9
Contract Chapter Formation
TRUE/FALSE QUESTIONS
1.
Apromiseisanassertionthatsomethingwillorwillnothappeninthe
future.
ANSWER: T
PAGE:
NAT:AACSBAnalytic
2.
N
276
AICPALegal
TYPE:
N
A contractcanbecreatedonlywhena promiseis giveninexchange for
anotherpromise.
ANSWER: F
PAGE:
NAT:AACSBAnalytic
5.
273
TYPE:
AICPACriticalThinking
Oneoftheelementsofavalidcontractisafairprice.
ANSWER: F
PAGE:
NAT:AACSBAnalytic
4.
N
Somepromisesarenotlegallybinding.
ANSWER: T
PAGE:
NAT:AACSBAnalytic
3.
273
TYPE:
AICPACriticalThinking
277
AICPALegal
TYPE:
N
Anoffertoformaunilateralcontractisacceptedbyapromisetoperform.
ANSWER: F
PAGE:
NAT:AACSBAnalytic
141
277
AICPALegal
TYPE:
+
142 UNITTWO:THECOMMERCIALENVIRONMENT
6.
Inanexpresscontract,thetermsarefullystatedinwords.
ANSWER: T
PAGE:
NAT:AACSBAnalytic
7.
TYPE:
N
281
AICPALegal
281
AICPALegal
281
AICPALegal
N
TYPE:
N
TYPE:
N
283
AICPALegal
TYPE:
=
TYPE:
N
Aninvitationtonegotiatealwaysconstitutesavalidoffer.
ANSWER: F
PAGE:
NAT:AACSBAnalytic
14.
TYPE:
Anofferorssubjectivebeliefsdeterminehisorherintenttocontract.
ANSWER: F
PAGE:
NAT:AACSBAnalytic
13.
N
Acontractisvoidifitspurposeisillegal.
ANSWER: T
PAGE: 282
NAT:AACSBReflective AICPALegal
12.
TYPE:
Avalidofferrequiresreasonablycertainterms.
ANSWER: T
PAGE:
NAT:AACSBAnalytic
11.
278
AICPALegal
Anexecutedcontractisonethatwasputtodeathbeforeitwasperformed.
ANSWER: F
PAGE:
NAT:AACSBAnalytic
10.
N
Avoidablecontractisavalidcontractthatcanbeavoidedattheoptionof
atleastoneofthepartiestoit.
ANSWER: T
PAGE:
NAT:AACSBAnalytic
9.
TYPE:
Anexpresscontractmustbeinwriting.
ANSWER: F
PAGE:
NAT:AACSBAnalytic
8.
278
AICPALegal
285
AICPALegal
Anagreementtoagreemaybeenforceable.
CHAPTER9:CONTRACTFORMATION 143
ANSWER: T
PAGE: 285
NAT:AACSBReflective AICPALegal
15.
TYPE:
N
289
AICPALegal
TYPE:
N
291
AICPALegal
TYPE:
N
291
AICPALegal
TYPE:
N
Underthemailboxrule,anacceptanceisnotvaliduntilitisreceived.
ANSWER: F
PAGE:
NAT:AACSBAnalytic
22.
288
AICPALegal
Anacceptancemustadhereexactlytoanoffertocreateacontract.
ANSWER: T
PAGE:
NAT:AACSBAnalytic
21.
N
Nooffercanbeacceptedbysilence.
ANSWER: F
PAGE:
NAT:AACSBAnalytic
20.
TYPE:
Alloffersareirrevocable.
ANSWER: F
PAGE:
NAT:AACSBAnalytic
19.
N
Thecommunicationofanoffermustbebymailorinperson.
ANSWER: F
PAGE:
NAT:AACSBAnalytic
18.
TYPE:
Acontractlackingaquantitytermmaynotbeenforceable.
ANSWER: T
PAGE: 288
NAT:AACSBReflective AICPALegal
17.
N
Anadvertisementthispropertyforsaleisanoffer.
ANSWER: F
PAGE: 287
NAT:AACSBReflective AICPALegal
16.
TYPE:
292
AICPALegal
TYPE:
N
Abargainedforexchangeisoneoftheelementsofconsideration.
