature of the director's duties to the corporation.

Answer: A fiduciary duty is owed, in that the director must act in the best interests of the corporation, not taking any advantage of corporate opportunities for himself, and must not act negligently in carrying out his direct responsibilities.

Feedback: A fiduciary duty is owed, in that the director must act in the best interests of the corporation, not taking any advantage of corporate opportunities for himself, and must not act negligently in carrying out his direct responsibilities.

Diff: 2 Type: ES Page Reference: 220g Skill: Recall 145) Mrs. Marine was a director of a major investment corporation. In the course of her normal work, she identified a land development investment opportunity that she felt would be good for the company and passed along the information to the board of directors. The board rejected the opportunity and told Mrs. Marine she could pursue it on her own. Mrs. Marine is trying to decide if she should take advantage of the investment opportunity. What advice would you offer to her? a. Mrs. Marine should consider the opportunity and ensure that no harm could come to the corporation if she participates in the deal, as a shareholder may be able to bring an oppression action against her in such a situation. b. Mrs. Marine should enter into the investment opportunity with confidence, as she fulfilled her fiduciary duty and has permission from the board of directors. c. Mrs. Marine should consider the opportunity and ensure that no harm could come to the corporation if she participates in the deal, as a shareholder may be able to bring a representative action against her in such a situation. d. Mrs. Marine should only enter into the investment opportunity after she has the permission from the board of directors in writing. e. Mrs. Marine should not proceed with the opportunity, as she should realize that the board of directors could change its decision.

Answer: c Diff: 3

..

62

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

Type: MC Page Reference: 220h Skill: Applied 146) Art Raskle was an officer, director, and employee of a broadly held corporation. At a directors meeting, he was surprised but pleased to learn that the corporation was discussing a resolution to contract with the firm of Fielding's Office Supply for $200 worth of office equipment. Raskle and a business woman had recently bought that business; Raskle has a 45% interest in it. Raskle voted for the contract and the resolution passed without discussion by a vote of 6–0. Several months after completion of the purchase, the other directors learned of Raskle's interest in Fielding's Office Supply and called on him to account to the corporation for any profit made. Which of the following is true? a. Raskle must account for any profit made because he failed to disclose his interest and voted on the question. b. Raskle is not in breach of any fiduciary duty because the dollar value of the contract falls below the minimum statutory threshold. c. Raskle has not breached his fiduciary duty because his vote did not determine the matter. Had he not voted, the result would have been the same. d. Raskle has breached his fiduciary duty but if the sale was "fair" and if the shareholders approve the sale by a special resolution after full disclosure, he need not account to the corporation for any profit made. e. Raskle is not in breach of his fiduciary duty because directors of corporations vote on contracts in which they have an interest all the time.

Answer: a Diff: 2 Type: MC Page Reference: 220i Skill: Applied 147) John Hollin was an officer, director, and employee of a large broadly held corporation. At a directors meeting, he learned that the corporation was voting on a resolution to buy a piece of property from Sam Keanu for $100 000. It so happens that Hollin is one of three co-owners of that property. Hollin voted for the purchase and the resolution passed without discussion by a vote of 5–0. Several months after completion of the purchase, the other directors learned of Hollin's ownership and called on him to account to the corporation for any profit made. Which of the following is false? a. Hollin should have disclosed his interest and refrained from voting or otherwise influencing the decision. b. Hollin owed a fiduciary duty to the corporation and breached that duty by his actions.

..

63

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

c. Hollin must account for any profit made because he failed to disclose his interest and voted on the question. d. If the directors failed to take action, the shareholders could have brought an action on behalf of the corporation against Hollin. e. The shareholders could proceed under the dissent procedure and force the corporation to buy them out.

Answer: e Diff: 2 Type: MC Page Reference: 220j Skill: Applied 148) Mr. Malik, an investment counsellor by training, sat on the board of directors of Talbot Enterprises Ltd., a broadly held corporation. During a meeting of the board, he advised the corporation to buy some condominiums given the present soft real estate market. Malik did not disclose that he owned shares in the corporation that owned the properties, nor did he disclose that he would be entitled to a commission for every unit he helped sell. When the question was put to the board, he voted in favour of it. Read each of the following statements separately, and indicate which is true. a. A director must disclose his interest in a contract before the board, but is not required to refrain from voting for it. b. A shareholder, learning of his actions, could proceed under the dissent procedure, which would cause the corporation to buy his shares at fair market value. c. Malik doesn't have to disclose his interest in the contract if he has signed an agreement with the other directors relieving them of their fiduciary duties. d. Malik has breached his fiduciary duty, but if the sale was fair, he need not give up his profits. e. Malik must account for any profit made because he failed to disclose his interest and voted on the question.

Answer: e Diff: 2 Type: MC Page Reference: 220k Skill: Applied 149) In the BCE case, the Supreme Court clarified the fiduciary duty owed by directors.

Which of the following correctly reflects the court’s view in this case?

..

64

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

a. The duty is owed to the corporation; in determining what is in the best interest of the corporation, directors may consider the interests of all stakeholders. b. The duty is owed to the corporation and only the corporation; no consideration should be given to shareholders, employees, or creditors. c. The duty is owed to all stakeholders; the interests of shareholders, employees, and creditors should be emphasized in all decisions. d. The duty is owed to the corporation; in determining what is in the best interest of the corporation, directors must consider the interests of shareholders. e. The duty is owed to the corporation; in determining what is in the best interest of the corporation, the directors must consider the interests of employees.

Answer: a Diff: 1 Type: MC Page Reference: 221a Skill: Recall 150) Based on the clarification provided by the Supreme Court of Canada in the BCE case, explain the fiduciary duty owed by directors.

Answer: The court made it clear that the duty of the director is owed only to the corporation.

However, the court did point out that in determining what is in the best interest of the corporation, the director may take into consideration the interests of all stakeholders involved, including shareholders, employees, and creditors.

Feedback: The court made it clear that the duty of the director is owed only to the corporation. However, the court did point out that in determining what is in the best interest of the corporation, the director may take into consideration the interests of all stakeholders involved, including shareholders, employees, and creditors.

Diff: 2 Type: ES Page Reference: 221b Skill: Recall 151) Directors owe a fiduciary duty to the public. a. True b. False Answer: b

..

65

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

Diff: 1 Type: TF Page Reference: 221c Skill: Recall 152) Directors owe a fiduciary duty to the corporation. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 221d Skill: Recall 153) With regard to the law of corporations, which of the following is true? a. A director of a corporation could not be personally liable on a promissory note even if he just signed his own name, as long as at the time he had intended to sign on behalf of the corporation. b. If a minority shareholder is treated unfairly, the appropriate relief to request is that the court "lift the corporate veil." c. In many jurisdictions, pre-emptive rights entitle a shareholder to pass on her right to vote to someone else. d. "Relief from oppression" provisions allow a party who has contracted with the corporation to force the corporation to honour a contract it has signed in an irregular manner. e. A creditor of a corporation could sue for some remedy if the directors of the corporation voted for a resolution to pay a dividend when the corporation was insolvent.

Answer: e Diff: 2 Type: MC Page Reference: 221f Skill: Recall 154) A director can be held responsible for unpaid taxes, wages, and environmental harm. a. True b. False

..

66

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

Answer: a Diff: 2 Type: TF Page Reference: 221g Skill: Recall 155) Which of the following might be a successful claim (i.e., defence) if a director is charged personally for violation of environmental regulations, resulting in pollution? a. He did not participate in the decision leading to the offence. b. He had delegated decision authority to someone else. c. He had exercised due diligence. d. He was not aware of the regulations. e. He was not present at the meeting when the decision was made.

Answer: c Diff: 1 Type: MC Page Reference: 221h Skill: Recall 156) To protect directors from exposure to personal liability in the case of violations of statutes related to the environment and competition, corporations often include terms in the directors’ contracts that provide indemnification for losses they incur and legal expenses associated with involvement in these types of actions. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 222b Skill: Recall 157) Discuss appropriate measures that a business might take to prevent and detect corporate fraud.

Answer: A business might appoint a loss prevention team to focus on this problem. Part of the effort should involve a comprehensive system of audits of financial matters as well as

..

67

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

other aspects of the business, such as the use of computers and other company resources.

Management needs to be vigilant in assessing risk and developing proactive strategies to avoid it. Implementation of strong ethical standards, a code of conduct, and related training of all staff would help to avoid internal fraud.

Feedback: A business might appoint a loss prevention team to focus on this problem. Part of the effort should involve a comprehensive system of audits of financial matters as well as other aspects of the business, such as the use of computers and other company resources. Management needs to be vigilant in assessing risk and developing proactive strategies to avoid it. Implementation of strong ethical standards, a code of conduct, and related training of all staff would help to avoid internal fraud.

Diff: 2 Type: ES Page Reference: 225a Skill: Applied 158) Discuss and contrast the various methods of financing a corporation. Deal with the advantages and disadvantages of each.

Answer: There are two main methods of financing for a corporation. Equity financing involves the sale of shares to investors. A company is incorporated with an authorized share capital and then a portion of those authorized shares are issued to investors. In most jurisdictions, no value is put on these shares when issued and the market determines their worth. In a closely held corporation, shares are usually sold directly to the participants in the business. Shares can take various forms, including preferred shares or other shares with special rights and restrictions attached to them, or simply the normal issuing of common shares. When people buy shares, they invest in the business, and the corporation does not owe them any funds. This is true even of preferred shares where the corporation has committed to pay specific dividends. That is not owed in the normal sense.

The other method of finance is debt financing where money is loaned to the corporation by creditors. Again, this can be done directly with a simple loan from a bank or other finance source that would likely be secured, but the corporation can also be financed through bonds or debentures. These are like shares and are sold on the bond market, but each represents a share of debt owed by the corporation. Of course, if the corporation fails to honour its legal obligation to repay this debt, the creditors can enforce their claim against the assets of the corporation by obtaining judgment and executing that judgment.

Usually there are contractual provisions that allow the creditors to take over the company in the event of default (receivership) without first seeking judgment.

There are many different variations and combinations of these methods, and students should at least demonstrate an understanding of the primary distinctions and the implications for the corporation.

..

68

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

Feedback: There are two main methods of financing for a corporation. Equity financing involves the sale of shares to investors. A company is incorporated with an authorized share capital and then a portion of those authorized shares are issued to investors. In most jurisdictions, no value is put on these shares when issued and the market determines their worth. In a closely held corporation, shares are usually sold directly to the participants in the business. Shares can take various forms, including preferred shares or other shares with special rights and restrictions attached to them, or simply the normal issuing of common shares. When people buy shares, they invest in the business, and the corporation does not owe them any funds. This is true even of preferred shares where the corporation has committed to pay specific dividends. That is not owed in the normal sense.

The other method of finance is debt financing where money is loaned to the corporation by creditors. Again, this can be done directly with a simple loan from a bank or other finance source that would likely be secured, but the corporation can also be financed through bonds or debentures. These are like shares and are sold on the bond market, but each represents a share of debt owed by the corporation. Of course, if the corporation fails to honour its legal obligation to repay this debt, the creditors can enforce their claim against the assets of the corporation by obtaining judgment and executing that judgment. Usually there are contractual provisions that allow the creditors to take over the company in the event of default (receivership) without first seeking judgment.

There are many different variations and combinations of these methods, and students should at least demonstrate an understanding of the primary distinctions and the implications for the corporation.

Diff: 3 Type: ES Page Reference: 225b, 227e, 228a Skill: Applied 159) The rights associated with preferred shares are always the same, and there is no actual right to a dividend. a. True b. False Answer: b Diff: 2 Type: TF Page Reference: 225c Skill: Recall 160) If expected dividends are not paid to preferred shareholders, there is no right to sue although those unpaid dividends will accumulate. a. True

..

69

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

b. False Answer: a Diff: 1 Type: TF Page Reference: 225d Skill: Recall 161) Which of the following statements is correct with respect to regulation of the purchase, sale, and promotion of securities in Canada? a. The federal government has no involvement in this area. b. This is a provincial responsibility but all provinces have the same provisions. c. Because of the location of the Toronto Stock Exchange, the Ontario Securities Commission oversees these matters for all of Canada. d. Canada has a federal securities regulator responsible for this. e. This is primarily a provincial responsibility.

Answer: e Diff: 2 Type: MC Page Reference: 226b-227b Skill: Applied 162) Explain the regulation environment in Canada related to the purchase, sale, and promotion of shares and other financial vehicles (i.e., securities).

Answer: Canada does not have a federal securities regulator (as does the United States). Other than the Criminal Code provisions, there is little federal involvement related to these activities. This is a provincial responsibility. The Toronto Stock Exchange is the main place where shares are sold in Canada, so the Exchange and the Ontario Securities Commission hold primary responsibility to detect and prosecute wrongdoing that affects that market. However, each province has legislation and securities commissions to regulate these activities. Provincial regulations are in the form of consumer protection legislation, designed to protect investors. Currently, efforts are under way to coordinate the various provincial regulations so they would have common provisions.

Feedback: Canada does not have a federal securities regulator (as does the United States). Other than the Criminal Code provisions, there is little federal involvement related to these activities. This is a provincial responsibility. The Toronto Stock

..

70

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

Exchange is the main place where shares are sold in Canada, so the Exchange and the Ontario Securities Commission hold primary responsibility to detect and prosecute wrongdoing that affects that market. However, each province has legislation and securities commissions to regulate these activities. Provincial regulations are in the form of consumer protection legislation, designed to protect investors. Currently, efforts are under way to coordinate the various provincial regulations so they would have common provisions.

Diff: 2 Type: ES Page Reference: 226c-227c Skill: Recall 163) Securities regulations are a federal responsibility. a. True b. False Answer: b Diff: 2 Type: TF Page Reference: 227a Skill: Recall 164) Four years ago, Ben Ratzi incorporated a corporation and became the sole shareholder, director, and officer. He loaned the corporation $10 000 and took a debenture from the corporation as security for repayment of the loan. The corporation prospered. Last year, your brother began supplying the corporation with office supplies.

He was paid at the end of each month for supplies delivered during that month. For the last six months, however, he has not been paid. He learned that other suppliers had not been paid either because sales dropped drastically, apparently due to Ratzi's harsh management style, which has upset the entire staff. Which of the following is true? a. If Ratzi dies, his corporation would automatically die too, and there wouldn't be any person to sue. b. Your brother has no claim against the corporation because it has limited liability. c. If this corporation were placed into bankruptcy, Ratzi would be in a better position than your brother for receiving proceeds realized from the sale of the assets of the corporation. d. Your brother could take an action under statutory "relief from oppression" provisions. e. If your brother decided to sue for the debt, he could sue Ratzi because he was the sole shareholder and his management style caused all of the trouble.

..

71

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

Answer: c Diff: 3 Type: MC Page Reference: 227d Skill: Applied 165) When a personal guarantee has been signed by a shareholder, the creditor can demand payment from that shareholder despite the separate legal entity nature of the corporation. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 227f Skill: Recall 166) Another term commonly used where a bond is involved is: a. A negotiable instrument b. A debenture c. A personal property security d. A loan e. A share Answer: b Diff: 2 Type: MC Page Reference: 228b Skill: Recall 167) Mr. Ace of Oink Inc., a closely held corporation, is one of three shareholders. After several years of considerable success, the corporation hit hard times. The other shareholders, Mr. Bane and Mr. Curr, in the best interests of the corporation, voted Mr. Ace out as a director and voted not to renew his employment contract. Upset by these events, Mr. Ace wanted to sell his interest and leave the corporation. The other two shareholders, however, refused to buy his shares. Furthermore, when Mr. Ace attempted to sell his shares to his brother, who was interested in the corporation, the other shareholders refused to register the brother as a member. Which of the following is true?

..

72

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

a. Mr. Ace could sue the corporation for breach of its fiduciary duty. b. Mr. Ace could have avoided such a dilemma through the provisions of a shareholders' agreement. c. The court would "lift the corporate veil" because Mr. Bane and Mr. Curr were hiding behind the corporation to commit a fraud. d. Mr. Ace could sell his shares to whomever he chose and the remaining shareholders must register the new owner. e. Because of statutory pre-emptive right provisions, if Ace wants out, the other shareholders must buy him out.

Answer: b Diff: 3 Type: MC Page Reference: 229 Skill: Applied 168) In a franchise arrangement one business enters into a contract with another to sell its product exclusively. Which of the following is true with respect to a franchise? a. The franchisor, in addition to an initial sum of capital, is required to pay a substantial franchise fee as well as regular payments to the franchisee. b. The franchisee and franchisor are in partnership together. c. The franchisor must comply with rules, standards, and specifications with respect to products and prices. d. A franchise arrangement is an effective way to expand the business. e. The franchisee provides the product and other supplies and equipment.

Answer: d Diff: 1 Type: MC Page Reference: 230a Skill: Recall 169) A franchisee and franchisor are considered to be in a partnership with each other. a. True b. False Answer: b Diff: 2

..

73

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

Type: TF Page Reference: 230b Skill: Recall 170) A franchisee provides the product, equipment, and a licence to use the name, trademark, and logos. a. True b. False Answer: b Diff: 2 Type: TF Page Reference: 230c Skill: Recall 171) In a franchise arrangement, describe the advantages offered in such a business structure to the franchisee.

Answer: The franchisee gets the advantages of corporate advertising, the use of a (hopefully) highequity brand name and/or logo, access to a supplier network, a "winning" business formula, and perhaps even financing from the franchisor.

Feedback: The franchisee gets the advantages of corporate advertising, the use of a (hopefully) high-equity brand name and/or logo, access to a supplier network, a "winning" business formula, and perhaps even financing from the franchisor.

Diff: 2 Type: ES Page Reference: 230d, 231e Skill: Recall 172) In a franchise arrangement, describe the advantages offered in such a business structure to the franchisor.

Answer: The franchisee must pay a (usually substantial) franchise fee, regular payments to the franchisor, and often a percentage of the profits generated. Additionally, the franchisor often supplies the accounting system to the franchisee (thus offering a high degree of direct control over the franchisee by the franchisor). Finally, the relationship between franchisor and franchisee tends to be an unequal one whereby the larger franchisor organization will dominate negotiations.

..

74

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 7: Methods of Carrying on Business

Feedback: The franchisee must pay a (usually substantial) franchise fee, regular payments to the franchisor, and often a percentage of the profits generated. Additionally, the franchisor often supplies the accounting system to the franchisee (thus offering a high degree of direct control over the franchisee by the franchisor). Finally, the relationship between franchisor and franchisee tends to be an unequal one whereby the larger franchisor organization will dominate negotiations.

Diff: 2 Type: ES Page Reference: 231a, c, and f Skill: Recall 173) A franchisee normally pays an initial investment of capital, a franchise fee, and a percentage of the profits. a. True b. False Answer: a Diff: 2 Type: TF Page Reference: 231b Skill: Recall 174) In a franchise arrangement, one business enters into a contract with another to sell its products exclusively. Which of the following is true with respect to a franchise? a. The franchisee provides the technical expertise to manage the franchise. b. The franchisor must comply with rules, standards, and specifications with respect to products and prices. c. Examples of franchises in Canada include Tim Hortons, KFC, and Budget Car Rental. d. An advantage of a franchise arrangement is the equal bargaining position of the parties. e. The franchisee and franchisor are in partnership together.

Answer: c Diff: 1 Type: MC Page Reference: 231d Skill: Recall

..

75

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

1) When a house is built on a lot, the house is an example of: a. A profit à prendre b. A house is not considered property c. A chattel d. An easement e. Real property Answer: e Diff: 1 Type: MC Page Reference: 238a Skill: Recall 2) Which of the following statements is correct with respect to personal property that becomes attached to real property? a. When a tenant attaches tangible personal property to the real property he has rented in order to use it in his trade or profession, those trade fixtures cannot be removed when he leaves. b. When a person renting a home attaches a mirror to the wall to better use it, he cannot take that mirror with him when he leaves. c. When tangible personal property becomes attached to the real property, it is unlawful to remove it under any circumstances. d. When tangible personal property becomes attached, it becomes part of the real property. e. The owner of real property does not have the right to detach a fixture if he so desires.

Answer: d Diff: 1 Type: MC Page Reference: 238b Skill: Recall 3) Which of the following is considered real property in legal terms? a. Chattels b. Land c. A claim against someone that has value d. Intellectual property (ideas and creative work)

..

1

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

e. Intangible property or chose in action Answer: b Diff: 2 Type: MC Page Reference: 238c Skill: Recall 4) A distinction between real property and personal property is that one cannot be moved while the other can. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 238d, h Skill: Recall 5) Distinguish between real property and other forms of property.

Answer: Real property consists of land and the things permanently affixed to it (e.g., buildings, bridges). Personal property consists of tangible, movable things called a chattel or good and various forms of intangibles referred to as a chose in action. There is also intellectual property, another form of intangible personal property.

Feedback: Real property consists of land and the things permanently affixed to it (e.g., buildings, bridges). Personal property consists of tangible, movable things called a chattel or good and various forms of intangibles referred to as a chose in action. There is also intellectual property, another form of intangible personal property.

Diff: 1 Type: ES Page Reference: 238e Skill: Recall 6) Distinguish between real and personal property.

Answer:

..

2

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

Real property is land and things fixed to it. Personal property includes movables called chattels and intangible personal property in the form of a chose in action.

Feedback: Real property is land and things fixed to it. Personal property includes movables called chattels and intangible personal property in the form of a chose in action.

Diff: 1 Type: ES Page Reference: 238f Skill: Recall 7) Which of the following is the correct definition of a chattel? a. Chattel refers to intellectual property such as patents and copyrights. b. The term chattel is the broad term used to describe any kind of property interest. c. Chattel is the term used to describe tangible personal property or movables. d. Chattel is an intangible form of personal property, such as a debt or claim. e. Chattel is a term used to describe the land registration system in place in the Western provinces.

Answer: c Diff: 1 Type: MC Page Reference: 238g Skill: Recall 8) What is meant by a chattel?

Answer: A chattel is a tangible, movable item of personal property.

Feedback: A chattel is a tangible, movable item of personal property.

Diff: 1 Type: ES Page Reference: 238i Skill: Recall 9) Which of the following statements is correct with respect to the person who is entitled to found property?

..

3

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

a. When a person finds valuable property, he must turn it over to the police, and if the rightful owner is not found, the property goes to the government. b. When a person finds a valuable watch in a public place, he is entitled to that property over everyone else except the rightful owner. c. When a person finds a valuable watch in a public place, he is entitled to that property over everyone else including the rightful owner. d. When an employee finds an item of lost property on the premises of his employer, he is entitled to that lost property if the rightful owner cannot be found. e. You only have a claim to personal property you find if it is a chose in action.

Answer: b Diff: 2 Type: MC Page Reference: 239a Skill: Recall 10) The only person who has a better claim to goods that are found is the original owner. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 239b Skill: Recall 11) A finder has no obligation to return found goods to the proper owner. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 239c Skill: Recall 12) Joe was walking in a park and found a watch. He took it to the City's lost and found, but it was not claimed. Three years later, Joe went to this lost and found and asked for the watch and was told that it was a property of the City. Explain Joe's legal position in these circumstances. ..

4

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

Answer: Joe had prior possession and therefore prior title to the City. His title is good against everyone except the person who lost the watch; therefore, Joe is entitled to the watch.

(Finders keepers.)

Feedback: Joe had prior possession and therefore prior title to the City. His title is good against everyone except the person who lost the watch; therefore, Joe is entitled to the watch. (Finders keepers.)

Diff: 2 Type: ES Page Reference: 239d Skill: Applied 13) Mabel was employed as a waitress at a respectable restaurant in Vancouver. After cleaning up one of the tables, she noticed a valuable broach on the floor beneath the table.

Which of the following is correct with respect to her legal claim to the broach? a. Because of the principle of "finders keepers," Mabel gets to keep the broach even against the original owners who lost it. b. Mabel must hand the broach to the police, and if the rightful owner does not come forward, the broach becomes the property of the government. c. Mabel has no claim to the broach no matter where she found it. d. As the finder of the broach, Mabel is entitled to it. She has a prior claim against all but the rightful owner of the broach. e. Although Mabel found the broach in a public part of the restaurant, she must give the broach to her employer, who has the right to keep it if the rightful owner is not found.

Answer: e Diff: 2 Type: MC Page Reference: 239e Skill: Applied 14) Late one night, Mr. Kane found a duffle bag in his front yard. He opened it and discovered that it contained $30 000. He called the police department to report what he had found. The police picked up the bag and the cash. During a thorough investigation, it was determined that the $30 000 was payment for illegal drugs. Who would have legal claim to the money? a. The person who lost it b. The government ..

5

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

c. Mr. Kane (since the duffle bag was located on his property) d. Mr. Kane and the government e. Mr. Kane (since he found the duffle bag) Answer: b Diff: 2 Type: MC Page Reference: 239f Skill: Applied 15) When one person leaves tangible personal property with another to look after, the resulting relationship is called: a. A chattel b. A choose in action c. A bailment d. A fiduciary relationship e. A fixture Answer: c Diff: 1 Type: MC Page Reference: 240a Skill: Recall 16) When a person acquires temporary possession of a chattel by arrangement with the owner, it is known as which of the following? a. Bailment b. Fixture c. Consignment d. Chose in action e. Holder in due course Answer: a Diff: 1 Type: MC Page Reference: 240b

..

6

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

Skill: Recall 17) What is meant by the term bailment?

Answer: A bailment takes place when one person takes possession of and cares for the goods of another person.

Feedback: A bailment takes place when one person takes possession of and cares for the goods of another person.

Diff: 1 Type: ES Page Reference: 240c Skill: Recall 18) Discuss the various obligations of bailees when looking after the property of others.

Answer: Bailment takes place when one person has in his possession chattels owned by another.

The obligations associated with this relationship will vary with the type of bailment in place. Students should show an understanding of the nature of personal property and what is meant by a bailment. The obligations on the parties to take care of the goods and be responsible when they are damaged, lost, or destroyed depends on whether or not the possession is pursuant to a commercial relationship, and who gets the benefit. A bailment for value takes place when both parties receive a benefit under the bailment. Usually this is a commercial relationship where goods are stored for a fee, where goods are being shipped, or where the goods are left with a repair person to be fixed for a fee. In these situations, the standard is that of normal negligence (i.e., the bailee has an obligation to take the care that a reasonable person in that situation would), or in special industries, the tradition or common practice of the industry. The duty might be modified in the contract, giving rise to the commercial relationship. Exculpatory clauses in such contracts will usually limit the bailee's obligations. Common carriers and innkeepers have a special duty to care for these goods, but this is usually reduced by statute. When the bailment is gratuitous—that is, one party only is getting a benefit—then if the bailment is to the benefit of the bailee (borrowing your neighbour's lawn mower), the duty is high. Where it is for the benefit of the bailor (storing your neighbour's furniture in your garage), the duty is minimal. The question requires students to demonstrate an understanding of personal and real property as well as what a bailment is, and then to deal with the duties imposed.

Feedback: Bailment takes place when one person has in his possession chattels owned by another. The obligations associated with this relationship will vary with the type of bailment in place. Students should show an understanding of the nature of personal property and what is meant by a bailment. The obligations on the parties to take care of ..

7

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

the goods and be responsible when they are damaged, lost, or destroyed depends on whether or not the possession is pursuant to a commercial relationship, and who gets the benefit. A bailment for value takes place when both parties receive a benefit under the bailment. Usually this is a commercial relationship where goods are stored for a fee, where goods are being shipped, or where the goods are left with a repair person to be fixed for a fee. In these situations, the standard is that of normal negligence (i.e., the bailee has an obligation to take the care that a reasonable person in that situation would), or in special industries, the tradition or common practice of the industry. The duty might be modified in the contract, giving rise to the commercial relationship.

Exculpatory clauses in such contracts will usually limit the bailee's obligations. Common carriers and innkeepers have a special duty to care for these goods, but this is usually reduced by statute. When the bailment is gratuitous—that is, one party only is getting a benefit—then if the bailment is to the benefit of the bailee (borrowing your neighbour's lawn mower), the duty is high. Where it is for the benefit of the bailor (storing your neighbour's furniture in your garage), the duty is minimal. The question requires students to demonstrate an understanding of personal and real property as well as what a bailment is, and then to deal with the duties imposed.

Diff: 2 Type: ES Page Reference: 240d-241b, h Skill: Recall 19) A voluntary bailment can occur when someone borrows an item from a neighbour. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 240e Skill: Recall 20) Distinguish between a bailment for value and a voluntary bailment.

Answer: Bailment for value involves some sort of relationship where the goods are being taken by the bailee pursuant to some sort of contractual relationship such as repair, use, etc., or for some mutual benefit. In a voluntary bailment, no such contract is involved and the benefit is not mutual.

Feedback: Bailment for value involves some sort of relationship where the goods are being taken by the bailee pursuant to some sort of contractual relationship such as

..

8

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

repair, use, etc., or for some mutual benefit. In a voluntary bailment, no such contract is involved and the benefit is not mutual.

Diff: 1 Type: ES Page Reference: 240f, 241g Skill: Recall 21) Harry's lawn mower ceased to work, and in order to get the lawn mowed, he borrowed his neighbour's lawn mower. Which one of the following is correct with respect to Harry's responsibility in relation to that lawn mower? a. Because the lawn mower is valuable, this is an example of a bailment for value. b. This is a voluntary bailment and, as such, Harry has no legal obligation to look after the lawn mower. c. This is a voluntary bailment for Harry's benefit and, as such, Harry has a duty to be reasonably careful that no harm or accident comes to that lawn mower. d. Because Harry has borrowed the lawn mower, he is obligated to return it in the condition it was given and is liable for any damage or loss no matter what the reason. e. If, when Harry asked his neighbour to borrow the lawn mower, the neighbour was reluctant to loan it to Harry but did so anyway, this is an example of an involuntary bailment.

