Business Law In canada 11th Edition By Yates -Test Bank

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Business Law In canada 11th Edition By Yates -Test Bank

Business Law in Canada, 11e (Yates)

Chapter 5   Negligence, Professional Liability, and Insurance

 

1) A seven-year-old boy followed his dog into Mr. Howe’s backyard. He fell into a large hole dug by Mr. Howe in preparation for a tree that had been ordered. The boy broke his arm in the fall. At the hospital, the boy was treated by a doctor who had been employed there for four years. The doctor did not set the boy’s arm because he made a mistake in reading the x-ray. Because the arm was not treated correctly, it healed improperly. When the boy kept complaining, his mother took him to their family doctor, who discovered the error. The boy had to have his arm rebroken so that it could be set properly. Based on these facts, which of the following is true?

  1. A) The owner of the land owed no duty of care to the boy because the boy was a trespasser.
  2. B) The case law that developed over hundreds of years on the duty of care owed by occupiers of land has priority over any subsequent legislation on the point.
  3. C) The doctor owed a duty of care to the boy, but he only had to meet the standard of care expected of the average man.
  4. D) The hospital, not the doctor, would be solely liable for any harm suffered due to the negligence.
  5. E) In an action against the land owner, if the boy were found to be partially at fault for his injury, the court would apportion the award of damages as it apportioned the fault.

Answer:  E

Diff: 3      Type: MC      Page Ref: 135

Topic:  Ch. 5 – Negligence

Skill:  Applied

Objective:  Chapter 5: 1. Identify the four elements of a negligence claim.

Bloom’s Taxonomy:  Knowledge

 

2) Which of the following situations could not result in a successful action for negligence?

  1. A) When Todd was setting up a tent for a backyard wedding, he fell into a hole and broke his leg. The owner forgot to tell the wedding planner that he had been digging a hole to put in a fish pond.
  2. B) An employee of the bank mistakenly wrote to Maria saying that the bank had approved her loan. Relying on that letter, Maria made contracts she could not honour when the bank refused to forward the money. Maria lost $10,000 because of the bank’s carelessness.
  3. C) A driver, trying to see what a movie crew was doing, accidentally plowed his car into the side of a catering truck.
  4. D) Nikki almost upset a glass table and broke an expensive vase when she yanked on a large cable without checking what was blocking its path.
  5. E) A real estate agent, fed up with his client, punches him in the nose when he changes his mind about selling his condo.

Answer:  D

Diff: 2      Type: MC      Page Ref: 135

Topic:  Ch. 5 – Negligence

Skill:  Applied

Objective:  Chapter 5: 1. Identify the four elements of a negligence claim.

Bloom’s Taxonomy:  Knowledge

 

3) Two real estate agents, pressed for time, stopped at the bakery for some muffins that would suffice as lunch. John bought the muffins and gave one to Mary. They both began to eat the muffins as they hurried to the car. When Mary looked at the muffin she had just bitten, she saw that the raisins had little worms in them. John’s muffins were the same—with little worms. Based on these facts, which of the following possibilities is true? (Read each independently from the others.)

  1. A) Since Mary did not buy the muffins, she could not sue in contract, but if she were injured, she could sue in tort.
  2. B) Even if Mary was not injured by eating the worms, she could sue the baker of the muffins for nuisance.
  3. C) If Mary sued the baker of the muffins or the packer of the raisins, she would have to prove only one thing to win her case—that there were worms in the muffin.
  4. D) Mary has a cause of action against the baker of the muffins only if she can prove that the baker used bad raisins on purpose.
  5. E) Mary can do nothing since she did not purchase the muffins.

Answer:  A

Diff: 3      Type: MC      Page Ref: 135

Topic:  Ch. 5 – Negligence

Skill:  Applied

Objective:  Chapter 5: 1. Identify the four elements of a negligence claim.

Bloom’s Taxonomy:  Knowledge

 

4) Which of the following situations could result in a successful action for negligence?

  1. A) George deliberately broke an expensive camera when he yanked on a large cable.
  2. B) 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.
  3. C) 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 $100,000 because of the bank’s carelessness.
  4. D) 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.
  5. E) Dr. Jones used the skill of a reasonable doctor in his field, but the patient did not respond to the treatment and lost sight in one eye. The patient sued the doctor.

Answer:  C

Diff: 2      Type: MC      Page Ref: 135

Topic:  Ch. 5 – Negligence

Skill:  Applied

Objective:  Chapter 5: 2. State when a duty of care arises, explaining how courts determine whether it is owed.

Bloom’s Taxonomy:  Knowledge

 

5) 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 and was found guilty in the criminal proceedings. Given these facts, which of the following is true?

  1. A) Mr. Watson, the neighbour, could sue John for negligence.
  2. B) Mr. Mitsu could sue John for negligence.
  3. C) If Mr. Mitsu sued John, he would be entitled only to punitive damages.
  4. D) Because John was charged with an offence, Mr. Mitsu cannot sue him in a civil action for compensation. One court action is all that is allowed.
  5. E) Since no one was physically injured, there could be no civil action.

Answer:  B

Diff: 2      Type: MC      Page Ref: 135

Topic:  Ch. 5 – Negligence

Skill:  Applied

Objective:  Chapter 5: 2. State when a duty of care arises, explaining how courts determine whether it is owed.

Bloom’s Taxonomy:  Knowledge

 

6) In which of the following cases is a legal duty not owed?

  1. A) A person undertakes to rescue someone in danger
  2. B) It would be apparent to a prudent person that the conduct was likely to cause injury
  3. C) A person making a misstatement knew that it would be relied on by a member of a group
  4. D) A visitor comes on your property
  5. E) A person sees another in desperate need of assistance

Answer:  E

Diff: 1      Type: MC      Page Ref: 135

Topic:  Ch. 5 – Negligence

Skill:  Recall

Objective:  Chapter 5: 2. State when a duty of care arises, explaining how courts determine whether it is owed.

Bloom’s Taxonomy:  Knowledge

 

 

7) Which of the following statements with regard to the tort of negligence is false?

  1. A) If a person is injured by a defective product that he himself did not purchase, he can sue the manufacturer for negligence.
  2. B) If the court finds contributory negligence, the defendant has no liability at all.
  3. C) If physical injury can be foreseen as the result of a person’s negligence, the wrongdoer will be liable for all the injury suffered although the person injured was unusually weak and infirm.
  4. D) A possible defence to the plaintiff’s claim of negligence is that the plaintiff volunteered to take the risk.
  5. E) The test used to determine whether a duty of care is owed is this: would a reasonable person foresee that the plaintiff could be affected by the acts of the defendant?

Answer:  B

Diff: 1      Type: MC      Page Ref: 135

Topic:  Ch. 5 – Negligence

Skill:  Recall

Objective:  Chapter 5: 2. State when a duty of care arises, explaining how courts determine whether it is owed.

Bloom’s Taxonomy:  Knowledge

8) Because of the North American Free Trade Agreement and increasing world competition, a provincial government decided to help businesses by providing more information about market conditions, currencies, etc., around the world. It opened small offices throughout the province that provided business information retrieved from the government’s database, which was frequently updated. Mr. Hill relied on some information given to him by Alex Chec, an employee of the government. The information was wrong due to Chec’s mistake; it was his job to cross-check that information before it was released to the public, but he forgot to do it. Mr. Hill suffered a $15,000 loss because of the error. Which of the following is true?

  1. A) Mr. Hill cannot take any action because he suffered no physical injury. The case only deals with information.
  2. B) If Mr. Hill sues the government on the principle of vicarious liability, he cannot also sue the employee at fault.
  3. C) On these facts, Mr. Hill could sue successfully on the principle of strict liability.
  4. D) Mr. Hill could not take any action because he had not entered into a contract with the government for this information.
  5. E) To win in an action against the government, Hill must prove that the government owed him a duty of care, fell below the standard of care owed, and thereby caused him a foreseeable loss.

Answer:  E

Diff: 2      Type: MC      Page Ref: 135

Topic:  Ch. 5 – Negligence

Skill:  Applied

Objective:  Chapter 5: 2. State when a duty of care arises, explaining how courts determine whether it is owed.

Bloom’s Taxonomy:  Knowledge

 

 

9) Which of the following statements best describes the standard used by the courts to measure socially acceptable behaviour?

  1. A) An average person acting normally
  2. B) A careful person acting to the best of his ability
  3. C) A reasonably prudent person acting in a careful manner
  4. D) The best possible response to the circumstance
  5. E) When you cause injury, you are always liable.

Answer:  C

Diff: 1      Type: MC      Page Ref: 135

Topic:  Ch. 5 – Negligence

Skill:  Recall

Objective:  Chapter 5: 2. State when a duty of care arises, explaining how courts determine whether it is owed.

Bloom’s Taxonomy:  Knowledge

10) In which of the following would the plaintiff not succeed in an action for negligence?

  1. A) A zoning officer carelessly told Mr. Lee that the lot was zoned “commercial,” but it was really zoned “duplex.” Lee lost $85,000 by relying on this information.
  2. B) An accounting firm made a mistake in the audited financial statements, which caused an investor to lose $20,000. The firm knew the investor was going to rely on the statements to invest.
  3. C) May was made sick by drinking a contaminated cola, bottled by Black, bought for her by her friend Fred from Green.
  4. D) Dr. Zotsky used the skill of a reasonable doctor in his field, but his patient did not respond to the treatment and lost sight in one eye.
  5. E) Nick was a willing passenger when Alex was driving at 140 km/h. He was hurt when the car slid on wet pavement and crashed. The court found Nick took the physical risk, but never took the legal risk.

Answer:  D

Diff: 2      Type: MC      Page Ref: 163

Topic:  Ch. 5 – Liability of Professionals and Other Experts

Skill:  Applied

Objective:  Chapter 5: 3. Describe breach of the standard of care, identifying the test used to determine if a breach has occurred.

Bloom’s Taxonomy:  Knowledge

 

 

11) The director of the children’s zoo, Mr. Watson, was appalled to see an employee, Jake, throwing a pitchfork like a javelin in an area where there were both animals and children. Luckily, no one was hurt. He yelled to Jake to get busy and feed the birds so that the birds would come closer to the children. Jake opened a new sealed bag of feed and threw some to the birds. It happened that the manufacturer of the feed, ordered by Watson, had accidentally mixed some caustic substance with the feed, so that later in the day Jake’s hand began to blister badly. Jake sued Watson for negligence because of the burns he suffered; Watson sued Jake for negligence because of the way Jake used the pitchfork. On these facts, which of the following is true?