ANSWER:
T
PAGE:
293
TYPE:
N
144 UNITTWO:THECOMMERCIALENVIRONMENT
NAT:AACSBAnalytic
23.
Tobelegallysufficient,considerationmustincludesomethingofeconomic
value.
ANSWER: F
PAGE:
NAT:AACSBAnalytic
24.
295
AICPALegal
296
AICPALegal
296
AICPALegal
297
AICPALegal
N
TYPE:
N
TYPE:
N
TYPE:
N
TYPE:
=
Aminormaydisaffirmacontractonlyifthesubjectmatterisillegal.
ANSWER: F
PAGE: 297
NAT:AACSBReflective AICPALegal
30.
TYPE:
Disaffirmanceisthelegalavoidanceofacontractualobligation.
ANSWER: T
PAGE:
NAT:AACSBAnalytic
29.
295
AICPALegal
Thedoctrineofpromissoryestoppelrequiresaclearanddefinitepromise.
ANSWER: T
PAGE:
NAT:AACSBAnalytic
28.
N
Twopartiescanmutuallyagreetorescindacontractunlessitisexecutory.
ANSWER: F
PAGE:
NAT:AACSBAnalytic
27.
TYPE:
Apromisetodowhatonealreadyhasalegaldutytododoes notnormally
constitutelegallysufficientconsideration.
ANSWER: T
PAGE:
NAT:AACSBAnalytic
26.
293
AICPALegal
Unforeseendifficultiesthatjustifyademandforadditionalcompensa tion
includerisksordinarilyassumedinbusiness.
ANSWER: F
PAGE:
NAT:AACSBAnalytic
25.
AICPALegal
Anadultmayavoidanycontractwithaminor.
TYPE:
N
CHAPTER9:CONTRACTFORMATION 145
ANSWER: F
PAGE:
NAT:AACSBAnalytic
31.
N
300
AICPALegal
TYPE:
N
Acovenantnottocompeteisenforceableonlyifitisnecessarytorestrain
trade.
ANSWER: F
PAGE:
NAT:AACSBAnalytic
33.
TYPE:
Acontractwithanunlicensedprofessionalissometimesenforceable.
ANSWER: T
PAGE:
NAT:AACSBAnalytic
32.
297
AICPALegal
300
AICPALegal
TYPE:
N
Acovenantnottocompetebetweenongoingbusinessesisvoid.
ANSWER: T
PAGE: 300
NAT:AACSBReflective AICPALegal
TYPE:
N
146UNITTWO:THECOMMERCIALENVIRONMENT
34.
Adhesioncontractsareoftenheldtobecontrarytopublicpolicy.
ANSWER: T
PAGE: 303
NAT:AACSBReflective AICPALegal
35.
TYPE:
N
TYPE:
N
Anexculpatoryclausemayviewedasunconscionable.
ANSWER: T
PAGE:
NAT:AACSBAnalytic
304
AICPALegal
MULTIPLE CHOICE QUESTIONS
1.
JackpromisestobuyKrisshandheldgameplayerfor$75.Jackis
a.
b.
c.
d.
anexecutor.
anofferee.
apromisee.
apromisor.
ANSWER: D
PAGE: 274
NAT:AACSBReflective AICPALegal
2.
N
ToppOff Pavers, Inc., agrees to repave Unity Building Corporations
parkinglot. Theelementsrequiredforthisagreementtoconstituteavalid
contractdonotinclude
a.
b.
c.
d.
consideration.
contractualcapacity.
legality.
practicality.
ANSWER: D
PAGE:
NAT:AACSBAnalytic
3.
TYPE:
275
AICPALegal
TYPE:
N
LutherassertsthatadealheenteredintowithMonaisanunenforce able
contract because of a certain defense to its enforcement. Such defenses
include
a.
b.
c.
adesirenottoperform.
adverseeconomicconsequences.
resultsthatdonotmatchexpectations.
CHAPTER9:CONTRACTFORMATION 147
d.
thelackofapartysvoluntaryconsent.
ANSWER: D
PAGE: 275
NAT:AACSBReflective AICPALegal
4.
thecircumstancessurroundingtheallegedcontract.
thepartiesconductatthetimeoftheallegedcontract.
thepartiesstatementsatthetimeoftheallegedcontract.
thepartiessubjectivebeliefsatthetimeoftheallegedcontract.