Answer: c Diff: 2 Type: MC Page Reference: 240g Skill: Applied 22) A gratuitous bailment can occur when someone borrows an item from a neighbour. a. True b. False Answer: a Diff: 2 Type: TF Page Reference: 240h Skill: Recall

..

9

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

23) Joe borrowed his neighbour Sam's lawn mower. At the same time, Sam asked Joe to look after a valuable camera for him while he was on vacation. Explain in relation to which of these items Joe has a higher duty to be careful.

Answer: With the lawn mower, it’s voluntary bailment for the benefit of the bailee, which carries with it a very high duty of care. With the camera, it's a voluntary bailment for the benefit of the bailor, which carries with it a lower duty of responsibility to avoid gross negligence (although the value of the item will cause the duty to vary).

Feedback: With the lawn mower. It's voluntary bailment for the benefit of the bailee, which carries with it a very high duty of care. With the camera, it's a voluntary bailment for the benefit of the bailor, which carries with it a lower duty of responsibility to avoid gross negligence (although the value of the item will cause the duty to vary).

Diff: 2 Type: ES Page Reference: 240i, k - 241a Skill: Applied 24) Jane asked her friend Harry to look after her very valuable Stradivarius violin while she was away on vacation. Which one of the following statements is correct with respect to the legal relationship created? a. This is an example of a voluntary bailment for the benefit of the bailor only. b. This is an example of a voluntary bailment for the benefit of the bailee. c. Because the violin is a Stradivarius, this is an example of a bailment for value. d. This is an example of an involuntary bailment. e. Because Harry is doing his friend a favour, he has no legal duty to be careful of the violin.

Answer: a Diff: 2 Type: MC Page Reference: 240j Skill: Applied 25) Which of the following describes involuntary bailment? a. Someone is forced to provide bail. b. The bailor sells the goods to compensate for storage costs. c. Goods have been left without permission.

..

10

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

d. The borrower refuses to return goods. e. The bailee refuses to claim the stored goods.

Answer: c Diff: 2 Type: MC Page Reference: 241c Skill: Recall 26) If someone stores goods on your property without permission, and you exercise no control over those goods, there is no duty to take care of them. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 241d Skill: Recall 27) Which of the following statements is correct with respect to the creation of a bailment? a. For a bailment to be created, the property must be given with the understanding that payment would be given for the service. b. The duty of care imposed on the bailee in a bailment for value is usually that of a reasonable person in the circumstances. c. A bailment is the process provided for releasing people from jail before trial. d. A bailment is not created when the transfer of the property is only done incidentally, such as leaving a watch with a watchmaker for repair. e. Bailments can only be created through contracts.

Answer: b Diff: 2 Type: MC Page Reference: 241e Skill: Recall 28) The bailee is not liable for damage done to goods while in his or her possession.

..

11

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 241f Skill: Recall 29) If a sign in the cloakroom of a restaurant hall warned “not responsible for lost or stolen goods” and the restaurant burned to the ground and all guests’ coats and hats are destroyed, the court would likely determine that the restaurant had no responsibility, as the guests’ property was lost in the fire and the exculpatory clause would protect the hall. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 241i Skill: Recall 30) Real property refers to land only. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 242a Skill: Recall 31) With regard to real property law, which one of the following is true? a. An interest in land less than an estate (e.g., an easement) gives its owner exclusive possession of that property for some period of time. b. Allowing a power, water, or sewer line to permanently cross over or under one property to service another is an example of a right of way. c. If a father cuts his family out of his will and leaves the property to someone else, there is no legal recourse for the family (i.e., the property is his to dispose of entirely as he wishes).

..

12

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

d. A property owner’s land extends vertically only as far as the owner can make use of it. e. A life estate is an interest in land that necessarily ends when the life of the grantor ends.

Answer: d Diff: 2 Type: MC Page Reference: 242b Skill: Recall 32) If Niles and Frasier buy a "fee simple" interest, which of the following is true with regard to their rights? a. Today a person's right to the area above his land is restricted to that part of it he can make use of. b. The maxim "to whomsoever the soil belongs, he owns also to the sky" remains unchanged and is as valid today as ever. c. You can sue an airplane for trespass for flying at 30 000 feet over your property. d. Niles and Frasier have rights to the area under their land, including the mineral rights. e. In law, Niles and Frasier are entitled only to the surface of the earth within the boundaries.

Answer: a Diff: 2 Type: MC Page Reference: 242c Skill: Applied 33) After saving his money for years, Taylor was finally able to buy property with a small house and a lake. Which of the following is false? a. Taylor's interest is referred to as a fee simple. b. Taylor owns all of the area above his land and all of the land below it. c. Taylor can sell part of his interest and create a joint tenancy. d. Taylor’s ownership extends to include "fixtures." e. Despite the extent of Taylor’s interest, the Crown can grant the mineral rights to someone else.

Answer: b Diff: 2

..

13

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

Type: MC Page Reference: 242d, g Skill: Applied 34) Indicate the extent of ownership above and below land.

Answer: You own above and below your land as much as can be used, excluding mining rights and mineral rights below, and you have the right to exclude any permanent incursion into the space above.

Feedback: You own above and below your land as much as can be used, excluding mining rights and mineral rights below, and you have the right to exclude any permanent incursion into the space above.

Diff: 2 Type: ES Page Reference: 242e, h Skill: Recall 35) Zack, Virgil, and Craig, friends for several years and all worried about the alarming rise in land prices, want to go in together to buy a four-hectare parcel in the country.

There is a small cabin on it. They hope that the land value will appreciate, and they want to sell it in a few years to help finance a house of their own. Read each of the following separately and indicate which is true with regard to their ownership of this property. a. Ownership of the property does not guarantee their right to everything below the surface of their property. b. Ownership of the property entitles them not only to the surface of the earth between the boundaries, but also to the infinite airspace above and everything below the surface of their property. c. In Canada, in strict legal terms, the only owner of land is the Crown, and if they buy land free and clear, they are only getting a life estate. d. Once a decision is made to hold property as joint tenants, that decision cannot be changed. e. If they buy the land and later use it to secure debt, possession of the property will be transferred to the creditor until the debt is repaid.

Answer: a Diff: 2 Type: MC Page Reference: 242f

..

14

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

Skill: Applied 36) If Sam buys the fee simple, which of the following is true with regard to his rights? a. In law, Sam is entitled only to the surface of his property within the boundaries, and not to things attached to the land, such as fences and barns. b. Sam would have a right to under-surface property that can be used, but under-surface mineral rights and oil and gas rights would be retained by the Crown. c. The maxim "to whomsoever the soil belongs, he owns also to the sky" remains unchanged and is as valid today as ever. d. If someone intrudes on his property, the proper cause of action is to sue for the tort of public nuisance. e. If fumes from the neighbouring processing plant kill Sam’s bushes and vegetables, he may be able to sue the neighbour for the tort of trespass.

Answer: b Diff: 2 Type: MC Page Reference: 242i Skill: Applied 37) An estate in the land describes a person's right to the exclusive possession and use of that land. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 243a Skill: Recall 38) A right of way is an example of an estate in land since it gives the holder of it the right to go across the land. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 243b, 244e ..

15

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

Skill: Recall 39) Which of the following is true with regard to real property law? a. The essential characteristic of an estate in land is that the owner of the estate, whether it is a fee simple, life estate, or leasehold, has exclusive possession. b. People gain an interest in land when they are given the right to use or access property for some particular purpose. c. Restrictive covenants that are negative in nature are not binding on future owners. d. A profit à prendre is a type of restrictive covenant attaching to all properties within a particular development plan. e. An easement acquired by prescription must be restrictive in nature to be binding on subsequent purchasers of land.

Answer: a Diff: 2 Type: MC Page Reference: 243c, k, and n Skill: Recall 40) Mario bought a small house in Nelson and was puzzled when he saw the conveyancing documents, which referred to a transfer of a "fee simple." The following statements were made to him to explain the term. Which is correct? a. The owner of the fee simple has the right to exclusive possession of the land until his death. b. If the owner of the fee simple dies without a will, his estate reverts back to the Crown. c. The owner of the fee simple has rights to the surface of the earth and also unlimited use of the airspace above his property. d. The owner of the fee simple also owns what is below the land, including mineral rights. e. Technically, only the Crown owns the land, but the fee simple interest is the greatest bundle of rights, other than the Crown's, that a person can own.

Answer: e Diff: 2 Type: MC Page Reference: 243d Skill: Applied

..

16

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

41) Explain what is meant by a fee simple interest.

Answer: This is the highest interest in land that we have and is akin to ownership, but in actual fact just gives the holder of the fee simple a right to use the land as he or she pleases (subject to regulations and by-laws) and to buy and sell it.

Feedback: This is the highest interest in land that we have and is akin to ownership, but in actual fact just gives the holder of the fee simple a right to use the land as he pleases (subject to regulations and by-laws) and to buy and sell it.

Diff: 2 Type: ES Page Reference: 243e Skill: Recall 42) In 2004, Ned bought two hectares in Richmond. In 2014, he subdivided the property, keeping Lot A for himself and selling Lot B to Weerdt. Ned also retained a right of way along one side of Lot B to permit access to the road. Another term of the contract required Weerdt to plant a row of poplar trees along the boundary with Lot A within two months of the sale. Both covenants were registered. Weerdt took possession and soon built a small motorcross course near Ned's lot where he and his friends practised on their unmuffled dirt bikes, during which times Ned was unable to use his backyard because of the noise. Weerdt hauled the cycles around in his truck, which he often parked either on Ned's property or in the right of way, blocking Ned's passage. Weerdt never did plant the trees. Based on these facts, which one of the following is false? a. Ned could sue Weerdt for the tort of nuisance. b. Ned could secretly place strips of spikes on his property to deflate the tires of those who trespassed on his property. c. Ned could ask for an injunction as a remedy. d. Ned could sue Weerdt for interference with his right of way. e. Ned could sue Weerdt for breach of contract.

Answer: b Diff: 2 Type: MC Page Reference: 243f, 244d, 261k Skill: Applied 43) Explain what is held in a life estate.

..

17

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

Answer: A fee simple estate in land can be split. For example, a beneficiary in a will may be given a life estate in a particular property to ensure that person is cared for during the remainder of his or her life (i.e., he or she is said to have a life estate). When that beneficiary dies, the estate will go to other heirs (who have a remainder interest).

Feedback: A fee simple estate in land can be split. For example, a beneficiary in a will may be given a life estate in a particular property to ensure that person is cared for during the remainder of his or her life (i.e., he or she is said to have a life estate). When that beneficiary dies, the estate will go to other heirs (who have a remainder interest).

Diff: 2 Type: ES Page Reference: 243g Skill: Recall 44) Life estates are another way of describing landlord and tenant relationships. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 243h Skill: Recall 45) Life estate means that the land is leased to a tenant for the period of his or her life. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 243i Skill: Recall 46) If I grant my grandma a life estate and she asks about her rights and duties as a life tenant, which of the following is true? a. If I make no indication of who the property is to go to when she dies, the property reverts back to my estate. b. The life tenant, after 20 years, can establish an easement interest in the property.

..

18

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

c. The life tenant is not responsible to make repairs to keep the property in good condition, only the fee simple owner has that responsibility. d. Grandma, as life tenant, holds a reversion interest in the property. e. The life tenant can transfer the fee simple to someone in her will.

Answer: a Diff: 2 Type: MC Page Reference: 243j Skill: Applied 47) What is meant by a reversionary interest in a life estate?

Answer: When the original grantor of the life estate does not designate where the estate is to go after the life estate is exhausted, then that original grantor is said to retain a reversionary interest or right to have the property revert to him or to his estate.

Feedback: When the original grantor of the life estate does not designate where the estate is to go after the life estate is exhausted, then that original grantor is said to retain a reversionary interest or right to have the property revert to him or to his estate.

Diff: 3 Type: ES Page Reference: 243l Skill: Recall 48) Old Uncle Isaac has a cold and has become very morbid, talking continuously about funerals, death, and wills. Now he asks about life estates and wills; should he give his wife, Juliet, a life estate? Which of the following is a true statement about wills and life estates? a. The owner of the fee simple can grant a life estate only while he is alive. b. If Isaac doesn't make out a will, his property will revert back to the Crown. c. The holder of a life estate must not harm the value of the reversionary interest. d. A life estate can only be created by contract. e. The life tenant is entitled to exclusive possession of the property for his or her remaining life and can extend the life tenancy by including the property in his or her will.

Answer: c Diff: 2

..

19

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

Type: MC Page Reference: 243m Skill: Applied 49) Explain what right is conveyed by an easement.

Answer: This gives the right to a person to use a portion of another's land, usually for a specific purpose (e.g., driveway, utility maintenance).

Feedback: This gives the right to a person to use a portion of another's land, usually for a specific purpose (e.g., driveway, utility maintenance).

Diff: 2 Type: ES Page Reference: 244a Skill: Recall 50) Distinguish between an easement and a right of way.

Answer: A right of way is a particular type of easement giving the holder of it the right to cross the land to get to another location but not to stay on that land. An easement gives the right to a person to use a portion of another's land, usually for a specific purpose (e.g., driveway, utility maintenance) on a permanent basis.

Feedback: A right of way is a particular type of easement giving the holder of it the right to cross the land to get to another location but not to stay on that land. An easement gives the right to a person to use a portion of another's land, usually for a specific purpose (e.g., driveway, and utility maintenance) on a permanent basis.

Diff: 2 Type: ES Page Reference: 244b, g Skill: Applied 51) When a person has the right to go across land to get to another location, this is referred to as what?

Answer: Either a right of way or an easement

..

20

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

Feedback: Either a right of way or an easement Diff: 2 Type: ES Page Reference: 244c, h Skill: Recall 52) A right of way is an example of a leasehold estate that is specified for a period of time. a. True b. False Answer: b Diff: 2 Type: TF Page Reference: 244f Skill: Recall 53) If a person wanted to build a log cabin in a new subdivision. what might prevent him or her from doing so? a. Restrictive covenant b. Federal statute c. Prescription d. Easement e. Strata regulations Answer: a Diff: 2 Type: MC Page Reference: 244i Skill: Recall 54) When a person buys property but under the title is prevented from building certain types of structures or carrying on certain types of activities at that location, this is called what?

Answer: A restrictive covenant

..

21

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

Feedback: A restrictive covenant Diff: 2 Type: ES Page Reference: 244j Skill: Recall 55) Brenna owns two adjacent lakeside lots. She sells one lot to Burt and Ernie, with the provisions that they agree not to develop any commercial facilities on the land and to plant a row of rose bushes between the properties. The covenants are registered in the appropriate land title office. Which of the following is true? a. If Burt and Ernie do not plant the bushes as agreed, Brenna could sue them for private nuisance. b. If Burt and Ernie sell the property, the new owner would not have to plant the row of rose bushes as provided in the original contract. c. If Burt and Ernie sell the property, the new owner would have to plant the row of rose bushes as provided in the original contract. d. The registration of a covenant guarantees that it is valid interest that runs with the land. e. If Burt and Ernie sell their lot to Holly, Holly would not be bound by the covenant to refrain from developing commercial facilities.

Answer: b Diff: 2 Type: MC Page Reference: 244k Skill: Applied 56) Interests in land "run with the land." This means that: a. All interests in land give the owner of that interest the right to exclusive possession b. The interest in land is tied to the property itself and is therefore binding on subsequent owners of the land c. The fee simple and life estate are types of freehold estates d. A leasehold estate is a type of freehold estate e. Contracts for interests in land are governed by the privity of contract rule (i.e., the contract affects only the parties to the contract) Answer: b Diff: 1 Type: MC

..

22

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

Page Reference: 244l Skill: Recall 57) Which one the following is true with regard to real property law? a. Property includes only the land and not the buildings attached to it. b. A legal, registered restrictive covenant that is negative in nature "runs with the land" (i.e., it can bind subsequent owners who were not parties to the original contract under which it arose). c. A person who owns an interest less than an estate (e.g., a right of way) has a right to exclusive possession of that property. d. The "leasehold estate" interest in land is the greatest interest that can be granted and bestows the rights to use or sell the property. e. If two people own land as tenants in common, the surviving joint owner takes the interest of the deceased co-owner.

Answer: b Diff: 2 Type: MC Page Reference: 244m Skill: Recall 58) Soon after marrying, John and Mary purchased a home in a new development. After living there for a number of years, they wanted to distinguish their home from others on the street by changing the roofing material and colour and installing old-fashioned light poles in the front of the house. When they shared their plans with neighbours, they were told that they would not be allowed to make such changes even though they owned the home. In checking their original home purchase documents, they discovered a building scheme that addressed roofs and outdoor lighting, among other things, leaving them very disappointed. Explain what is meant by a building scheme and how it compares with a restrictive covenant.

Answer: A building scheme is similar to a restrictive covenant. In the case of a building scheme, all properties in a particular development have the same restrictions placed on them. A restrictive covenant has one property that benefits and one property that is restricted, while a building scheme benefits and restricts all properties. A building scheme has similar outcomes as municipal zoning, but it is done privately by the developer.

Feedback: A building scheme is similar to a restrictive covenant. In the case of a building scheme, all properties in a particular development have the same restrictions placed on them. A restrictive covenant has one property that benefits and one property that is

..

23

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

restricted, while a building scheme benefits and restricts all properties. A building scheme has similar outcomes as does municipal zoning, but it is done privately by the developer.

Diff: 2 Type: ES Page Reference: 244n Skill: Applied 59) Distinguish between a tenancy in common and a joint tenancy.

Answer: A tenancy in common is where two or more people share an estate on the same property, each owning an undivided interest. In a joint tenancy, on the other hand, each of the parties owning the property owns the whole property, and when one of them dies, the other retains the entire title by survivorship.

Feedback: A tenancy in common is where two or more people share an estate on the same property, each owning an undivided interest. In a joint tenancy, on the other hand, each of the parties owning the property owns the whole property, and when one of them dies, the other retains the entire title by survivorship.

Diff: 3 Type: ES Page Reference: 245a, e Skill: Recall 60) About 10 years into their marriage, Eric and Bev had saved enough money to buy an investment property. First they bought a duplex, which they held as joint tenants, and later they bought a building lot in Surrey, which they held as tenants-in-common. Eric's will provided that his interest in the duplex would go to their daughter, Lisa, and that his interest in the Surrey lot would go to their son, Max. Indicate the statement that accurately describes who will take what upon Eric's death. a. Lisa will get his interest in the duplex and Max will get the interest in the Surrey lot, just as the will states. b. Bev will get Eric's interest in the duplex but Max will take Eric's interest in the Surrey lot. c. Bev will get Eric's interest in the Surrey lot but Lisa will get his interest in the duplex. d. Bev will get both properties because she and Eric co-owned both. e. As the oldest son, Max will get Eric's interest in both properties.

Answer: b ..

24

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

Diff: 3 Type: MC Page Reference: 245b, h Skill: Applied 61) A husband and wife own Lot A as joint tenants and Lot B as tenants in common. The husband's will reads: "I leave Lot A to my son, John, and Lot B to my daughter, Mary."

Who takes what when the husband dies? a. The son, John, gets Lot A and the daughter, Mary, gets Lot B, just as their father wished and designated in his will. b. Mary will get her father's interest in Lot B, but John will get no interest in Lot A. c. Mary will get all of Lot B but John will not get Lot A because it was co-owned with the mother in joint tenancy, so the mother takes Lot A as the surviving joint tenant. d. Mary will get her father's interest in Lot B, but John will only get a life tenancy in Lot A. e. John will get Lot A but Mary will not get Lot B because it was co-owned with the mother as tenants in common, so the mother takes Lot B as the other tenant in common.

Answer: b Diff: 3 Type: MC Page Reference: 245c, i Skill: Applied 62) Jane had two teenage sons. Her husband died when the boys were ages 14 and 16.

She met Jack, who had a son and daughter by his first marriage. He was divorced from both a first and a second wife. Jane and Jack decided to marry. Once married, they bought a house as co-owners. Which of the following is true with regard to coownership? a. If Jane and Jack took the property as joint tenants and Jane decides that she does not want the "right of survivorship," she cannot change that type of ownership without Jack’s permission. b. Even under joint tenancy, when one dies, the other will face inheritance taxes and probate fees. c. If Jane and Jack co-own the property as joint tenants, Jane could control what happens to her share upon her death through a well-crafted will. d. A joint tenancy cannot be severed by one party selling his or her interest. e. If it is a joint tenancy and no changes are made, if Jane dies first then Jack gets the whole property.

..

25

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

Answer: e Diff: 2 Type: MC Page Reference: 245d Skill: Applied 63) When people have a tenancy in common and one of them dies, his or her share in the property goes to the survivor. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 245f Skill: Recall 64) With regard to interests in land, which one of the following statements is true? a. An easement in land is characterized by giving the owner of the estate exclusive possession of that property for some time. b. If Carol and Mary buy land and later use it to secure debt, possession of the property will be transferred to the creditor until the debt is repaid. c. If a joint tenant severs the joint tenancy, he can then will his interest in the land to whomever he chooses, and on his death the person named will take his interest. d. Tenancy in common is often used by families to get around inheritance taxes and probate fees. e. A joint tenant can sever the joint tenancy by bequeathing his interest in the property in a will, naming a third person as beneficiary.

Answer: c Diff: 2 Type: MC Page Reference: 245g Skill: Recall 65) The separation or division of joint ownership is referred to as severance. a. True b. False

..

26

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

Answer: a Diff: 1 Type: TF Page Reference: 245j Skill: Recall 66) Jack and Joan got married. It was the second marriage for both of them, and each brought one teenage child to the family. They bought a house in Langley as joint tenants.

They worked very hard to create a loving home, but when the children had disputes it affected the relationship between Jack and Joan because of their loyalty to their own child. Joan now thinks that it was a mistake to buy the house as joint tenants and wants her share in the house to go to her child in the event of her death. Which of the following will bring about such a change? a. Joan could have a will drawn up by which her share in the house would be left to her child. b. Joan could lease her interest in the house. c. Joan could sell her interest in her house to her uncle and have him sell it back to her. d. Joan could purchase an option agreement to lease her interest in the house to herself. e. Jack and Joan cannot sever the joint tenancy.

Answer: c Diff: 3 Type: MC Page Reference: 245k Skill: Applied 67) In January 2012, Adam sold his farm to his three sons: Bert (age 36), Charles (age 33), and Darwin (age 31), all married. The transfer of estate in fee simple form named them as joint tenants. Bert sold his interest to his younger sister, Eileen (age 27) in June 2012. In August 2012, Charles and Darwin were killed in a car accident. They died instantaneously. The law presumes that the older brother, Charles, died first. Which of the following is false? Read each separately. a. After the sale of Bert's interest to her, Eileen became a tenant in common in relation to her brothers Charles and Darwin. b. After the sale of Bert's interest to her, Eileen became a joint tenant in relation to her brothers Charles and Darwin. c. After the purchase of Bert’s interest in the farm, Eileen would be free to bequeath her interest to her heirs in her will. d. After the accident, Eileen is a co-owner with Darwin's heirs. ..

27

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

e. If Eileen becomes a tenant in common, she cannot identify the portion of the property that will belong to her exclusively.

Answer: b Diff: 3 Type: MC Page Reference: 245l Skill: Applied 68) A joint tenancy can be changed to a tenancy in common in a will. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 246a Skill: Recall 69) Distinguish a condominium from a cooperative in terms of ownership.

Answer: Condominium owners have a fee simple interest in their individual units and share an interest in the common elements of the development (e.g., hallways, elevators, recreational facilities). The units can be sold, mortgaged, or otherwise dealt with as any fee simple property. The sale or mortgage of one unit does not affect the other units in any way. Cooperatives are similar in that the property is owned together but instead of each member owning a fee simple interest in a specific part, the members own the whole property together and each share entitles them to occupy a specific apartment. They are like tenants in a building in which they are part owners.

Feedback: Condominium owners have a fee simple interest in their individual units and share an interest in the common elements of the development (e.g., hallways, elevators, recreational facilities). The units can be sold, mortgaged, or otherwise dealt with as any fee simple property. The sale or mortgage of one unit does not affect the other units in any way. Cooperatives are similar in that the property is owned together but instead of each member owning a fee simple interest in a specific part, the members own the whole property together and each share entitles them to occupy a specific apartment. They are like tenants in a building in which they are part owners.

Diff: 1 Type: ES

..

28

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

Page Reference: 246b, 248a Skill: Recall 70) An option to purchase agreement is: a. A contract by which an offeree promises to buy the property offered at a later date set in the contract b. A contract by which the offeror of property promises to hold his offer open for a period of time during which the offeree can accept the offer and the property can't be sold to another c. A contract that provides that a debtor will transfer title in property to a creditor as security for repayment of the debt d. A contract transferring the fee simple to a new owner e. A contract that provides that a seller will retain the title in the property until the buyer has made all of the required payments Answer: b Diff: 1 Type: MC Page Reference: 248b Skill: Recall 71) An option to purchase agreement is: a. A contract by which the offeror of property promises to hold his offer open for a period of time during which the offeree can accept the offer and the property can't be sold to another b. A contract that provides that a seller will retain the title in the property until the buyer has made all required payments c. A contract by which an offeree promises to buy the property offered at a later date set in the contract d. A contract transferring the fee simple to a new owner e. A contract that provides that a debtor will transfer title in property to a creditor as security for repayment of the debt Answer: a Diff: 1 Type: MC Page Reference: 248c Skill: Recall

..

29

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

72) What is the major advantage of the land titles system over the traditional land registry in Canada?

Answer: The land titles system guarantees title. That is, the land titles system generates a document defined as "certificate of indefeasible title." The traditional land registry does not. So what? The certificate of indefeasible title is conclusive evidence of who has title of a property in any court.

Feedback: The land titles system guarantees title. That is, the land titles system generates a document defined as "certificate of indefeasible title." The traditional land registry does not. So what? The certificate of indefeasible title is conclusive evidence of who has title of a property in any court.

Diff: 2 Type: ES Page Reference: 249a Skill: Recall 73) With respect to the land titles system of registering interests in land, which one of the following is true? a. This registration system is the same throughout Canada because the procedure has been set by the federal government to ensure a uniform method of registration. b. Mortgages, judgments, and easements need not be registered to protect those interests against third-party claims. Registration of such interests is voluntary and won't affect one's interest. c. When land is registered under the land titles system, it provides the advantage of guaranteed title and conclusive evidence of who has title to the property in any court. d. Most provinces in Canada have moved away from the land titles system in favour of the land registry system. e. The system exists to safeguard the documents; the government is not guaranteeing title.

Answer: c Diff: 2 Type: MC Page Reference: 249b Skill: Recall 74) Mr. Bucks owned a 10-hectare property in Langley. He subdivided the land into two 5-hectare lots. He decided to keep lot A for himself and to sell lot B. His friend and

..

30

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

neighbour, Ms. Goode, wanted lot B, so they made the following deal: For lot B, Goode would give Bucks $100 000, her car, a right of way of three metres along the east side of lot B to provide access to the highway, her promise not to remove any of the cedar trees (a row of which benefits lot A by blocking the view of a factory), and her promise to plant a 5-metre-long laurel hedge to block Bucks’ view of her driveway. All promises were registered. Which one of the following is true? a. If Ms. Goode sells lot B to Mr. Ho, Mr. Ho could cut down the cedar trees because the promise was part of the contract between Mr. Bucks and Ms. Goode to which Mr. Ho was not privy, and which therefore does not affect him. b. This kind of deal for land is not possible because it is too complicated. c. Ms. Goode would have to comply with all terms of this contract except for the part about the laurel hedge, because that is a positive covenant. d. If the right of way is properly registered in the land title office, it would bind subsequent purchasers of either lot A or lot B even though they were not privy to the original contract. e. With regard to the right of way, lot B is the dominant tenement and lot A is the servient tenement.

Answer: d Diff: 2 Type: MC Page Reference: 249c Skill: Applied 75) If a person habitually crosses property over a number of years with the permission of the owner, he can, in some provinces, acquire a right to cross that property even though there has been no actual documented grant of such a right. Acquiring such a right is this manner is called: a. Profit à prendre b. A dominant tenement c. Prescription d. An estate in land e. Adverse possession Answer: c Diff: 1 Type: MC Page Reference: 251a Skill: Recall

..

31

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

76) A right of way can be acquired by prescription when a person's habitual use of land is not interfered with by the owner. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 251b Skill: Recall 77) Explain what is meant by a person obtaining a right of way by prescription.

Answer: If a person is allowed to go across land without interference for a period of time (for example, 20 years), it will then be too late to stop that person from using the land. He or she acquires the right of way by prescription. Note: This is not be possible in land titles jurisdictions.

Feedback: If a person is allowed to go across land without interference for a period of time (for example, 20 years), it will then be too late to stop that person from using the land. He or she acquires the right of way by prescription. Note: This is not be possible in land titles jurisdictions.

Diff: 2 Type: ES Page Reference: 251c Skill: Recall 78) A mortgagor finances the purchase of property, holds title to it until it is paid for, and can take possession in the event of default. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 252a Skill: Recall

..

32

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

79) Discuss the principle of the equity of redemption as developed by the Court of Chancery, and indicate its importance in the field of mortgage law today.

Answer: The whole nature of a mortgage transaction is that it is a dead transfer of real property to secure a loan by the mortgagor or debtor to the mortgagee/creditor. At common law, the property was transferred to the creditor as security, and if there was a default, the creditor just kept the property and the debt was still owed. The Court of Chancery developed the concept of an equity of redemption. That is, because this was primarily a loan transaction, the debtor still had a right in the property even after default, and that right was a right to redeem the property by paying what was owed. This right to redeem the property becomes an equitable interest in the property, which has a value (the value of the property minus what is owing). This is generally referred to as the equity one has in property.