  1. A) Jake will be found liable for negligence because he was careless with the pitchfork; a reasonable person would not have done what he did.
  2. B) The test the court will apply to determine whether or not Jake owed a duty of care is this: would a reasonable person foresee that his acts could affect the animals and children?
  3. C) Watson owed Jake a duty of care and Watson will, therefore, be liable for negligence.
  4. D) Children attending a zoo are voluntarily assuming any risk.
  5. E) Jake could not sue the manufacturer because he did not buy the feed.

Answer:  B

Diff: 2      Type: MC      Page Ref: 135

Topic:  Ch. 5 – Negligence

Skill:  Applied

Objective:  Chapter 5: 3. Describe breach of the standard of care, identifying the test used to determine if a breach has occurred.

Bloom’s Taxonomy:  Knowledge

12) Al bought a case of beer because his friends were coming over to watch the Grey Cup game. 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 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 contaminated the beer. Chuck was seriously injured. On these facts, which of the following is true?

  1. A) Since Chuck did not buy the beer, he has no cause of action against anyone.
  2. B) Chuck could sue Al successfully for negligence because Al handed the contaminated beer to Chuck.
  3. C) Bob could sue Al successfully for negligence because Al poured the contaminated beer in Bob’s glass.
  4. D) 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.
  5. E) 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.

Answer:  D

Diff: 2      Type: MC      Page Ref: 135

Topic:  Ch. 5 – Negligence

Skill:  Applied

Objective:  Chapter 5: 3. Describe breach of the standard of care, identifying the test used to determine if a breach has occurred.

Bloom’s Taxonomy:  Knowledge

 

 

13) 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 the business information but also advice on how the businesses could link up to the government’s database that held the updated 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 Mr. Chec’s job to cross-check that information before it was released to the public. He forgot to do it. Mr. Su suffered a $100,000 loss because of the error. Which of the following is true?

  1. A) If Mr. Su sues the government on the principle of vicarious liability, he cannot also sue the employee, or employees, at fault.
  2. B) Mr. Su could not take any action because he suffered no physical injury. The case only deals with information.
  3. C) The court must find only one party liable and that party must pay for all of the damages.
  4. D) Mr. Su could not take any action because he had not entered into a contract with the government for this information.
  5. E) The operator may be found liable for negligence if Su, the plaintiff, can prove, among other things, that he owed him a duty of care.

Answer:  E

Diff: 3      Type: MC      Page Ref: 135

Topic:  Ch. 5 – Negligence

Skill:  Applied

Objective:  Chapter 5: 2. State when a duty of care arises, explaining how courts determine whether it is owed.

Bloom’s Taxonomy:  Knowledge

 

14) As a result of careless driving, Mr. Boz accidentally knocked Mr. Alder, a seventy-year-old man, off his bike. Mr. Alder broke his arm and collar bone. 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, he lost the use of his right arm. Mr. 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?

  1. A) It should be an amount to cover the full extent of the injury suffered.
  2. B) It should be an amount to cover the extent of injury that would have been suffered by a reasonable man.
  3. C) It should be an amount to cover the extent of injury that would have been suffered by the average man.
  4. D) In should be an amount to cover the extent of injury that would have been suffered by the average seventy-year-old man, because a reasonable man would not have foreseen the extent of injury actually suffered.
  5. E) It should be no compensation at all because of Mr. Alder’s rare condition.

Answer:  A

Diff: 2      Type: MC      Page Ref: 135

Topic:  Ch. 5 – Negligence

Skill:  Applied

Objective:  Chapter 5: 3. Describe breach of the standard of care, identifying the test used to determine if a breach has occurred.

Bloom’s Taxonomy:  Knowledge

 

15) Which of the following is true with respect to the law of tort?

  1. A) With assault and battery, a person can successfully sue only if they can prove damages.
  2. B) 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.
  3. C) A person will always succeed with the defence of self-defence even if he used excessive force.
  4. 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.
  5. E) For fair comment to be an effective legal defence to a claim of defamation, the person making the comment must have been made in Parliament or court.

Answer:  B

Diff: 2      Type: MC      Page Ref: 135

Topic:  Ch. 5 – Negligence

Skill:  Recall

Objective:  Chapter 5: 3. Describe breach of the standard of care, identifying the test used to determine if a breach has occurred.

Bloom’s Taxonomy:  Knowledge

 

16) 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?

  1. A) You could sue for the tort of negligence if someone used his property in such a way that it interfered with your use and enjoyment of your property.
  2. B) The use of your property is partly governed by the Personal Property Securities Act.
  3. C) If you bring something onto your property that is inherently dangerous and it escapes causing damage to others, you will be liable even if you were very careful and did not intend to harm anyone.
  4. D) If there were an accident out front and a car was knocked onto your yard, you could sue the driver in that car for trespass.
  5. E) Your tenants have no duty to take reasonable steps to make sure that any person is reasonably safe when in their suite.

Answer:  C

Diff: 2      Type: MC      Page Ref: 155

Topic:  Ch. 5 – Occupiers’ Liability

Skill:  Applied

Objective:  Chapter 5: 4. Explain how both physical and legal causation and damage are proven.

Bloom’s Taxonomy:  Knowledge

 

17) Creative Farming Ltd. manufactures fertilizer from organic matter, a by-product of which is explosive methane gas. During the processing, some of this gas escaped and drifted onto the adjacent property, where it caused an explosion and extensively damaged a building owned by XYZ Co. Creative Farming Ltd. would be liable for the loss under which one of the following principles?

  1. A) Strict liability
  2. B) Vicarious liability
  3. C) Product liability
  4. D) Occupiers’ Liability Act
  5. E) Contributory negligence

Answer:  A

Diff: 1      Type: MC      Page Ref: 157

Topic:  Ch. 5 – Strict Liability

Skill:  Applied

Objective:  Chapter 5: 4. Explain how both physical and legal causation and damage are proven.

Bloom’s Taxonomy:  Knowledge

 

18) In Hall v. Hebert, an individual was severely injured when he allowed his intoxicated friend to drive his car. The Supreme Court of Canada had to deal with whether volenti non fit injuria would apply. What did the Court hold?

  1. A) The plaintiff assumed neither the physical risk nor the legal risk in the circumstances.
  2. B) The plaintiff assumed only the legal risk, but this is all that is required for volenti non fit injuria to apply.
  3. C) The plaintiff assumed only the physical risk, but this is all that is required for volenti non fit injuria to apply.
  4. D) The plaintiff assumed the physical risk, but there was no indication he had assumed the legal risk as well.
  5. E) The plaintiff assumed the legal risk, but there was no indication he had assumed the physical risk as well.

Answer:  D

Diff: 3      Type: MC      Page Ref: 154

Topic:  Ch. 5 – Negligence

Skill:  Applied

Objective:  Chapter 5: 4. Explain how both physical and legal causation and damage are proven.

Bloom’s Taxonomy:  Knowledge

 

19) Which of the following statements with regard to the tort of negligence is true?

  1. A) If a person is injured by a defective product that he himself did not purchase, he cannot sue the manufacturer for negligence.
  2. B) If the court finds contributory negligence, the defendant has no liability at all.
  3. C) If physical injury can be foreseen as the result of a person’s actions, the wrongdoer will be not be liable for all the injury suffered.
  4. D) A possible defence to the plaintiff’s claim of negligence is that the plaintiff volunteered to take the risk.
  5. E) The test used to determine whether a duty of care is owed is this: would a below-average person foresee that the plaintiff could be affected by the acts of the defendant?

Answer:  D

Diff: 2      Type: MC      Page Ref: 151

Topic:  Ch. 5 – Defences

Skill:  Applied

Objective:  Chapter 5: 4. Explain how both physical and legal causation and damage are proven.

Bloom’s Taxonomy:  Knowledge

 

 

20) Raheel wants to sue a manufacturer who he believes was careless during the manufacturing process. What do the courts do to make this easier on people like Raheel?

  1. A) The courts are willing to imply a rebuttable presumption of breach of duty from the circumstantial evidence of the injury or loss.
  2. B) The courts are willing to award legal costs to plaintiffs who bring forward these claims, regardless of their success at trial.
  3. C) The courts are willing to waive the usual rules of evidence in the favour of the plaintiff.
  4. D) The courts are willing to construe the evidence in favour of the plaintiff using the contra proferentum
  5. E) The courts are willing to disregard the requirement of a duty of care.

Answer:  A

Diff: 1      Type: MC      Page Ref: 158

Topic:  Ch. 5 – Product Liability

Skill:  Applied

Objective:  Chapter 5: 5. Distinguish the defences applicable to the tort of negligence.

Bloom’s Taxonomy:  Knowledge

21) 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 would be true?

  1. A) If Stella sues the coffee shop for negligence, she will only have to prove that the company owed her a duty of care.
  2. B) If Stella sues the coffee shop, the company’s best argument is that it didn’t owe her a duty of care.
  3. C) To succeed with the defence that she volunteered to take the risk, the coffee shop would have to prove that she deliberately spilled the coffee.
  4. D) 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 she suffered burns.
  5. E) If the court finds the plaintiff contributorily negligent causing 60% of her loss, she will not be compensated for the 60% by the defendant.

Answer:  E

Diff: 2      Type: MC      Page Ref: 151

Topic:  Ch. 5 – Defences

Skill:  Applied

Objective:  Chapter 5: 5. Distinguish the defences applicable to the tort of negligence.

Bloom’s Taxonomy:  Knowledge

 

 

22) Celebrating the end of the fall term, Mr. C had already drunk six beers before he arrived with his friends at the Spoke Tavern, run by the student council. After he had two more beers, he was refused more and told he would be asked to leave if he did have more. He returned to the table and continued to drink. He was ordered to leave. While being escorted out, he resisted but was ejected. He snuck back in, “spoiling for a fight,” and was removed once more. He returned, and when pushed through the doorway, he stumbled. His hand went through a small window, and he had to undergo surgery to repair a tendon in his wrist. Mr. C sued the tavern, the bouncer, and the student council (as operators of the tavern) under the Occupiers’ Liability Act. Read each of the following separately and indicate which is false.

  1. A) The Occupiers’ Liability Act in this province provides that an occupier of land owes a duty to take reasonable steps to make sure that any person will be reasonably safe.
  2. B) If the court holds that Mr. C voluntarily took the risk, Mr. C will get no award of damages from the defendants.
  3. C) To successfully use the defence of volenti no fit injuria (he volunteered to take the risk), the court must find that the plaintiff knew the risk, volunteered to take the risk, and expressly or impliedly waived his right of action.
  4. D) If the court holds that Mr. C was contributorily negligent, Mr. C could get no compensation from the defendants.
  5. E) Under our Occupiers’ Liability Act, a tenant could be liable, not just the land owner.

Answer:  D

Diff: 3      Type: MC      Page Ref: 151

Topic:  Ch. 5 – Defences

Skill:  Applied

Objective:  Chapter 5: 5. Distinguish the defences applicable to the tort of negligence.