ANSWER: D
PAGE: 275
NAT:AACSBReflective AICPALegal
N
abilateralcontract.
atrilateralcontract.
aunilateralcontract.
nocontract.
ANSWER: A
PAGE: 277
NAT:AACSBReflective AICPALegal
TYPE:
N
PacoofferstopayQuikDelivery(QD)$50ifitpicksupanddeliverstohim
apackagefromhisaccountantRupertwithin30minutes.QDcanac cept
theofferonlybymeetingthedeadline.IfQDperformsasdirected,these
partieswillhave
a.
b.
c.
d.
abilateralcontract.
atrilateralcontract.
aunilateralcontract.
nocontract.
ANSWER: C
PAGE: 277
NAT:AACSBReflective AICPALegal
7.
TYPE:
ClayofferstopayDot$50foragolflessonforEula.Theyagreetomeetthe
dayaftertomorrowtoexchangethecashforthelesson.Thesepartieshave
a.
b.
c.
d.
6.
N
LauraandMikeenterintowhatLauralaterclaimsisacontract.Inde cid
ingwhetheravalidcontractwasformed,acourtwillnotlookat
a.
b.
c.
d.
5.
TYPE:
TYPE:
N
BretentersCoffeeCaf,wherehehasanopenaccount,fillsacupofcoffee,
holdsitsoDemythecashiercanseeit,acknowledgeshernod,andwalks
148UNITTWO:THECOMMERCIALENVIRONMENT
outwiththecoffee,knowingthathewillbebilledforitattheendofthe
month.Brethasformed
a.
b.
c.
d.
anexpresscontract.
animpliedinfactcontract.
animpliedinlawcontract.
nocontract.
ANSWER: B
PAGE: 278
NAT:AACSBReflective AICPALegal
TYPE:
N
CHAPTER9:CONTRACTFORMATION 149
8.
BuildRiteContractors,Inc.,asksCoolElectric,asubcontractor,toprovide
certainservices.Nothingissaidaboutpayment.Coolprovidestheservices
andsubmitsaninvoice,whichBuildRiterefusestopay.InCoolssuitto
recover,thechiefissueismostlikelytobewhetherthesepartieshad
a.
b.
c.
d.
aformalcontract.
anexecutorycontract.
animpliedinfactcontract.
avoidablecontract.
ANSWER: C
PAGE:
NAT:AACSBCommunication
9.
278
AICPALegal
N
FlotellsGregorthatshewillbuyhistextbookfromlastsemesterfor$65.
Gregoragrees.FloandGregorhave
a.
b.
c.
d.
anexecutedcontract.
anexpresscontract.
animpliedinfactcontract.
nocontract.
ANSWER: B
PAGE: 278
NAT:AACSBReflective AICPALegal
10.
TYPE:
TYPE:
N
Avatar,Inc.,andBlingCorporationsignacontractinwhichAvataragrees
todelivertshirtsemblazonedwithvideogamecharactersinexchangefor
Blingspromisetopay.Avatardelivers.Thecontractis
a.
voidable.
b.
executed.
c.executive.
d.
executory.
ANSWER: D
PAGE: 281
NAT:AACSBReflective AICPALegal
11.
TYPE:
N
ColedrivesintoDinosServiceStationandasksErin,theattendant,tofill
thetankinColessportutilityvehicle.AfterErinfillsthetank,butbefore
Colepaysforthegas,anycontractbetweenColeandDinosis
a.
b.
executed.
executory.
150UNITTWO:THECOMMERCIALENVIRONMENT
c.
d.
unenforceable.
voidable.
ANSWER: B
PAGE: 281
NAT:AACSBReflective AICPALegal
TYPE:
N
CHAPTER9:CONTRACTFORMATION 151
12.
Scot enters into a contract with Tiffany that later proves voidable at
Tiffanys option. If she elects to avoid any duty to perform under the
contract
a.
b.
c.
d.
bothpartiesarereleasedfromit.
neitherpartyisreleasedfromit.
onlyScotisreleasedfromit.
onlyTiffanyisreleasedfromit.