Because this is an interest in property, the equity of redemption can also be used to secure further debt. This is an equitable mortgage, and the mortgagor still retains a right to redeem that equity of redemption. (And so on and so forth for third and fourth mortgages.) In the event of a default, the option available to the mortgagee is to have the right to redeem the property foreclosed by the courts. This involves the debtor being given a period of time within which he must redeem; if he fails to do so, he will be forever foreclosed from exercising that right to redeem. Thus, the concept of the equity of redemption and the process of foreclosure are central to the field of mortgage law today.

Even though in land titles jurisdictions, the title doesn't the change hands, the rights established are essentially the same, and students should be able to explain how this equity of redemption works within that structure.

Feedback: The whole nature of a mortgage transaction is that it is a dead transfer of real property to secure a loan by the mortgagor or debtor to the mortgagee/creditor. At common law, the property was transferred to the creditor as security, and if there was a default, the creditor just kept the property and the debt still owed. The Court of Chancery developed the concept of an equity of redemption. That is, because this was primarily a loan transaction, the debtor still had a right in the property even after default, and that right was a right to redeem the property by paying what was owed. This right to redeem the property becomes an equitable interest in the property, which has a value (the value of the property minus what is owing). This is generally referred to as the equity one has in property. Because this is an interest in property, the equity of redemption can also be used to secure further debt. This is an equitable mortgage, and the mortgagor still retains a right to redeem that equity of redemption. (And so on and so forth for third and fourth mortgages.) In the event of a default, the option available to the mortgagee is to have the right to redeem the property foreclosed by the courts. This involves the debtor being given a period of time within which he must redeem; if he fails to do so, he will be forever foreclosed from exercising that right to redeem. Thus, the concept of the equity of redemption and the process of foreclosure are central to the field of mortgage law today.

Even though in land titles jurisdictions, the title doesn't the change hands, the rights established are essentially the same, and students should be able to explain how this equity of redemption works within that structure.

..

33

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

Diff: 3 Type: ES Page Reference: 252b-253a Skill: Recall 80) Explain what is meant by the equity of redemption in a mortgage transaction.

Answer: The equity of redemption was a right created by the Court of Chancery that gave the debtor the right to reclaim the property by paying what was owed even after default. The value of the equity of redemption is the market value of the property minus the amount that is owed on it—hence the term "equity."

Feedback: The equity of redemption was a right created by the Court of Chancery that gave the debtor the right to reclaim the property by paying what was owed even after default. The value of the equity of redemption is the market value of the property minus the amount that is owed on it—hence the term "equity."

Diff: 3 Type: ES Page Reference: 252c Skill: Recall 81) The term "equity" is often used to refer to the value left in an asset after what is owed on it is subtracted. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 252d Skill: Recall 82) Explain what is foreclosed in the foreclosure proceedings related to mortgages.

Answer: The debtor's right to redeem the real property is foreclosed or ended by the foreclosure process.

..

34

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

Feedback: The debtor's right to redeem the real property is foreclosed or ended by the foreclosure process.

Diff: 2 Type: ES Page Reference: 252e Skill: Recall 83) Explain what is used as security in a mortgage transaction.

Answer: The title to the property is held by the creditor as security for the debt. Note that in a land title system, the title doesn't actually change hands, but the effect is the same.

Feedback: The title to the property is held by the creditor as security for the debt. Note that in a land title system, the title doesn't actually change hands, but the effect is the same.

Diff: 1 Type: ES Page Reference: 252f Skill: Recall 84) Consider the various remedies that are available to the mortgagee in the event of a default, and discuss the effectiveness of each.

Answer: This answer will vary to some extent from jurisdiction to jurisdiction. Essentially, the main remedies upon default are foreclosure, suing, taking possession of the property, and exercising the power of sale or judicial sale. To understand the effectiveness of these remedies, it is important to consider a situation where more than the creditor/mortgagee and debtor/mortgagor are involved. Usually there is a second or third mortgage or other claims against the property. In those circumstances, the power of sale or judicial sale becomes very important. The power of sale is included as a term in the mortgage agreement itself and can be exercised when the debtor is in default without a court order, like seizing a car under a chattel mortgage. In those jurisdictions where it is appropriate, the judicial sale is normally a better remedy from the creditor's point of view, since the court is involved and the property is being sold under court order. The first mortgagee will usually get an order of foreclosure, which sets a time limit within which the debt of the debtor must be paid and the property redeemed. If it is not done, all other interests below (second and third mortgages, etc.) will also be foreclosed. It is important during that time set for redemption that the property be sold and the first mortgagee's interest paid off, so any excess will be available to pay the second and third mortgagees if possible. So the exercise of the power of sale or the judicial sale process is the way that

..

35

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

the interests of the second and third mortgagees are protected as much as possible. Also, when the property is foreclosed, that is normally the only remedy available to that creditor, and so there is no right for the mortgagee who forecloses to sue for a deficit. The exercise of the power of sale or the judicial sale process allows the creditors to sue the debtor/mortgagor for any shortfall. If the property is foreclosed, all other creditors are limited to their right to sue. But this remedy is usually meaningless, since the only real asset of the mortgagor was the property foreclosed.

The key here is for students to demonstrate that they understand that the most effective remedy is the power of sale or the judicial sale process, which does the best job of protecting the interest of creditors and mortgagees where the value of the property is not enough to cover all claims. Taking possession of the property is not very attractive for the creditor/mortgagee, because along with it goes an obligation to be responsible for upkeep and protection and the requirement of accounting for any income. Foreclosure is usually only a benefit to the first mortgagee, and it must wait during the redemption period.

Suing will not be effective, because the mortgagor will not have any funds (that's why the mortgage is in default), and you can't do this and foreclose as well. Students should at least show an understanding of the main points discussed here in their answers.

Feedback: This answer will vary to some extent from jurisdiction to jurisdiction.

Essentially, the main remedies upon default are foreclosure, suing, taking possession of the property, and exercising the power of sale or judicial sale. To understand the effectiveness of these remedies, it is important to consider a situation where more than the creditor/mortgagee and debtor/mortgagor are involved. Usually there is a second or third mortgage or other claims against the property. In those circumstances, the power of sale or judicial sale becomes very important. The power of sale is included as a term in the mortgage agreement itself and can be exercised when the debtor is in default without a court order, like seizing a car under a chattel mortgage. In those jurisdictions where it is appropriate, the judicial sale is normally a better remedy from the creditor's point of view, since the court is involved and the property is being sold under court order. The first mortgagee will usually get an order of foreclosure, which sets a time limit within which the debt of the debtor must be paid and the property redeemed. If it is not done, all other interests below (second and third mortgages, etc.) will also be foreclosed. It is important during that time set for redemption that the property be sold and the first mortgagee's interest paid off, so any excess will be available to pay the second and third mortgagees if possible. So the exercise of the power of sale or the judicial sale process is the way that the interests of the second and third mortgagees are protected as much as possible. Also, when the property is foreclosed, that is normally the only remedy available to that creditor, and so there is no right for the mortgagee who forecloses to sue for a deficit. The exercise of the power of sale or the judicial sale process allows the creditors to sue the debtor/mortgagor for any shortfall. If the property is foreclosed, all other creditors are limited to their right to sue. But this remedy is usually meaningless, since the only real asset of the mortgagor was the property foreclosed.

The key here is for students to demonstrate that they understand that the most effective remedy is the power of sale or the judicial sale process, which does the best job of protecting the interest of creditors and mortgagees where the value of the property is not

..

36

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

enough to cover all claims. Taking possession of the property is not very attractive for the creditor/mortgagee, because along with it goes an obligation to be responsible for upkeep and protection and the requirement of accounting for any income. Foreclosure is usually only a benefit to the first mortgagee, and it must wait during the redemption period. Suing will not be effective, because the mortgagor will not have any funds (that's why the mortgage is in default), and you can't do this and foreclose as well. Students should at least show an understanding of the main points discussed here in their answers.

Diff: 3 Type: ES Page Reference: 252g, 253b, 254b Skill: Applied 85) In a second or third mortgage, it is the right to redeem that is mortgaged or transferred as security. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 253c Skill: Recall 86) Explain what is mortgaged in a second mortgage.

Answer: The creditor is given the right to redeem the first mortgage as security for a second mortgage.

Feedback: The creditor is given the right to redeem the first mortgage as security for a second mortgage.

Diff: 2 Type: ES Page Reference: 253d Skill: Recall 87) Mr. Hoo granted a first mortgage on his property to Vancouver Trust as security for a loan of $110 000 and a second mortgage to Hong Kong Bank as security for a loan of $25 000. Which of the following statements is false?

..

37

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

a. If Hoo were to default on his first mortgage, Vancouver Trust could start the foreclosure process. b. If Hoo were to default on his first mortgage and the property was sold under court order, the proceeds from that sale would go first to Vancouver Trust, second to Hong Kong Bank, and the remainder, if any, to Hoo. c. If Hoo were to default on his second mortgage only and the second mortgagee foreclosed, then the first mortgagee and Hoo himself would lose their interests in the property. d. Hoo has given the fee simple interest in his property to Vancouver Trust; he has given Hong Kong Bank only his equity of redemption. e. If Hoo were to default on his first mortgage, his creditors could ask that the court order the property to be sold to avoid foreclosure.

Answer: c Diff: 2 Type: MC Page Reference: 253e Skill: Applied 88) The power to foreclose creates risk for the second mortgagee. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 253f Skill: Recall 89) A second or third mortgagee is not affected if the first mortgagee obtains an order of foreclosure. a. True b. False Answer: b Diff: 3 Type: TF Page Reference: 253g Skill: Recall

..

38

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

90) Nelson granted a first mortgage on his property to Vancouver Trust as security for a loan of $110 000, and a second mortgage to Hong Kong Bank as security for a loan of $25 000. Which of the following statements is false? Read each separately. a. Nelson has given Vancouver Trust his fee simple interest and Hong Kong Bank his right to redeem, and he has retained a right to redeem. b. If Nelson were to default on his first mortgage, Vancouver Trust could petition the court to set a period of time within which the debtor must pay off the mortgage (redeem his title). c. If Nelson were to default on his first mortgage, at the first hearing he would likely be granted a redemption period within which he could pay his debt and thus avoid foreclosure. d. If Nelson is in default on his first mortgage, Vancouver Trust has a contractual right to sell. e. If Nelson were to default on his second mortgage only and the second mortgagee foreclosed, then the first mortgagee and Nelson himself would lose their interests in the property.

Answer: e Diff: 2 Type: MC Page Reference: 253h Skill: Applied 91) Where a first mortgagee forecloses in the event of a default, explain what the appropriate course of action would be for a second or third mortgagee.

Answer: They must be prepared to either buy out or pay off those prior to them in title—for example, the first mortgagee—or ask the court for an order of judicial sale.

Feedback: They must be prepared to either buy out or pay off those prior to them in title—for example, the first mortgagee—or ask the court for an order of judicial sale.

Diff: 3 Type: ES Page Reference: 253i, l Skill: Recall 92) Which of the following is false with regard to mortgages on land? a. The right to foreclose is a remedy from the court of equity that allowed the mortgagee the right to end the mortgagor's equitable right to redeem the property after default. ..

39

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

b. If the borrower (the mortgagor) is paying and otherwise honouring the terms of the mortgage, he is entitled to no interference with his use of the property by the mortgagee. c. The courts of equity have given the borrower (mortgagor) the right to redeem his property even after default if he makes the appropriate payments. d. A mortgage is a contract between a lender and a borrower that provides that the borrower not only gives the lender his promise to pay but also grants the lender title to his real property to hold as security. e. A second or third mortgagee is not affected if the first mortgagee obtains an order of foreclosure.

Answer: e Diff: 2 Type: MC Page Reference: 253j Skill: Recall 93) Which of the following is false with regard to the nature of mortgages? a. A second mortgage is referred to as an equitable mortgage because it is the equity of redemption that is transferred to the mortgagee as security. b. The land titles system of land registration provides that the mortgagee does not show up as the registered owner on the state of title certificate but merely as the holder of a charge against the property. c. In the event of default, the first mortgagee must wait until the end of the redemption period to ask the court to make the foreclosure absolute if payment has not been made. d. In the case of default, the property cannot be sold by a second mortgagee until the end of the redemption period. e. Unlike an agreement for sale, under which an owner retains title to his property until the purchaser makes all payments, a mortgage is a document by which the owner conveys title to a lender.

Answer: d Diff: 2 Type: MC Page Reference: 253k Skill: Recall 94) Explain how a judicial sale or order can have the effect of shortening the foreclosure period.

..

40

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

Answer: Foreclosure takes place in a two-stage process. The first step is the setting of the time period in which the property must be redeemed, followed in the absence of such redemption with an order absolute. During that time period, if an order for judicial sale has been granted, the property may be sold by a second or third mortgagee, thus shortening the period of time within which the mortgagor must act to redeem his or her property.

Feedback: Foreclosure takes place in a two-stage process. The first step is the setting of the time period in which the property must be redeemed, followed in the absence of such redemption with an order absolute. During that time period, if an order for judicial sale has been granted, the property may be sold by a second or third mortgagee, thus shortening the period of time within which the mortgagor must act to redeem his or her property.

Diff: 3 Type: ES Page Reference: 253m Skill: Recall 95) A judicial sale does not affect a mortgagor's right to redeem the property. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 253n, 254a Skill: Recall 96) The following are the mortgages registered against Holly's Holly Farm when it defaulted, and the amounts owed on each: first, in favour of the Royal Bank for $100 250; second, in favour of Kits Credit Union for $50 250; third, in favour of Aunt Suzy for $25 250. The Royal Bank petitioned for foreclosure. Which of the following is false? a. If the Royal Bank eventually received the order absolute of foreclosure, the interest in the land of all those ranking below it would be lost because it forecloses the equity of redemption and that is the security the others had taken. b. Any of the parties to the action can ask the court for a judicial sale. c. If the property is sold by way of judicial sale, the equity of redemption is extinguished. d. If the property is sold by judicial sale and there is not enough to pay all mortgagees, those not paid can sue for the difference.

..

41

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

e. If the property is sold by way of a judicial sale, and the first and second mortgagees are paid in full, but the third is not paid in full, the third is out of luck; Aunt Suzy has no further remedy.

Answer: e Diff: 2 Type: MC Page Reference: 254c Skill: Applied 97) Consider the following statements regarding the nature of the landlord–tenant relationship. Indicate the true one. a. A leasehold is one kind of interest less than an estate. b. Leases are only available in residential tenancies. c. The term of a lease must be for a definite period of time. d. An oral lease is never enforceable. e. A characteristic of leaseholds is that they grant to the holder the right of exclusive possession.

Answer: e Diff: 2 Type: MC Page Reference: 255a Skill: Recall 98) A periodic lease means: a. A lease in which the parties agree to no set termination date but to the rental period being automatically renewed b. A term lease c. A lease created when a tenant is over-holding after the termination date of his lease without the landlord's permission d. A tenancy created when an owner of property allows a purchaser to take possession before title transfers to him e. A lease granting the lessee exclusive possession for one year Answer: a Diff: 1 Type: MC

..

42

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

Page Reference: 255b Skill: Recall 99) Which of the following is incorrect in relation to commercial tenancies? a. A lease does not grant an interest in land. b. The Statute of Frauds requires that leases be evidenced in writing to be enforceable. c. Most jurisdictions consider a lease of less than three years to be enforceable even without writing. d. A leasehold interest will run with the land if it is properly registered. e. If construction interferes with the tenant’s access to the property, this is a breach to the tenant’s right to quiet enjoyment.

Answer: a Diff: 2 Type: MC Page Reference: 255c, 256c Skill: Recall 100) Which of the following is false with regard to the law of landlord and tenant, lessor and lessee? a. The law of frustration applies to residential leases. b. A lease agreement is a contract that grants an estate in land (i.e., it gives the lessee exclusive possession for a period of time). c. Residential properties are governed by statute and vary from jurisdiction to jurisdiction. d. If a commercial lessee defaults on his rent, the lessor has the power to seize the lessee's property left on the premises. e. A tenancy is primarily contractual and therefore does not "run with the land"; it does not bind a purchaser of the building.

Answer: e Diff: 2 Type: MC Page Reference: 255d Skill: Recall 101) Joe verbally agreed with his landlord to a two-year lease for an office, and then only five months later, the property was sold to somebody else. The new owners immediately

..

43

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

gave Joe three months to vacate the premises. Explain his legal rights under these circumstances.

Answer: Because this is a two-year lease, it need not be evidenced in writing. It runs with the land and binds the new owners. Note that this may be subject to the local legislation in your province.

Feedback: Because this is a two-year lease, it need not be evidenced in writing. It runs with the land and binds the new owners. Note that this may be subject to the local legislation in your province.

Diff: 2 Type: ES Page Reference: 255e Skill: Applied 102) Which of the following is one of the implied rights of a lessee of a commercial tenancy? a. The lessor will repair unfurnished premises. b. The lessee will deliver vacant possession to the new tenant at the time they agreed the lease period would start. c. The lessee will give the lessor possession. d. The lessee can use and enjoy the premises for all usual purposes without physical interference from the lessor. e. The lessor is assured against the interference by a third party.

Answer: d Diff: 1 Type: MC Page Reference: 256a Skill: Recall 103) Explain what is meant by a landlord's obligation to provide quiet enjoyment.

Answer: It's the landlord's obligation to ensure that nothing happens to interfere with the tenant's use of the property for the purpose for which it was let.

..

44

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

Feedback: It's the landlord's obligation to ensure that nothing happens to interfere with the tenant's use of the property for the purpose for which it was let.

Diff: 2 Type: ES Page Reference: 256b Skill: Recall 104) Blasting going on nearby that interferes with the tenant’s work or sleep, construction that interferes with the tenant’s access to the office, or a major leak that makes the premises uninhabitable are all breaches of a tenant’s right to quiet enjoyment. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 256d Skill: Recall 105) Marian met with the owner of a warehouse and contracted for factory space for a two-year term. The amount to be paid ($2400 yearly) and the premises were made clear, but nothing else was discussed. The law, however, implies some terms. Which of the following is a term of the contract? a. The landowner has no obligation to provide vacant possession at the time the lease period is to start. b. The premises will be reasonably fit for Marian’s purpose. c. The tenant is responsible for normal wear and tear. d. The landlord need not provide quiet enjoyment of the premises. e. Usually neither the landlord nor the tenant has an obligation to make repairs where normal wear and tear is involved.

Answer: e Diff: 2 Type: MC Page Reference: 256e Skill: Applied 106) In a three-year commercial lease, the tenant must give the landlord two months’ notice before leaving.

..

45

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 256f Skill: Recall 107) Term lease describes a period-to-period rental. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 256g Skill: Recall 108) Explain when the notice must be given to vary or terminate a periodic tenancy agreement.

Answer: One clear rental period notice must be given. In a month-to-month tenancy, that's one full month. The notice must be given before the expiration of the prior period (e.g., April 30 to be effective at the end of the next rental period, May 31). (May vary with jurisdiction.)

Feedback: One clear rental period notice must be given. In a month-to-month tenancy, that's one full month. The notice must be given before the expiration of the prior period (e.g., April 30 to be effective at the end of the next rental period, May 31). (May vary with jurisdiction.)

Diff: 2 Type: ES Page Reference: 256h-257a Skill: Recall 109) When a landlord seizes the tenant's property for failure to pay rent, this is called what?

Answer:

..

46

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

Distraint Feedback: Distraint Diff: 2 Type: ES Page Reference: 257b Skill: Recall 110) "When a tenant has signed a two-year lease and then for some reason finds himself in the position where he has to leave, the landlord has an obligation to try to rent out the premises to someone else." Explain the accuracy of this statement.

Answer: Except where otherwise created by statute (which is often the case), a landlord has no such obligation. The tenant is obligated for the lease period, and if he chooses to leave earlier, that does not relieve him of his obligation to pay.

Feedback: Except where otherwise created by statute (which is often the case), a landlord has no such obligation. The tenant is obligated for the lease period, and if he chooses to leave earlier, that does not relieve him of his obligation to pay.

Diff: 2 Type: ES Page Reference: 257c Skill: Recall 111) A lease longer than three years must be registered in the land registry to be effective against any subsequent owner, whether the land is sold or even against a mortgagee or other creditor having a claim against the property. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 258 Skill: Recall 112) Who is responsible for the repair of the premises in a normal rental agreement?

Answer: ..

47

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

Without legislation to the contrary, the tenant is responsible for any major damage he or she causes; otherwise, repairs are the landlord's responsibility, although the landlord may only be required to make such repairs when not to do so would seriously interfere with the tenant's ability to use those premises.

Feedback: Without legislation to the contrary, the tenant is responsible for any major damage he or she causes; otherwise, repairs are the landlord's responsibility, although the landlord may only be required to make such repairs when not to do so would seriously interfere with the tenant's ability to use those premises.

Diff: 2 Type: ES Page Reference: 259a Skill: Recall 113) The landlord is reluctant to rent the premises to three male students. He wants to impress upon them that they have certain responsibilities as well as certain rights when they become tenants. He tells them the following as if they were statements of the law.

Which of the following is not accurate as to their rights and obligations as tenants? a. They must maintain ordinary cleanliness standards throughout the premises. b. They must repair any damage to the premises that they cause or that any of their guests might cause. c. Each of them must pay one month’s rent in advance so the landlord has three months' rent as a security deposit. d. If they breach their lease and leave early, the landlord has the right to find new tenants to reduce his damages. e. If the landlord sells the property, the new owner is bound by the terms of any lease, including the obligation to repay the security deposit.

Answer: c Diff: 2 Type: MC Page Reference: 259b Skill: Applied 114) In some jurisdictions, the landlord is permitted to take a pet damage deposit (where pets are allowed) in addition to the security deposit. a. True b. False Answer: a

..

48

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

Diff: 1 Type: TF Page Reference: 259c Skill: Recall 115) In Ontario, both the tenant and the landlord must give 60 days’ notice of termination of tenancy. a. True b. False Answer: a Diff: 2 Type: TF Page Reference: 260 Skill: Recall 116) The various human rights statutes in place also apply to the provision of rental accommodation; complaints with respect to discrimination in providing this service can be brought to the appropriate officer or board empowered to enforce the statute. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 261a Skill: Recall 117) Which level of government has jurisdiction to pass laws to protect the environment? a. Provincial b. Federal c. Municipal d. All of the above e. Neither the federal, provincial, nor municipal government has jurisdiction.

Answer: d Diff: 1 Type: MC Page Reference: 261b

..

49

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

Skill: Recall 118) The federal government has exclusive legislative power when it comes to protecting the environment. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 261c Skill: Recall 119) Some businesses may be subject to both federal and provincial regulations. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 261d Skill: Recall 120) Which levels of government have the power to pass legislation dealing with the environment?

Answer: Federal, provincial, territorial, and municipal levels, depending on the types of activities or the areas involved Feedback: Federal, provincial, territorial, and municipal levels, depending on the types of activities or the areas involved Diff: 1 Type: ES Page Reference: 261e Skill: Recall 121) Environmental concerns have become a very important aspect of carrying on business. a. True ..

50

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

b. False Answer: a Diff: 1 Type: TF Page Reference: 261f Skill: Recall 122) Which one of the following indicates what is meant by riparian rights? a. Consumer protection laws are referred to as "riparian rights." b. This is where someone uses his property in such a way that it interferes with his neighbours' use of their property. c. This is where someone brings something essentially dangerous onto his property and it escapes, causing damage to a neighbour's property. d. A person has the right when living downstream to water of a certain quality and quantity. e. A farmer can sue a polluter if that pollution interferes with the maturing or ripening of his crop.

Answer: d Diff: 2 Type: MC Page Reference: 261g Skill: Recall 123) People living on rivers in Canada are entitled to have the water come to them in undiminished quality and quantity. This is an expression of what kind of rights? a. Natural law b. Riparian rights c. Real property rights d. Strict liability rights e. Environmental rights Answer: b Diff: 2 Type: MC Page Reference: 261h Skill: Recall

..

51

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

124) Riparian rights refer to a person living downstream on a river having the right to protect the quality and quantity of the water flowing to him or her. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 261i Skill: Recall 125) Explain what is meant by riparian rights.

Answer: A person living on a river has the right to have water come to them in undiminished quantity and quality.

Feedback: A person living on a river has the right to have water come to them in undiminished quantity and quality.

Diff: 2 Type: ES Page Reference: 261j Skill: Recall 126) Explain how the tort of private nuisance is an example of environment protection.

Answer: This allows a private citizen to seek a remedy when a neighbour interferes with the person’s enjoyment of his or her property through the escape of water, noise, smoke, odours, etc.

Feedback: This allows a private citizen to seek a remedy when a neighbour interferes with the person’s enjoyment of his or her property through the escape of water, noise, smoke, odours, etc.

Diff: 2 Type: ES Page Reference: 261l Skill: Applied

..

52

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

127) The private right to sue for private nuisance was reinforced with the Supreme Court of Canada decision in St. Lawrence Cement Inc. v. Barrette in Quebec. Which of the following is incorrect related to this case? a. The court gave a broader definition to neighbour, giving all of the people affected the right of action. b. The common law doctrine of nuisance would have led to a different decision. c. This action went forward as a class action, allowing the burden of bringing action to be spread much more widely. d. As a result of this case, private nuisance is a much more effective tool. e. St. Lawrence Cement Inc. was found liable.

Answer: b Diff: 2 Type: MC Page Reference: 262 Skill: Applied 128) Environmental legislation is not concerned with which of the following? a. Consumer protection b. Pollution of the environment c. Depletion of natural resources d. Disposal of dangerous products and chemicals e. Contamination of the waterways Answer: a Diff: 1 Type: MC Page Reference: 263-265 Skill: Recall 129) What is the general requirement of the Canadian Environmental Assessment Act? Answer: All projects that the federal government has control over (through granting licences, permits, and granting funding, etc.) must go through a formal environmental assessment process.

..

53

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

Feedback: All projects that the federal government has control over (through granting licences, permits, and granting funding, etc.) must go through a formal environmental assessment process.

Diff: 2 Type: ES Page Reference: 264 Skill: Recall 130) The provincial governments can create legislation that controls hazardous materials. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 265a Skill: Recall 131) Most provinces have set up environmental protection agencies or departments.

Indicate three functions of these departments.

Answer: Grant permits with restrictions and requirements, supervise discharge and storing of waste, perform inspections and investigations, hold hearings, levy fines Feedback: Grant permits with restrictions and requirements, supervise discharge and storing of waste, perform inspections and investigations, hold hearings, levy fines Diff: 2 Type: ES Page Reference: 265b Skill: Recall 132) When pollution takes place, the law is clear that the polluter will pay for all cleanup obligations. a. True b. False Answer: b Diff: 2 Type: TF ..

54

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

Page Reference: 265c Skill: Recall 133) Explain who is liable for paying for pollution that takes place in a commercial situation.

Answer: In general, the polluter must pay, but this is not always the situation. “Brownfields” legislation, which deals with the cleanup of contaminated commercial sites, will often impose cleanup obligations on whoever owns the land. The legislation may even require that former owners, the government, and the actual user who contaminated the property in the first place share the cleanup responsibilities.

Feedback: In general, the polluter must pay, but this is not always the situation.

“Brownfields” legislation, which deals with the cleanup of contaminated commercial sites, will often impose cleanup obligations on whoever owns the land. The legislation may even require that former owners, the government, and the actual user who contaminated the property in the first place share the cleanup responsibilities.

Diff: 2 Type: ES Page Reference: 265d Skill: Recall 134) What is an insurance premium?

Answer: This is basically a fee paid by a client to an insurer to cover a specific type of risk such as fire damage or lost property.

Feedback: This is basically a fee paid by a client to an insurer to cover a specific type of risk such as fire damage or lost property.

Diff: 1 Type: ES Page Reference: 266a Skill: Recall 135) For the purposes of vicarious liability and authority to contract, an insurance broker can still be considered an agent of the insurer when it appears to the insured that the broker represents the insurance company. a. True

..

55

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

b. False Answer: a Diff: 1 Type: TF Page Reference: 266b Skill: Recall 136) An all-risk insurance policy is likely to contain exclusions. a. True b. False Answer: a Diff: 2 Type: TF Page Reference: 266c Skill: Recall 137) Explain what is meant by an insurable interest.

Answer: An insurable interest is an interest that the insured has in the property or matter being insured, such that if the insured-against event takes place, he or she will be economically hurt, resulting in the insurance payment compensating him or her for a loss (indemnity) rather than being a windfall profit.

Feedback: An insurable interest is an interest that the insured has in the property or matter being insured, such that if the insured-against event takes place, he or she will be economically hurt, resulting in the insurance payment compensating him or her for a loss (indemnity) rather than being a windfall profit.

Diff: 2 Type: ES Page Reference: 266d-267d Skill: Recall 138) Explain what is meant by an insurable interest and how the existence of this principle affects the right to collect on an insurance claim.

Answer:

..

56

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

One of the most important aspects of insurance law is the requirement that the person taking out insurance have an insurable interest in the thing insured. Students should demonstrate an understanding of what an insurable interest is and why it is so important.

The insurable interest requirement is simply that it be clear that the person purchasing insurance coverage will lose something if the insured-against event happens. Thus, when the insurance is paid, there is no windfall to the person taking out the insurance; rather, there is simply compensation for a loss. Otherwise, it would be like gambling. You place a wager that the house in question will burn down, and when it does, you win. Of course, you don't win, and the insurance is just a way of spreading the risk; however, if you could insure something you didn't have such an interest in, such as your neighbour's house, you could get a windfall, and it would be like gambling.

Students must first show they understand this and then could explain how insurable interest works in different situations. Where you have an interest in property and insure it, you can collect only what you can lose (to the limit of that interest). Where life insurance is involved, the extent of the interest is assumed to be the amount of insurance coverage purchased. With a relative, the presence of an insurable interest is clear, but with others, permission is normally needed. Often the life of key employees or the principal of the business will be insured to cover against the loss to the business were that key employee to die suddenly.