Bloom’s Taxonomy:  Knowledge

23) With regard to the law of negligence, which of the following is false?

  1. A) If the court finds that the plaintiff was 40% and the defendant 60% responsible for the loss suffered by the plaintiff, the plaintiff cannot recover the 40% from the defendant.
  2. B) Some occupiers’ liability acts set the standard of care owed by the occupier, namely, to take reasonable care that any person is reasonably safe.
  3. C) To win his action in negligence, a plaintiff must prove, among other things, that the defendant owed the plaintiff a duty of care.
  4. D) If you hurt someone and are sued for negligence, a possible defence is that you didn’t intend to hurt the person.
  5. E) If you are negligent and cause damage to another, a possible defence is that the other voluntarily took the risk.

Answer:  D

Diff: 2      Type: MC      Page Ref: 151

Topic:  Ch. 5 – Defences

Skill:  Applied

Objective:  Chapter 5: 5. Distinguish the defences applicable to the tort of negligence.

Bloom’s Taxonomy:  Knowledge

 

 

24) Pete and John had been hired by the same computer consulting company. They worked a 3-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 Britt’s 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?

  1. A) Since Mr. Britt was not physically injured, he could not sue.
  2. B) Mr. Watson, the neighbour, could successfully sue John for negligence.
  3. C) Pete could sue John for negligence, but if the court held that Pete volunteered to take the physical and legal risk (volenti non fit injuria), Pete would get no award of damages.
  4. 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.
  5. E) One court action is all that is allowed.

Answer:  C

Diff: 2      Type: MC      Page Ref: 151

Topic:  Ch. 5 – Defences

Skill:  Applied

Objective:  Chapter 5: 5. Distinguish the defences applicable to the tort of negligence.

Bloom’s Taxonomy:  Knowledge

25) Which of the following statements with regard to the tort of negligence is false?

  1. A) If a person is injured by a defective product that he himself did not purchase, he can sue the manufacturer for negligence.
  2. B) To win his negligence case, the plaintiff must prove that the defendant owed him a duty of care, was below the standard of care the law requires, and thus caused him foreseeable damage.
  3. C) In most provinces, the standard of care imposed on an occupier has been modified by statute.
  4. D) For a person to completely escape liability for negligence on the grounds that the plaintiff volunteered to take the risk, the court would have to find that the plaintiff volunteered to accept the physical risk and the legal consequences as well.
  5. E) In negligence cases, the special provision of res ipsa loquitor must always be applied in order to establish liability.

Answer:  E

Diff: 3      Type: MC      Page Ref: 151

Topic:  Ch. 5 – Defences

Skill:  Recall

Objective:  Chapter 5: 5. Distinguish the defences applicable to the tort of negligence.

Bloom’s Taxonomy:  Knowledge

 

 

26) Hank rented a new ground-floor condominium for four months before the owner offered to sell it to him. Hank accepted the offer. After Hank became the owner, he built a small patio off the living room. At a house-warming party, one of his friends caught the heel of her shoe between some patio bricks and fell, breaking her arm. It took an abnormally long time to heal because she suffered from an unusual bone disease. Hank has heard the following assertions about liability and asks you about them. Which of the following statements is true?

  1. A) The standard of care owed to this visitor is governed by a federal statute and is therefore the same for all provinces.
  2. B) Under the governing statute, he owed a duty of care because he now owned the property; he would not have had any duty of care if he had still been renting it.
  3. C) He owed no duty of care to persons who came to his place; people must take responsibility to look after themselves.
  4. D) The standard of care set by statute is that the occupier has a duty to take reasonable care to see that any guest on the property is reasonably safe.
  5. E) If found liable, he would be responsible only for the damages incurred by a normal person who had suffered from such a fall and not for the greater damages actually suffered by this guest.

Answer:  D

Diff: 2      Type: MC      Page Ref: 155

Topic:  Ch. 5 – Occupiers’ Liability

Skill:  Applied

Objective:  Chapter 5: 6. Examine legislation that affects when liability may be imposed.

Bloom’s Taxonomy:  Knowledge

27) Ms. J was severely injured as the result of a fall sustained when a portion of a fence surrounding a private cemetery gave way as she was attempting to climb over to visit a grave site. Which of the following is true with regard to an occupier’s liability?

  1. A) The standard of care is set by a federal statute and is therefore the same for all the provinces.
  2. B) The standard of care required of the occupier is set by provincial statute.
  3. C) An occupier owes no duty of care to a trespasser.
  4. D) There is no duty of care owed to persons who come onto another’s property whether invited or not; people must take responsibility to look after themselves.
  5. E) The duty imposed by the statute is on the landowner not the tenant.

Answer:  B

Diff: 2      Type: MC      Page Ref: 154

Topic:  Ch. 5 – Legislation Impacting Duty of Care

Skill:  Applied

Objective:  Chapter 5: 6. Examine legislation that affects when liability may be imposed.

Bloom’s Taxonomy:  Knowledge

 

 

28) Last month, Rueben removed a tall tree in his backyard. He left the large hole because he intended to plant a new tree when the rains began. Sunday, he invited his neighbour, Joe, to come over to watch the Olympics. When Joe came, he cut through the backyard and fell into the hole and broke his arm. Which of the following is true with regard to the liability of an occupier of land?

  1. A) The standard of care is set by a federal statute and is therefore the same for all the provinces.
  2. B) An occupier owes a duty only to “licencees.”
  3. C) There is no duty of care owed to persons who come onto another’s property whether invited or not; persons must take responsibility to look after themselves.
  4. D) The standard of care imposed on the occupier is set by provincial statute.
  5. E) A tenant cannot be liable; only the owner can be sued.

Answer:  D

Diff: 2      Type: MC      Page Ref: 154

Topic:  Ch. 5 – Special Situations

Skill:  Applied

Objective:  Chapter 5: 6. Examine legislation that affects when liability may be imposed.

Bloom’s Taxonomy:  Knowledge

29) When Joan visited her friend Clive, who was renting a small farm in Langley, she was injured by some dangerous cleaning solvent that Clive stores in very large quantities for Soapo Ltd. The solvent had leaked from one of several massive 1000-litre drums. When Joan had walked toward the side door of the farmhouse, she stepped through a puddle of what turned out to be solvent. The solvent not only ruined her shoes, but also burned her skin when some splashed onto her legs. The solvent also drained down into the fish pond on the adjacent property owned by the Nelsons. Read each of the following separately and indicate which is true.

  1. A) If the Nelsons sue for any loss, they would not succeed against Clive because he is just the tenant of the farm, not the owner.
  2. B) If the Nelsons sued on the rule in Rylands v. Fletcher, the defendant could succeed by showing that there was no intention to harm anyone and reasonable care had been taken to contain the solvent.
  3. C) If Joan sued Clive, she would not sue on the rule of strict liability but under the Occupiers’ Liability Act.
  4. D) If the Nelsons sued on the rule in Rylands v. Fletcher, they would be barred from also pleading negligence as an alternative cause of action.
  5. E) If Joan sues for any loss, she must sue the owner of the farm.

Answer:  C

Diff: 3      Type: MC      Page Ref: 154

Topic:  Ch. 5 – Legislation Impacting Duty of Care

Skill:  Applied

Objective:  Chapter 5: 6. Examine legislation that affects when liability may be imposed.

Bloom’s Taxonomy:  Knowledge

 

 

30) Ms. Lam bought a lot next to a house owned by Mr. Dodson. She asked Mr. Dodson for permission to use his electricity while building a house on her property. He refused. He feared his house was too old to handle the electricity load needed. Later, a carpenter employed by Ms. Lam accidentally broke a window of Mr. Dodson’s while moving lumber. Furthermore, the carpenter removed part of Dodson’s fence to make room for needed materials, used Dodson’ house to support the lumber and drove some nails into Dodson’s tree to hold some wires. Dodson complained to Ms. Lam. Irritated by his stand on the electricity and his complaints, Lam began a civil action against him for the tort of defamation, although she had absolutely no grounds for alleging defamation. Which of the following is not supported by the facts given above?

  1. A) Dodson has an action against the carpenter for trespass.
  2. B) Dodson has an action against Lam on the principle of vicarious liability.
  3. C) Dodson has an action against Lam on the grounds of strict liability (the rule of Rylands v. Fletcher).
  4. D) Dodson has an action against the carpenter for negligence.
  5. E) Dodson could sue Lam for trespass even if there was no damage.

Answer:  C

Diff: 2      Type: MC      Page Ref: 157

Topic:  Ch. 5 – Strict Liability

Skill:  Applied

Objective:  Chapter 5: 7. Distinguish among strict liability, vicarious liability, and product liability.

Bloom’s Taxonomy:  Knowledge

31) Although there was no carelessness on the part of Mr. Tam, and although he had no intention of harming anyone, he could still be sued by someone harmed by dangerous substances that escaped from his property. This is an example of what tort or what principle of tort law?

  1. A) Vicarious liability
  2. B) Contributory negligence
  3. C) False imprisonment
  4. D) Strict liability
  5. E) Defamation

Answer:  D

Diff: 1      Type: MC      Page Ref: 157

Topic:  Ch. 5 – Strict Liability

Skill:  Recall

Objective:  Chapter 5: 7. Distinguish among strict liability, vicarious liability, and product liability.

Bloom’s Taxonomy:  Knowledge

 

 

32) For his Superbowl Sunday party, Jack bought, among other things, some Francisco mustard. Even before the game began, one of the guests, Fred, made himself a sandwich using that mustard. When Fred saw another guest, Tad, making a sandwich with the 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 was contaminated when it was made. Jack had bought the mustard just an hour before game time from Big Store, which had bought it from DB Distributors Ltd., which had bought it from the manufacturer New Foods Ltd. On these facts, which of the following is true?

  1. A) Since Fred did not buy the mustard himself, he must suffer his loss; i.e., he cannot sue anyone.
  2. B) Fred could successfully sue Jack for negligence because Jack bought the mustard.
  3. C) Tad could successfully sue Jack for negligence.
  4. D) Fred could successfully sue the distributor for negligence because the distributor delivered the case of mustard to Big Store.
  5. 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 Ref: 158

Topic:  Ch. 5 – Negligence

Skill:  Applied

Objective:  Chapter 5: 7. Distinguish among strict liability, vicarious liability, and product liability.

Bloom’s Taxonomy:  Knowledge

33) Paul invited several friends over to celebrate Ann’s birthday. About an hour before the guests arrived, Paul bought some sparkling wine and put it in his refrigerator. When all the guests were assembled, Paul lifted the chilled bottle of wine from its gift box. Before it was completely out of the box, the bottle exploded, sending glass in all directions. The glass cut Paul’s hand and also the eye of one of his guests, Joan. No one else was hurt at all. Assuming all these facts could be proved, which of the following is true?