ANSWER: A
PAGE: 281
NAT:AACSBReflective AICPALegal
13.
avalidacceptancebecauseMayisseriouslyfrustrated.
avalidacceptancebecauseNickisacardealer.
notavalidacceptancebecauseMaydoesnotseriouslyintendtosell.
notavalidacceptancebecauseNickisacardealer.
ANSWER: C
PAGE: 283
NAT:AACSBReflective AICPALegal
TYPE:
N
NatetellsOpal,ImightselltheskisthatIboughtlastfallsinceIhavent
usedthemandtheskiingseasonisalmostover.Thisis
a.
b.
c.
d.
anacceptanceofanoffer.
aninvitationtoacceptanoffer.
anoffer.
astatementoffutureintent.
ANSWER: D
PAGE: 284
NAT:AACSBReflective AICPALegal
15.
N
Maytriestostarthernewcarwithnosuccess.Sheyellsthatshewillsell
thecar toanyone for $10.Nick,a passerbywho owns Nicks Preowned
Autos,handsMay$10.Thisis
a.
b.
c.
d.
14.
TYPE:
TYPE:
N
Elmoadvertisesarewardforthereturnofhislostdog.Floyd,whodoesnot
knowofthereward,findsandreturnsthedog.Floydcannotrecoverthere
wardbecausehe
a.
b.
c.
didnotconferabenefitonElmobyreturningthedog.
didnotknowoftherewardwhenhefoundandreturnedthedog.
doesnotneedthemoney.
152UNITTWO:THECOMMERCIALENVIRONMENT
d.
returnedthedog.
ANSWER: B
PAGE: 288
NAT:AACSBReflective AICPALegal
TYPE:
N
CHAPTER9:CONTRACTFORMATION 153
16.
YvonasksZach,Doyouwanttobuyoneofmyfishingrods?Thisis
a.
avalidoffer.
b.
notavalidofferbecausethetermsarenotdefinite.
c.notavalidofferbecauseYvondidnotstateanintent.
d.
notavalidofferbecauseZackdidnotrespond.
ANSWER: B
PAGE: 288
NAT:AACSBReflective AICPALegal
17.
liabletoRapidforbreachofcontract.
liabletoSpeedyforbreachofcontract.
notliable,becausethesalerevokedtheoffertoRapid.
notliable,ifQTofferssubstitutegoodstoRapid.
ANSWER: C
PAGE: 289
NAT:AACSBReflective AICPALegal
TYPE:
=
NuCellPhoneCompanyofferstobuyalaserprinter,withacaseofpaper
and an extra cartridge, for $200 from Office Products, Inc. (OPI). Paul,
OPIs representative, says,Okay, but nopaperand noextra car tridge.
Paulhas
a.
b.
c.
d.
acceptedtheoffer.
madeacounterofferwithoutrejectingtheoffer.
rejectedtheofferandmadeacounteroffer.
rejectedtheofferwithoutmakingacounteroffer.
ANSWER: C
PAGE: 289
NAT:AACSBReflective AICPALegal
19.
N
QTTransport,Inc.,offerstosellatruckloadofpalettestoRapidDelivery
Company.Beforeacceptingtheoffer,Rapidlearnsthatthepaletteshave offers
beensoldtoSpeedyTruckingCorporation.QTis
a.
b.
c.
d.
18.
TYPE:
TYPE:
N
Bill to sell his Consumer Service Center business to Dina for
$100,000.Dinareplies,Thepriceistoohigh.Iwillbuyitfor$90,000.
Dinahas
a.
b.
c.
acceptedtheoffer.
madeacounterofferwithoutrejectingtheoffer.
rejectedtheofferandmadeacounteroffer.
154UNITTWO:THECOMMERCIALENVIRONMENT
d.
rejectedtheofferwithoutmakingacounteroffer.
ANSWER: C
PAGE: 289
NAT:AACSBReflective AICPALegal
20.
effectivebecauseKitdidnotbuildthedock.
effectivebecauseKitdidnotknowthatLiuwouldbuildadock.
ineffectivebecauseLiujustifiablyreliedonKitsoffer.
ineffectivebecauseLiushowedaseriousintenttoclosethedeal.