Feedback: One of the most important aspects of insurance law is the requirement that the person taking out insurance have an insurable interest in the thing insured. Students should demonstrate an understanding of what an insurable interest is and why it is so important. The insurable interest requirement is simply that it be clear that the person purchasing insurance coverage will lose something if the insured-against event happens.

Thus, when the insurance is paid, there is no windfall to the person taking out the insurance; rather, there is simply compensation for a loss. Otherwise, it would be like gambling. You place a wager that the house in question will burn down, and when it does, you win. Of course, you don't win, and the insurance is just a way of spreading the risk; however, if you could insure something you didn't have such an interest in, such as your neighbour's house, you could get a windfall, and it would be like gambling.

Students must first show they understand this and then could explain how insurable interest works in different situations. Where you have an interest in property and insure it, you can collect only what you can lose (to the limit of that interest). Where life insurance is involved, the extent of the interest is assumed to be the amount of insurance coverage purchased. With a relative, the presence of an insurable interest is clear, but with others, permission is normally needed. Often the life of key employees or the principal of the business will be insured to cover against the loss to the business were that key employee to die suddenly.

Diff: 2 Type: ES Page Reference: 266e, 267e, 269b Skill: Recall

..

57

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

139) Which of the following is true in relation to insurable interest? a. Shareholders do not have a sufficient interest in the assets of a corporation to take out insurance on them and receive compensation if they are damaged or destroyed. b. If Chuck takes out insurance on his ex-wife’s home and it burns down, he will be able to collect from the insurance company. c. If Joe has an insurable interest in property, he will likely enjoy an insurance windfall in the event of a loss of that property. d. If Sam arranges a comprehensive, all-risk insurance policy, this will guarantee that he holds an insurable interest in the insured property. e. If Mr. Cole takes out the proper insurance on his home and it burns down, he will be able to collect from the insurance company.

Answer: e Diff: 2 Type: MC Page Reference: 266f-267f Skill: Applied 140) Which of the following is not an appropriate matter for insurance coverage? a. Insurance against lost profits b. Insurance against damage to property c. Insurance against fire in your next-door neighbour’s home d. Insurance against loss of life e. Insurance against fire in a home Answer: c Diff: 2 Type: MC Page Reference: 267a Skill: Recall 141) Insurable interest means that the insured must have a personal stake or interest in whatever is being insured and can only claim on the insurance to the extent of the value of that interest. a. True b. False

..

58

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

Answer: a Diff: 1 Type: TF Page Reference: 267b Skill: Recall 142) An insurable interest refers to the fact that the insurance company has to have been paid a premium so that it has an interest in the contract. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 267c Skill: Recall 143) A person owns a half interest in a house valued at $200 000 and has insurance on that property in the amount of $400 000. If the house burns down, causing a loss of $100 000, how much will that person collect? a. $50 000 b. $200 000 c. $1000 d. $400 000 e. Nothing Answer: a Diff: 2 Type: MC Page Reference: 267g Skill: Applied 144) Which one of the following explains the effect of a co-insurance clause? a. A co-insurance clause provides for the insurance claim to be split between two or more beneficiaries. b. A co-insurance clause provides for several different properties to be insured under the same policy.

..

59

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

c. A co-insurance clause provides for the insurance company to only pay a percentage of any loss. d. A co-insurance clause provides for more than one person to pay the premium. e. A co-insurance clause provides for the insurance company to arrange its own insurance on a large policy.

Answer: c Diff: 2 Type: MC Page Reference: 267h Skill: Recall 145) Which of the following is correct with respect to the principle of subrogation as it relates to insurance law? a. Subrogation refers to the principle that the insured cannot benefit from his own wrongdoing. b. Subrogation refers to the principle that, if an insurance company pays out on a policy, it assumes all of the rights of the insured against the person causing the loss. c. Subrogation refers to the principle that, if the insured does not take out enough insurance, he will be taken to be responsible for a portion of any loss incurred. d. Subrogation refers to the insured's right to demand payment from the insurance company if the insured-against event takes place. e. Subrogation refers to the practice of insurance companies taking out their own insurance where a policy involves potentially large losses or high risk.

Answer: b Diff: 2 Type: MC Page Reference: 268a Skill: Recall 146) Once it has paid out on the loss, an insurance company can step into the shoes of the insured and pursue a claim against the person who caused the loss. a. True b. False Answer: a Diff: 1 Type: TF

..

60

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

Page Reference: 268b Skill: Recall 147) An insurance company's right to subrogation refers to its right to refuse to pay where the insured is responsible for his or her own loss. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 268c Skill: Recall 148) Joe was a customer in Sam's store when he carelessly dropped a very expensive vase, but he was relieved when he found that Sam had insurance to cover the loss.

Explain Joe's legal position in these circumstances.

Answer: Joe should not be so relieved. When the insurance company pays for the loss, it steps into Sam's shoes (subrogation) and could sue Joe, just like Sam could have for Joe’s negligence, and Joe may be required to pay.

Feedback: Joe should not be so relieved. When the insurance company pays for the loss, it steps into Sam's shoes (subrogation) and could sue Joe, just like Sam could have for Joe’s negligence, and Joe may be required to pay.

Diff: 3 Type: ES Page Reference: 268d Skill: Applied 149) Business interruption insurance is designed to cover which of the following situations? a. A person owns a restaurant business and the restaurant is destroyed by fire. The insurance coverage pays for the repair of the building. b. A person is an employee at a restaurant business and gets ill. The insurance coverage pays him his wages while he is off work sick. c. A person owns a restaurant business and the restaurant is destroyed by fire. The insurance covers the losses caused by the business being closed down for several months.

..

61

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

d. A person operates a restaurant business and some customers suffer injury due to food poisoning. The insurance coverage provides for payment to cover any losses incurred because of claims by the restaurant arising from damages paid to these customers. e. A person has a partner in his restaurant business and that partner catches a disease and dies. The insurance provides for coverage of the death of the partner.

Answer: c Diff: 2 Type: MC Page Reference: 268e Skill: Recall 150) Describe three different types of insurance that a business person might obtain in relationship to his or her business.

Answer: Property insurance, business interruption insurance, life insurance (for key personnel and partners), health insurance with respect to the personnel involved, and liability insurance Feedback: Property insurance, business interruption insurance, life insurance (for key personnel and partners), health insurance with respect to the personnel involved, and liability insurance Diff: 1 Type: ES Page Reference: 268f-269 Skill: Recall 151) Explain what is meant by bonding.

Answer: Where a person dealing with another person or company can be assured that he or she will be compensated if that person or company fails to properly perform its obligations.

But note that the person or company that has acted wrongfully will still be required to repay the bonding company if possible; thus, this is quite different from insurance.

Feedback: Where a person dealing with another person or company can be assured that he or she will be compensated if that person or company fails to properly perform its obligations. But note that the person or company that has acted wrongfully will still be required to repay the bonding company if possible; thus, this is quite different from insurance.

..

62

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

Diff: 2 Type: ES Page Reference: 268g Skill: Recall 152) Which of the following statements is correct with respect to bonding? a. Bonding provides protection against losses incurred because of fluctuations in the financial markets. b. Bonding provides protection to the victim injured by the wrongful conduct of the person bonded. c. Bonding is a government certification system whereby the government guarantees that a person so bonded or certified will do the job he is hired to do as set out in the bonding certificate. d. If a person is bonded and that person commits some wrongful act such as stealing a client's money, the bonding company is bound to compensate him for any losses he suffers from being caught. e. Bonding is another term for insurance. The two terms, bonding and insurance, are interchangeable.

Answer: b Diff: 2 Type: MC Page Reference: 268h Skill: Recall 153) A fidelity bond provides compensation for the wrongful conduct of employees. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 268i Skill: Recall 154) A fidelity bond is when the employee pays the employer a fee to cover himself while he is on the job. a. True b. False

..

63

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

Answer: b Diff: 1 Type: TF Page Reference: 268j Skill: Recall 155) What is a fidelity bond?

Answer: Wilful and wrongful actions of a company's employees can be covered by a fidelity bond (taken out by the employee's company), which resembles insurance. Thus, if an employee steals from clients, for example, the bonding company will provide financial compensation to those clients to cover the employee's misdeeds.

Feedback: Wilful and wrongful actions of a company's employees can be covered by a fidelity bond (taken out by the employee's company), which resembles insurance. Thus, if an employee steals from clients, for example, the bonding company will provide financial compensation to those clients to cover the employee's misdeeds.

Diff: 2 Type: ES Page Reference: 268k Skill: Recall 156) Distinguish between a fidelity bond and a surety bond.

Answer: A fidelity bond involves a person or an employee being bonded against his or her own wrongful conduct for actions such as theft. A surety bond is intended to provide assurance that one party to a contract will properly perform its side of the contract, for example, a contractor on a construction project.

Feedback: A fidelity bond involves a person or an employee being bonded against his or her own wrongful conduct for actions such as theft. A surety bond is intended to provide assurance that one party to a contract will properly perform its side of the contract, for example, a contractor on a construction project.

Diff: 2 Type: ES Page Reference: 268l, p Skill: Recall

..

64

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

157) A surety bond guarantees performance of a contract. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 268m Skill: Recall 158) A surety bond provides assurance that the party to a contract will perform his or her part of the contract. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 268n Skill: Recall 159) What is a surety bond?

Answer: A surety bond guarantees performance of a contract rather than compensation for wrongful conduct.

Feedback: A surety bond guarantees performance of a contract rather than compensation for wrongful conduct.

Diff: 1 Type: ES Page Reference: 268o Skill: Recall 160) In which one of the following situations would Joe be able to collect the entire amount of insurance claimed? a. Joe insured the clubhouse of a Hells Angels motorcycle club located in the next block for $75 000; the house is valued at about that amount. The clubhouse is subsequently destroyed in a fire. Joe claims $75 000.

..

65

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 8: Property

b. Joe owns a one-half interest in a house valued at $1000 that is completely destroyed in a fire. The house is insured for that amount and Joe makes a claim for $100 000. c. Joe took out a life insurance policy on his wife for $500 000, and shortly thereafter, during a fight that occurred while he was in a drunken rage, he struck his wife, causing her death. Joe claims $500 000. d. Joe insured his law partner's life for $500 000 and the amount he actually loses when the partner dies is only $1000. Joe claims $500 000. e. Joe's house suffers $20 000 damage, and he only had it insured for $1000, when the actual value was over $250 000. Joe claims $20 000.

Answer: d Diff: 3 Type: MC Page Reference: 269a Skill: Applied

..

66

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

1) Which of the following lawsuits is an action not based on copyright law? a. A company that created computer programs for the mass market sued an end user for making 13 copies of the program for use in its various branches. b. Lee Garrett and Lloyd Chiate sued Stevie Wonder, alleging that Wonder's song "I Just Called to Say I Love You" was lifted from their song "Hello It's Me." c. Tim Anderson sued Sylvester Stallone and MGM-UA for $105 million, alleging that the script for Rocky IV was based on a plot he had submitted to MGM-UA. d. A sculptor sued the company to whom he sold his statue when the company covered it with decorations in celebration of St. Patrick's Day. e. A company sued an employee/director who took a secret idea from private company meetings and used it for his own profit.

Answer: e Diff: 1 Type: MC Page Reference: 277a, 279a Skill: Applied 2) The information age brought about by computers and the internet has led to significant world change in terms of access to and transmission of information. With respect to law, where has the impact of this change had its greatest influence? a. Trademarks b. Patents c. Industrial designs d. Copyrights e. Circuit topography Answer: d Diff: 1 Type: MC Page Reference: 277b, 278b Skill: Recall 3) Provincial legislation gives the right to copy or reproduce a created work to the author or owner and it controls infringements. a. True b. False

..

1

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

Answer: b Diff: 1 Type: TF Page Reference: 278a Skill: Recall 4) As part of his preparation for a debate on whether the Criminal Code should be amended to include a crime for the unauthorized use of computer programs, Joe photocopied a short essay on the topic to study at home. The essay proved to be an excellent argument for his side—namely, that such a crime should be created. Although some of the other articles advanced different arguments Joe could have used, he was short of time and simply turned in the essay as his own and later used its ideas in the debate. Which of the following is true? a. There can be no infringement of copyright by a student. b. Using the essay's arguments in the debate is an infringement of copyright even though they would be expressed in Joe's own words. c. The first time Joe copied the essay was clearly an infringement of copyright; there is no defence available to him. d. Joe cannot use the essay in any way without infringing copyright. e. There would be an infringement of copyright when Joe used the essay as his own work.

Answer: e Diff: 3 Type: MC Page Reference: 278c Skill: Applied 5) Believing that he was a very creative person, and knowing he was broke, Sam decided he would attempt to sell some of the songs he continually created. He mostly just whistles his new tunes, but he now wants them to be protected by copyright. Which of the following is not a requirement for copyright protection? a. The idea on which Sam’s songs are based must be original. b. Sam’s songs must be original and not a copy of someone else's work. c. Sam’s songs must be put in some material form. d. Sam has to satisfy a citizenship or residence requirement. e. Sam’s songs must fall into one of the specified categories of work protected by the Copyright Act (e.g., literary, dramatic).

Answer: a

..

2

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

Diff: 2 Type: MC Page Reference: 278d, 280a, e, h Skill: Applied 6) A person can obtain copyright protection only when the idea upon which the work is based is original. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 278e Skill: Recall 7) Distinguish between copyright and patent.

Answer: Copyright protects the expression of an idea, not the idea itself. It may protect books, photos, music, and other artistic works. A patent protects the idea, not the expression of the idea. It may protect “any new and useful art, process, machine, manufacture or composition of matter, or any new and useful improvement” of same.

Feedback: Copyright protects the expression of an idea, not the idea itself. It may protect books, photos, music, and other artistic works. A patent protects the idea, not the expression of the idea. It may protect “any new and useful art, process, machine, manufacture or composition of matter, or any new and useful improvement” of same.

Diff: 2 Type: ES Page Reference: 278f, 284b, 285a Skill: Recall 8) Contrast patent and copyright protection. In your discussion, consider the differences in the nature of the protection, the kind of things protected, the effectiveness of the protection granted, and the objectives of the legislation.

Answer: The main difference between copyright protection and patent protection is that the copyright protects the expression of the idea, not the idea itself, whereas the patent

..

3

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

protects the invention, however it is expressed or whatever form it takes. In fact, the type of protection given varies with the type of intellectual property being protected, copyright being more appropriate where written material, dance, music, computer programs, and the like are involved. Patents are more appropriate for inventions and products that are eventually manufactured and incorporated into products that do things, produce things, or otherwise function in some way that is useful. The copyright lasts longer, usually the life of the creator plus 50 years, whereas the patent protection normally lasts for only 20 years. Patent protection creates a monopoly with respect to the use of and profit from the invention. Copyright gives exclusive right to copy and profit from the work, writing, computer program, or whatever is being protected. The objective of the question is for students to show that they understand the difference between copyright and patent protection, the kinds of things protected by each, and the contrasting ways that protection is extended.

Feedback: The main difference between copyright protection and patent protection is that the copyright protects the expression of the idea, not the idea itself, whereas the patent protects the invention, however it is expressed or whatever form it takes. In fact, the type of protection given varies with the type of intellectual property being protected, copyright being more appropriate where written material, dance, music, computer programs, and the like are involved. Patents are more appropriate for inventions and products that are eventually manufactured and incorporated into products that do things, produce things, or otherwise function in some way that is useful. The copyright lasts longer, usually the life of the creator plus 50 years, whereas the patent protection normally lasts for only 20 years. Patent protection creates a monopoly with respect to the use of and profit from the invention. Copyright gives exclusive right to copy and profit from the work, writing, computer program, or whatever is being protected. The objective of the question is for students to show that they understand the difference between copyright and patent protection, the kinds of things protected by each, and the contrasting ways that protection is extended.

Diff: 2 Type: ES Page Reference: 278g, 280j, 283k, 284c, 285c Skill: Applied 9) Explain what rights a copyright holder has in relationship to the work.

Answer: The right to control it and prevent copying or use of that product by others. However, the use of small portions of a work for research or private study is permitted, and there is no infringement when portions of a work are reproduced for review, criticism, or news reporting (called “fair dealing”). There are other exceptions for libraries, museums, and archives, as well as for reproductions done to facilitate someone who is blind or deaf.

..

4

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

Feedback: The right to control it and prevent copying or use of that product by others.

However, the use of small portions of a work for research or private study is permitted, and there is no infringement when portions of a work are reproduced for review, criticism, or news reporting (called “fair dealing”). There are other exceptions for libraries, museums, and archives, as well as for reproductions done to facilitate someone who is blind or deaf.

Diff: 2 Type: ES Page Reference: 278h, 281a Skill: Recall 10) How long is the protection given under the Copyright Act? Answer: Copyright protection is extended to authors and artists for 50 years after the death of the creator of the work. This period is reduced to just 50 years when a corporation is involved, the author is not known, or the work involves such things as movies, photographs, or sound recordings.

Feedback: Copyright protection is extended to authors and artists for 50 years after the death of the creator of the work. This period is reduced to just 50 years when a corporation is involved, the author is not known, or the work involves such things as movies, photographs, or sound recordings.

Diff: 1 Type: ES Page Reference: 278i Skill: Recall 11) "In Canada, copyright always resides with the author of the material." Discuss the accuracy of that statement.

Answer: It's inaccurate. It’s common for a publishing company to produce and market a work and for the author, artist, etc., to receive royalties from the sales. In this case, the copyright is assigned to the publishing company. It should also be noted that when the author is an employee, the work created will belong to the employer unless the employment contract states otherwise. In the case of consultants, the ownership of the copyright should be defined in the contract.

Feedback: It's inaccurate. It’s common for a publishing company to produce and market a work and for the author, artist, etc., to receive royalties from the sales. In this case, the

..

5

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

copyright is assigned to the publishing company. It should also be noted that when the author is an employee, the work created will belong to the employer unless the employment contract states otherwise. In the case of consultants, the ownership of the copyright should be defined in the contract.

Diff: 2 Type: ES Page Reference: 278j, 279j Skill: Recall 12) Moral rights means that the creator has the right to continue to have his or her name associated with his or her work and to have the integrity of the work preserved (e.g., not to have the work changed in such a way as to diminish or degrade it). a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 279b Skill: Recall 13) When an author assigns copyright to a purchaser, what rights does he or she still have in relation to the work?

Answer: The author has moral rights in relationship to the work, that is, the right to have his or her name continually associated with it and not to have the work modified except with his or her permission.

Feedback: The author has moral rights in relationship to the work, that is, the right to have his or her name continually associated with it and not to have the work modified except with his or her permission.

Diff: 3 Type: ES Page Reference: 279c Skill: Recall 14) Pete is an accountant and Judy works in a bank, but every evening of last year they worked to create a clever computer game. When they approached a publisher, they had no difficulty in gaining the interest of the publisher. Pete and Judy hired a lawyer to draft

..

6

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

a licence agreement in which they would give the publisher exclusive rights to sell the game in North America for royalties based on gross sales. When the game was published, the advertising was rather vulgar but acceptable to Pete and Judy. They learned, however, that there was a further change—the villain had been changed and clearly represented a world leader of an Asian country. Pete and Judy were embarrassed and outraged. On these facts, which of the following is true? a. They have no cause of action because once there has been an assignment of rights, the creators would not have their name on the product and thus no right to sue. b. They have no protection here since they failed to register their copyright in the game. c. They would have a cause of action only if the contract provided that there should be no alterations without their consent. Such a change would then be a breach of contract. d. There is no protection here; a game is not something that can be copyrighted. e. They have a cause of action (even though there has been a partial assignment) if the modification was made without permission of the creators.

Answer: e Diff: 2 Type: MC Page Reference: 279d Skill: Applied 15) Ownership of a copyright can be sold. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 279e Skill: Recall 16) Which of the following is true with regard to the Canadian Copyright Act? a. The statute expressly provides that computer programs are not copyrightable. b. Copyright is protected both by statute and in common law. c. The statute provides for copyright protection only where the copyright is registered and the owner of copyright uses the following form of notice: (c) year of creation, name of creator.

..

7

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

d. The statute provides that the employer owns copyright in a work created by the employee in the course of his employment, in the absence of any agreement to the contrary. e. It is a provincial statute, with each province having its own unique statute.

Answer: d Diff: 2 Type: MC Page Reference: 279f Skill: Recall 17) Tom, a classmate of yours at Red River College, was employed as a programmer by Mohawk Oil Company about three months after graduation. Because you could understand the program he was working on and because you write well, he called to ask if you wanted to take on the task of writing the manual to accompany the program. Read each of the following separately and indicate which is true. a. If the company hires you as an employee to write the manual, the company would own copyright unless your employment contract provided otherwise. b. The owner of the copyright will be whoever first gets his claim of ownership in the copyright office. c. If you contract as an independent contractor (independent consultant) with the company, and the contract does not specify otherwise, the company owns the copyright. d. If two persons write the manual together, only one person can have ownership of the copyright. e. The issue of who owns copyright in the manual depends solely on who writes it.

Answer: a Diff: 2 Type: MC Page Reference: 279g and i Skill: Applied 18) Fred worked for a software firm, Lernit Inc., which was developing a computer program to help illiterate adults learn to read. Fred had signed a three-year contract with Lernit, which included a clause in which he promised not to disclose confidential information. After he had worked there for almost two years, Fred was approached by a retired English teacher, Mr. Wright, who was trying to develop a similar program but needed a skilled programmer. Wright offered Fred about twice the salary and a share in the proceeds from the sale if he would join with him and bring with him a copy of Lernit's program to date. Fred did leave Lernit and did bring the requested program,

..

8

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

although it was marked "confidential." Within about two months, Mr. Wright and Fred began to market the finished program, a program very similar to that being developed by Lernit. Mr. Wright estimated that Fred and his information saved him about eight months of work. On these facts, which of the following is true? a. Lernit could sue Fred for breach of contract. b. Lernit could sue Mr. Wright for inducing breach of contract. c. Lernit could sue Fred for breach of confidence/trade secret. d. Lernit could seek an injunction to stop Mr. Wright, even though Mr. Wright himself did not take confidential information. e. All of the above Answer: e Diff: 2 Type: MC Page Reference: 279h, 293a, 296i, q Skill: Applied 19) Which of the following is true with regard to copyright law in Canada? a. Registration of copyright is restricted to published works. b. Copyright law is governed by the Copyright Act, but an author need not register under the statute to acquire copyright. c. Everyone can receive copyright protection in Canada for his or her work created elsewhere. d. A Canadian author must register upon the creation of his or her book in order to acquire copyright protection. e. Generally, the term of copyright is 50 years.

Answer: b Diff: 2 Type: MC Page Reference: 280b Skill: Recall 20) Joe wrote a short story that he was extremely proud of, brought it to you, and asked you how to go about having it copyrighted. What would be your answer?

Answer:

..

9

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

In Canada, the work is automatically copyrighted when it is created. Joe could, however, take steps to register it so that he will be protected in other jurisdictions and will have proof of when it was created for copyright purposes. Registration can take place by making an application to the Copyright Office at the Canadian Intellectual Property Office (CIPO). That office will issue a certificate of registration and maintains an official registry of copyrights that can be accessed and used for legal purposes.

Feedback: In Canada, the work is automatically copyrighted when it is created. Joe could, however, take steps to register it so that he will be protected in other jurisdictions and will have proof of when it was created for copyright purposes. Registration can take place by making an application to the Copyright Office at the Canadian Intellectual Property Office (CIPO). That office will issue a certificate of registration and maintains an official registry of copyrights that can be accessed and used for legal purposes.

Diff: 1 Type: ES Page Reference: 280c Skill: Applied 21) Which of the following is essential for a work to have copyright protection? a. The idea on which the work is based must be original. b. The creator of the work must register his or her work in Canada. c. The subject matter of the work must only fall into either musical or artistic categories. d. The expression of the idea must be an original product of the author's own skill. e. The expression of the idea will generally be sufficient.

Answer: d Diff: 2 Type: MC Page Reference: 280d Skill: Recall 22) If Weird Al wants to take "Blue Bayou," a song composed by Roy Orbison, and replace only Orbison's lyrics and publish it under the name "Blue by You," a song about domestic violence, which of the following is true? Assume that all are Canadian citizens governed by Canadian law. Read each separately. a. Orbison's legal representative could not sue if Weird Al's lyrics were different, because the song takes on a whole new meaning. b. Weird Al could get no protection for his original lyrics unless he sent a copy of his lyrics to the Copyright Office along with his application for copyright.

..

10

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

c. If, before his death, Orbison has signed a licence agreement with Weird Al, allowing him to use the music, there could be no lawsuit against Weird Al no matter how offensive the lyrics turned out to be. d. Weird Al could get protection for his original lyrics even if they were unpublished. e. Orbison's legal representative could not sue because Roy Orbison died and thus so did his copyright.

Answer: d Diff: 2 Type: MC Page Reference: 280f Skill: Applied 23) A computer programmer created a program and put a hard copy of it in his desk. If that program were copied, etched on a chip, embedded in the ROM of a computer, and sold to a mass market, the programmer: a. Would be better off to seek patent protection b. Could claim copyright based on common law principles c. Could not claim copyright because there is no provision in the Copyright Act nor case law that would give him protection d. Could not claim copyright because the program would be part of a machine, which bars it from copyright protection e. Could claim copyright because there is a provision in the Copyright Act to that effect Answer: e Diff: 2 Type: MC Page Reference: 280g Skill: Applied 24) Give three examples of matters covered by copyright legislation.

Answer: Literary works such as books, computer programs, etc.; dramatic works such as plays, mime, movies, etc.; musical works such as compositions and arrangements; and artistic works such as paintings, drawings, sculpture, etc.

..

11

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

Feedback: Literary works such as books, computer programs, etc.; dramatic works such as plays, mime, movies, etc.; musical works such as compositions and arrangements; and artistic works such as paintings, drawings, sculpture, etc.

Diff: 2 Type: ES Page Reference: 280i Skill: Recall 25) Three students chose to work on a directed study project for Planned Parenthood Association. The project included the creation of a computer program for inventory control. The students went to the library to get a book on the topic. The book was in the reserve section, so the students made three copies of the four relevant pages so they could study them. They used the ideas from the book and created an original program and a manual. Later, when the students were preparing a report for their presentation, they decided that the pages in the book exactly expressed the theoretical background they needed for the introduction. They copied those four pages and used them as their own for the beginning of their 20-page report. At the presentation, seven copies of the report were made (with the program and manual as appendices). On these facts, which of the following is true? a. When the students made three copies of the few pages of the book for study purposes, that in itself was an infringement of copyright; they have no defence. b. Since the students have created a program and a manual as a project, they would own the copyright on the program and the manual unless they had agreed otherwise. c. Using the ideas from the book was an infringement of copyright. d. Because the copied pages were a very small part of the whole report, there was no infringement of copyright. e. Copying the pages from the book for their report was fair dealing because it was exactly what they wanted to say about the theoretical basis of the report.

Answer: b Diff: 2 Type: MC Page Reference: 280k Skill: Applied 26) Explain under what circumstances copyrighted material can be reproduced without permission of the copyright holder.

Answer:

..

12

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

The use of small portions of a work for research or private study is permitted, and there is no infringement when portions of a work are reproduced for review, criticism, or news reporting (called “fair dealing”). There are other exceptions for libraries, museums, and archives, as well as for reproductions done to facilitate someone who is blind or deaf.

Feedback: The use of small portions of a work for research or private study is permitted, and there is no infringement when portions of a work are reproduced for review, criticism, or news reporting (called “fair dealing”). There are other exceptions for libraries, museums, and archives, as well as for reproductions done to facilitate someone who is blind or deaf.

Diff: 2 Type: ES Page Reference: 281b Skill: Recall 27) In Canada, the Copyright Board is a governmental regulatory body established under the Copyright Act. a. True b. False Answer: a Diff: 2 Type: TF Page Reference: 281c Skill: Recall 28) Discuss the Copyright Board, its responsibilities, and the tariff related to the copying of music that was levied under the Board’s direction.

Answer: The Copyright Board, a government regulatory body established under the Copyright Act, sets the royalty fees charged by Access Copyright and SOCAN and has responsibility for other matters, including the arbitration of disputes with respect to copyright. The tariff was levied against all recordable media (CDs and tapes). This allows the private copying of music and other material for non-commercial use without violating copyright. An attempt was also made to extend this tariff to any computer hard drive, MP3 player, or iPod, but the Federal Court determined that this would require a change in legislation.

Feedback: The Copyright Board, a government regulatory body established under the Copyright Act, sets the royalty fees charged by Access Copyright and SOCAN and has responsibility for other matters, including the arbitration of disputes with respect to copyright. The tariff was levied against all recordable media (CDs and tapes). This

..

13

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

allows the private copying of music and other material for non-commercial use without violating copyright. An attempt was also made to extend this tariff to any computer hard drive, MP3 player, or iPod, but the Federal Court determined that this would require a change in legislation.

Diff: 3 Type: ES Page Reference: 281d Skill: Recall 29) Which of the following is the main objection to Canada’s Copyright Act? a. Users have objected to the strict rules and severe remedies in the Act, which have prevented users from pirating movies and music. b. It does not allow “fair dealing.” c. It was copied from the U.S. law and does not respect the Canadian views of freedom. d. It is too restrictive in its protection against copying of digital material such as music, games, books, and movies. e. It does not provide sufficient protection against copying of digital material such as music, games, books, and movies.

Answer: e Diff: 1 Type: MC Page Reference: 282a Skill: Recall 30) Which of the following is incorrect with respect to views related to the Copyright Act and Bill C-11? a. The creators want more protections, allowing them to earn a living from their creations. b. Large commercial publishers want more restrictions to protect their profits. c. Users would be the most satisfied with proposed amendments to the Act, as they would have complete freedom to make copies, back up, format shift, time shift, and create mash-ups. d. Intermediaries are interested in being able to escape any liability for the service they provide. e. All parties seem dissatisfied with the changes proposed in Bill C-11.