  1. A) Because Joan did not buy the wine, she has no cause of action against anyone.
  2. B) Joan could sue Paul successfully for the tort of negligence for buying and serving sparkling wine.
  3. C) All the guests, including Joan, could successfully sue the manufacturer for negligence; they need only prove that the explosion was the fault of the manufacturing process.
  4. D) If Joan sued the manufacturer for negligence, the court could draw, from the circumstantial evidence of the injury, a conclusion that someone must have been negligent, leaving it to the manufacturer to produce evidence to the contrary.
  5. E) Only Joan has a right to sue in contract.

Answer:  D

Diff: 2      Type: MC      Page Ref: 158

Topic:  Ch. 5 – Product Liability

Skill:  Applied

Objective:  Chapter 5: 7. Distinguish among strict liability, vicarious liability, and product liability.

Bloom’s Taxonomy:  Knowledge

 

34) 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?

  1. A) A land appraiser owes a duty of care to his client, the company, but not to any potential investors.
  2. B) A land appraiser owes a duty of care to his client, and to potential investors only if he knows the name of the investor.
  3. C) The investor might sue the appraiser for “negligent misstatement causing economic loss.”
  4. D) The investor must suffer his own loss, because an investor takes the risk and so must take care.
  5. E) A person cannot be sued for words that cause loss, only for actions that cause physical injury.

Answer:  C

Diff: 2      Type: MC      Page Ref: 163

Topic:  Ch. 5 – Liability of Professionals and Other Experts

Skill:  Applied

Objective:  Chapter 5: 8. Describe the circumstances where professional liability may arise.

Bloom’s Taxonomy:  Knowledge

35) To have the schools valued for insurance purposes, a school district hired a firm of surveyors to give them 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 the calculations based on the measurements. Surveyors always use the services of such tabulating companies. An error was made in the calculations, so the surveyor’s report was wrong. Therefore, the buildings were under-insured. When one of the school buildings was destroyed by fire, the school district did not get sufficient funds from the insurance company to rebuild the school. On these facts, which of the following is true? (Assume that the school district has the ability to sue and be sued in court.)

  1. A) This action would most likely be commenced in the Small Claims Court.
  2. B) The insurance company can successfully sue the statistical tabulating company for nuisance.
  3. C) The school district can successfully sue the statistical tabulating company for negligent misstatement causing economic loss.
  4. D) The school district could successfully sue the surveyors for nuisance, for subcontracting the calculating work.
  5. E) The statistical tabulating company cannot be sued by the school district.

Answer:  C

Diff: 2      Type: MC      Page Ref: 163

Topic:  Ch. 5 – Liability of Professionals and Other Experts

Skill:  Applied

Objective:  Chapter 5: 8. Describe the circumstances where professional liability may arise.

Bloom’s Taxonomy:  Knowledge

 

 

36) In which of the following would the plaintiff not succeed in an action for negligence?

  1. 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.
  2. B) 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.
  3. C) Shunan was made sick by drinking a contaminated cola bought for her by her friend Fred. She sued the manufacturer.
  4. D) Dr. Alberts used the skill of a reasonable doctor in that field, but the patient did not respond to the treatment and lost hearing in one ear. She sued the doctor.
  5. E) Pradeep was hurt when a driver of a Gino’s pizza truck carelessly ran through a yellow traffic light on his way to deliver a pizza. Pradeep sued the driver and Gino, his employer, although Gino wasn’t even in the truck.

Answer:  D

Diff: 1      Type: MC      Page Ref: 163

Topic:  Ch. 5 – Liability of Professionals and Other Experts

Skill:  Recall

Objective:  Chapter 5: 8. Describe the circumstances where professional liability may arise.

Bloom’s Taxonomy:  Knowledge

37) In Hodgkinson v. Simms, an accountant advised a client to invest in a real estate development while also acting for the developers. What did the Supreme Court of Canada find?

  1. A) The presence of a financial risk was the identifying feature of a fiduciary relationship and, in this case, imposed the fiduciary duty.
  2. B) The presence of a financial risk was the identifying feature of a fiduciary relationship but, in this case, did not impose a fiduciary duty.
  3. C) The presence of loyalty, trust, and confidence were identifying features of a fiduciary relationship and, in this case, imposed the fiduciary duty.
  4. D) A fiduciary relationship could not arise in circumstances where an investor acted of his own accord.
  5. E) A fiduciary relationship could not arise in commercial circumstances, such as those found in this case.

Answer:  C

Diff: 2      Type: MC      Page Ref: 163

Topic:  Ch. 5 – Fiduciary Duty and Breach of Trust

Skill:  Recall

Objective:  Chapter 5: 8. Describe the circumstances where professional liability may arise.

Bloom’s Taxonomy:  Knowledge

 

 

38) Sumanthra, an accountant, prepared financial statements for ZeeTech Ltd. A cutting edge technology company, ZeeTech was actively seeking private investment in order to finance a new electronics device. Despite the fact that Sumanthra followed Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), the statements she prepared were misleading. Arif and Alena, both potential investors, relied on the statements Sumanthra had prepared. As a result of their reliance, Arif and Alena both invested in ZeeTech and lost a considerable sum of money. Independently, Arif and Alena decided to sue Sumanthra for their financial loss. Which of the following is true?

  1. A) Sumanthra will not escape liability because accountants are automatically liable for losses arising from the use of financial statements they prepare.
  2. B) Sumanthra will not escape liability simply because she followed GAAP and IFRS.
  3. C) Sumanthra has nothing to worry about, because an accountant who follows GAAP and IFRS could not have breached the standard of care.
  4. D) Sumanthra has nothing to worry about, because accountants are immune from liability.
  5. E) Sumanthra has nothing to worry about, because negligence requires proof of more than mere financial loss.

Answer:  B

Diff: 2      Type: MC      Page Ref: 163

Topic:  Ch. 5 – Liability of Professionals and Other Experts

Skill:  Applied

Objective:  Chapter 5: 8. Describe the circumstances where professional liability may arise.

Bloom’s Taxonomy:  Knowledge

39) Which of the following statements describes the standard expected of experts?

  1. A) Require skills and abilities expected of an average person.
  2. B) Must exercise skill with degree of care expected from a reasonable person in that profession.
  3. C) Inexperience excuses incompetence.
  4. D) Common practice always sets the appropriate standard.
  5. E) The standard of an expert need be perfection.

Answer:  B

Diff: 2      Type: MC      Page Ref: 163

Topic:  Ch. 5 – Liability of Professionals and Other Experts

Skill:  Recall

Objective:  Chapter 5: 8. Describe the circumstances where professional liability may arise.

Bloom’s Taxonomy:  Knowledge

 

 

40) 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 (assume all can be proven), which of the following is true?

  1. A) A person can only be sued for actions that cause physical injury.
  2. B) The cause of action most likely to be taken by the investor in this case is “deceit.”
  3. C) 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).
  4. D) The employer of the zoning officer could not be sued since the employer did no wrong.
  5. E) The zoning officer could not be sued successfully since he had no intention of hurting anyone; his error was just an accident.

Answer:  C

Diff: 3      Type: MC      Page Ref: 163

Topic:  Ch. 5 – Liability of Professionals and Other Experts

Skill:  Applied

Objective:  Chapter 5: 8. Describe the circumstances where professional liability may arise.

Bloom’s Taxonomy:  Knowledge

41) 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 $200,000. On these facts, which of the following is true?

  1. A) Mr. Jones could not take any action because he had no contract with the company or the appraiser.
  2. B) A person cannot be sued for words that cause loss, only for actions that cause physical injury.
  3. C) If Jones sues the appraiser, he cannot also sue the employer company.
  4. D) The cause of action most likely to be taken by the investor is defamation.
  5. E) 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.

Answer:  E

Diff: 3      Type: MC      Page Ref: 163

Topic:  Ch. 5 – Liability of Professionals and Other Experts

Skill:  Applied

Objective:  Chapter 5: 8. Describe the circumstances where professional liability may arise.

Bloom’s Taxonomy:  Knowledge

 

 

42) 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’s, 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?

  1. A) Because there was no contractual connection between Carson and anyone else, he has no legal right to compensation.
  2. B) Carson will have to sue Benson and then Benson can turn around and sue Jack under the principles of vicarious liability.
  3. 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.
  4. D) Jack cannot be held liable for Carson’s loss, but Adco can be because it employed Jack.
  5. E) Jack can only be held liable if Carson can establish that Jack owed him a duty to be careful.

Answer:  E

Diff: 3      Type: MC      Page Ref: 163

Topic:  Ch. 5 – Liability of Professionals and Other Experts

Skill:  Applied

Objective:  Chapter 5: 8. Describe the circumstances where professional liability may arise.

Bloom’s Taxonomy:  Knowledge

43) To win his 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?

  1. A) That he act to the very best of his ability
  2. B) That he act as may reasonably be expected of the normally skilled professional of that type
  3. C) That he act as a reasonably prudent person
  4. D) That he act sincerely and with goodwill
  5. E) That he act sincerely and as may reasonably be expected of a skilled professional

Answer:  B

Diff: 1      Type: MC      Page Ref: 163

Topic:  Ch. 5 – Liability of Professionals and Other Experts

Skill:  Recall

Objective:  Chapter 5: 8. Describe the circumstances where professional liability may arise.

Bloom’s Taxonomy:  Knowledge

 

 

44) Which of the following statements does not describe the standard expected of experts?

  1. A) Require skills and abilities expected of a professional in that field.
  2. B) Must exercise skill with degree of care expected from a reasonable person in that profession.
  3. C) Inexperience does not excuse incompetence.
  4. D) Common practice always sets the appropriate standard.
  5. E) The standard of an expert need not be perfection.

Answer:  D

Diff: 1      Type: MC      Page Ref: 163

Topic:  Ch. 5 – Liability of Professionals and Other Experts

Skill:  Recall

Objective:  Chapter 5: 8. Describe the circumstances where professional liability may arise.

Bloom’s Taxonomy:  Knowledge

 

45) In most Canadian jurisdictions, ________ can be obtained on an individual basis with an insurance corporation, but it is more often acquired by businesses as part of an employee benefits package.

  1. A) property insurance
  2. B) business interruption insurance
  3. C) liability insurance
  4. D) disability insurance
  5. E) professional liability insurance

Answer:  D

Diff: 1      Type: MC      Page Ref: 172

Topic:  Ch. 5 – Insurance

Skill:  Recall

Objective:  Chapter 5: 9. Describe the four types of insurance businesses commonly need.