ANSWER: C
PAGE: 290
NAT:AACSBReflective AICPALegal
N
afterareasonableperiodoftime.
afteratypicalworkweek(fivebusinessdays).
afterausualmonth(thirtycalendardays).
never.
ANSWER: A
PAGE: 290
NAT:AACSBReflective AICPALegal
TYPE:
N
MaxpromisestopayNan$500toinstallapumpinhisfactory.Nancom
pletestheinstallation.Theactofinstallingthepump
a.
b.
c.
d.
isnotsufficientconsiderationbecauseitisnotgoodsormoney.
isnotsufficientconsiderationif$500istoomuchmoneyfortheact.
isnotsufficientconsiderationunlessNanisalicensedprofessional.
istheconsiderationthatcreatesMaxsobligationtopay$500toNan.
ANSWER: D
PAGE: 293
NAT:AACSBReflective AICPALegal
23.
TYPE:
CanDoFixIt,Inc.,offersDeweyajobasaplumber. Notimeforacceptance
isspecifiedintheoffer.Theofferwillterminate
a.
b.
c.
d.
22.
N
KitofferstosellherboattoLiu.Liuacceptsand,unknowntoKit,buildsa
dockfortheboat.Kitslaterattempttorevoketheofferwillbe
a.
b.
c.
d.
21.
TYPE:
TYPE:
N
Quality Aluminum Corporation files a suit against Rite Tool Company,
claimingthattheconsiderationfortheircontractisinadequate.Thecourt
willmostlikelynotexaminetheadequacyoftheconsiderationif
CHAPTER9:CONTRACTFORMATION 155
a.
b.
c.
d.
itisobviousthattheconsiderationisadequate.
RiteToolassertsthatthereisadequateconsideration.
somethingofvaluepassedbetweentheparties.
theconsiderationisworthmorethan$100.
ANSWER: C
PAGE: 294
NAT:AACSBReflective AICPALegal
TYPE:
N
156UNITTWO:THECOMMERCIALENVIRONMENT
Fact Pattern 9-1 (Questions 2426 apply)
BraddefendsagainstabreachofcontractsuitbyCollegeCreditCorporationby
claimingthattheirdealastudentloanaccruinginterestatacertainrateand
payable beginning on acertaindatewas unfairbecausethe considerationfor
theircontractwasinadequate.
24.
RefertoFactPattern91.Acourtismostlikelytoevaluatetheadequacyof
considerationif
a.
b.
c.
d.
athingexchangedhasnointangiblevaluetooneoftheparties.
somethingexchangedisnotofdirecteconomicorfinancialvalue.
theitemsexchangedwereofunequalvalue.
thereisagrossdisparityinthevalueoftheconsiderationexchanged.
ANSWER: D
PAGE:
NAT:AACSBAnalytic
25.
TYPE:
N
RefertoFactPattern91.Adequacyofconsiderationrefersto
a.
b.
c.
d.
howmuchconsiderationisgiven.
legallysufficientvalueintheeyesofthelaw.
theintangiblevaluetoacontractingpartyofathingexchanged.
thesubstantialityoftheconsiderationexchanged.
ANSWER: A
PAGE:
NAT:AACSBAnalytic
26.
294
AICPALegal
294
AICPALegal
TYPE:
N
Refer to Fact Pattern 91. If, as Brad claims, the consideration in this
problemisinadequate,itmayindicatealackof
a.
b.
c.
d.
accordinBradssatisfactionwiththevalueofthedeal.
bargainedforexchangeormutualassent.
flexibilityonthepartofCollegeCredittoaccommodateBradsneeds.
heft,substance,orweightinthetermsofthecontract.
ANSWER: B
PAGE: 294
NAT:AACSBReflective AICPALegal
TYPE:
N
CHAPTER9:CONTRACTFORMATION 157
27.
Baked Goods Company agrees to supply Comida Caf with all the corn
chipsthatitrequiresforayear.Asuddenblightcausedbyanorganism
hithertounknownintheUnitedStatesresultsinashortageofcorn,and
thepricerisessharply.BakedGoodsasksComidatopayahigherpricefor
thechips.Thisrequestis
a.
b.
c.
d.
invalidasanattemptatextortionorthesocalledholdupgame.
invalidunderthepreexistingdutyrule.
validasariskordinarilyassumedinbusiness.
validduetotheunforeseendifficultyofthesharppriceincrease.