Answer: c

..

14

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

Diff: 2 Type: MC Page Reference: 282b, 283c Skill: Applied 31) Canada’s Copyright Act is likely to be amended under Bill C-11. What are the key changes expected with this legislation?

Answer: The new legislation will allow users to copy for non-commercial purposes, permitting them to back up, format shift, time shift, and create mash-ups. This seems to give users the freedom and flexibility they have sought. However, Bill C-11 would make it illegal to overcome digital locks. The bill would make it illegal to import or sell any program or anything to interfere with digital locks and encryption. Thus, users would have the right to make copies, but they would be prohibited from overcoming locks and encryption, thus preventing them from making copies. The Bill would also introduce the notice-andnotice system, which would notify the ISP when one of its customers does something illegal and could lead to a court order that would provide the user’s information to the copyright holder. The Bill would also expand the definition of “fair dealing.” It has been recommended that the Bill be modified to remove the provisions making it illegal to interfere with encryption and locking devices and to expand the levy on recording media to include iPods, MP3 players, and other equipment with a hard drive or chip that can permanently record digital information. However, it appears unlikely that these recommendations will be implemented.

Feedback: The new legislation will allow users to copy for non-commercial purposes, permitting them to back up, format shift, time shift, and create mash-ups. This seems to give users the freedom and flexibility they have sought. However, Bill C-11 would make it illegal to overcome digital locks. The bill would make it illegal to import or sell any program or anything to interfere with digital locks and encryption. Thus, users would have the right to make copies, but they would be prohibited from overcoming locks and encryption, thus preventing them from making copies. The Bill would also introduce the notice-and-notice system, which would notify the ISP when one of its customers does something illegal and could lead to a court order that would provide the user’s information to the copyright holder. The Bill would also expand the definition of “fair dealing.” It has been recommended that the Bill be modified to remove the provisions making it illegal to interfere with encryption and locking devices and to expand the levy on recording media to include iPods, MP3 players, and other equipment with a hard drive or chip that can permanently record digital information. However, it appears unlikely that these recommendations will be implemented.

Diff: 3 Type: ES Page Reference: 282c-283a

..

15

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

Skill: Recall 32) John is a college student who spends several hours a day on the internet, surfing for information for school assignments, downloading music, and interacting with friends on social media. He just learned that Bill C-11 will amend the Copyright Act and is searching the Web to find out how he might be affected if this or similar legislation is implemented. Which of the following is not accurate in regard to Bill C-11 and the potential changes John might expect? a. John will be able to format shift (e.g., move music from a CD to his iPod) legally for non-commercial purposes. b. John will be able to time shift (i.e., record a movie to watch at a later time) legally for non-commercial purposes. c. John may expect his internet service provider to contact him if he violates copyright and, with a court order, his name and other information could be provided to the copyright holder. d. John should expect the price of CDs and tapes to go down, as the Copyright Board is expected to remove the current tariffs. e. John should expect that Bill C-11 will make it illegal to import programs that allow him to overcome digital locks.

Answer: d Diff: 2 Type: MC Page Reference: 282d-283b Skill: Applied 33) Explain the notice-and-notice system provided in Bill C-11.

Answer: This provides for copyright holders to notify the ISP that one of the ISP’s customers is violating its copyright. The ISP would then notify the user that he or she was doing something illegal. Then, with a court order, that user’s information, including identity, could be provided to the copyright holder. The ISP would be immune from any breach of copyright by their customers.

Feedback: This provides for copyright holders to notify the ISP that one of the ISP’s customers is violating its copyright. The ISP would then notify the user that he or she was doing something illegal. Then, with a court order, that user’s information, including identity, could be provided to the copyright holder. The ISP would be immune from any breach of copyright by their customers.

Diff: 1

..

16

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

Type: ES Page Reference: 283d Skill: Recall 34) The provisions of Bill C-11 that would amend the Copyright Act seem to satisfy all parties with a strong interest in copyright issues (i.e., the creators, the publishers, the intermediaries, and the users). a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 283e Skill: Recall 35) A patent gives the exclusive right to produce, market, and sell a new invention. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 283f Skill: Recall 36) Which of the following is true with regard to the law governing patents? a. In exchange for the monopoly given under the Patent Act, the owner of the patent must disclose the invention in its entirety. b. A patent will only be granted if the invention has been the subject of a publication of over one year prior to the application. c. Generally, if a patent is developed by an employee, the employer has the right to obtain the patent. d. An amendment to the Patent Act allows patent protection automatically. e. Computer programs can only be copyrighted (i.e., they cannot be patented).

Answer: a Diff: 2 Type: MC

..

17

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

Page Reference: 283g Skill: Applied 37) Which of the following is false if an inventor has his or her application for a patent granted? a. He or she has the right to renew the period of protection at the expiration of the last period. b. He or she can no longer allege that the invention is a trade secret. c. He or she has the right to sue anyone who uses the invention without his or her permission. d. Infringement of the patent could be both a civil and a criminal offence. e. He or she has the exclusive right to make, use, and sell the invention for a period of 20 years.

Answer: a Diff: 2 Type: MC Page Reference: 283h Skill: Recall 38) Homer Ford invented a unique pollution-free engine that runs on gas created by chicken "droppings" and old leaves. This fuel also caused no wear on the engine of the car. Homer built a prototype in a workshop in his backyard. Before he seeks publicity, he would like to protect his invention and any business that emerges from the development and sale of his cars. In this regard, which of the following is false? a. Surnames cannot be registered as trademarks unless the name has already been associated with the product or business. b. If Homer is granted a patent, he will be giving up any trade secret protection he might have had to protect his ideas. c. If anyone steals his ideas, Homer could also sue in tort for injurious falsehood. d. If Homer can succeed in getting a patent on his novel engine, he would have a government-granted monopoly to produce, sell, or otherwise profit from his invention. e. If Homer obtains a patent, the protection will be for a period of 20 years.

Answer: c Diff: 2 Type: MC Page Reference: 283i, m, and 291b

..

18

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

Skill: Applied 39) What rights are conveyed by the granting of a patent?

Answer: The patent holder has a monopoly over the use of the invention for a period of 20 years.

Feedback: The patent holder has a monopoly over the use of the invention for a period of 20 years.

Diff: 2 Type: ES Page Reference: 283j Skill: Recall 40) What is the period of protection associated with patent law?

Answer: Twenty years Feedback: Twenty years Diff: 1 Type: ES Page Reference: 283l Skill: Recall 41) Unlike copyright, it is the expression of the idea and not the idea itself that is protected in a patent. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 284a Skill: Recall 42) What qualifications must be met in order for something to be patentable?

Answer:

..

19

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

It must be a new and useful art, process, machine, manufacture, or composition of matter.

It must contribute in some way to improving our society. It must not have been the subject of prior publication more than one year prior to the application.

Feedback: It must be a new and useful art, process, machine, manufacture, or composition of matter. It must contribute in some way to improving our society. It must not have been the subject of prior publication more than one year prior to the application.

Diff: 2 Type: ES Page Reference: 285b Skill: Recall 43) In an article about the patents held by the Research Services Office at the University of British Columbia, it was written that none of the patents were there because someone set out to invent something new. "If we knew what it was that creates innovation, we would all be millionaires ... it's chance, brilliance, an offhand remark...." We know that to obtain a patent we need to have created an "invention." Which of the following would most likely be a patentable invention? a. An original artistic work b. A unique mark identifying a business or product c. A significant scientific principle d. A new and useful machine e. Novel information used in a person's business that gives him or her a competitive edge Answer: d Diff: 1 Type: MC Page Reference: 285d Skill: Recall 44) Yung created a machine that was not exactly new and novel in that it was an improvement on an existing patented machine. Which of the following is true? a. Both Yung's improvement and the original machine lose their patent protection. b. Yung could get a patent for his improvement, but has no right to make, sell, or use the original machine. c. The patent holder of the original machine has the right to make, sell, or use the improvement because its machine is the basis of the improvement.

..

20

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

d. Yung could get a patent for his improvement, and would thereby get an independent right to make, sell, or use his machine with the original machine incorporated into it. e. Yung cannot get a patent for his improvement because it is not entirely new or novel.

Answer: b Diff: 2 Type: MC Page Reference: 285e Skill: Applied 45) Which of the following is true with regard to obtaining a patent? a. To obtain a patent, besides satisfying the provisions of the Patent Act, the inventor must show that the invention was not known or used by any other person before he or she invented it. b. The inventor's expression of the idea is automatically protected under the provincial Patent Act. c. If a patent application is denied, the inventor can apply for trademark protection instead. d. The Patent Act allows a patent to someone for an existing process or machine that is in use but has not been patented. e. The inventor does not have to send specifications or a model when he sends his application.

Answer: a Diff: 2 Type: MC Page Reference: 285f Skill: Recall 46) Canwell developed a chemical formula that it began selling. Just over a year later, it applied for a patent. Which of the following statements would be true? a. Canwell was entitled to a patent, as all necessary elements had been satisfied. b. Canwell was not entitled to a patent. A corporation cannot seek patent protection, only an individual can. c. Canwell was not entitled to a patent. A formula cannot qualify as an invention capable of being protected by patent. d. Canwell was not entitled to a patent. Patent protection can only be extended to mechanical, not chemical, inventions.

..

21

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

e. Canwell was not entitled to a patent. To qualify as "new," the invention must not have been disclosed more than one year prior to application.

Answer: e Diff: 2 Type: MC Page Reference: 285g Skill: Applied 47) Which of the following is not protected by intellectual property law? a. Building designs b. Inventions c. Scientific theories d. Music compositions e. Sculptures Answer: c Diff: 2 Type: MC Page Reference: 285h Skill: Recall 48) Harvard College sought protection for a genetically altered mouse. Which of the following statements would be true? a. Unless the Patent Act is amended, higher life forms cannot be patented in Canada. b. The mouse was granted patent protection on the basis that it was not the product of the laws of nature. c. Unless the Patent Act is amended, higher life forms can only be patented under the doctrine of "sound prediction." d. The mouse was granted patent protection on the basis that it was the product of inventiveness. e. The mouse was granted patent protection on the basis that it was a non-naturally occurring composition of matter.

Answer: a Diff: 2 Type: MC Page Reference: 285i

..

22

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

Skill: Applied 49) In Canada, software is protected primarily under copyright law, although there are situations in which patent law will apply to software embedded in a particular invention. a. True b. False Answer: a Diff: 2 Type: TF Page Reference: 286a Skill: Recall 50) Which of the following is true with regard to patent protection? a. The patent protection order is an order of the court requiring a person who stole and used a trade secret to make an accounting of all profit realized from its use. b. Unlike copyright, patent protection does not come automatically. It must be applied for. c. Patent protection for property lasts for a period of 15 years and is renewable, but it must be used during that time or it will be considered abandoned. d. Unlike copyright, patents can extend to "every original literary, dramatic, musical and artistic work" produced in Canada. e. Computer software is never patentable in Canada.

Answer: b Diff: 2 Type: MC Page Reference: 286b Skill: Recall 51) The Patent Office will conduct a search of patent records for you to determine that your invention is original and unique. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 286c

..

23

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

Skill: Recall 52) Explain how a patent is obtained.

Answer: The process is complex and expensive and is usually handled by registered patent agents.

Typically, they make a search of the patent registries in Canada at the Patent Office and similar registries in other countries to see if a similar patent has been granted. Then they submit an application on a specified form in which they set out full disclosure with respect to the invention. They send along the required documentation and a fee. If the invention qualifies, the commissioner grants the approval of the patent.

Feedback: The process is complex and expensive and is usually handled by registered patent agents. Typically, they make a search of the patent registries in Canada at the Patent Office and similar registries in other countries to see if a similar patent has been granted. Then they submit an application on a specified form in which they set out full disclosure with respect to the invention. They send along the required documentation and a fee. If the invention qualifies, the commissioner grants the approval of the patent.

Diff: 2 Type: ES Page Reference: 286d Skill: Recall 53) Once a patent has been granted in Canada, patents are automatically granted to the Canadian patent holder in other countries that are signatories to the Paris Convention for the Protection of Industrial Property and the Patent Cooperation Treaty on Intellectual Property. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 286e Skill: Recall 54) Explain how a patent granted in Canada provides certain rights to the patent holder in some other countries.

Answer:

..

24

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

Once a patent is granted in Canada, protection can be obtained in other countries that are signatories to applicable treaties. The Paris Convention for the Protection of Industrial Property and the Patent Cooperation Treaty on Intellectual Property are the most important of these treaties and apply to all nations that are signatories to them. The treaties do not grant patents in those other countries, but they establish priority so that once a patent is filed in Canada, the inventor then has a specific period of time (usually one year) to file for a patent application in those other countries.

Feedback: Once a patent is granted in Canada, protection can be obtained in other countries that are signatories to applicable treaties. The Paris Convention for the Protection of Industrial Property and the Patent Cooperation Treaty on Intellectual Property are the most important of these treaties and apply to all nations that are signatories to them. The treaties do not grant patents in those other countries, but they establish priority so that once a patent is filed in Canada, the inventor then has a specific period of time (usually one year) to file for a patent application in those other countries.

Diff: 2 Type: ES Page Reference: 286f-287 Skill: Recall 55) Explain how one might secure a patent in some European countries.

Answer: One may file an application in the European Patent Office pursuant to the European Patent Convention (EPC) for patent protection in all European countries that are signatories to the EPC. It is not necessary to file an additional application in each country.

Feedback: One may file an application in the European Patent Office pursuant to the European Patent Convention (EPC) for patent protection in all European countries that are signatories to the EPC. It is not necessary to file an additional application in each country.

Diff: 2 Type: ES Page Reference: 287a Skill: Recall 56) Which of the following is true with regard to industrial design? a. Properly marking a protected item may limit an owner's remedies for infringement. b. To be protected, an industrial design must be registered within five years of being published.

..

25

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

c. The design of a manufactured article such as a sofa is protected by copyright. d. Industrial design protection lasts for the life of the inventor plus 50 years. e. A person who creates a unique shape of a manufactured article (with no useful function) can protect his or her design by registering it under the Industrial Design Act, a federal statute.

Answer: e Diff: 2 Type: MC Page Reference: 287b Skill: Recall 57) The Industrial Design Act is designed to protect distinctive patterns or shapes as opposed to useful ones. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 287c Skill: Recall 58) What kinds of things are protected as industrial designs?

Answer: Distinctive designs, shapes, or patterns associated with an article (anything made by hand, tool, or machine) that has no useful function, but that simply adds to the appeal. An industrial design protected by the Industrial Design Act is defined as “features of shape, configuration, pattern or ornament and any combination of those features that, in a finished product, appeal and are judged solely by the eye.” Examples include the distinctive shape of a utensil or a chair.

Feedback: Distinctive designs, shapes, or patterns associated with an article (anything made by hand, tool, or machine) that has no useful function, but that simply adds to the appeal. An industrial design protected by the Industrial Design Act is defined as “features of shape, configuration, pattern or ornament and any combination of those features that, in a finished product, appeal and are judged solely by the eye.” Examples include the distinctive shape of a utensil or a chair.

Diff: 2

..

26

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

Type: ES Page Reference: 287d Skill: Recall 59) What period of protection is granted under industrial design legislation?

Answer: Ten years Feedback: Ten years Diff: 1 Type: FIB Page Reference: 287e Skill: Recall

59) Discuss the registration requirements of industrial designs.

Answer: Registration takes place through the Industrial Design Division of the Canadian Intellectual Property Office. The item registered must be new and unique and the registration must take place within one year of its publication. Any design that makes clothing, automobiles, appliances, or other manufactured goods attractive can be covered.

Feedback: Registration takes place through the Industrial Design Division of the Canadian Intellectual Property Office. The item registered must be new and unique and the registration must take place within one year of its publication. Any design that makes clothing, automobiles, appliances, or other manufactured goods attractive can be covered.

Diff: 2 Type: ES Page Reference: 287f Skill: Recall 60) Since the design of a manufactured product includes both the expression of an idea and a physical manifestation of it, overlapping protection may be available under copyright and trademark and in rare instances under patent. a. True b. False Answer: a Diff: 1 Type: TF

..

27

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

Page Reference: 288a Skill: Recall 61) Professor Grant developed an integrated circuit that might revolutionize the manufacture of televisions. He knows that he needs to protect his design, so he researches the Integrated Circuit Topography Act. Which of the following statements would be true related to registration of an integrated circuit? a. Once the professor registers his integrated circuit in Canada, he will have to register in other countries as well but without the benefit of treaties related to integrated circuits. b. Once the professor registers the integrated circuit, he will have protection for 20 years. c. The professor must register the circuit board within two years of its first commercial use. d. Even with registration, an integrated circuit can be copied for commercial, research, and non-profit purposes. e. Registration takes place through the Industrial Design Division of the Canadian Intellectual Property Office.

Answer: c Diff: 2 Type: MC Page Reference: 288b Skill: Applied 62) The remedies for infringement included in the Integrated Circuit Topography Act are limited to payment of royalties, payment of damages or profits (including punitive damages), and the seizure and destruction of offending items. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 288c Skill: Recall 63) Indicate the kinds of things that are covered by trademark legislation.

Answer: Names, symbols, logos, and other distinctive marks that are associated with a business.

..

28

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

Feedback: Names, symbols, logos, and other distinctive marks that are associated with a business.

Diff: 1 Type: ES Page Reference: 288d Skill: Recall 64) Discuss how the common law protects intellectual property. In your discussion, indicate why it was necessary to introduce statutes in some areas.

Answer: The main type of common law protection with respect to intellectual property deals with the use of confidential information, including trade secrets and passing-off actions. In relationships where one party is vulnerable to the disclosure of such confidences (e.g., employers), the other party has a duty not to disclose that information. Of course, the employer should make it clear that the information is confidential and is to remain secret.

Disclosure of such business secrets can cause serious harm, and the courts usually take a very serious view of a breach of this duty.

Passing-off actions occur where one business tries to take advantage of the goodwill developed by another by getting the customers to think that they are dealing with someone else, usually a more successful business. An example would be where a restaurant uses golden arches to make people think it is associated with McDonald's, when it is not.

These common law remedies can be very effective when the type of intellectual property that has been abused falls into one of these categories. But as with all common law action, the plaintiff has to be willing and have the funds to pursue an action against the infringer. The Trade-marks Act, which covers much of the same territory as a passing-off action, can be more effective, in that the statutory remedies discussed in the text are available, and in some circumstances criminal prosecution can take place. But there has to be a trademark that has been infringed, and that is not necessary when a passing-off action is involved. Thus the common law remedy can be actually broader.

But there is no common law remedy where copyright or patent is involved, or in several other areas where specific acts impose obligations and rights on the parties. In those areas, the federal statutes and the protection they provide is vital. One area where you would expect common law protection to have developed is in the protection of privacy, but this has not happened; it is only now, with federal and provincial initiatives in passing statutes in this area, that abuse of a person's privacy is actionable to any extent. Students should understand that this is a situation where the common law remedies can be very valuable and effective, but that only applies to specific areas and the federal statues provide protection in several areas where the common law is silent.

..

29

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

Feedback: The main type of common law protection with respect to intellectual property deals with the use of confidential information, including trade secrets and passing-off actions. In relationships where one party is vulnerable to the disclosure of such confidences (e.g., employers), the other party has a duty not to disclose that information.

Of course, the employer should make it clear that the information is confidential and is to remain secret. Disclosure of such business secrets can cause serious harm, and the courts usually take a very serious view of a breach of this duty.

Passing-off actions occur where one business tries to take advantage of the goodwill developed by another by getting the customers to think that they are dealing with someone else, usually a more successful business. An example would be where a restaurant uses golden arches to make people think it is associated with McDonald's, when it is not.

These common law remedies can be very effective when the type of intellectual property that has been abused falls into one of these categories. But as with all common law action, the plaintiff has to be willing and have the funds to pursue an action against the infringer. The Trade-marks Act, which covers much of the same territory as a passing-off action, can be more effective, in that the statutory remedies discussed in the text are available, and in some circumstances criminal prosecution can take place. But there has to be a trademark that has been infringed, and that is not necessary when a passing-off action is involved. Thus the common law remedy can be actually broader.

But there is no common law remedy where copyright or patent is involved, or in several other areas where specific acts impose obligations and rights on the parties. In those areas, the federal statutes and the protection they provide is vital. One area where you would expect common law protection to have developed is in the protection of privacy, but this has not happened; it is only now, with federal and provincial initiatives in passing statutes in this area, that abuse of a person's privacy is actionable to any extent.

Students should understand that this is a situation where the common law remedies can be very valuable and effective, but that only applies to specific areas and the federal statues provide protection in several areas where the common law is silent.

Diff: 3 Type: ES Page Reference: 288e, 291k, 292d, 296g Skill: Applied 65) Explain how trademark protection is obtained.

Answer: An unregistered trademark is entitled to protection at common law, but for a trademark to be protected formally under the Trade-marks Act, it must be registered. This registration takes place at the Office of the Registrar of Trade-marks that is part of the Canadian Intellectual Property Office.

..

30

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

Feedback: An unregistered trademark is entitled to protection at common law, but for a trademark to be protected formally under the Trade-marks Act, it must be registered.

This registration takes place at the Office of the Registrar of Trade-marks that is part of the Canadian Intellectual Property Office.

Diff: 1 Type: ES Page Reference: 288f Skill: Recall 66) Which of the following is true with regard to trademark? a. Registration under the Trademark Act provides protection for only registered trademarks, unregistered marks and names are protected under the common law tort of copyright. b. Registration of a trademark gives the owner of the trademark the exclusive right to use it throughout Canada with respect to the particular type of business, or similar products or services as indicated on the application. c. Registration of a trademark grants the owner protection for life plus 50 years with the right to renew. d. The distinctive design of a product container cannot be the subject of trademark protection. e. If a person registers a trademark but later fails to use it, protection of the mark will not be lost; it still belongs to the owner and is protected for the remainder of the period of protection granted.

Answer: b Diff: 3 Type: MC Page Reference: 288g Skill: Recall 67) Aunt Juliet wants to know whether or not to register her trademark. Which of the following is true with regard to registration of trademarks? a. If she does not register her trademark under the Trademark Act, she will have no legal protection of that mark. b. Trademarks can only consist of socially acceptable symbols or logos; words and expressions must seek copyright protection. c. A registered trademark is required for a passing-off action.

..

31

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

d. Registration of the trademark would give her exclusive use of that mark nationwide with respect to the particular type of business, or similar products or services as indicated on the application even though she is not marketing her wares nationwide. e. Registration gives her the right to use her mark for her life plus 50 years.

Answer: d Diff: 2 Type: MC Page Reference: 288h Skill: Applied 68) What protection is given under trademark legislation?

Answer: It provides the owner of the trademark the exclusive right to use it throughout Canada with respect to a particular business or similar products or services as indicated on the application. It prevents others from using the same or similar mark that would have the effect of confusing the public and leading it to believe it was dealing with the original.

Feedback: It provides the owner of the trademark the exclusive right to use it throughout Canada with respect to a particular business or similar products or services as indicated on the application. It prevents others from using the same or similar mark that would have the effect of confusing the public and leading it to believe it was dealing with the original.

Diff: 2 Type: ES Page Reference: 288i, m Skill: Recall 69) When a trademark is registered, it gives protection for a period of 50 years. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 288j Skill: Recall 70) Which of the following is false with regard to trademark?

..

32

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

a. Registration of a trademark gives the owner of the trademark the exclusive right to use it throughout Canada with respect to the particular type of business, or similar products or services as indicated on the application. b. Registration of a trademark grants the owner protection for 15 years with the right to renew. c. Registration under the Trademark Act establishes a presumption that the person registered is the owner of the trademark. d. The distinctive design of a product container may be the subject of trademark protection. e. If a person registers a trademark but later fails to use it, protection of the mark will not be lost; it is still that person’s and protected for the remainder of the period of protection granted.

Answer: e Diff: 2 Type: MC Page Reference: 288k Skill: Recall 71) Paul and Robert designed a new disk holder that they wanted to introduce to a large market. They decided that the quickest way to have their product recognized would be a symbol that would alert the buyer that it can be used with any computer. After playing with some symbols, they decided to use a slight variation of Apple Computer Ltd.'s symbol of an apple because it was pleasing to the eye and well known. Which of the following is true? a. If Apple Computer Ltd. sues Paul and Robert for infringement of trademark, it could ask the court for an injunction as well as for damages. b. It is one of the jobs of the trademark office to alert owners of trademarks when their symbols are being used by others. c. There could be no infringement of Apple Computer Ltd.'s registered trademark unless Apple Computer Ltd. suffered a loss because of this unauthorized use of its symbol. d. There could be no infringement of Apple Computer Ltd.'s registered trademark unless the apple symbol used by Paul and Robert was exactly like Apple’s symbol. e. Even if Paul and Robert knowingly forged the trademark, they would only be liable in a civil action and could never be charged with a criminal offence.

Answer: a Diff: 2 Type: MC Page Reference: 288l, 293c

..

33

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

Skill: Applied 72) “Official marks” prohibit all others from using marks that might be confused with them, except for those that were pre-existing (as the rights of the owners of pre-existing marks cannot be violated). a. True b. False Answer: b Diff: 2 Type: TF Page Reference: 289 Skill: Recall 73) Under the Trademarks Act, an application can be made for a proposed trademark where the mark has not yet been used and is not known to the public but will be used sometime in the future. a. True b. False Answer: a Diff: 2 Type: TF Page Reference: 290 Skill: Recall 74) Indicate three things that cannot be used as a trademark.

Answer: Anything associated with royalty, national flags, institutions such as the Red Cross or RCMP, or provincial or national coats of arms cannot be used without permission.

Anything obscene or illicit is prohibited. Normally a surname cannot be used unless it has already become associated with the product or business. Anything that would be misleading or confused with another mark of a similar business or one selling similar products or services is not permitted.

Feedback: Anything associated with royalty, national flags, institutions such as the Red Cross or RCMP, or provincial or national coats of arms cannot be used without permission. Anything obscene or illicit is prohibited. Normally a surname cannot be used unless it has already become associated with the product or business. Anything that would be misleading or confused with another mark of a similar business or one selling similar products or services is not permitted.

..

34

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

Diff: 3 Type: ES Page Reference: 291a Skill: Recall 75) Unique sounds may be registered as trademarks but do not fall under copyright or patent protection. a. True b. False Answer: b Diff: 3 Type: TF Page Reference: 291c Skill: Recall 76) It is possible for a trademark name to lose its status through common use. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 291d Skill: Recall 77) Disputes with respect to the registration of trademarks are handled by the Registrar of Trademarks and Trademarks Opposition Board with appeals going to the Federal Court. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 291e Skill: Recall 78) An application can be brought to have a trademark expunged where there has been misrepresentation with respect to the application or for some other reason the mark

..

35

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

doesn’t qualify for registration, and this challenge can be brought even years after the trademark has been registered. a. True b. False Answer: a Diff: 2 Type: TF Page Reference: 291f Skill: Recall 79) Trademarks can be challenged up to 15 years after registration. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 291g Skill: Recall 80) A person can only bring a passing-off action where there is no registered trademark involved. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 291h Skill: Recall 81) Distinguish between a trademark action and a passing-off action.

Answer: Even where there is no registered trademark, when one business does something that will confuse the public into thinking that it is dealing with another business, that other business can sue in common law by way of a passing-off action.

..

36

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

Feedback: Even where there is no registered trademark, when one business does something that will confuse the public into thinking that it is dealing with another business, that other business can sue in common law by way of a passing-off action.

Diff: 2 Type: ES Page Reference: 291i-292b Skill: Recall 82) Joe wanted to start up a restaurant business, did some research, and found out that McDonald's had not properly registered its trademark, the golden arches, in his particular area. Joe used a similar pair of arches over his restaurant and started conducting business.

Explain any danger he might face.

Answer: Even if McDonald's has failed to properly register its trademark under these circumstances, it could still sue Joe under a common law passing-off action for trying to confuse the public into thinking that it was dealing with McDonald's when it was not.

Feedback: Even if McDonald's has failed to properly register its trademark under these circumstances, it could still sue Joe under a common law passing-off action for trying to confuse the public into thinking that it was dealing with McDonald's when it was not.

Diff: 2 Type: ES Page Reference: 291j-292c Skill: Applied 83) A "passing-off action" prevents a person from misleading the public into thinking it is dealing with some other business and applies whether or not a registered trademark is involved. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 291l-292a Skill: Recall 84) Naxon opened a retail computer shop that he called Computer Haven Ltd. He used colours and signs similar to those used by Computerheaven Ltd., a very successful

..

37

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

computer store three kilometres away. After Naxon was in business for about five months, the directors of Computerheaven Ltd. noticed that their sales had dropped. On these facts, which of the following is true? a. Computerheaven could successfully sue Naxon for the tort of passing-off if it can prove that the name, signs, and colours used by Naxon were likely to mislead the public. b. Computerheaven could successfully sue Naxon for the tort of innuendo. c. Computerheaven could successfully sue Naxon for the tort of injurious falsehood. d. Computerheaven could successfully sue Naxon for breach of contract. e. Computerheaven has no cause of action against Naxon because ours is a free society and competition in all forms is encouraged by our political and legal system.

Answer: a Diff: 2 Type: MC Page Reference: 292e Skill: Applied 85) Which of the following is true with regards to passing-off? a. In a passing-off action, the onus is on the plaintiff to prove that actual monetary damages were caused. b. The law concerning passing-off is founded in contract law. c. Passing-off requires some proof of actual confusion. d. The law of passing-off does not require proof of any intent to deceive or misrepresent. e. In a passing-off action, proof of trademark registration must be established.