Bloom’s Taxonomy:  Knowledge

46) Often, a business suffering a loss from a fire will have insurance to cover the property damage, but there will be nothing to cover the revenue losses the business suffers during the period it is closed down for repairs.  What form of insurance will cover the latter issue?

  1. A) liability insurance
  2. B) disability insurance
  3. C) business interruption insurance
  4. D) property insurance
  5. E) professional liability insurance

Answer:  C

Diff: 1      Type: MC      Page Ref: 146

Topic:  Ch. 5 – Insurance

Skill:  Recall

Objective:  Chapter 5: 9. Describe the four types of insurance businesses commonly need.

Bloom’s Taxonomy:  Knowledge

 

 

47) ________ provides only a benefit upon death, and the premiums are lower than whole life insurance, which provides coverage in the event of death as well as investment potential and retirement income.

  1. A) Liability insurance
  2. B) Health insurance
  3. C) Term insurance
  4. D) Death insurance
  5. E) Property insurance

Answer:  C

Diff: 1      Type: MC      Page Ref: 172

Topic:  Ch. 5 – Insurance

Skill:  Recall

Objective:  Chapter 5: 9. Describe the four types of insurance businesses commonly need.

Bloom’s Taxonomy:  Knowledge

 

48) ________ is the type of insurance most closely associated with torts.

  1. A) Liability insurance
  2. B) Business interruption insurance
  3. C) Disability insurance
  4. D) Property insurance
  5. E) Umbrella insurance

Answer:  A

Diff: 1      Type: MC      Page Ref: 172

Topic:  Ch. 5 – Insurance

Skill:  Recall

Objective:  Chapter 5: 9. Describe the four types of insurance businesses commonly need.

Bloom’s Taxonomy:  Knowledge

49) A recent innovation in the insurance industry is ________ where several types of liability are bundled together, allowing the insured higher limits of coverage for a more economical premium.

  1. A) liability insurance
  2. B) business interruption insurance
  3. C) term insurance
  4. D) umbrella liability
  5. E) bundled liability insurance

Answer:  D

Diff: 2      Type: MC      Page Ref: 172

Topic:  Ch. 5 – Insurance

Skill:  Recall

Objective:  Chapter 5: 9. Describe the four types of insurance businesses commonly need.

Bloom’s Taxonomy:  Knowledge

 

 

50) In which one of the following would Joe be able to collect the entire amount of insurance claimed?

  1. A) Joe insured his law partner’s life for $500,000 and the amount he actually lost when the partner died was only $100,000. Joe claims $500,000.
  2. B) Joe’s house suffers $20,000 damage, and he only had it insured for $100,000, when the actual value was over $250,000. Joe claims $20,000.
  3. C) Joe owns a one-half interest in a house valued at $100,000 that is completely destroyed in a fire. The house is insured for that amount and Joe makes a claim for $100,000.
  4. D) Joe insured the club house of a Hell’s Angels motorcycle club located in the next block for $75,000; the house is valued at about that amount. The club house is subsequently destroyed in a fire. Joe claims $75,000.
  5. E) Joe took out a life insurance policy on his wife for $500,000, and shortly thereafter, during a fight when he was in a drunken rage, he struck his wife, causing her death. Joe claims $500,000.

Answer:  A

Diff: 3      Type: MC      Page Ref: 172

Topic:  Ch. 5 – Types of Insurance

Skill:  Applied

Objective:  Chapter 5: 9. Describe the four types of insurance businesses commonly need.

Bloom’s Taxonomy:  Knowledge

51) In Mueller v. Wawanesa Insurance Co., insurance had been taken out on a house when it was being used as a residential dwelling. The building was occupied by three members of a motorcycle gang. The insurance company was not notified of the change. What was the result when the house was destroyed by fire?

  1. A) The failure to notify of the change voided the policy and the insurance company did not have to pay.
  2. B) The failure to notify of the change voided the policy, but the insurance company still had to cover the loss.
  3. C) The failure to notify of the change was immaterial, because there was no proof that is what caused the fire.
  4. D) The failure to notify of the change was immaterial, because there was no misrepresentation at the time the policy was taken out.
  5. E) The failure to notify of the change resulted in the insured being charged higher premiums.

Answer:  A

Diff: 2      Type: MC      Page Ref: 177

Topic:  Ch. 5 – Insurance

Skill:  Recall

Objective:  Chapter 5: 9. Describe the four types of insurance businesses commonly need.

Bloom’s Taxonomy:  Knowledge

 

 

52) Which of the following is not an appropriate matter for insurance coverage?

  1. A) Insurance against lost profits
  2. B) Insurance against fire in a home
  3. C) Insurance against the wrongful conduct of the insured, e.g., theft
  4. D) Insurance against loss of life
  5. E) Insurance against damage to property

Answer:  C

Diff: 1      Type: MC      Page Ref: 172

Topic:  Ch. 5 – Types of Insurance

Skill:  Recall

Objective:  Chapter 5: 9. Describe the four types of insurance businesses commonly need.

Bloom’s Taxonomy:  Knowledge

 

53) Which one of the following explains the effect of a co-insurance clause?

  1. A) A co-insurance clause provides for more than one person paying the premium.
  2. B) A co-insurance clause provides for the insurance claim to be split between two or more beneficiaries.
  3. C) A co-insurance clause provides for the insured to assume part of the responsibility for any loss.
  4. D) A co-insurance clause provides for several different properties being insured under the same policy.
  5. E) A co-insurance clause provides for the insurance company arranging their own insurance on a large policy.

Answer:  C

Diff: 2      Type: MC      Page Ref: 172

Topic:  Ch. 5 – Types of Insurance

Skill:  Recall

Objective:  Chapter 5: 9. Describe the four types of insurance businesses commonly need.

Bloom’s Taxonomy:  Knowledge

54) Where 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?

  1. A) $50,000
  2. B) $100,000
  3. C) $200,000
  4. D) $400,000
  5. E) Nothing

Answer:  A

Diff: 2      Type: MC      Page Ref: 172

Topic:  Ch. 5 – Types of Insurance

Skill:  Applied

Objective:  Chapter 5: 9. Describe the four types of insurance businesses commonly need.

Bloom’s Taxonomy:  Knowledge

 

 

55) Business interruption insurance is designed to cover which of the following situations?

  1. A) A person owns a restaurant business and the restaurant is destroyed by fire. The insurance coverage pays for the repair of the building.
  2. B) 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.
  3. C) A person owns a restaurant business and the restaurant is destroyed by fire. The insurance covers revenue losses caused by the business being closed down for several months.
  4. D) 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.
  5. E) 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 out to these customers.

Answer:  C

Diff: 2      Type: MC      Page Ref: 172

Topic:  Ch. 5 – Types of Insurance

Skill:  Recall

Objective:  Chapter 5: 9. Describe the four types of insurance businesses commonly need.

Bloom’s Taxonomy:  Knowledge

 

56) Joe entered a store and approached a display of china. He was examining an extremely valuable vase and carelessly dropped it, destroying it. Which of the following is correct with respect to his liability?

  1. A) If the store has insurance coverage, the insurance will cover his careless conduct and he doesn’t have to worry about anything.
  2. B) If the store has insurance coverage, the insurance will pay the store for the loss but may pursue Joe for repayment by suing him for negligence.
  3. C) Joe cannot be sued for the loss because Joe is not a party to the insurance contract.
  4. D) If the store does not have insurance coverage, they should have and so Joe has no responsibility in these circumstances.
  5. E) Joe is responsible only if the store has no insurance coverage.

Answer:  B

Diff: 3      Type: MC      Page Ref: 172

Topic:  Ch. 5 – Types of Insurance

Skill:  Applied

Objective:  Chapter 5: 9. Describe the four types of insurance businesses commonly need.

Bloom’s Taxonomy:  Knowledge

 

57) In which one of the following would Joe be able to collect the entire amount of insurance claimed?

  1. A) Joe insured his law partner’s life for $500,000 and the amount he actually lost when the partner died was only $100,000. Joe claims $500,000.
  2. B) Joe’s house suffers $20,000 damage, and he only had it insured for $100,000, when the actual value was over $250,000. Joe claims $20,000.
  3. C) Joe owns a one-half interest in a house valued at $100,000 that is completely destroyed in a fire. The house is insured for that amount and Joe makes a claim for $100,000.
  4. D) Joe insured the club house of a Hell’s Angels motorcycle club located in the next block for $75,000; the house is valued at about that amount. The club house is subsequently destroyed in a fire. Joe claims $75,000.
  5. E) Joe took out a life insurance policy on his wife for $500,000, and shortly thereafter, during a fight when he was in a drunken rage, he struck his wife, causing her death. Joe claims $500,000.

Answer:  A

Diff: 3      Type: MC      Page Ref: 172

Topic:  Ch. 5 – Types of Insurance

Skill:  Applied

Objective:  Chapter 5: 9. Describe the four types of insurance businesses commonly need.

Bloom’s Taxonomy:  Knowledge

 

58) Property insurance should correspond to the actual value of the property for all of the following reasons except

  1. A) if the property is insured for more, the insured will pay too high a premium.
  2. B) no insurance means no compensation for loss.
  3. C) if the property is insured for less, the insured will only receive partial compensation.
  4. D) if the property is insured for less, there is a danger of being a co-insurer.
  5. E) if the property is insured for more, there will be no compensation for loss.

Answer:  E

Diff: 1      Type: MC      Page Ref: 172

Topic:  Ch. 5 – Types of Insurance

Skill:  Recall

Objective:  Chapter 5: 9. Describe the four types of insurance businesses commonly need.

Bloom’s Taxonomy:  Knowledge

 

59) In which of the following situations will the insured be able to collect the entire amount of the insurance claimed?

  1. A) Jane had a compact disc player worth $300. It was portable and it was stolen from her car. She had a house policy and a car policy, both of which provided coverage. Jane claimed $300 from each policy.
  2. B) Joe has his house insured for $100,000 when the actual value of the house is $200,000. When it burns down, Joe claims $200,000.
  3. C) Joe owns a house on a lot in Regina, and although the property would sell for $100,000, the value of the house is only $50,000. Joe takes out a $50,000 policy against loss to the house, which is subsequently destroyed by fire. Joe claims $50,000.
  4. D) Joe and his wife both own a one-half interest in their house, worth $100,000. Joe took out an insurance policy in his own name for the $100,000 and the house is destroyed by fire. Joe claims the $100,000.
  5. E) Joe takes out insurance on his neighbour’s house for $50,000 because his neighbour is notoriously careless. Sure enough, the house burns down with $50,000 loss.

Answer:  C

Diff: 3      Type: MC      Page Ref: 172

Topic:  Ch. 5 – Types of Insurance

Skill:  Applied

Objective:  Chapter 5: 9. Describe the four types of insurance businesses commonly need.