ANSWER: D
PAGE: 295
NAT:AACSBReflective AICPALegal
28.
N
SalcontractswithTastyPizzaCompanytodeliveritsproducts.Later,both
partieschangetheirmindsanddecidetocanceltheircontract. Thenext
day,SalagainofferstodeliverTastysproducts.Tastyiswillingtodeal,but
foranewprice.SalandTasty
a.
b.
c.
d.
canagreetoanewcontract,butitcannotincludeanewprice.
canagreetoanewcontractthatincludesthenewprice.
mustperformtheiroriginalcontract.
mustperformthepartoftheiroriginalcontractthatisexecutory.
ANSWER: B
PAGE: 296
NAT:AACSBReflective AICPALegal
29.
TYPE:
TYPE:
N
AutoBodyRepairShop(ABRS)promisestopayBen$1,000aweektowork
forABRS.BenacceptsandquitshisjobwithCarCareService.ABRSfails
toprovideajobforBen.Benhasacauseofactionbasedon
a.
b.
c.
d.
pastconsideration.
preexistingduty.
promissoryestoppel.
rescission.
ANSWER: C
PAGE: 296
NAT:AACSBReflective AICPALegal
TYPE:
N
158UNITTWO:THECOMMERCIALENVIRONMENT
30.
Noni,aseventeenyearold,signsacontracttosellhercartoOKUsedCars.
Thenextday,NonitellsOKthatshesdecidednottosellthecar.Noniis
a.
b.
c.
d.
liabletoOKandmustsellitacarofcomparablevalue.
liabletoOKandmustsellithercar.
liabletoOKfortheamountofitsprofitonthedeal.
notliabletoOK.
ANSWER: D
PAGE: 297
NAT:AACSBReflective AICPALegal
31.
cankeepthehorseandthetack.
cankeepthehorsebutnotthetack.
cankeepthetackbutnotthehorse.
mustreturnboththehorseandthetack.
ANSWER: D
PAGE: 297
NAT:AACSBReflective AICPALegal
TYPE:
N
Intoxicatedbutfullyawareoftheconsequences,Uriagreestoatwoyear
cellphone service contract with Wander Talk, Inc., at more than the
averagemarketprice.Thiscontractis
a.
b.
c.
d.
enforceable.
notenforceablebecausecontractingpartiescanchangetheirminds.
notenforceablebecausethecontractclearlyfavorsWanderTalk.
notenforceablebecauseUriwasintoxicatedwhenheagreedtoit.
ANSWER: A
PAGE: 298
NAT:AACSBReflective AICPALegal
33.
N
Elle,aminoractingonherown,signsacontracttobuyahorseanditstack
fromFieldEquineRanch.Later,aftertakingpossessionofthehorseand
tack,Elledisaffirmsthedeal.She
a.
b.
c.
d.
32.
TYPE:
TYPE:
N
NeilrepresentshimselfasacontractorinOhio,butheisnotlicensedin
thatstate.AcontractbetweenPamandNeilbywhichNeilagreestobuilda
warehouseforPaminOhiois
a.
b.
c.
d.
enforceableonlyifPamdoesnotobjectafterlearningofNeilsstatus.
enforceableonlyifPamknowsthatNeilisunlicensed.
enforceableonlyiftheoutcomeissuccessful.
notenforceable.
CHAPTER9:CONTRACTFORMATION 159
ANSWER: D
PAGE: 300
NAT:AACSBReflective AICPALegal
TYPE:
N
160UNITTWO:THECOMMERCIALENVIRONMENT
34.
Kokosignsacovenantnottocompetewithhercurrentemployer,Laurel
ValleyComputerService,Inc.,inexchangeforabonuspaymentandaraise
inhersalary.Ifthecovenantisreasonableintermsofgeographicareaand
time,itwillmostlikelybeenforceableby
a.
b.
c.
d.
bothparties.
Kokoforthepayment,butnotLaurelValleyfortheperformance.
LaurelValleyfortheperformance,butnotKokoforthepayment.
neitherparty.
ANSWER: B
PAGE: 300
NAT:AACSBReflective AICPALegal
35.