Answer: d Diff: 1 Type: MC Page Reference: 292f Skill: Applied 86) Discuss the various remedies that are available and their effectiveness when intellectual property such as copyright and patent are interfered with.

Answer: The remedies available in court when intellectual property rights are infringed are similar in all cases and include damages, injunctions, an Anton Piller order, an accounting, or criminal penalties. Damages are only available at trial and after a long wait. When there

..

38

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

is urgency and the victim wants to stop the infringement quickly, it may apply for an interim injunction, but this will only be granted when there is a strong case likely to be successful at trial and the balance of convenience is in the applicant’s favour. Where there is concern that the offending products or records will be destroyed or moved before trial, the victim may request an Anton Piller order, allowing seizure of the products or records. Courts, however, are reluctant to issue these orders except in the most extreme cases. At trial, there are other remedies, including damages or a permanent injunction.

But the actual value of the intellectual property involved and the damages suffered are often difficult to determine. Therefore, it may be more appropriate to seek an order for an accounting. Because of the difficulty in assessing actual losses to be compensated, there is an increasing tendency to award punitive damages in these cases. Because of these problems, the Copyright Act allows the victim to elect an award of statutory damages without the necessity of proving the actual loss. Both the Copyright Act and the Patent Act have provisions that make some forms of infringement a criminal offence with penalties of imprisonment and/or fines.

Feedback: The remedies available in court when intellectual property rights are infringed are similar in all cases and include damages, injunctions, an Anton Piller order, an accounting, or criminal penalties. Damages are only available at trial and after a long wait. When there is urgency and the victim wants to stop the infringement quickly, it may apply for an interim injunction, but this will only be granted when there is a strong case likely to be successful at trial and the balance of convenience is in the applicant’s favour.

Where there is concern that the offending products or records will be destroyed or moved before trial, the victim may request an Anton Piller order, allowing seizure of the products or records. Courts, however, are reluctant to issue these orders except in the most extreme cases. At trial, there are other remedies, including damages or a permanent injunction. But the actual value of the intellectual property involved and the damages suffered are often difficult to determine. Therefore, it may be more appropriate to seek an order for an accounting. Because of the difficulty in assessing actual losses to be compensated, there is an increasing tendency to award punitive damages in these cases.

Because of these problems, the Copyright Act allows the victim to elect an award of statutory damages without the necessity of proving the actual loss. Both the Copyright Act and the Patent Act have provisions that make some forms of infringement a criminal offence with penalties of imprisonment and/or fines.

Diff: 2 Type: ES Page Reference: 292g, 293b, 294a Skill: Recall 87) Which of the following is true with regard to trademark infringement and the remedies of the trademark owner? a. Before a trademark owner can sue successfully for an infringement, he or she must prove that the mark used by the defendant actually did confuse members of the public.

..

39

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

b. If a person forges a trademark, that person can be sued by the owner of the trademark for infringement in a civil action, but there cannot be any criminal charges laid against him or her. c. The owner of a trademark can sue someone who forges his or her trademark, and can ask the court for an injunction, an accounting of profits, and custody of the offending wares. d. Once a trademark is registered, the owner of the trademark cannot lose the right to use that mark. e. Before a trademark owner can sue successfully for an infringement, he or she must prove that the mark used by the defendant was the same as his or her mark.

Answer: c Diff: 2 Type: MC Page Reference: 293d Skill: Recall 88) Which of the following is not a remedy for a copyright infringement? a. Anton Piller order b. Permanent injunction c. Damages d. Quantum meruit e. Interim injunction Answer: d Diff: 2 Type: MC Page Reference: 293e Skill: Recall 89) The effect of an Anton Piller order is to: a. Require the infringer to pay over any profits b. Stop offending conduct after trial c. Require the infringer to pay damages d. Compensate the holder of copyright e. Seize material from the suspected wrongdoer

..

40

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

Answer: e Diff: 2 Type: MC Page Reference: 293f Skill: Recall 90) Indicate four remedies that may be available to the victim of the breach of copyright.

Answer: An Anton Piller order; damages (both normal and punitive); injunction (both interim and permanent); accounting Feedback: An Anton Piller order; damages (both normal and punitive); injunction (both interim and permanent); accounting Diff: 2 Type: ES Page Reference: 293g, 294f Skill: Recall 91) When a court orders that any profits made from wrongdoing be paid over to the victim, this is known as: a. Statutory damages b. Punitive damages c. Compensatory damages d. An injunction e. An accounting Answer: e Diff: 1 Type: MC Page Reference: 293h Skill: Recall 92) Explain how the remedy of an accounting works when there has been a violation of copyright.

Answer:

..

41

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

The offender is required to report any profits that he or she has made from the sale or use of the offending materials and pay those profits over to the holder of the copyright.

Feedback: The offender is required to report any profits that he or she has made from the sale or use of the offending materials and pay those profits over to the holder of the copyright.

Diff: 2 Type: ES Page Reference: 293i Skill: Recall 93) Where intellectual property is involved, what could be added to a contract or licence to strengthen the argument in support of an injunction if a breach does take place?

Answer: It is advisable to include a restrictive covenant and provisions to acknowledge that if a breach does take place, immediate and irreparable harm will occur for which damages will not provide adequate compensation.

Feedback: It is advisable to include a restrictive covenant and provisions to acknowledge that if a breach does take place, immediate and irreparable harm will occur for which damages will not provide adequate compensation.

Diff: 2 Type: ES Page Reference: 294b Skill: Recall 94) If a copyright owner has grounds for believing that a person is infringing his copyright, but fears that the infringer may destroy the evidence, the owner could get a court order to allow him to search and seize the evidence. Which of the following is such an order? a. Anton Piller order b. Interlocutory injunction c. Order for an accounting d. Execution order e. All of the above Answer: a Diff: 2

..

42

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

Type: MC Page Reference: 294c Skill: Recall 95) If a copyright owner has grounds for believing that a person is infringing his or her copyright, but fears that the infringer may destroy the evidence, the owner could go to court to get an Anton Piller order, which would allow seizure of the evidence. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 294d Skill: Recall 96) What is an Anton Piller order?

Answer: This is an interim court order whereby the offending products or records are seized before they can be destroyed or removed. To be effective, this must be done without notice to the offending party.

Feedback: This is an interim court order whereby the offending products or records are seized before they can be destroyed or removed. To be effective, this must be done without notice to the offending party.

Diff: 3 Type: ES Page Reference: 294e Skill: Recall 97) Which of the following is true with regard to infringement and the remedies available to the copyright owner? a. Copyright protection on photographs lasts for the life of the photographer plus 50 years. b. The Copyright Office helps the owner of copyright police his or her work. c. Copying for use inside a business is not infringement because infringement requires that the copying be done for profit from the selling of copies to those outside the firm. d. Copyright infringement is a civil matter; there are no criminal penalties.

..

43

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

e. The Copyright Act allows the victim of an infringement to elect an award of statutory damages without the necessity of actually proving the loss.

Answer: e Diff: 3 Type: MC Page Reference: 294g Skill: Applied 98) Which of the following is true of copyright law in Canada? a. A creator's ownership of copyright is created only when that copyright is registered pursuant to the federal Copyright Act. b. A person who copies any work or part of a work is infringing copyright and his or her reason for doing so is irrelevant. c. A person who infringes copyright is subject to a civil action and a criminal action under provisions in the Copyright Act. d. Canada’s Copyright Act, a federal statute, provides that a person can infringe copyright so long as it is not for profit. e. The Copyright Act sets out who owns the rights when the author is an employee or a consultant, and its provisions cannot be changed by contract.

Answer: c Diff: 2 Type: MC Page Reference: 294h Skill: Recall 99) Which of the following is true of copyright law in Canada? a. Canada’s Copyright Act, a federal statute, provides that a person can infringe copyright so long as it is not for profit. b. A creator's ownership of copyright is created only when that copyright is registered pursuant to the federal Copyright Act. c. The Copyright Act sets out who owns the rights when the author is an employee or a consultant, and its provisions cannot be changed by contract. d. A person who copies any work or part of a work is infringing copyright and his or her reason for doing so is irrelevant. e. A person who infringes copyright is subject to a civil action and a criminal action under provisions in the Copyright Act.

..

44

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

Answer: e Diff: 2 Type: MC Page Reference: 294i Skill: Applied 100) Discuss the idea of the duty of confidentiality that an employee owes to the employer. Give examples of the circumstances under which such a duty is imposed and what an employer should do to ensure that such confidences are kept.

Answer: There are many situations where the disclosure of confidential information can have a harmful effect on a business. In this question, students are expected to demonstrate knowledge of the nature of an employee's duty to keep confidences, what constitutes confidential information, and the consequences of its disclosure. Trade secrets, customer lists, and information—even private information about key personnel in the company— can be important to a competitor, and its disclosure can hurt the business. It is clear that any employee, as part of his or her duty to the company, has a duty to maintain such confidences. Of course, the more senior the employee, the more likely he or she will be privy to such harmful information; however, even the most junior of employees can be privy to information the disclosure of which can hurt the company.

When the employee wrongfully discloses such information, he or she has violated his or her duty to the company and can be disciplined. This may include firing and suing that employee for damages. Where another person, such as a new employer or competitor, has persuaded that employee to disclose the secret, that competitor can also be sued for inducing breach of contract.

But even the best-intentioned employee cannot be expected to keep a confidence that he or she doesn't know is secret. It is vital for the employers to tell the employee what materials, information, or trade secrets are confidential. Employers must make clear the company policy on keeping such confidences and inform the employees what they can expect if the confidential information is disclosed. Any confidential documents should be clearly marked. Terms can be included in employment contracts designed to control such information, such as provisions prohibiting employees from going to work for competitors for a reasonable period of time upon termination.

As far as remedies are concerned, the normal gamut should be available, including damages, injunction (often to keep the employee from working for a competitor), accounting, and even punitive damages in the appropriate circumstances.

Feedback: There are many situations where the disclosure of confidential information can have a harmful effect on a business. In this question, students are expected to demonstrate knowledge of the nature of an employee's duty to keep confidences, what constitutes confidential information, and the consequences of its disclosure. Trade

..

45

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

secrets, customer lists, and information—even private information about key personnel in the company—can be important to a competitor, and its disclosure can hurt the business.

It is clear that any employee, as part of his or her duty to the company, has a duty to maintain such confidences. Of course, the more senior the employee, the more likely he or she will be privy to such harmful information; however, even the most junior of employees can be privy to information the disclosure of which can hurt the company.

When the employee wrongfully discloses such information, he or she has violated his or her duty to the company and can be disciplined. This may include firing and suing that employee for damages. Where another person, such as a new employer or competitor, has persuaded that employee to disclose the secret, that competitor can also be sued for inducing breach of contract.

But even the best-intentioned employee cannot be expected to keep a confidence that he or she doesn't know is secret. It is vital for the employers to tell the employee what materials, information, or trade secrets are confidential. Employers must make clear the company policy on keeping such confidences and inform the employees what they can expect if the confidential information is disclosed. Any confidential documents should be clearly marked. Terms can be included in employment contracts designed to control such information, such as provisions prohibiting employees from going to work for competitors for a reasonable period of time upon termination.

As far as remedies are concerned, the normal gamut should be available, including damages, injunction (often to keep the employee from working for a competitor), accounting, and even punitive damages in the appropriate circumstances.

Diff: 2 Type: ES Page Reference: 295, 296h Skill: Applied 101) In order to obtain a remedy for the disclosure of confidential information or a trade secret, what must the plaintiff show? a. That the information was not personal b. That there was a non-disclosure agreement c. That the employee profited from the disclosure d. That the employee intended to harm the employer e. That the disclosure of information has caused harm Answer: e Diff: 2 Type: MC Page Reference: 296a Skill: Recall

..

46

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

102) Maureen, who frequently develops gadgets, had an idea for a machine that could feed her animals (cats, dogs, rabbits, and fish) while she was away on vacation for a week. She was very sure of the idea and began discussions with a manufacturer.

Unfortunately, after it was concluded that it could make the machine, the parties could not agree on proper compensation and they broke off negotiations. Shortly afterwards, this manufacturer, Easylife Ltd., began to manufacture "the animal feeder" based on Maureen’s idea. On these facts, which of the following is true? a. The manufacturer could not be sued for misuse of a trade secret because it was not Maureen's employee and thus was not in a position of trust and could use the information for its own benefit. b. The manufacturer could not be sued for misuse of a trade secret because it had not signed any document in which it acknowledged it had understood the information was confidential and in which it promised not to use the information to Maureen’s detriment. c. The manufacturer could not be sued for misuse of a trade secret because Maureen only shared her idea and ideas cannot be protected by trade secret law. d. Maureen has no action against the manufacturer because she had not patented her invention. e. Maureen could not sue the manufacturer for infringement of copyright but could sue for misuse of a trade secret if she can show that it was apparent in the circumstances that the manufacturer was being trusted with confidential information.

Answer: e Diff: 2 Type: MC Page Reference: 296b Skill: Applied 103) Computer students who watched their teachers go out on strike were amazed when they heard about the difficult logistics required in such an operation. Two students spent two nights and two days developing a program to organize a strike and picket line. It included such variables as legal requirements, number of sites, number of picketers, communications network, shifts, and media contacts. The students called their program "Picket Program." The students took their package—program and manual—to a computer developer/publisher, Mr. Lacs, to discuss the feasibility of marketing it. Lacs said that it was feasible. However, negotiations, which stretched over two weeks, broke down when Lacs rejected the terms in the students’ licensing agreement. Three months later, the students learned that Lacs had developed and published a program called "Picketers' Path" based on their ideas, with a manual that they recognized as their own.

On these facts, which of the following is true? a. The students' manual was not protected by copyright, because they had not yet applied for protection under the Copyright Act.

..

47

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

b. Because no non-disclosure agreement was signed by Lacs, he cannot be sued for misuse of a trade secret. c. The students cannot protect the computer program under the law of trade secrets because all of the information it contained could be obtained by others (e.g., the law from the library, the necessities of picketers from observation or unions). d. The students could sue for breach of trade secret law if they can show it was apparent in the circumstances that Lacs was being trusted with confidential information. e. With regard to the computer program, Lacs could not be sued for misuse of a trade secret because the students only told him their idea and ideas cannot be protected by trade secret law.

Answer: d Diff: 3 Type: MC Page Reference: 296c Skill: Applied 104) Beth and Kate, trying to beat the competition to the market, were in a mad race to complete a book with a computer program that would aid gardeners in designing and maintaining their gardens. Because they knew another group in town was working on a similar project, they were very fearful that their work would be plagiarized (copied).

Which of the following is false with regard to their safeguarding their work? a. They should mark the work "confidential." b. They could require employees and others who must have access to the work to sign "non-disclosure" agreements in which those persons acknowledge that information about the work is confidential and shouldn't be disclosed without consent. c. After the book and program are finished, they can register copyright in them even before they have them published. d. They could try to keep the information and program secret (i.e., only disclose the parts of it that the individual employees had to know to do their jobs). e. They could register the book and program under the provincial Trade Secrets Act. Answer: e Diff: 2 Type: MC Page Reference: 296d Skill: Applied 105) Which of the following is correct with respect to trade secrets?

..

48

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

a. The information must be fully disclosed under the provincial Trade Secrets Act. b. Trade secrets include such things as formulas, processes, and recipes. c. Personal information cannot be a trade secret, even if it affects the business. d. The employee need not be informed that the information is confidential. e. There is no duty not to disclose trade secrets unless specified in a contract.

Answer: b Diff: 2 Type: MC Page Reference: 296e Skill: Recall 106) Which of the following is true with regard to trade secrets? a. Trade secrets are often not protected by patent, copyright, or trademark. b. Trade secrets are protected automatically by the law of patents. c. The protection afforded for trade secrets applies only to personal information, not to commercial matters. d. An Anton Piller order is an order of the court requiring a person who stole and used a trade secret to make an accounting of all profit realized from its use. e. An injunction could be granted by the court only against a person who stole a trade secret, not against a third person using the stolen secret.

Answer: a Diff: 2 Type: MC Page Reference: 296f Skill: Applied 107) Chad was the best private detective in the west. His system for tracking persons who have caused themselves to disappear was markedly superior to that of others. Sally, his only assistant, was considered so valuable that he had her sign five-year contracts with non-disclosure clauses. Sally took notes at a private meeting between Chad and a representative of the RCMP who was negotiating a contract with Chad to track down two criminals. Sally and Chad took care that the discussions were understood to be confidential—regarding the information shared both by the RCMP and by Chad about his methods. Sally was approached by a competitor of Chad, Mr. Adolph, who offered her three times her current salary if she would break her contract with Chad, sign with him, and bring him information about Chad's tracking system. After some months, she did just that. Furthermore, she shared with Adolph the information given to Chad by the RCMP,

..

49

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

which caused the RCMP embarrassment, time, and money. Which of the following is true? a. Chad could sue Sally for breach of her employment contract, not only on the clause relating to the term of her employment, but also on the non-disclosure clause. b. Chad could sue Adolph for the tort of passing-off. c. Sally owes no fiduciary duty to Chad even though she had a trusted position as an employee. d. Chad could sue Sally for disclosing the information only if he had signed a nondisclosure clause. e. The RCMP could not sue Chad for breach of confidence because the information disclosed by Sally was not novel know-how that was giving the RCMP the cutting edge in business competition.

Answer: a Diff: 2 Type: MC Page Reference: 296j, n Skill: Applied 108) Joe worked for Harry's Fine Toys for a period of six years. In September, he left Harry's Fine Toys and went to Sam's Toy Shop, a competitor, disclosing Harry's Christmas line. What could Harry do under these circumstances?

Answer: In the process of disclosing this information, Joe has violated his duty to his employer of confidentiality and can be sued for the damages suffered.

Feedback: In the process of disclosing this information, Joe has violated his duty to his employer of confidentiality and can be sued for the damages suffered.

Diff: 2 Type: ES Page Reference: 296k Skill: Applied 109) Lodown Ltd., a company created by Mr. Day, became very successful over its 10year history. The company was run by Day, as president, and three vice-presidents (Martin, Mull, and Rand) who made up the executive board. At their last meeting, Day announced that he had confidential information to share with them—namely, that his wife was terminally ill, that he was withdrawing from active management for an indefinite period of time, and that he would transfer his responsibilities to Martin. Rand

..

50

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

repeated this information to others, and by doing so, he caused the company to lose a lucrative contract being negotiated and also caused Day personal embarrassment and monetary loss in his personal affairs. On these facts, which of the following is true? a. Rand cannot be sued since the information disclosed was personal and did not deal directly with the business. b. Rand owes no fiduciary duty to the company as an officer of the company. c. A non-disclosure provision is required; Day simply putting the members of the executive on notice that they were expected to keep the information confidential is not sufficient to bring action. d. In law, there can be no action against Rand because the information he repeated was not a trade secret. e. The company would have an action against Rand because it is a commercial enterprise that suffered a loss because he breached his fiduciary duty to the company.

Answer: e Diff: 2 Type: MC Page Reference: 296l Skill: Applied 110) Which of the following is true with respect to the duty owed when a person is in possession of confidential information? a. The nature of the duty is not to disclose confidential information about a business that would cause harm to the business or bring personal benefit. b. There is an obligation of duty, but it stems from contract law. c. A duty is only owed when the information is copyrighted or patented. d. The duty is owed only between partners within a partnership. e. There must be a fiduciary duty in order to have a legal obligation not to disclose confidential information.

Answer: a Diff: 2 Type: MC Page Reference: 296m Skill: Recall 111) An employee could not be sued for disclosing a company's customer list because no trade secret or unique manufacturing process is involved.

..

51

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 296o Skill: Recall 112) Gordon invented a solution that dissolved the residue of tape that remained on walls after the removal of notices, pictures, etc. He kept his formula secret, but wasn't yet interested in marketing it, just in improving it. Gordon's only employee, Thad, who had signed a contract to work until July 1, 2011, was offered a job by Mr. Barr, who would pay him twice his salary if Thad would leave Gordon right away (in April) and bring Gordon's secret formula with him. Because Thad was upset by Gordon's lack of interest in marketing his product, he did copy the formula, quit, and began working for Barr, who marketed the solution. On these facts, which of the following is false? a. Gordon could sue Barr for inducing breach of contract. b. Gordon could not get an injunction to stop Barr from marketing the product because Barr didn't steal the formula. c. Gordon could sue Thad for breach of trade secret law. d. As one remedy, Gordon could ask for the accounting of profits. e. Gordon could sue Thad for breach of the employment contract.

Answer: b Diff: 3 Type: MC Page Reference: 296p Skill: Applied 113) Where a competitor has encouraged an employee to breach his or her duty of confidentiality, it may be possible to seek redress from that competitor in the form of damages for inducing a breach of contract. a. True b. False Answer: a Diff: 2 Type: TF Page Reference: 296r

..

52

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

Skill: Recall 114) Explain under what circumstances a tort action of inducing a breach of contract can be brought.

Answer: When one business persuades an employee or someone else doing business with another to breach that contract and do business with him instead Feedback: When one business persuades an employee or someone else doing business with another to breach that contract and do business with him instead Diff: 2 Type: ES Page Reference: 296s Skill: Recall 115) Separate privacy protection is provided under common law. a. True b. False Answer: b Diff: 3 Type: TF Page Reference: 298a Skill: Recall 116) The federal government's Personal Information Protection and Electronic Documents Act (PIPEDA) applies in all provinces except where legislation that provides for equivalent protection has been passed by the province. a. True b. False Answer: a Diff: 2 Type: TF Page Reference: 298b Skill: Applied 117) Which of the following is true in respect of privacy law in Canada?

..

53

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

a. Organizations in the private sector are subject to legislated responsibilities with respect to the personal information they collect. b. The power to enact privacy legislation has been granted exclusively to the federal government. c. Privacy protection is found primarily in the common law. d. The Personal Information Protection and Electronic Documents Act is designed primarily to regulate the government in its collection, use, and disclosure of personal information. e. Privacy laws are generally considered unnecessary because voluntary privacy protection has been so successful.

Answer: a Diff: 2 Type: MC Page Reference: 298c Skill: Recall 118) Discuss the scope and purpose of the Personal Information Protection and Electronic Documents Act (PIPEDA).

Answer: This federal act came into force as of January 1, 2004. It applies to all organizations in Canada involved in the collection, use, and disclosure of personal information in connection with all commercial activity. It applies to both health and non-health information, information gathered from websites, as well as subscriptions to magazines and internet services by an individual and any other personal information that a company has in its possession that relates to identifiable individuals. This Act requires that businesses and organizations develop a privacy policy that will protect all such private information from being disclosed to others.

Feedback: This federal act came into force as of January 1, 2004. It applies to all organizations in Canada involved in the collection, use, and disclosure of personal information in connection with all commercial activity. It applies to both health and nonhealth information, information gathered from websites, as well as subscriptions to magazines and internet services by an individual and any other personal information that a company has in its possession that relates to identifiable individuals. This Act requires that businesses and organizations develop a privacy policy that will protect all such private information from being disclosed to others.

Diff: 2 Type: ES Page Reference: 298e, 299b Skill: Recall

..

54

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

119) The Personal Information Protection and Electronic Documents Act (PIPEDA) applies only to federal government institutions. a. True b. False Answer: b Diff: 3 Type: TF Page Reference: 298d Skill: Recall 120) Health information is not specifically protected by legislation in any province. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 298f Skill: Recall 121) The Personal Information Protection and Electronic Documents Act (PIPEDA) protects personal information, limits its collection, and provides for limited access where appropriate. a. True b. False Answer: a Diff: 3 Type: TF Page Reference: 299a Skill: Recall 122) In Canada, as of January 1, 2004, all organizations involved in the collection, use, and disclosure of personal information in connection with their commercial activities must be in compliance of the Personal Information Protection and Electronic Documents Act (or, where enacted, equivalent provincial legislation). Discuss the salient points of the legislation with which businesses must be in compliance.

Answer:

..

55

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

The organization must be accountable for the information collected.

Consent must be obtained from those whose information is used (although in some circumstances this can be implied).

Reasonable limits must be placed on the collection, use, retention, and disclosure of this information.

Provisions must be in place for maintaining the accuracy and safeguarding of personal information, including safeguarding from abuses by employees of the organization.

Individuals must have access to the collected information in order to determine its accuracy and challenge the information collected about them where appropriate.

Feedback: The organization must be accountable for the information collected.

Consent must be obtained from those whose information is used.

Reasonable limits must be placed on the collection, use, retention, and disclosure of this information.

Provisions must be in place for maintaining the accuracy and safeguarding of said personal information, including safeguarding from abuses by employees of the organization.

Individuals must have access to the collected information in order to determine its accuracy and challenge the information collected about them where appropriate.

Diff: 2 Type: ES Page Reference: 299c-300 Skill: Recall 123) “Cloud computing” services appear to be a very secure alternative for file storage and access. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 301a Skill: Recall 124) Laura is concerned that her emails may be read by third parties and that her internet "surfing" is being tracked by businesses hoping to use the information to inundate her with unsolicited email advertising. She is also convinced that embedded software devices on her computer give others the ability to access her private information. Her friends

..

56

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

think she is just being paranoid. Which of the following is true in respect of privacy on the internet? a. Now that privacy rights are legally protected, internet users should feel secure in providing private information online. b. Although privacy laws are being enacted as precautionary measures, voluntary protection of privacy has proven overwhelmingly successful. c. Every Canadian province is governed by the provisions of the federal Personal Information Protection and Electronic Documents Act. d. Since email communication is not secure, the best way to ensure privacy is through encryption. e. While unencrypted data are susceptible to unauthorized access, encryption of information communicated online provides perfect protection against hackers.

Answer: d Diff: 2 Type: MC Page Reference: 301b Skill: Applied 125) Which of the following statements regarding privacy is true? a. Credit card and debit card fraud is now virtually impossible with the new safeguards in place. b. Since the development of encryption, wireless networks are 100% protected against unauthorized access. c. Employers are not liable for employees' abuses of privacy. d. An example of identity theft is accessing some basic information to obtain a new driver's licence and other identifying documents, and then using them to secure new credit cards in the name of the victim. e. The theft of personal identification numbers (PINs) has been eliminated.

Answer: d Diff: 1 Type: MC Page Reference: 302a Skill: Recall 126) Identity theft refers to someone accessing some basic information such as a driver's licence, and then using that to obtain a new credit card in the name of the victim.

..

57

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

a. True b. False Answer: a Diff: 2 Type: TF Page Reference: 302b Skill: Recall 127) The Criminal Code has been updated to make identity theft and fraud an indictable offence punishable by up to 10 years in prison. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 302c Skill: Recall 128) Employers are particularly vulnerable to the misuse of their computer resources by employees. Discuss.

Answer: Employees may disclose confidential information inadvertently or cause damage and loss through the misuse of computer resources. They may waste resources by using the computer for personal activities. They may expose the company to embarrassment and liability then they use company equipment or company email accounts for illegal or otherwise inappropriate purposes. This might include accessing a customer or client’s personal information; downloading inappropriate material such as pornography; gambling; or distributing defamatory, sexually explicit, harassing, or hateful material.

Feedback: Employees may disclose confidential information inadvertently or cause damage and loss through the misuse of computer resources. They may waste resources by using the computer for personal activities. They may expose the company to embarrassment and liability then they use company equipment or company email accounts for illegal or otherwise inappropriate purposes. This might include accessing a customer or client’s personal information; downloading inappropriate material such as pornography; gambling; or distributing defamatory, sexually explicit, harassing, or hateful material.

Diff: 3 Type: ES

..

58

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 9: Ideas and Information

Page Reference: 302d Skill: Applied 129) Personal use of computers by a company's employees can expose the employer to a variety of liabilities. Discuss some practical solutions available to the employer that help to contain this risk.

Answer: The employer may have mechanisms in place to digitally monitor the employees’ use of company equipment. Here, it is important to make the employees aware of the various monitoring activities that are employed. The optimum solution is to educate all employees upon their hire—and at periodic intervals during their employment—that their phone calls, computer usage, and other employment activities are the subject of monitoring.

Feedback: The employer may have mechanisms in place to digitally monitor the employees’ use of company equipment. Here, it is important to make the employees aware of the various monitoring activities that are employed. The optimum solution is to educate all employees upon their hire—and at periodic intervals during their employment—that their phone calls, computer usage, and other employment activities are the subject of monitoring.

Diff: 2 Type: ES Page Reference: 302e Skill: Applied 130) In order to be effective, employers who monitor their employees' use of computers are well advised to do so secretly, without informing their employees of this practice. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 302f Skill: Recall

..

59

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

1) Electronic commerce consists of: a. The purchase and sale of goods and services at a retail level, but also the goods and services interchanged between businesses b. The laws regulating the internet and internet transactions c. The laws to restrict internet gambling, pornography, and defamatory material d. The digital communication between government agencies e. The laws of what jurisdiction should apply to internet transactions Answer: a Diff: 2 Type: MC Page Reference: 309a Skill: Recall 2) "Existing laws have proven useless with respect to the internet." Discuss the accuracy of this statement.

Answer: It is inaccurate. The various forms of existing law, including civil remedies for fraud, breach of contract, and tort, as well as most forms of criminal law and federal and provincial regulation, apply to transactions and activities conducted online. The difficulties consist primarily in determining the laws of what jurisdiction should apply and enforcement. The laws in place are often not readily adaptable to the new technologies and regulators have been slow to respond. However, that is changing. It should be noted that Web 2.0 now allows many more varieties of online communication, making it even more difficult for government controls to be effective.

Feedback: It is inaccurate. The various forms of existing law, including civil remedies for fraud, breach of contract, and tort, as well as most forms of criminal law and federal and provincial regulation, apply to transactions and activities conducted online. The difficulties consist primarily in determining the laws of what jurisdiction should apply and enforcement. The laws in place are often not readily adaptable to the new technologies and regulators have been slow to respond. However, that is changing. It should be noted that Web 2.0 now allows many more varieties of online communication, making it even more difficult for government controls to be effective.