Bloom’s Taxonomy:  Knowledge

 

60) In Heitsman v. Canadian Premier Life Insurance Co., an insurance company denied coverage on the basis of an ambiguous exclusion of liability clause. What did the Court find?

  1. A) The contra proferentum rule was applied, and the exclusion was narrowly interpreted.
  2. B) The contra proferentum rule was applied, and the exclusion was broadly construed.
  3. C) The contra proferentum rule was applied, so the interpretation favoured the insurance company.
  4. D) The contra proferentum rule did not apply, because the insurance contract was in standard form.
  5. E) The contra proferentum rule did not apply, because the insured had signed the contract voluntarily.

Answer:  A

Diff: 2      Type: MC      Page Ref: 172

Topic:  Ch. 5 – Insurance

Skill:  Recall

Objective:  Chapter 5: 10. Identify when an insurable interest exists.

Bloom’s Taxonomy:  Knowledge

 

61) Which of the following is correct with respect to the meaning of an insurable interest?

  1. A) An insurable interest means that the person causing the loss is required to show enough interest in what he is doing to be careful.
  2. B) The insurance company must have received a premium before it can be said to have an interest in the agreement and be bound to pay when a claim is made.
  3. C) The beneficiary or person receiving payment must have an ownership interest in the thing being insured.
  4. D) The person taking out the insurance contract must be in a position that he will suffer a loss if the insured-against event occurs.
  5. E) This term describes when a person has taken out insurance on something.

Answer:  D

Diff: 1      Type: MC      Page Ref: 172

Topic:  Ch. 5 – Insurance

Skill:  Recall

Objective:  Chapter 5: 10. Identify when an insurable interest exists.

Bloom’s Taxonomy:  Knowledge

 

62) Some jurisdictions have instituted “no fault” insurance programs. Which of the following statements is true?

  1. A) Under common law, if a person is not at fault, damages can always be recovered in tort.
  2. B) No fault insurance means no compensation for loss.
  3. C) No fault insurance assumes there is a voluntary assumption of risk.
  4. D) There is always an assumption of contributory negligence under no fault insurance programs.
  5. E) Under no fault programs, people are treated the same and compensated for their injuries whether they are at fault or not.

Answer:  E

Diff: 2      Type: MC      Page Ref: 172

Topic:  Ch. 5 – Types of Insurance

Skill:  Recall

Objective:  Chapter 5: 11. Explain the significance of insurance being a contract of utmost good faith.

Bloom’s Taxonomy:  Knowledge

 

 

63) Which of the following is correct with respect to the principle of subrogation as it relates to insurance law?

  1. A) Subrogation refers to the insured’s right to demand payment from the insurance company if the insured-against event takes place.
  2. B) Subrogation refers to the principle that the insured cannot benefit from his own wrongdoing.
  3. 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.
  4. D) Subrogation refers to the principle that, if an insurance company pays out on a policy, they assume all of the rights of the insured against the person causing the loss.
  5. E) Subrogation refers to the practice of the insurance companies taking out their own insurance where the policy involves potentially large losses or high risk.

Answer:  D

Diff: 1      Type: MC      Page Ref: 180

Topic:  Ch. 5 – Subrogation

Skill:  Recall

Objective:  Chapter 5: 12. Identify the duties imposed on the insured and the insurer.

Bloom’s Taxonomy:  Knowledge

64) Which of the following statements is correct with respect to bonding?

  1. A) Bonding is another term for insurance. The two terms, bonding and insurance, are interchangeable.
  2. B) 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.
  3. C) Bonding provides protection to the victim injured by the wrongful conduct of the person bonded.
  4. D) Bonding provides protection against losses incurred because of fluctuations in the financial markets.
  5. E) 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.

Answer:  C

Diff: 2      Type: MC      Page Ref: 172

Topic:  Ch. 5 – Insurance

Skill:  Recall

Objective:  Chapter 5: 12. Identify the duties imposed on the insured and the insurer.

Bloom’s Taxonomy:  Knowledge

 

65) The court determines the standard of care required and whether or not there was a failure to live up to that standard.

Answer:  TRUE

Diff: 1      Type: TF      Page Ref: 135

Topic:  Ch. 5 – Negligence

Skill:  Recall

Objective:  Chapter 5: 2. State when a duty of care arises, explaining how courts determine whether it is owed.

Bloom’s Taxonomy:  Knowledge

 

66) Children are not held liable for their torts.

Answer:  FALSE

Diff: 2      Type: TF      Page Ref: 172

Topic:  Ch. 5 – Negligence

Skill:  Recall

Objective:  Chapter 5: 2. State when a duty of care arises, explaining how courts determine whether it is owed.

Bloom’s Taxonomy:  Knowledge

 

67) If a person is injured while attempting to rescue someone, he or she may have a claim against the person who caused the situation that endangered the victim and the rescuer.

Answer:  TRUE

Diff: 3      Type: TF      Page Ref: 172

Topic:  Ch. 5 – Negligence

Skill:  Applied

Objective:  Chapter 5: 2. State when a duty of care arises, explaining how courts determine whether it is owed.

Bloom’s Taxonomy:  Knowledge

68) At common law, a mother owes a duty of care to an unborn child.

Answer:  FALSE

Diff: 3      Type: TF      Page Ref: 172

Topic:  Ch. 5 – Negligence

Skill:  Applied

Objective:  Chapter 5: 2. State when a duty of care arises, explaining how courts determine whether it is owed.

Bloom’s Taxonomy:  Knowledge

 

69) A reasonable person is one who is prudent and careful.

Answer:  TRUE

Diff: 1      Type: TF      Page Ref: 135

Topic:  Ch. 5 – Negligence

Skill:  Recall

Objective:  Chapter 5: 2. State when a duty of care arises, explaining how courts determine whether it is owed.

Bloom’s Taxonomy:  Knowledge

 

70) 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.

Answer:  FALSE

Diff: 2      Type: TF      Page Ref: 141

Topic:  Ch. 5 – Negligence

Skill:  Recall

Objective:  Chapter 5: 2. State when a duty of care arises, explaining how courts determine whether it is owed.

Bloom’s Taxonomy:  Knowledge

 

71) We owe a duty to anyone we can reasonably anticipate might be harmed by our conduct.

Answer:  TRUE

Diff: 1      Type: TF      Page Ref: 135

Topic:  Ch. 5 – Negligence

Skill:  Recall

Objective:  Chapter 5: 2. State when a duty of care arises, explaining how courts determine whether it is owed.

Bloom’s Taxonomy:  Knowledge

 

72) If a person attempts to help, there is a duty to exercise reasonable care.

Answer:  TRUE

Diff: 3      Type: TF      Page Ref: 135

Topic:  Ch. 5 – Negligence

Skill:  Recall

Objective:  Chapter 5: 2. State when a duty of care arises, explaining how courts determine whether it is owed.

Bloom’s Taxonomy:  Knowledge

 

73) A person has to prove only that another caused his injury to succeed in a negligence action.

Answer:  FALSE

Diff: 2      Type: TF      Page Ref: 135

Topic:  Ch. 5 – Negligence

Skill:  Recall

Objective:  Chapter 5: 3. Describe breach of the standard of care, identifying the test used to determine if a breach has occurred.

Bloom’s Taxonomy:  Knowledge

74) Innkeepers at common law were required to protect their guests from the wrongful acts of others, even when the innkeeper or servant was not at fault.

Answer:  TRUE

Diff: 1      Type: TF      Page Ref: 157

Topic:  Ch. 5 – Innkeeper’s Liability

Skill:  Recall

Objective:  Chapter 5: 4. Explain how both physical and legal causation and damage are proven.

Bloom’s Taxonomy:  Knowledge

 

75) Strict liability means that liability can be established even when there is no fault.

Answer:  TRUE

Diff: 2      Type: TF      Page Ref: 157

Topic:  Ch. 5 – Strict Liability

Skill:  Recall

Objective:  Chapter 5: 7. Distinguish among strict liability, vicarious liability, and product liability.

Bloom’s Taxonomy:  Knowledge

 

 

76) Absent a statutory provision to the contrary, parents are not responsible for their children’s torts unless there was obvious failure to control, instruct, or supervise.

Answer:  TRUE

Diff: 3      Type: TF      Page Ref: 172

Topic:  Ch. 5 – Negligence

Skill:  Recall

Objective:  Chapter 5: 7. Distinguish among strict liability, vicarious liability, and product liability.

Bloom’s Taxonomy:  Knowledge

 

77) The standard of care that is required of a professional in a negligence action is that she acts to the best of her ability.

Answer:  FALSE

Diff: 1      Type: TF      Page Ref: 163

Topic:  Ch. 5 – Liability of Professionals and Other Experts

Skill:  Recall

Objective:  Chapter 5: 8. Describe the circumstances where professional liability may arise.

Bloom’s Taxonomy:  Knowledge

 

78) The occurrences of professional malpractice actions have decreased dramatically in recent years, due largely to the increased availability of liability insurance.

Answer:  FALSE

Diff: 1      Type: TF      Page Ref: 163

Topic:  Ch. 5 – Liability of Professionals and Other Experts

Skill:  Recall

Objective:  Chapter 5: 8. Describe the circumstances where professional liability may arise.

Bloom’s Taxonomy:  Knowledge

 

79) No-fault personal liability automobile insurance is an attempt to distribute losses among the most accident-prone drivers.

Answer:  FALSE

Diff: 2      Type: TF      Page Ref: 172

Topic:  Ch. 5 – Types of Insurance

Skill:  Recall

Objective:  Chapter 5: 9. Describe the four types of insurance businesses commonly need.

Bloom’s Taxonomy:  Knowledge

80) The institution of no-fault insurance programs in some jurisdictions allows people to be compensated for their injuries only if they are not at fault.

Answer:  FALSE

Diff: 2      Type: TF      Page Ref: 172

Topic:  Ch. 5 – Types of Insurance

Skill:  Recall

Objective:  Chapter 5: 9. Describe the four types of insurance businesses commonly need.

Bloom’s Taxonomy:  Knowledge

 

 

81) Business interruption insurance covers the policy-holder when an unforeseen event causes a business to permanently cease operation.

Answer:  FALSE

Diff: 2      Type: TF      Page Ref: 172

Topic:  Ch. 5 – Types of Insurance

Skill:  Recall

Objective:  Chapter 5: 9. Describe the four types of insurance businesses commonly need.

Bloom’s Taxonomy:  Knowledge

 

82) Most insurance contracts require insured parties to maintain certain safety and security standards to protect themselves against the risk of fire and theft.

Answer:  TRUE

Diff: 2      Type: TF      Page Ref: 172

Topic:  Ch. 5 – Types of Insurance

Skill:  Recall

Objective:  Chapter 5: 9. Describe the four types of insurance businesses commonly need.