TYPE:
N
UCanOwnIt Corporation sells appliances to less educated consumers,
includingViv,oninstallmentplans.UCanOwnItfilesasuitagainstViv
when she stops making payments. Viv claims that the deal is
unconscionable.Thecourtwillmostlikelyconsider
a.
b.
c.
d.
thegeographicareaoftherelevantmarket.
thepartiesrelativebargainingpower.
thequalityofrelatedproductsinthegeneralmarket.
therelationofthisdealtothoseofothercustomers.
ANSWER: B
PAGE: 303
NAT:AACSBReflective AICPALegal
TYPE:
N
ESSAY QUESTIONS
1.
OnMay1,Faith,arealestateagent,andGrace,acommercialproperty
owner,signanagreementtofindabuyerforGracesofficebuilding.Under
theterms,ifabuyermakesaseriousofferwithinsixtydays,Gracemust
payFaithscommission.Faithputssignsonthebuilding,adsinrealestate
pamphletsandalocalnewspaper,andfeaturesthepropertyinawalking
tourontheInternet.OnJune1,Gracetells Faiththatsheiscanceling
their arrangement. Ten days later, Grace closes a sale on the building
without Faiths participation. Faith files a suit against Grace for the
amountofhercommission.Inwhosefavoristhecourtmostlikelytorule
andwhy?
ANSWER: ThecourtismostlikelytoissueajudgmentinFaithsfavoron
the basis that the parties in this situation had agreed to a unilateral
CHAPTER9:CONTRACTFORMATION 161
contract.ThecourtwouldlikelyreasonthatFaithhadbegunperformance
underthiscontractbyputtingupthesigns,placingtheads,andaddinga
featuredtourofthebuildingontheInternet.Underthemodernviewof
unilateral contracts, once a party to such a contract has begun
performance,theotherpartycannotlegitimatelyrevokeorotherwisecancel
thedeal.Thus,Gracesattemptedrevocationinthisproblemwhichwas
probablybasedonherdesiretoavoidpayingacommissiontoFaithwould
constituteabreachofhercontractwithFaith,andGracewouldoweFaith
hercommissioneventhoughFaithdidnotparticipateintheclosingofthe
saleontheproperty.TheproblemdoesnotmentionwhetherFaithfound
thebuyer,butGracewouldmostlikelybeliableforthepaymentofthe
commissionunderthetermsofhercontractwithFaithevenifGracefound
thebuyerherself.
PAGE:
277
TYPE: N
NAT:AACSBReflective AICPADecisionModeling
2.
BabyProducts,Inc.,hiresChewytodevelopandimplementanecommerce
strategy for marketing Babys products. Chewy signs a contract that in
cludesaclauseprohibitinghimfromcompetingwithBabyduringandaf ter
theemployment.Beforethestrategyisimplemented,Chewyresignsfrom
BabysemployandopensabusinesstocompetewithBaby.InBabyssuit
againstChewy,todeterminewhetherhemaycompetewithBaby,whatis
themostimportantfactorthecourtshouldconsider?Istheclauselikelyto
beenforced?Explain.
ANSWER: IndeterminingwhetherChewymaycompetewithBaby,the
court should consider, most importantly, whether the covenant not to
compete is necessary to protect Babys legitimate business interests. A
covenantnottocompetecanviolatethepublicpolicytopromotecompeti
tionintheeconomy.Ifso,itwouldbeanunreasonablerestraintoftrade.To
beenforceable,acovenant nottocompeteshouldbeancillarytoanoth
erwise enforceable contract, which, in this question, is the employ ment
contract.Acovenantnottocompeteshouldcontainreasonablere strictions
in terms of duration and geographic area. The covenant should not
unreasonablyburdenthepartywhois prohibitedfrom com peting. Ifthe
restrictions are unreasonable, a court can void the cove nant. Whether a
partyresignsunderanemploymentcontractdoesnotaffecttheenforce
ability of a covenant not to compete. The terms of the covenant in this
problemarelikelyunreasonableandwouldnotbeenforceablebecausethey
dostateanylimits,reasonableorotherwise.
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TYPE: N
NAT:AACSBReflective AICPADecisionModeling