Diff: 2 Type: ES Page Reference: 309b Skill: Applied

..

1

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

3) Which of the following is true with respect to the application of tort law to the internet? a. It is unlikely that courts will be willing to expand existing tort law to encompass new technologies. b. The principle of defamation will apply to the internet just as it does to any other form of communication, but the problems of jurisdiction and whom to sue will create significant obstacles. c. Companies that sell their products over the internet cannot be held liable under the laws of negligence if those products cause injury. d. Since common law provides adequate protection, no new statutes need to be passed to provide additional protection. e. Because the internet provides direct and inexpensive access to a massive audience, torts such as deceit, negligent misstatement, and defamation as well as normal civil and criminal remedies do not apply.

Answer: b Diff: 2 Type: MC Page Reference: 309c Skill: Recall 4) With regards to the internet, which of the following statements is true? a. Regulatory steps have been taken to overcome all problems associated with jurisdictional issues. b. Judicial action is allowed only if the person being sued is a resident of that jurisdiction. c. A major problem is to determine what laws apply to the internet and internet transactions. d. Valid laws apply to the internet, and there have been no difficulties in determining what laws apply to the internet and internet transactions. e. Determining where an action should be brought has not presented any legal problems.

Answer: c Diff: 2 Type: MC Page Reference: 310a Skill: Recall 5) Discuss the problems associated with business and the internet.

..

2

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

Answer: A major problem is to determine what laws apply to the internet and internet transactions.

Also, it is often not clear whom to sue or where an action should be brought. There is a considerable problem for local jurisdictions with respect to taxation. Finally, businesses may be held liable for employee misuse of company internet and email communications.

Feedback: A major problem is to determine what laws apply to the internet and internet transactions. Also, it is often not clear whom to sue or where an action should be brought. There is a considerable problem for local jurisdictions with respect to taxation.

Finally, businesses may be held liable for employee misuse of company internet and email communications.

Diff: 2 Type: ES Page Reference: 310b, e, h, 315c Skill: Applied 6) Discuss the unique challenges that the internet presents with respect to the law and how such challenges are being addressed.

Answer: Students should highlight the key challenges raised by the internet in a legal context. One of the greatest challenges obviously relates to jurisdiction. Online activities do not fit neatly within established geographic boundaries, making it difficult to determine which jurisdiction's laws are to be applied. There are also difficulties that arise as a result of the anonymity associated with the persons involved in online activities. Whether such anonymity is real or imagined, dealing with persons of uncertain identity raises additional challenges. Because of the vast amount of information and data easily transmitted over the internet, intellectual property issues are clearly present. Issues of privacy, the threat of computer viruses and related problems, and payment over the internet are all the subject of much concern for businesses today. In addition, all of the general business law issues—related to contracts, torts, criminal and regulatory offences, consumer protection, etc.—are also present in, and sometimes magnified by, online business transactions.

Students should note that laws and regulatory processes are working hard to catch up with an area that has grown at a phenomenal rate. It is important that students recognize that existing laws go a long way in establishing rights and obligations for parties doing business online, and new statutory provisions are being enacted to address particular concerns. Good students will point out that enforcement is not perfect, however, and individual businesses are well advised to take steps to protect themselves through proper the exercise of appropriate technological and organizational safeguards.

Feedback: Students should highlight the key challenges raised by the internet in a legal context. One of the greatest challenges obviously relates to jurisdiction. Online activities

..

3

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

do not fit neatly within established geographic boundaries, making it difficult to determine which jurisdiction's laws are to be applied. There are also difficulties that arise as a result of the anonymity associated with the persons involved in online activities. Whether such anonymity is real or imagined, dealing with persons of uncertain identity raises additional challenges. Because of the vast amount of information and data easily transmitted over the internet, intellectual property issues are clearly present.

Issues of privacy, the threat of computer viruses and related problems, and payment over the internet are all the subject of much concern for businesses today. In addition, all of the general business law issues—related to contracts, torts, criminal and regulatory offences, consumer protection, etc.—are also present in, and sometimes magnified by, online business transactions.

Students should note that laws and regulatory processes are working hard to catch up with an area that has grown at a phenomenal rate. It is important that students recognize that existing laws go a long way in establishing rights and obligations for parties doing business online, and new statutory provisions are being enacted to address particular concerns. Good students will point out that enforcement is not perfect, however, and individual businesses are well advised to take steps to protect themselves through proper the exercise of appropriate technological and organizational safeguards.

Diff: 2 Type: ES Page Reference: 310c, f, 318a, f, 321b, 322f Skill: Applied 7) A major problem concerning the internet is to determine what laws apply to the internet and internet transactions. a. True b. False Answer: a Diff: 2 Type: TF Page Reference: 310d Skill: Recall 8) Which of the following statements is incorrect in relation to the internet and computer fraud? a. There is no satisfactory means of regulating the internet. b. Finding and identifying the perpetrators of computer fraud presents a primary challenge. c. New technologies have provided satisfactory means of regulating the internet.

..

4

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

d. Prosecuting in the appropriate jurisdiction makes it difficult and costly to reduce computer fraud. e. Internet users need to be very careful with whom they deal and to whom they provide personal information.

Answer: c Diff: 2 Type: MC Page Reference: 310g Skill: Recall 9) Long-arm statutes refer to rules used to resolve questions as to which jurisdiction's laws are to be applied to a particular issue. a. True b. False Answer: b Diff: 2 Type: TF Page Reference: 311a Skill: Recall 10) Explain the concept of long-arm statutes.

Answer: Long-arm statutes refer to laws passed by many jurisdictions, allowing them to take jurisdiction even when no resident is directly involved. The result is that business people providing an internet service from one area where the activity is completely legal may find themselves sued or criminally prosecuted in other jurisdictions where they did not know they were breaking the law.

Feedback: Long-arm statutes refer to laws passed by many jurisdictions, allowing them to take jurisdiction even when no resident is directly involved. The result is that business people providing an internet service from one area where the activity is completely legal may find themselves sued or criminally prosecuted in other jurisdictions where they did not know they were breaking the law.

Diff: 2 Type: ES Page Reference: 311b Skill: Applied

..

5

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

11) A Canadian company published an article on the internet defaming an Australian resident. The Australian resident brought action against the Canadian company. With regards to internet jurisdiction, which of the following statements is true? a. Since the plaintiff lives in Australia, and the defendant is based in Canada, a third neutral country would be the appropriate jurisdiction. b. The Canadian company's appropriate defence would be to point out that it is impossible to know and comply with the laws of every jurisdiction, and therefore it is not liable. c. Since the plaintiff lives in Australia, and the harm was done in that country, there is a sufficient connection between the defamation and that country, and the case would be heard in an Australian court. d. Since the plaintiff lives in Australia, and the harm was done in that country, there is no connection between the defamation and Canada, and appropriately there is no jurisdiction. e. Since the company is Canadian, the most convenient jurisdiction would be the province in which the Canadian company resides.

Answer: c Diff: 3 Type: MC Page Reference: 311c Skill: Applied 12) With regards to internet jurisdiction, which of the following statements is true? a. Every jurisdiction has a different set of laws, and each internet user should conform to the local laws of each nation, state, or province. b. Judicial action is allowed only if the person being sued is a resident of that jurisdiction and directly involved. c. Canadian courts are willing to find jurisdiction where there is a real and substantial connection between the act complained of and the province. d. Many jurisdictions have passed long-arm statutes allowing them to take jurisdiction only if the person being sued is a resident of that jurisdiction. e. Valid laws apply to the internet, and there have been no difficulties in determining what laws apply to the internet and internet transactions.

Answer: c Diff: 2 Type: MC Page Reference: 311d ..

6

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

Skill: Applied 13) Canadian courts may decline jurisdiction if the court can be convinced that it would be more reasonable for some other jurisdiction to deal with the matter, especially where an action has already been started in that other jurisdiction. a. True b. False Answer: a Diff: 2 Type: TF Page Reference: 311e Skill: Recall 14) Dan, a Canadian resident, has decided to create a website offering products and services to consumers in certain European markets. Which of the following is true with respect to the jurisdictional issues that arise? a. Because the website is created to do business in other jurisdictions, the laws of those jurisdictions will apply to the transactions unless it is clearly stated otherwise in the contract. b. Disclaimers posted on Dan's website will protect him if the content of his website turns out to constitute an offence in the European markets in which he is operating. c. The laws of the jurisdiction of residence always govern. d. Dan could not be prosecuted for an activity that is against the law in a European jurisdiction, as long as that activity is acceptable in Canada. e. It is sufficient for Dan to follow the rules of his own jurisdiction.

Answer: a Diff: 2 Type: MC Page Reference: 312a, 320b Skill: Applied 15) With regards to the Ontario Consumer Protection Act, which of the following statements is true? a. The Act specifically provides that the rights set out in it apply only if the seller resides in Ontario at the time of the transaction. b. The Act specifically provides that the rights set out in it apply to all consumer transactions where the consumer or the other party is located anywhere in Canada at the time of the transaction. ..

7

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

c. The Act specifically provides that the rights set out in it apply only if the consumer resides in Ontario. d. The Act specifically provides that the rights set out in it apply to all consumer transactions where the consumer or the other party is a Canadian resident. e. The Act specifically provides that the rights set out in it apply to all consumer transactions where the consumer or the other party is located in Ontario at the time of the transaction.

Answer: e Diff: 3 Type: MC Page Reference: 312b Skill: Applied 16) Ontario's Consumer Protection Act specifically provides that the rights set out in it apply to all consumer transactions where the consumer or the other party is located in that province at the time of the transaction and that the rights set out in the Act apply despite any agreement to the contrary. a. True b. False Answer: a Diff: 2 Type: TF Page Reference: 312c Skill: Recall 17) When a foreign judgment is obtained against a business or individual, which of the following statements is true? a. If the business has no assets in the foreign jurisdiction or if there is no treaty in place to allow for enforcement, enforcement is a substantial threat. b. Whether a business resides in a foreign or domestic jurisdiction presents no problems regarding enforcement. c. Since the business resides in a foreign jurisdiction, there is no threat of enforcement. d. Since the judgment is obtained in a foreign jurisdiction, the business or individual may be extradited to face criminal charges. e. If the business has assets in the foreign jurisdiction or there are treaties in place to allow for enforcement, it is quite likely that the foreign judgment will be enforced.

Answer: e ..

8

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

Diff: 3 Type: MC Page Reference: 312d Skill: Applied 18) When a foreign judgment is obtained against a Canadian business, the business is often protected by Canadian laws that rarely allow enforcement of such judgments. a. True b. False Answer: b Diff: 1 Type: TF Page Reference: 312e Skill: Recall 19) Which of the following statements is incorrect regarding the enforcement of a Canadian judgment abroad? a. While it may be difficult to enforce such a judgment, there are important treaties in place that allow for such enforcement. b. Generally, courts are more willing to enforce judgments for money that can be enforced against the assets of an individual or business. c. Courts tend to be more reluctant to enforce non-monetary judgments against individuals (as compared with monetary judgments). d. There is a growing trend to enforce injunctions. e. Generally, courts are becoming more reluctant to enforce injunctions.

Answer: e Diff: 2 Type: MC Page Reference: 312f Skill: Recall 20) You decide to register a domain name "Delicious_breads_R_us.com," although you neither own a bakery nor have any legitimate use for the domain name. Subsequently you receive a complaint alleging that you have registered the name in bad faith. The complainant does not hold a registered trademark in the name nor do they have a domain name registered, but they have used the business name "Breads R Us" for many years.

Which of the following statements is true?

..

9

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

a. You are a cybersquatter. b. Your domain name dispute must be litigated in court. c. You can claim good faith justification for your use of your domain name. d. You have a real property right in the name. e. The complainant does not have any legitimate claim on the domain name.

Answer: a Diff: 2 Type: MC Page Reference: 313a Skill: Applied 21) Cybersquatting captures domain names that rightfully should go to others. a. True b. False Answer: a Diff: 2 Type: TF Page Reference: 313b Skill: Recall 22) Describe the concept of cybersquatting.

Answer: Each domain name is a unique address, giving rise to considerable conflict. Since only one business can have that domain address, conflicts arise when less well-intentioned individuals register the domain names first and then, in effect, hold the names for ransom.

Sometimes similar names are registered so that visitors making slight mistakes are intercepted and redirected to a competing business.

Feedback: Each domain name is a unique address, giving rise to considerable conflict.

Since only one business can have that domain address, conflicts arise when less wellintentioned individuals register the domain names first and then, in effect, hold the names for ransom. Sometimes similar names are registered so that visitors making slight mistakes are intercepted and redirected to a competing business.

Diff: 2 Type: ES Page Reference: 313c

..

10

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

Skill: Applied 23) Which of the following statements regarding cybersquatting is true? a. Cybersquatters capture domain names that rightfully belong to no one. b. Businesses that did not register their domain names have no recourse against someone else appropriating their names and registering them first. c. A business is entitled to its own unique domain name regardless of who registered it first. d. Registration of domain name precludes someone from registering a similar name to confuse visitors to the business’s website. e. Similar domain names are registered so that visitors making slight but expected mistakes are intercepted and redirected to a competing business.

Answer: e Diff: 2 Type: MC Page Reference: 313d Skill: Recall 24) Internet defamation is a particular problem because of the ease of widespread distribution. a. True b. False Answer: a Diff: 2 Type: TF Page Reference: 314a Skill: Recall 25) Describe the most common type of tort on the internet.

Answer: Defamation is the most common type of tort on the internet due primarily to the ease of widespread distribution. Online defamation can take many different forms, ranging from a remark in a private email, to chat room conversations, to postings on social networks and blogs, to an article posted on a business's website.

Feedback: Defamation is the most common type of tort on the internet due primarily to the ease of widespread distribution. Online defamation can take many different forms, ..

11

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

ranging from a remark in a private email, to chat room conversations, to postings on social networks and blogs, to an article posted on a business's website.

Diff: 2 Type: ES Page Reference: 314b Skill: Applied 26) In the context of employment and use of the internet, which of the following is true? a. Employers can be liable when their employees misuse the internet. b. Viewing an employee’s Facebook account is considered a criminal offence. c. Employers cannot be held liable when their employees misuse the internet. d. An employer need not have a clear and comprehensive policy prohibiting misuse of company resources such as the internet. e. Email should be encouraged over other forms of communication, because it is inherently private.

Answer: a Diff: 1 Type: MC Page Reference: 315a Skill: Recall 27) Businesses can find themselves liable for defamatory statements made by an employee. a. True b. False Answer: a Diff: 2 Type: TF Page Reference: 315b Skill: Recall 28) Employers are particularly vulnerable to the misuse of their computer resources by employees. Discuss.

Answer: There are dangers for businesses that are not careful about their internet and email communications. Not only will an employee making a defamatory statement be liable,

..

12

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

but the business that employs him or her may be liable as well, especially if company email services or websites are used to publish the offending statements.

Feedback: There are dangers for businesses that are not careful about their internet and email communications. Not only will an employee making a defamatory statement be liable, but the business that employs him or her may be liable as well, especially if company email services or websites are used to publish the offending statements.

Diff: 2 Type: ES Page Reference: 315d Skill: Recall 29) While at work, Neil would spend a considerable amount of time on the internet. After multiple warnings, Neil was fired from his job as a result. To get back at his boss, Neil anonymously posted several untrue and offensive messages about his boss to an internet discussion board frequently visited by his employer's customers and suppliers. Which of the following is true? a. Neil's internet service provider, not Neil, is the one facing liability for defamation, because it is the one technically publishing the offensive material. b. If Neil's former boss notifies Neil's internet service provider about the offensive messages, the internet service provider should not remove the messages because free speech is the cornerstone of the internet. c. Because the messages were posted anonymously, Neil could not be held liable for such discussion board postings. d. Neil's internet service provider could be forced to disclose the source of the discussion board postings. e. Because the internet remains largely unregulated, neither Neil nor his internet service provider could be held liable for such discussion board postings.

Answer: d Page Reference: 315e Skill: Applied 30) It has been proposed in Bill C-11 that internet service providers (ISPs) would be required to disclose user identities in cases of defamation or other internet offences, but the ISPs would be insulated from any liability. a. True b. False Answer: a

..

13

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

Diff: 2 Type: TF Page Reference: 315f Skill: Recall 31) Discuss any liability faced by the internet service provider (ISP) in cases where defamatory or other offensive statements are made on the internet.

Answer: This is an area of controversy. It is likely that the ISP will be obligated to disclose the identity of users that are accused of defamation or other internet offences. A proposal in Bill C-11 would insulate ISPs from liability, but it would require them to disclose the users’ identities.

Feedback: This is an area of controversy. It is likely that the ISP will be obligated to disclose the identity of users that are accused of defamation or other internet offences. A proposal in Bill C-11 would insulate ISPs from liability, but it would require them to disclose the users’ identities.

Diff: 2 Type: ES Page Reference: 315g Skill: Recall 32) Discuss the validity of online transactions, and the related issues that arise in transacting business over the internet.

Answer: Students should point out that online transactions often involve contracts, but that the online environment does not undermine their validity. The elements required for a valid contract remain, although certain additional issues are raised. Offers accepted by email or through a website will be effective as long as the usual requirements are present. Good students will note that clicking "I Accept" (or the equivalent) can constitute valid acceptance. Buyers are well advised to ensure that they carefully review licence terms (and other provisions) prior to acceptance (as with any contract). Students should also point out that capacity issues are heightened in an online environment, as it difficult to know whether the person engaging in an online transaction is sufficiently old enough and possesses the mental faculties to enter into the transaction. Further issues arise when there is a requirement of writing. Many jurisdictions have passed legislation making electronic documents and signatures equivalent to written documents. Sale of goods law and consumer protection law remain relevant to this area.

..

14

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

Feedback: Students should point out that online transactions often involve contracts, but that the online environment does not undermine their validity. The elements required for a valid contract remain, although certain additional issues are raised. Offers accepted by email or through a website will be effective as long as the usual requirements are present. Good students will note that clicking "I Accept" (or the equivalent) can constitute valid acceptance. Buyers are well advised to ensure that they carefully review licence terms (and other provisions) prior to acceptance (as with any contract). Students should also point out that capacity issues are heightened in an online environment, as it difficult to know whether the person engaging in an online transaction is sufficiently old enough and possesses the mental faculties to enter into the transaction. Further issues arise when there is a requirement of writing. Many jurisdictions have passed legislation making electronic documents and signatures equivalent to written documents. Sale of goods law and consumer protection law remain relevant to this area.

Diff: 2 Type: ES Page Reference: 316a, f, 317a, e, 318b Skill: Applied 33) Traditional contract rules only apply to written contracts and not to internet transactions. a. True b. False Answer: b Diff: 2 Type: TF Page Reference: 316b Skill: Recall 34) Discuss the federal Uniform Electronic Commerce Act (UECA).

Answer: The UECA has no legal standing, but it serves as a model for the design of provincial legislation throughout Canada. The object is to make electronic documents and signatures as binding on the parties as are the written ones. In general, the UECA and provincial acts recognize electronic or digitally stored documents and signatures as satisfying those requirements. A signature equivalent may be a password or some other form of encryption, which is controlled by the author of the document (and possibly verified by a trusted third party). The password or encryption would authenticate the document and give it the same status as one that was written and signed. Note that this does not apply in all cases and some types of documents still have to be in writing and signed to be valid.

..

15

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

Feedback: The UECA has no legal standing, but it serves as a model for the design of provincial legislation throughout Canada. The object is to make electronic documents and signatures as binding on the parties as are the written ones. In general, the UECA and provincial acts recognize electronic or digitally stored documents and signatures as satisfying those requirements. A signature equivalent may be a password or some other form of encryption, which is controlled by the author of the document (and possibly verified by a trusted third party). The password or encryption would authenticate the document and give it the same status as one that was written and signed. Note that this does not apply in all cases and some types of documents still have to be in writing and signed to be valid.

Diff: 2 Type: ES Page Reference: 316c Skill: Applied 35) Deceitful practices and fraud are ongoing concerns for those transacting business on the internet. Pat has recently been the victim of such a scam. He gets into a heated discussion with a friend over the application of current consumer protection laws to online transactions. Which of the following statements is correct? a. Although new legislation may be enacted in the future, general consumer protection legislation has yet to be extended to online transactions in any Canadian jurisdiction. b. Consumer protection law in respect of online transactions is governed by the federal Universal Internet Transactions Act (UITA). c. While case law applies to online activities, statute law—such as sale of goods legislation—does not apply to such transactions. d. Provinces are adopting federal Uniform Electronic Commerce Act guidelines. e. Provincial consumer protection legislation has been ineffective in protecting consumers with respect to internet transactions.

Answer: d Diff: 3 Type: MC Page Reference: 316d Skill: Applied 36) The objective, in Canada, of the Uniform Electronic Commerce Act (UECA) is primarily: a. To define what constitutes a violation of privacy b. To make electronic documents and signatures as binding on parties as written ones. c. To restrict internet pornography. ..

16

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

d. To restrict internet gambling e. To provide a series of remedies for internet commerce retail abuses primarily from "offshore" enterprises Answer: b Diff: 2 Type: MC Page Reference: 316e Skill: Recall 37) Which of the following statements would be true with regards to the Uniform Electronic Commerce Act (UECA)? a. A signature equivalent may be a password or some other form of encryption. b. An offer will be accepted and a contract formed only when the offer is sent and accepted by snail mail, and not email. c. A password or encryption does not authenticate an electronic document. d. The UECA changes the law with respect to the requirement of written documents and signatures. e. The use of electronic documents is not allowed with regards to online purchase of goods.

Answer: a Diff: 2 Type: MC Page Reference: 316g Skill: Recall 38) A signature equivalent for electronic documents might be a password or some other form of encryption. a. True b. False Answer: a Diff: 2 Type: TF Page Reference: 316h Skill: Recall

..

17

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

39) Which of the following statements correctly illustrates a legal signature for online commercial transactions? a. Signing your name at the bottom of a standard form, and then not mailing it to the business b. Clicking an "I Reject" dialogue box c. Opening an online shopping basket, and adding several items to the basket d. Attaching a signature on your computer screen e. Attaching an electronic signature to an electronic document Answer: e Diff: 2 Type: MC Page Reference: 316i Skill: Applied 40) Which of the following is true with respect to the application of contract law to the internet? a. Online communications are governed by the "post-box rule." b. No jurisdiction has passed any legislation making electronic communications the equivalent of written documents for legal purposes. c. Clicking an "I Accept" button on a website is considered the equivalent of achieving the consensus element of a binding contract. d. If the basic requirements of acceptance are not met, an offer accepted by email is binding on both parties. e. Internet contracts are governed by the federal Uniform Electronic Commerce Act in effect throughout Canada.

Answer: c Diff: 2 Type: MC Page Reference: 317b Skill: Recall 41) Which of the following statements regarding online transactions is true? a. Conducting transactions online negates the need to satisfy the normal requirements of a contract. b. Electronic signatures are not effective in determining the capacity of the parties entering into a contract.

..

18

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

c. Common law has established the equivalency of electronic documents to written ones. d. The post-box rule applies to both non-instantaneous and instantaneous methods of communication. e. Clicking an "I Accept" button may constitute valid acceptance of the terms of an agreement.

Answer: e Diff: 1 Type: MC Page Reference: 317c Skill: Recall 42) Hitting the "I Accept" button on a website is equivalent to an acceptance of the seller's offer. a. True b. False Answer: a Diff: 2 Type: TF Page Reference: 317d Skill: Recall 43) Joe sends Sanjay an offer via email from his Toronto office. The offer contains a provision indicating that the offer expires at 5:00 p.m. Toronto time. Sanjay, who lives in Vancouver, replies and accepts Joe's offer at 4:00 p.m. Vancouver time. Joe receives Sanjay's email acceptance at 9:00 a.m. the next day. Which of the following statements is true? (Note the three-hour time difference between Toronto and Vancouver.) a. Joe's offer had expired. b. A binding contract had been formed, once Joe opened Sanjay's email acceptance the next day. c. Once Sanjay sent the email, a binding contract had been formed regardless of what time Joe received the email. d. Joe and Sanjay had a binding contract, since Sanjay had accepted by 4:00 p.m.

Vancouver time. e. The contract became binding once Joe made the offer.

Answer: a Diff: 2

..

19

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

Type: MC Page Reference: 317e Skill: Applied 44) Whether a contract or another form of internet communication, Uniform Electronic Commerce Act (UECA) provisions determine that a message is sent as soon as it is committed to the system and is received as soon as it is read by the recipient. a. True b. False Answer: b Diff: 2 Type: TF Page Reference: 317f Skill: Recall 45) With regards to online contracts, which of the following statements is accurate? a. Consumers cannot be held liable for terms that they did not actually read. b. The electronic equivalent of small print is the part of a document that cannot be seen on the screen. c. Canadian consumers may have to have their claims heard in foreign jurisdictions. d. Exemption clauses in electronic contracts do not have to be brought to the attention of the person accepting. e. An electronic document becomes effective only once the consumer is provided with a paper copy.

Answer: c Diff: 2 Type: MC Page Reference: 317g Skill: Recall 46) Which of the following is used to authenticate the identity of a party to an online contract? a. File formatting b. Information encryption security c. Digital certificate d. A court order

..

20

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

e. Digital waterboarding Answer: c Diff: 2 Type: MC Page Reference: 318c Skill: Recall 47) An electronic signature provides a digital certificate that authenticates the identity of a party to the contract. a. True b. False Answer: a Diff: 2 Type: TF Page Reference: 318d Skill: Recall 48) Describe electronic signatures with respect to capacity.

Answer: Electronic signatures are most effective in identifying people if used in conjunction with trusted third parties who provide a digital certificate that authenticates the identity of a party to the contract. It assists in determining a person's age or mental capacity.

Feedback: Electronic signatures are most effective in identifying people if used in conjunction with trusted third parties who provide a digital certificate that authenticates the identity of a party to the contract. It assists in determining a person's age or mental capacity.

Diff: 2 Type: ES Page Reference: 318e Skill: Applied 49) PayPal and other similar services are foolproof methods to ensure the consumer gets what he or she has paid for. a. True b. False

..

21

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

Answer: b Diff: 2 Type: TF Page Reference: 318g Skill: Recall 50) With respect to the online contracts, which of the following statements is true? a. Determining where the contract was formed is important in determining the legality of the contract. b. Determining where the contract was formed is not important in determining which jurisdiction's consumer protection legislation applies. c. Online contracts do not require all essential elements of a contract, such as consensus, capacity, and legality. d. The legal status of online contracts is determined by common law. e. Determining where the contract was formed is not important in determining the capacity of the parties to the contract.

Answer: a Diff: 2 Type: MC Page Reference: 319a Skill: Recall 51) Determining where the contract was formed is an important factor in determining the laws of what jurisdiction will apply to the transaction. a. True b. False Answer: a Diff: 2 Type: TF Page Reference: 319b Skill: Recall 52) Click Enterprises operated a software and internet business in Ontario to facilitate the illegal copying and downloading of movies in both Canada and the United States (including New York State). Disney Enterprises brought action against Click in New York. Which of the following statements is true?

..

22

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

a. An Ontario court will enforce a New York judgment since Click's involvement indicated a real and substantial connection between the conduct complained of and New York State. b. Even though Click's involvement in the United States consisted of selling its product directly to residents of the United States, the question of jurisdiction would be solely determined by Click's nationality. c. An Ontario court will not enforce a New York judgment regardless of any circumstances. d. Click's involvement in the United States was not direct, since the firm operated in Canada, and as a consequence Disney's action in New York State would not be successful. e. New York State has no jurisdiction since Click is a Canadian company.

Answer: a Diff: 3 Type: MC Page Reference: 319c-320a Skill: Applied 53) Which of the following statements is true? a. Online dispute resolution services are now available for electronic transactions. b. The legal status of online contracts is determined by common law. c. Arbitration has not been proved to be a valuable tool for ecommerce disputes. d. Online dispute resolution services are very costly and time consuming. e. Online disputes are often self-regulated.

Answer: a Diff: 1 Type: MC Page Reference: 320c Skill: Recall 54) Discuss alternate dispute resolution with respect to international transactions.

Answer: Alternate dispute resolution methods such as negotiation, mediation, and arbitration are useful in seeking a resolution to an international dispute. Arbitration is particularly appropriate in such cases. This avoids the risks and potential expense and delay associated with the litigation process when dealing with foreign courts. Online dispute

..

23

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

resolution services are available for electronic transactions and are considerably less costly and less time consuming than traditional court processes.

Feedback: Alternate dispute resolution methods such as negotiation, mediation, and arbitration are useful in seeking a resolution to an international dispute. Arbitration is particularly appropriate in such cases. This avoids the risks and potential expense and delay associated with the litigation process when dealing with foreign courts. Online dispute resolution services are available for electronic transactions and are considerably less costly and less time consuming than traditional court processes.

Diff: 2 Type: ES Page Reference: 320d, 324c Skill: Applied 55) Online dispute resolution services for electronic transactions are less expensive and less time consuming than traditional court processes. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 320e Skill: Recall 56) Alternate dispute resolution has been effective in settling certain types of internet disputes. a. True b. False Answer: a Diff: 1 Type: TF Page Reference: 320f Skill: Recall 57) The Canadian government was successful in forcing the Canadian components of eBay to disclose their financial records on certain "power sellers" to Revenue Canada. a. True b. False

..

24

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

Answer: a Diff: 2 Type: TF Page Reference: 321a Skill: Recall 58) Discuss Bill C-28, Canada’s anti-spam legislation, which was passed into law in December 2010.