Bloom’s Taxonomy:  Knowledge

 

83) There need not be negligence or some other basis for liability on the part of the insured for the insurer to pay out on the policy.

Answer:  FALSE

Diff: 2      Type: TF      Page Ref: 172

Topic:  Ch. 5 – Types of Insurance

Skill:  Recall

Objective:  Chapter 5: 9. Describe the four types of insurance businesses commonly need.

Bloom’s Taxonomy:  Knowledge

 

84) Death is inevitable, and so life insurance pay-outs are calculated on the basis of a prediction of how long a person of a certain age and health can be expected to live.

Answer:  FALSE

Diff: 2      Type: TF      Page Ref: 172

Topic:  Ch. 5 – Types of Insurance

Skill:  Recall

Objective:  Chapter 5: 9. Describe the four types of insurance businesses commonly need.

Bloom’s Taxonomy:  Knowledge

 

85) Health care services in Canada are funded through the government-sponsored medical system, which is often supplemented by plans providing extended coverage.

Answer:  TRUE

Diff: 2      Type: TF      Page Ref: 172

Topic:  Ch. 5 – Types of Insurance

Skill:  Recall

Objective:  Chapter 5: 9. Describe the four types of insurance businesses commonly need.

Bloom’s Taxonomy:  Knowledge

 

86) A recent innovation in the insurance industry is where several types of liability are bundled together, allowing the insured higher limits of coverage for a more economical premium.

Answer:  FALSE

Diff: 2      Type: TF      Page Ref: 172

Topic:  Ch. 5 – Types of Insurance

Skill:  Recall

Objective:  Chapter 5: 9. Describe the four types of insurance businesses commonly need.

Bloom’s Taxonomy:  Knowledge

 

87) Insurable interest means that the insured must have a personal stake or interest in whatever is being insured.

Answer:  TRUE

Diff: 2      Type: TF      Page Ref: 172

Topic:  Ch. 5 – Insurance

Skill:  Recall

Objective:  Chapter 5: 10. Identify when an insurable interest exists.

Bloom’s Taxonomy:  Knowledge

 

88) When there is ambiguity in the meaning of a limitation clause in an insurance contract, the courts defer to the party who drafted the contract.

Answer:  FALSE

Diff: 3      Type: TF      Page Ref: 172

Topic:  Ch. 5 – Insurance

Skill:  Recall

Objective:  Chapter 5: 10. Identify when an insurable interest exists.

Bloom’s Taxonomy:  Knowledge

 

89) Insurance agents owe important obligations to their principals, but do not owe any specific duty to their customers.

Answer:  FALSE

Diff: 2      Type: TF      Page Ref: 172

Topic:  Ch. 5 – Insurance

Skill:  Recall

Objective:  Chapter 5: 11. Explain the significance of insurance being a contract of utmost good faith.

Bloom’s Taxonomy:  Knowledge

 

90) The forfeiture rule will not allow a criminal to profit from a crime, but does not affect those claiming through the criminal’s estate.

Answer:  FALSE

Diff: 3      Type: TF      Page Ref: 172

Topic:  Ch. 5 – Insurance

Skill:  Applied

Objective:  Chapter 5: 11. Explain the significance of insurance being a contract of utmost good faith.

Bloom’s Taxonomy:  Knowledge

 

91) It is up to an insured whether the insurer repairs or replaces damaged goods.

Answer:  FALSE

Diff: 2      Type: TF      Page Ref: 172

Topic:  Ch. 5 – Insurance

Skill:  Recall

Objective:  Chapter 5: 11. Explain the significance of insurance being a contract of utmost good faith.

Bloom’s Taxonomy:  Knowledge

92) 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.

Answer:  TRUE

Diff: 3      Type: TF      Page Ref: 180

Topic:  Ch. 5 – Subrogation

Skill:  Recall

Objective:  Chapter 5: 12. Identify the duties imposed on the insured and the insurer.

Bloom’s Taxonomy:  Knowledge

 

93) A surety bond provides assurance that the party to a contract will perform its part of the contract.

Answer:  TRUE

Diff: 2      Type: TF      Page Ref: 172

Topic:  Ch. 5 – Insurance

Skill:  Recall

Objective:  Chapter 5: 12. Identify the duties imposed on the insured and the insurer.

Bloom’s Taxonomy:  Knowledge

 

94) A fidelity bond is when the employee pays the employer a fee to cover themselves while they are on the job.

Answer:  FALSE

Diff: 2      Type: TF      Page Ref: 172

Topic:  Ch. 5 – Insurance

Skill:  Recall

Objective:  Chapter 5: 12. Identify the duties imposed on the insured and the insurer.

Bloom’s Taxonomy:  Knowledge

 

95) An insurable interest refers to the fact that the insurance company has to have been paid a premium so that they have an interest in the contract.

Answer:  FALSE

Diff: 2      Type: TF      Page Ref: 172

Topic:  Ch. 5 – Insurance

Skill:  Recall

Objective:  Chapter 5: 10. Identify when an insurable interest exists.

Bloom’s Taxonomy:  Knowledge

 

 

96) An insurance company’s right to subrogation refers to their right to refuse to pay where the insured is responsible for his own loss.

Answer:  FALSE

Diff: 2      Type: TF      Page Ref: 180

Topic:  Ch. 5 – Subrogation

Skill:  Recall

Objective:  Chapter 5: 12. Identify the duties imposed on the insured and the insurer.

Bloom’s Taxonomy:  Knowledge

97) What elements must be established in order to succeed in a negligence action?

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

  1. Breach of that duty (failure to live up to the standard of care).
  2. Causation (actual and proximate).
  3. Damage.

Diff: 2      Type: ES      Page Ref: 135

Topic:  Ch. 5 – Negligence

Skill:  Recall

Objective:  Chapter 5: 1. Identify the four elements of a negligence claim.

Bloom’s Taxonomy:  Knowledge

 

98) Tom is complaining about the carelessness of his neighbour and asks you if you think he could sue him 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 on his part.

Diff: 3      Type: ES      Page Ref: 135

Topic:  Ch. 5 – Negligence

Skill:  Applied

Objective:  Chapter 5: 2. State when a duty of care arises, explaining how courts determine whether it is owed.

Bloom’s Taxonomy:  Knowledge

 

99) 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 person here is a careful, prudent, observant 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 Ref: 135

Topic:  Ch. 5 – Negligence

Skill:  Recall

Objective:  Chapter 5: 2. State when a duty of care arises, explaining how courts determine whether it is owed.

Bloom’s Taxonomy:  Knowledge

 

100) 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 the Anns case may permit a court to not enforce the duty for public policy reasons.

Diff: 2      Type: ES      Page Ref: 135

Topic:  Ch. 5 – Negligence

Skill:  Recall

Objective:  Chapter 5: 2. State when a duty of care arises, explaining how courts determine whether it is owed.

Bloom’s Taxonomy:  Knowledge

101) Distinguish between misfeasance and nonfeasance.

Answer:  Nonfeasance involves a person failing to do something that could have prevented injury to another. Misfeasance involves an act or conduct that causes injury to another. As a general rule, nonfeasance is not actionable unless there is some particular duty, such as if the person being sued were a guardian, parent, relative, or had an occupation such as lifeguard that demanded action.

Diff: 2      Type: ES      Page Ref: 135

Topic:  Ch. 5 – Negligence

Skill:  Recall

Objective:  Chapter 5: 2. State when a duty of care arises, explaining how courts determine whether it is owed.

Bloom’s Taxonomy:  Knowledge

 

102) In determining duty, what kind of factors would the court take into consideration in determining whether the defendant lived up to the standard of a reasonable person?

Answer:  The risk involved, the dangerous nature, the type of activity involved, the public benefit of such an activity, and the expense of adhering to a higher standard would be considered.

Diff: 2      Type: ES      Page Ref: 135

Topic:  Ch. 5 – Negligence

Skill:  Recall

Objective:  Chapter 5: 2. State when a duty of care arises, explaining how courts determine whether it is owed.

Bloom’s Taxonomy:  Knowledge

 

103) What test is used to establish a duty of care?

Answer:  Reasonable foreseeability test

Diff: 1      Type: ES      Page Ref: 135

Topic:  Ch. 5 – Negligence

Skill:  Recall

Objective:  Chapter 5: 2. State when a duty of care arises, explaining how courts determine whether it is owed.

Bloom’s Taxonomy:  Knowledge

 

 

104) What is the reasonable foreseeability test used for?

Answer:  To establish a duty of care

Diff: 1      Type: ES      Page Ref: 135

Topic:  Ch. 5 – Negligence

Skill:  Recall

Objective:  Chapter 5: 2. State when a duty of care arises, explaining how courts determine whether it is owed.

Bloom’s Taxonomy:  Knowledge

 

105) What test is used to determine the standard of care?

Answer:  The reasonable person test

Diff: 1      Type: ES      Page Ref: 135

Topic:  Ch. 5 – Negligence

Skill:  Recall

Objective:  Chapter 5: 2. State when a duty of care arises, explaining how courts determine whether it is owed.

Bloom’s Taxonomy:  Knowledge

106) What is the reasonable person test used for?

Answer:  To determine the standard of care

Diff: 1      Type: ES      Page Ref: 135

Topic:  Ch. 5 – Negligence

Skill:  Recall

Objective:  Chapter 5: 2. State when a duty of care arises, explaining how courts determine whether it is owed.

Bloom’s Taxonomy:  Knowledge

 

107) Does liability vary with age? Explain.

Answer:  While a standard does not diminish in the case of an elderly person, the standard required of children is the level of conduct that would be expected of a reasonable child of the same age.

Diff: 2      Type: ES      Page Ref: 135

Topic:  Ch. 5 – Negligence

Skill:  Recall

Objective:  Chapter 5: 2. State when a duty of care arises, explaining how courts determine whether it is owed.

Bloom’s Taxonomy:  Knowledge

 

108) What is the test used for physical causation?

Answer:  The “but for” test

Diff: 1      Type: ES      Page Ref: 135

Topic:  Ch. 5 – Negligence

Skill:  Recall

Objective:  Chapter 5: 3. Describe breach of the standard of care, identifying the test used to determine if a breach has occurred.

Bloom’s Taxonomy:  Knowledge

 

109) What is the “but for” test used for?

Answer:  Physical causation

Diff: 1      Type: ES      Page Ref: 135

Topic:  Ch. 5 – Negligence

Skill:  Recall

Objective:  Chapter 5: 3. Describe breach of the standard of care, identifying the test used to determine if a breach has occurred.

Bloom’s Taxonomy:  Knowledge

 

110) What is the test used for legal causation?