Answer: The intent of this Act is to prohibit unsolicited commercial email, prohibit false and misleading representations, prohibit the collection of personal information, impose liability for abuses, and control other abusive practices such as identity theft, phishing, and spyware. The CRTC, the Privacy Commissioner, and the Competition Bureau have been given additional powers under the Act to investigate, regulate, and provide remedies. It remains to be seen how effective this regulation will be. The Canadian Bar Association has argued that the Act goes too far in interfering with the Charter protection of free speech.

Feedback: The intent of this Act is to prohibit unsolicited commercial email, prohibit false and misleading representations, prohibit the collection of personal information, impose liability for abuses, and control other abusive practices such as identity theft, phishing, and spyware. The CRTC, the Privacy Commissioner, and the Competition Bureau have been given additional powers under the Act to investigate, regulate, and provide remedies. It remains to be seen how effective this regulation will be. The Canadian Bar Association has argued that the Act goes too far in interfering with the Charter protection of free speech.

Diff: 2 Type: ES Page Reference: 321c Skill: Recall 59) Which of the following issues is not covered in Canada’s anti-spam legislation? a. Unsolicited commercial email b. Collection of personal information c. Spyware d. Identity theft e. Downloading of music, games, and movies

..

25

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

Answer: e Diff: 2 Type: MC Page Reference: 321d Skill: Recall 60) The CRTC, the Privacy Commissioner, and the Competition Bureau have been given additional powers under Bill C-28, Canada’s anti-spy legislation. a. True b. False Answer: a Diff: 2 Type: TF Page Reference: 321e Skill: Recall 61) With regards to international business transactions, which of the following statements is true? a. There is no international court that deals with private disputes between businesses. b. There is a set of international laws that apply to all international transactions. c. The World Trade Organization litigates private disputes between businesses. d. The buyer must look to the local court in the seller's jurisdiction to resolve his or her problems. e. The General Agreement on Tariffs and Trade deals with private disputes between litigants.

Answer: a Diff: 2 Type: MC Page Reference: 321f Skill: Recall 62) When comparing international contracts with domestic contracts, which of the following statements is true? a. International contracts have no international court to litigate private matters, while domestic contracts have the Canadian judicial system to litigate private matters. b. International contracts are less complex than domestic contracts.

..

26

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

c. Domestic contract disputes can be resolved by the World Trade Organization. d. International contract disputes can be resolved by the World International Court of Trade Appeals. e. Domestic contracts are more complex because they have special problems such as transportation and insurance.

Answer: a Diff: 2 Type: MC Page Reference: 321g Skill: Applied 63) The International Court has jurisdiction over private international disputes between individuals or businesses. a. True b. False Answer: b Diff: 2 Type: TF Page Reference: 321h Skill: Recall 64) Discuss the international court with respect to international business transactions.

Answer: There is no international court that deals with private disputes between businesses doing business between jurisdictions. Rather, the parties must look to local courts in either jurisdiction to resolve their problems.

Feedback: There is no international court that deals with private disputes between businesses doing business between jurisdictions. Rather, the parties must look to local courts in either jurisdiction to resolve their problems.

Diff: 2 Type: ES Page Reference: 321i Skill: Recall 65) An international court to litigate private disputes between businesses doing business between jurisdictions exists within the World Trade Organization. ..

27

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

a. True b. False Answer: b Diff: 2 Type: TF Page Reference: 321j Skill: Recall 66) In most cases, it is best for parties to a contract to include a provision in the agreement to have any disputes between them arbitrated, usually using one of the international arbitration services available for that purpose. a. True b. False Answer: a Diff: 2 Type: TF Page Reference: 322a Skill: Recall 67) In which of the following ways can Canadian businesses become involved with businesses in different countries? a. Canadian businesses can be involved in joint ventures with a business in a foreign country. b. Canadian businesses can import or export goods. c. Canadian businesses may have licensing agreements of intellectual property with foreign businesses. d. Canadian businesses may become involved in providing or acquiring services from other jurisdictions. e. All of the above Answer: e Diff: 2 Type: MC Page Reference: 322b, d, g, and i Skill: Recall 68) Explain how Canadian businesses can become involved in business in different countries. ..

28

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

Answer: The most common way involves the exporting and importing of goods. Another way Canadian business can become involved in foreign countries is through dealings with intellectual property including copyrights, patents, and trademarks. This usually involves licensing agreements of intellectual property. Canadian businesses will also become involved in providing or acquiring services from other jurisdictions such as call centres for banking or warehouse distribution centres. They may also become involved in activities in other countries such as mining and resource exploration development and management.

Feedback: The most common way involves the exporting and importing of goods. Another way Canadian business can become involved in foreign countries is through dealings with intellectual property including copyrights, patents, and trademarks. This usually involves licensing agreements of intellectual property. Canadian businesses will also become involved in providing or acquiring services from other jurisdictions such as call centres for banking or warehouse distribution centres. They may also become involved in activities in other countries such as mining and resource exploration development and management.

Diff: 2 Type: ES Page Reference: 322c, e, h Skill: Applied 69) Mr. Smith and Sr. Zarza are negotiating an international contract for the sale of wicker furniture. They have agreed that, while they hope there will be no disputes, they want to include terms in the contract that would ensure that any disputes would be resolved favourably with limited time delay and minimal expense. Which of the following set of terms should they include in their contract? a. Limited liability, insurance, and mediation of disputes b. Unlimited liability, insurance, and arbitration of disputes c. Limited liability, payment in 90 days, and arbitration of disputes d. Limited liability, insurance, mediation of disputes, and payment in 90 days e. Limited liability, insurance, and arbitration of disputes Answer: e Diff: 2 Type: MC Page Reference: 322j Skill: Applied

..

29

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

70) Bilateral investment treaties (BITs) and foreign investment and promotion agreements (FIPAs) are government initiatives designed to stabilize the investment environment for corporations doing business abroad, especially for those involved in mining and natural resource extraction in countries where the political climate is unstable. a. True b. False Answer: a Diff: 2 Type: TF Page Reference: 322l Skill: Recall 71) Discuss the role of governments when companies engage in large projects abroad.

Answer: Governments will often become involved when the project is big enough, entering into BITs (bilateral investment treaties) and FIPAs (foreign investment and promotion agreements) designed to stabilize the investment environment for companies doing business abroad, especially for those involved in mining and natural resources extraction in countries where the political climate is unstable.

Feedback: Governments will often become involved when the project is big enough, entering into BITs (bilateral investment treaties) and FIPAs (foreign investment and promotion agreements) designed to stabilize the investment environment for companies doing business abroad, especially for those involved in mining and natural resources extraction in countries where the political climate is unstable.

Diff: 2 Type: ES Page Reference: 322m Skill: Recall 72) E & J Mining will be involved in several large mining projects in a number of developing countries. One of these countries is suffering from some political instability, and the company is concerned about potential expropriation or political violence that could disrupt its operations. Which of the following resources would most likely be able to offer insurance to E & J, given the nature of the risks it could face? a. The Export Development Bank b. The International Chamber of Commerce

..

30

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

c. Foreign Affairs and International Trade Canada d. The Organisation for Economic Co-operation and Development e. The RCMP Answer: a Diff: 2 Type: MC Page Reference: 322n Skill: Applied 73) Mandu lives in Toronto and would like to take advantage of a business opportunity to import goods from a company in China. In order to avoid the possibility of a dispute between himself and the foreign company, he should: a. Include a provision in the contract, stating that the law of a particular jurisdiction will govern the transaction in the event of a dispute b. Make no reference in the contract with respect to jurisdiction c. Include a provision in the contract, stating that the International Court of the World will have jurisdiction d. Include a provision in the contract, stating that the contract is subject to the exclusive jurisdiction of Ontario e. Include a provision in the contract, stating that the contract is subject to the exclusive jurisdiction of China Answer: a Diff: 3 Type: MC Page Reference: 323a Skill: Applied 74) Tony is a resident of Ontario, and Singh is a resident of England. They contract to sell Tony's car to Singh, who is emigrating to Canada. The contract contains a provision stating that the contract is "subject to the laws of the Province of Ontario." Which of the following statements is accurate? a. The clause will determine that Ontario laws will govern the transaction. b. The clause gives exclusive jurisdiction to the courts of England, but they must apply Ontario laws. c. The clause will render the contract void, since a person cannot determine the jurisdiction that will govern the transaction.

..

31

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

d. The clause will determine that Ontario courts have exclusive jurisdiction. e. The clause will determine that Ontario courts have exclusive jurisdiction, unless challenged by Singh in England.

Answer: a Diff: 3 Type: MC Page Reference: 323b Skill: Applied 75) It is important to be aware of the differences between local law and the rules in place in the foreign jurisdiction where you are doing business. a. True b. False Answer: a Diff: 2 Type: TF Page Reference: 323c Skill: Recall 76) International business contracts may also include specialty contracts such as a bill of lading, letters of credit, or insurance. a. True b. False Answer: a Diff: 2 Type: TF Page Reference: 324a Skill: Recall 77) Discuss various forms of specialty contracts that may be involved in international business transactions.

Answer: A bill of lading contract establishes the rights and obligations of the parties and the carrier when goods are shipped through a third party carrier. A letter of credit contract is used where a third party is to ensure that the selling party is paid when the purchasing party is satisfied. An insurance contract is used to cover the risks of the transaction.

..

32

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

Feedback: A bill of lading contract establishes the rights and obligations of the parties and the carrier when goods are shipped through a third party carrier. A letter of credit contract is used where a third party is to ensure that the selling party is paid when the purchasing party is satisfied. An insurance contract is used to cover the risks of the transaction.

Diff: 2 Type: ES Page Reference: 324b Skill: Applied 78) Discuss the advantages of arbitration in international business.

Answer: Arbitration is particularly appropriate when dealing with international disputes, since the risks and potential expense associated with the litigation process are amplified significantly when dealing with foreign courts. An arbitration clause can avoid litigation.

The main advantages of arbitration are the reduction of risk, respecting mutual obligations and rights, and the minimal costs.

Feedback: Arbitration is particularly appropriate when dealing with international disputes, since the risks and potential expense associated with the litigation process are amplified significantly when dealing with foreign courts. An arbitration clause can avoid litigation. The main advantages of arbitration are the reduction of risk, respecting mutual obligations and rights, and the minimal costs.

Diff: 2 Type: ES Page Reference: 324d, 325a Skill: Recall 79) Which of the following provided rules to guide international bodies handling arbitrations? a. The International Chamber of Commerce b. The United Nations Commission on International Trade Law c. The National Arbitration Forum d. The International Commercial Centre Arbitration e. The American Arbitration Association Answer: b Diff: 1 ..

33

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

Type: MC Page Reference: 325b Skill: Recall 80) Canadian courts do not provide for the enforcement of international arbitration awards pursuant to international treaties. a. True b. False Answer: b Diff: 2 Type: TF Page Reference: 326a Skill: Recall 81) Helen is the owner of a Japanese company that manufacturers car audio parts. Several months ago she received a favourable award in an arbitration in Japan against a Canadian car manufacturer for unpaid bills. The Canadian manufacturer has several assets in Canada, but none in Japan. Which of the following statements is true? a. The award must be enforced in Japan, but since the Canadian manufacturer has no assets in Japan, it is highly unlikely that Helen will ever receive the award. b. The award cannot be enforced since the dispute was settled by arbitration. c. The award must be enforced in Japan, and since the Canadian manufacturer only has assets in Canada, it is highly unlikely that Japan will litigate further. d. The award cannot be enforced in Canada since it took place in Japan. e. The award can be enforced by a court anywhere in Canada.

Answer: e Diff: 3 Type: MC Page Reference: 326b Skill: Applied 82) In determining jurisdiction for international business disputes, what factors will the court consider?

Answer: The court will consider where the contract was formed, where it was to be performed, where the parties and witnesses reside, where the problem occurred, where the goods or

..

34

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

property are located, whether the choice of either party would benefit the stronger, and which jurisdiction is most closely connected to the case.

Feedback: The court will consider where the contract was formed, where it was to be performed, where the parties and witnesses reside, where the problem occurred, where the goods or property are located, whether the choice of either party would benefit the stronger, and which jurisdiction is most closely connected to the case.

Diff: 2 Type: ES Page Reference: 327a Skill: Applied 83) Discuss the concept of territorial competence.

Answer: A Supreme Court of Canada decision and recommendations by the Uniform Law Conference of Canada simplify the process of determining when the local courts have jurisdiction through a test called territorial competence.

Feedback: A Supreme Court of Canada decision and recommendations by the Uniform Law Conference of Canada simplify the process of determining when the local courts have jurisdiction through a test called territorial competence.

Diff: 2 Type: ES Page Reference: 327b-328d Skill: Recall 84) A factor in determining jurisdiction with regards to international transactions is where the contract was formed. a. True b. False Answer: a Diff: 2 Type: TF Page Reference: 327c Skill: Recall 85) Factors determining jurisdiction include: a. Where the contract was to be performed ..

35

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

b. Where the contract was formed c. Which jurisdiction is most closely connected d. Where the parties reside e. All of the above Answer: e Diff: 2 Type: MC Page Reference: 327d Skill: Recall 86) In determining jurisdiction, which of the following statements is true? a. Where the contract was formed is not a factor in determining jurisdiction. b. Where the seller resides is the most critical factor in determining jurisdiction. c. Where the contract is to be performed is a factor in determining jurisdiction. d. Where the goods are located is not a factor in determining jurisdiction. e. Where the buyer resides is the most critical factor in determining jurisdiction.

Answer: c Diff: 2 Type: MC Page Reference: 327e Skill: Recall 87) A provision in the contract setting out the law of what jurisdiction is to govern an international contract is useless since the jurisdiction will be determined by common law. a. True b. False Answer: b Diff: 2 Type: TF Page Reference: 327f Skill: Recall 88) A factor in determining jurisdiction with regards to international transactions is the nationality of the seller.

..

36

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

a. True b. False Answer: b Diff: 2 Type: TF Page Reference: 327g Skill: Recall 89) The test for territorial competence refers to: a. The process of determining when the local courts have jurisdiction regarding international transactions b. The process of determining when the Supreme Court of Canada has jurisdiction c. The process of determining the most effective means of alternative dispute resolution d. The process of determining the nature of specialty contracts e. The process of enforcing an arbitration award Answer: a Diff: 3 Type: MC Page Reference: 328a Skill: Applied 90) The test for simplifying the process of determining when the local courts have jurisdiction is referred to as: a. Alternative dispute resolution b. International court order c. Reciprocal enforcement agreement d. Territorial competence e. Judicial competence Answer: d Diff: 1 Type: MC Page Reference: 328b Skill: Recall

..

37

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

91) Territorial competence refers to the laws determining the legality of international transactions. a. True b. False Answer: b Diff: 2 Type: TF Page Reference: 328c Skill: Recall 92) Explain the following statement: "Once a judgment has been obtained, there remains the problem of enforcing it" with respect to international disputes.

Answer: Enforcement is not a serious difficulty where the losing party has assets in the jurisdiction where the judgment was rendered. The problem arises when the party obtaining the judgment from a court in one jurisdiction wants to enforce it in another. At the outset, a court in one jurisdiction simply does not have the power to make an order enforceable in another. There are conventions between nations whereby foreign courts will enforce a judgment if reciprocal enforcement agreements are in place.

Feedback: Enforcement is not a serious difficulty where the losing party has assets in the jurisdiction where the judgment was rendered. The problem arises when the party obtaining the judgment from a court in one jurisdiction wants to enforce it in another. At the outset, a court in one jurisdiction simply does not have the power to make an order enforceable in another. There are conventions between nations whereby foreign courts will enforce a judgment if reciprocal enforcement agreements are in place.

Diff: 2 Type: ES Page Reference: 329a Skill: Applied 93) Once a foreign judgment has been obtained, which of the following statements is correct? a. Courts are reluctant to enforce arbitration awards. b. Foreign courts will not enforce a judgment even if a judicial competence enforcement agreement is in place. c. Foreign courts will enforce a judgment if a reciprocal enforcement agreement is in place.

..

38

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

d. Foreign courts will always enforce a judgment based on legal principles they do not recognize. e. Awards of internationally recognized arbitrators cannot be enforced by filing with a local court.

Answer: c Diff: 2 Type: MC Page Reference: 329b Skill: Applied 94) Foreign courts will enforce a judgment if a reciprocal enforcement agreement is in place. a. True b. False Answer: a Diff: 2 Type: TF Page Reference: 329c Skill: Recall 95) Why is it often easier to enforce the awards of internationally recognized arbitrators than the judgments of foreign courts? a. There is a great deal of suspicion related to foreign court judgments and possible corruption, while arbitration is deemed to be more ethical. b. Arbitration awards are viewed as more fair than court judgments. c. There are more comprehensive agreements and conventions between nations in place that allow for such enforcement. d. The United Nations Commission on International Trade Law requires this enforcement. e. The International Chamber of Commerce requires this enforcement.

Answer: c Diff: 2 Type: MC Page Reference: 329d Skill: Recall

..

39

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

96) Canada has accepted the United Nations Convention on Contracts for the International Sale of Goods, and statutes have been implemented at both the federal and the provincial levels declaring the convention to be law in those jurisdictions. a. True b. False Answer: a Diff: 2 Type: TF Page Reference: 330 Skill: Recall 97) Contract terms will override the provisions of the International Sale of Goods Act. a. True b. False Answer: a Diff: 2 Type: TF Page Reference: 331a Skill: Recall 98) Explain the role of Incoterms in international transactions covered by the International Sale of Goods Contracts Convention Act. Answer: The International Sale of Goods Contracts Convention Act sets out how and when a contract is formed, who bears the risk and when risk is transferred, and the remedies available in the event of breach. To facilitate this Act and the transactions taking place that are covered by it, standardized definitions and rules of interpretation have been developed to make the interpretation of such contracts clearer and thus avoid disputes.

When disputes do arise, these rules make the resolution much simpler. These definitions and rules are called Incoterms.

Feedback: The International Sale of Goods Contracts Convention Act sets out how and when a contract is formed, who bears the risk and when risk is transferred, and the remedies available in the event of breach. To facilitate this Act and the transactions taking place that are covered by it, standardized definitions and rules of interpretation have been developed to make the interpretation of such contracts clearer and thus avoid disputes. When disputes do arise, these rules make the resolution much simpler. These definitions and rules are called Incoterms.

Diff: 2

..

40

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

Type: ES Page Reference: 331b Skill: Applied 99) Describe the General Agreement on Tariffs and Trade (GATT).

Answer: GATT was an agreement that developed after World War II. Over the years, parties to GATT met regularly and negotiated to reduce trade barriers in the form of tariffs and encourage trade between member nations. The idea was to promote fair trade, encourage balanced competition, and prohibit or control abusive practices.

Feedback: GATT was an agreement that developed after World War II. Over the years, parties to GATT met regularly and negotiated to reduce trade barriers in the form of tariffs and encourage trade between member nations. The idea was to promote fair trade, encourage balanced competition, and prohibit or control abusive practices.

Diff: 2 Type: ES Page Reference: 331c Skill: Recall 100) The General Agreement on Tariffs and Trade (GATT) required that a member nation grant all other members the same tariff advantage; this is referred to as: a. Export preferential status b. Territorial competence c. Alternative dispute resolution d. Anti-dumping agreements e. Most favoured nation status Answer: e Diff: 1 Type: MC Page Reference: 331d Skill: Recall 101) One of the objectives of the World Trade Organization is to reduce trade barriers. a. True b. False

..

41

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

Answer: a Diff: 2 Type: TF Page Reference: 331e Skill: Recall 102) The objective of the World Trade Organization is to: a. Reduce trade barriers, contribute to the process of globalization, and provide a dispute resolution process for member countries b. Promote regional trade agreements c. Promote trade barriers so as to protect domestic industries d. Promote the reduction of world agriculture prices e. Reduce trade barriers and encourage the practice of dumping Answer: a Diff: 2 Type: MC Page Reference: 331f Skill: Recall 103) Describe the World Trade Organization (WTO).

Answer: The General Agreement on Tariffs and Trade (GATT) has since been incorporated into the WTO, whose objectives are to reduce trade barriers, foster cooperation, and contribute to the process of globalization. WTO is an organization of countries as opposed to GATT, which was an agreement between them. WTO adds a dispute resolution process, and covers subjects beyond goods, including financial and other services and intellectual property.

Feedback: The General Agreement on Tariffs and Trade (GATT) has since been incorporated into the WTO, whose objectives are to reduce trade barriers, foster cooperation, and contribute to the process of globalization. WTO is an organization of countries as opposed to GATT, which was an agreement between them. WTO adds a dispute resolution process, and covers subjects beyond goods, including financial and other services and intellectual property.

Diff: 2 Type: ES Page Reference: 331g

..

42

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

Skill: Recall 104) The World Trade Organization is limited only to the trade of goods. a. True b. False Answer: b Diff: 2 Type: TF Page Reference: 331h Skill: Recall 105) Which of the following statements with regards to the North American Free Trade Agreement (NAFTA) is true? a. NAFTA in essence restricts the World Trade Organization agreement. b. NAFTA is an agreement between Canada, the United States, and Mexico to eliminate trade with other countries not party to the agreement. c. NAFTA is an agreement between Canada, the United States, and Mexico to eliminate trade barriers and promote free trade between the three countries. d. NAFTA provides for no dispute resolution mechanism. e. NAFTA is concerned solely with trade barriers, and not with environmental protection or labour standards issues.

Answer: c Diff: 2 Type: MC Page Reference: 331i Skill: Recall 106) Describe the North American Free Trade Agreement (NAFTA).

Answer: NAFTA is an agreement between Canada, the United States, and Mexico, and is designed to promote easier trade relations between the three countries, eliminating trade barriers in the form of tariffs and duties as much as possible and promoting free trade between the three countries. NAFTA also allows some professionals greater access to the other nations, allowing them to move more freely and practise their professions in the three countries. There are also environmental protection provisions and labour standards included in the agreement. NAFTA also provides for a dispute resolution mechanism.

..

43

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

Feedback: NAFTA is an agreement between Canada, the United States, and Mexico, and is designed to promote easier trade relations between the three countries, eliminating trade barriers in the form of tariffs and duties as much as possible and promoting free trade between the three countries. NAFTA also allows some professionals greater access to the other nations, allowing them to move more freely and practise their professions in the three countries. There are also environmental protection provisions and labour standards included in the agreement. NAFTA also provides for a dispute resolution mechanism.

Diff: 2 Type: ES Page Reference: 331j-332a Skill: Recall 107) Dzijacky Inc. was a successful manufacturer of maple-based products sold in Canada. The owner decided to venture into exporting, as the Canadian market was limited and he had the capacity to produce much more than he could sell in Canada.

When he met you at a social event, he shared his plans with you and asked if you could tell him where he might get export assistance. What advice would you offer to Mr. Dzijacky?

Answer: Students should be aware of at least two primary federal government departments that offer services to assist companies during business in Canada and abroad. These are the Department of Foreign Affairs and International Trade and Industry Canada. They offer advice on regulations that apply to various activities in Canada as well as best practices for Canadians doing business abroad. Students should also mention customs brokers and freight forwarders. They might indicate that there is a government website to see treaties to which Canada is a signatory, as some of the treaties apply to trade.

Feedback: Students should be aware of at least two primary federal government departments that offer services to assist companies during business in Canada and abroad. These are the Department of Foreign Affairs and International Trade and Industry Canada. They offer advice on regulations that apply to various activities in Canada as well as best practices for Canadians doing business abroad. Students should also mention customs brokers and freight forwarders. They might indicate that there is a government website to see treaties to which Canada is a signatory, as some of the treaties apply to trade.

Diff: 2 Type: ES Page Reference: 332b, 333c Skill: Applied

..

44

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

108) Provide two examples of how regulations in place in other countries can have an impact on Canada.

Answer: Global warming initiatives designed to reduce harmful emissions are being set out in international protocols, and the resulting national regulations need to be taken into consideration when operating a business. There is a growing movement to impose liability on domestic companies and individuals for human rights violations that take place in their operations abroad. This may also require new audit and reporting requirements on companies with respect to foreign operations. Students may be able to identify other examples not covered in the chapter from their knowledge of world events.

Feedback: Global warming initiatives designed to reduce harmful emissions are being set out in international protocols, and the resulting national regulations need to be taken into consideration when operating a business. There is a growing movement to impose liability on domestic companies and individuals for human rights violations that take place in their operations abroad. This may also require new audit and reporting requirements on companies with respect to foreign operations. Students may be able to identify other examples not covered in the chapter from their knowledge of world events.

Diff: 2 Type: ES Page Reference: 332c Skill: Applied 109) Which of the following is correct with regard to Canada’s Corruption of Foreign Public Officials Act? a. Similar legislation in the United States has been much less effective than Canada’s legislation. b. The Act has not been aggressively enforced by the RCMP. c. This Act will make it a crime to bribe foreign officials, but it has not yet taken effect. d. This Act was passed pursuant to the World Trade Organization’s pressure to reduce bribery. e. This Act only applies to countries where corruption is a significant problem.

Answer: b Diff: 1 Type: MC Page Reference: 333a Skill: Recall

..

45

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

110) Discuss the Corruption of Foreign Public Officials Act. Answer: This Act was passed pursuant to the Organisation for Economic Co-operation and Development (OECD) Anti-Bribery Convention that came into force in 1999, making it a crime to bribe foreign officials. It should be noted that this Act has not been aggressively enforced. Similar legislation in the United States has been much more effective. The RCMP is responsible for enforcement of the Act. Feedback: This Act was passed pursuant to the Organisation for Economic Co-operation and Development (OECD) Anti-Bribery Convention that came into force in 1999, making it a crime to bribe foreign officials. It should be noted that this Act has not been aggressively enforced. Similar legislation in the United States has been much more effective. The RCMP is responsible for enforcement of the Act. Diff: 2 Type: ES Page Reference: 333b Skill: Recall 111) “Money laundering is a major activity in international trade.” Comment on this statement.

Answer: Money laundering is a growing practice and is often related to international trade (where money is obtained in various criminal activities). Governments are increasing their investigations of money laundering, which can take place by over- or undercharging for goods and services supplied, by issuing multiple invoices for those services, or by falsely describing goods and services that are supplied.

Feedback: Money laundering is a growing practice and is often related to international trade (where money is obtained in various criminal activities). Governments are increasing their investigations of money laundering, which can take place by over- or undercharging for goods and services supplied, by issuing multiple invoices for those services, or by falsely describing goods and services that are supplied.

Diff: 2 Type: ES Page Reference: 333d Skill: Recall 112) With regards to regulation concerning exports and imports, which of the following statements is true?

..

46

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

a. Imports coming into Canada are regulated primarily by the Customs Act. b. There is a large number of federal statutes that affect the export of Canadian products to other countries. c. Customs officials have limited enforcement powers concerning imported goods. d. There are more federal statutes that affect exports than imports. e. NAFTA is only concerned with exports and not imports.

Answer: a Diff: 1 Type: MC Page Reference: 334a Skill: Recall 113) The Customs Act empowers customs officials to enforce regulations restricting what goods can be imported. a. True b. False Answer: a Diff: 2 Type: TF Page Reference: 334b Skill: Recall 114) The regulation of imports coming into Canada is primarily regulated by the Customs Act. Explain the Customs Act. Answer: The Act empowers customs officials to enforce various regulations restricting what can be imported or imposing duties of varying amounts on those goods. Custom officials have significant enforcement powers that may lead to confiscated goods and imposition of penalties for failure to properly comply with the declaration permit and duty regulations.

Feedback: The Act empowers customs officials to enforce various regulations restricting what can be imported or imposing duties of varying amounts on those goods. Custom officials have significant enforcement powers that may lead to confiscated goods and imposition of penalties for failure to properly comply with the declaration permit and duty regulations.

Diff: 2

..

47

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

Type: ES Page Reference: 334c Skill: Recall 115) With regards to the Customs Act, which of the following statements is true? a. The main function of customs officials is to support Canadian businesses in developing foreign markets. b. Export Development Canada enforces regulations regarding imports. c. The Canadian Border Services Agency empowers customs officials to enforce regulations restricting what can be imported. d. NAFTA and WTO regulations override any regulation as set out by the Customs Act. e. Customs officials are empowered to enforce various regulations restricting the export of goods.

Answer: c Diff: 2 Type: MC Page Reference: 334d Skill: Applied 116) The term dumping refers to: a. Buying goods from China and selling them in Walmart b. Selling goods in a foreign nation at prices that unfairly compete with products manufactured in that market, usually due to subsidies, unusually low wages, or the sale of excess production c. Selling goods produced in China at lower prices than domestically produced goods d. Selling goods in a foreign nation at prices above the price sold domestically e. Buying goods at low cost and selling them for a higher price domestically Answer: b Diff: 1 Type: MC Page Reference: 334e Skill: Recall 117) Canada is party to a number of international treaties, including: a. European Common Trade Area

..

48

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

b. World Trade Organization c. North and South American Trade Treaty d. United States Trade Agreement e. South American Free Trade Agreement Answer: b Diff: 1 Type: MC Page Reference: 334f Skill: Recall 118) Discuss changes to Canada’s Competition Act and penalties associated with violations.

Answer: Canada recently amended the Competition Act so that it now has the world’s greatest restrictions on the creation and operation of cartels. Anyone found guilty of agreeing to fix prices, control markets, or restrict output can be imprisoned for up to 14 years and/or face fines of up to $25 million.

Feedback: Canada recently amended the Competition Act so that it now has the world’s greatest restrictions on the creation and operation of cartels. Anyone found guilty of agreeing to fix prices, control markets, or restrict output can be imprisoned for up to 14 years and/or face fines of up to $25 million.

Diff: 2 Type: ES Page Reference: 334g Skill: Recall 119) The Patriot Act empowers customs officials to enforce regulations restricting what goods can be imported. a. True b. False Answer: b Diff: 2 Type: TF Page Reference: 334h-335 Skill: Recall

..

49

Yates: Legal Fundamentals for Canadian Business, 3e Chapter 10: Electronic Commerce and International Trade

..

50