Answer:  Remoteness test

Diff: 2      Type: ES      Page Ref: 135

Topic:  Ch. 5 – Negligence

Skill:  Recall

Objective:  Chapter 5: 3. Describe breach of the standard of care, identifying the test used to determine if a breach has occurred.

Bloom’s Taxonomy:  Knowledge

111) What is the remoteness test used for?

Answer:  Legal causation

Diff: 1      Type: ES      Page Ref: 135

Topic:  Ch. 5 – Negligence

Skill:  Recall

Objective:  Chapter 5: 3. Describe breach of the standard of care, identifying the test used to determine if a breach has occurred.

Bloom’s Taxonomy:  Knowledge

 

112) The principle that we must take our victims as we find them is often referred to as ________.

Answer:  the thin skull rule

Diff: 1      Type: ES      Page Ref: 135

Topic:  Ch. 5 – Negligence

Skill:  Recall

Objective:  Chapter 5: 3. Describe breach of the standard of care, identifying the test used to determine if a breach has occurred.

Bloom’s Taxonomy:  Knowledge

 

113) When the Court recognizes pre-existing frailties and the award of damages aims at restoring the plaintiff to that position, we say the Court is applying ________.

Answer:  the crumbling skull rule

Diff: 1      Type: ES      Page Ref: 135

Topic:  Ch. 5 – Negligence

Skill:  Recall

Objective:  Chapter 5: 3. Describe breach of the standard of care, identifying the test used to determine if a breach has occurred.

Bloom’s Taxonomy:  Knowledge

 

114) Joe was driving his automobile when Sam came 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 number and sued Sam for his negligent driving. Indicate the expected result.

Answer:  Joe will fail because there was no damage.

Diff: 2      Type: ES      Page Ref: 135

Topic:  Ch. 5 – Negligence

Skill:  Applied

Objective:  Chapter 5: 3. Describe breach of the standard of care, identifying the test used to determine if a breach has occurred.

Bloom’s Taxonomy:  Knowledge

115) Mary was driving down the road when Sam came out from a side road, went through a stop sign, 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, she 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: 3      Type: ES      Page Ref: 135

Topic:  Ch. 5 – Negligence

Skill:  Applied

Objective:  Chapter 5: 3. Describe breach of the standard of care, identifying the test used to determine if a breach has occurred.

Bloom’s Taxonomy:  Knowledge

 

116) 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.

Diff: 2      Type: ES      Page Ref: 151

Topic:  Ch. 5 – Defences

Skill:  Recall

Objective:  Chapter 5: 3. Describe breach of the standard of care, identifying the test used to determine if a breach has occurred.

Bloom’s Taxonomy:  Knowledge

 

 

117) Distinguish between a licensee, an invitee, and a trespasser.

Answer:  An invitee is a person who comes on the property for a business purpose. A licensee is one who is there with permission, such as a visitor or guest. A trespasser is one who is on the property without legal right.

Diff: 2      Type: ES      Page Ref: 155

Topic:  Ch. 5 – Occupiers’ Liability

Skill:  Recall

Objective:  Chapter 5: 4. Explain how both physical and legal causation and damage are proven.

Bloom’s Taxonomy:  Knowledge

 

118) Explain the importance of the distinction between an invitee, licensee, and trespasser.

Answer:  In some provinces, the standard of care imposed on the occupiers towards those who are using the property varies with the status of the visitor. The obligation owed to an invitee is to take reasonable steps to protect the invitee from unusual danger on the property. The duty owed to a licensee, however, is to inform or warn that licensee of any hidden danger on the property, and the duty owed to the trespasser is simply not to wilfully or recklessly cause that trespasser injury. Note that this standard has been changed by statute in many provinces and by court cases in specific provinces.

Diff: 3      Type: ES      Page Ref: 155

Topic:  Ch. 5 – Occupiers’ Liability

Skill:  Applied

Objective:  Chapter 5: 4. Explain how both physical and legal causation and damage are proven.

Bloom’s Taxonomy:  Knowledge

119) What is the last clear chance doctrine?

Answer:  Historically, this doctrine held that the person who had the last opportunity to avoid the accident and failed to do so was completely responsible.

Diff: 3      Type: ES      Page Ref: 135

Topic:  Ch. 5 – Negligence

Skill:  Recall

Objective:  Chapter 5: 4. Explain how both physical and legal causation and damage are proven.

Bloom’s Taxonomy:  Knowledge

 

120) Because of the devastating losses and injuries associated with automobile collisions, what have many provinces done?

Answer:  Many have turned to compulsory insurance schemes, while some have gone further by instituting no-fault programs. Ontario has passed controversial legislation setting a threshold for physical injury before non-pecuniary damages can be awarded.

Diff: 2      Type: ES      Page Ref: 135

Topic:  Ch. 5 – Negligence

Skill:  Recall

Objective:  Chapter 5: 4. Explain how both physical and legal causation and damage are proven.

Bloom’s Taxonomy:  Knowledge

 

 

121) Joe, a concert pianist, was walking down the street when he was struck by Harry, a careless skate boarder. Joe was knocked down and crushed his hand. When Joe sued Harry for his negligence, claiming the loss of income from his profession (he could never play the piano again), Harry countered with the defence that there was no way he could have anticipated that the person he was going to hit was a concert pianist. Explain his likelihood of success in raising this defence.

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

Diff: 3      Type: ES      Page Ref: 151

Topic:  Ch. 5 – Defences

Skill:  Applied

Objective:  Chapter 5: 5. Distinguish the defences applicable to the tort of negligence.

Bloom’s Taxonomy:  Knowledge

 

122) Indicate under what circumstance the defence of voluntary assumption of risk or volenti will be available.

Answer:  The person being sued for negligence will be able to raise the defence of voluntary assumption of risk on the part of the plaintiff only where that plaintiff has voluntarily put himself in harm’s way, to the extent that he not only assumed the physical risk but the legal risk as well, somehow conveying to the other party that he is absolved with that person of legal liability for any injury suffered.

Diff: 2      Type: ES      Page Ref: 151

Topic:  Ch. 5 – Defences

Skill:  Recall

Objective:  Chapter 5: 5. Distinguish the defences applicable to the tort of negligence.

Bloom’s Taxonomy:  Knowledge

123) Joe was drunk and driving his car. When he saw Sam on the side of the road hitch-hiking, he opened the door and offered Sam a lift. Sam got in despite the fact that he could smell alcohol on Joe’s breath. Subsequently, Joe was in as accident, in which Sam was injured. Sam has sued Joe for negligence. Indicate what likely defence Joe would use in these circumstances and whether it would be successful.

Answer:  Joe would use voluntary assumption of risk but would not likely be successful because in these circumstances Sam assumed the physical risk but not the legal risk. There is no indication by Sam in these circumstances that when he got into the car he was absolving Joe of legal responsibility for any injury that might result.

Diff: 3      Type: ES      Page Ref: 151

Topic:  Ch. 5 – Defences

Skill:  Applied

Objective:  Chapter 5: 5. Distinguish the defences applicable to the tort of negligence.

Bloom’s Taxonomy:  Knowledge

 

 

124) Explain the standard of care that must be imposed on the occupier of a property toward a visitor on that property in your province.

Answer:  The standard of care and the relevant exceptions vary from province to province. Most provinces have enacted legislation in the form of occupiers’ liability statutes that impose a single standard of care on visitors, usually to take reasonable care to keep such visitors reasonably safe.

Diff: 2      Type: ES      Page Ref: 154

Topic:  Ch. 5 – Legislation Impacting Duty of Care

Skill:  Applied

Objective:  Chapter 5: 6. Examine legislation that affects when liability may be imposed.

Bloom’s Taxonomy:  Knowledge

 

125) Give three examples where tort standards have been modified by legislation.

Answer:  1. Motor Vehicle Act

  1. Innkeepers (Hotelkeepers) Act
  2. Occupiers’ Liability Act
  3. In some circumstances, human rights legislation
  4. Consumer protection acts
  5. Environmental protection acts

Diff: 2      Type: ES      Page Ref: 154

Topic:  Ch. 5 – Legislation Impacting Duty of Care

Skill:  Recall

Objective:  Chapter 5: 6. Examine legislation that affects when liability may be imposed.

Bloom’s Taxonomy:  Knowledge

 

126) In Canada, under what circumstances will the owner of property be held strictly liable for his conduct?

Answer:  Where he brings something inherently dangerous on the property and it escapes, causing injury to someone off the property.

Diff: 2      Type: ES      Page Ref: 155

Topic:  Ch. 5 – Strict Liability

Skill:  Recall

Objective:  Chapter 5: 7. Distinguish among strict liability, vicarious liability, and product liability.

Bloom’s Taxonomy:  Knowledge

127) In Canada, in order for a manufacturer to be held liable for injury caused by his product to an ultimate consumer, what must be shown?

Answer:  That there was a duty to be careful in manufacturing that good, 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 that injury resulted from the normal use of those goods).

Diff: 3      Type: ES      Page Ref: 158

Topic:  Ch. 5 – Product Liability

Skill:  Recall

Objective:  Chapter 5: 7. Distinguish among strict liability, vicarious liability, and product liability.

Bloom’s Taxonomy:  Knowledge

 

128) Harry operated a game farm in the suburbs of a large city. He took all reasonable precautions to keep the animals, some of which were dangerous, within the confines of that game farm. One night, a group of protesters came onto the property and released all the animals as an act of protest against the incarceration of such wild creatures. One of the animals, a cougar, went onto a neighbour’s property and killed an expensive show dog. That neighbour sued Harry. Explain the neighbour’s likelihood of success.

Answer:  A game farm is an unusual use of property. The dangerous animals created a situation of strict liability for Joe. When they escaped, although it was not his fault and he could not have anticipated this kind of interference, he would still be held strictly liable for the loss.

Diff: 3      Type: ES      Page Ref: 157

Topic:  Ch. 5 – Strict Liability

Skill:  Applied

Objective:  Chapter 5: 7. Distinguish among strict liability, vicarious liability, and product liability.

Bloom’s Taxonomy:  Knowledge

 

129) To what does “errors and omissions” insurance refer?

Answer:  This is the name often given to the specialized liability insurance that professionals carry.

Diff: 1      Type: ES      Page Ref: 163

Topic:  Ch. 5 – Liability of Professionals and Other Experts

Skill:  Recall

Objective:  Chapter 5: 8. Describe the circumstances where professional liability may arise.

Bloom’s Taxonomy:  Knowledge

 

130) Explain how the standard of care imposed varies when particular expertise is involved (e.g., a doctor).

Answer:  The reasonable person test really means a 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 reasonable plumber or electrician have done in the circumstances?

Diff: 2      Type: ES      Page Ref: 135

Topic:  Ch. 5 – Negligence

Skill:  Recall

Objective:  Chapter 5: 8. Describe the circumstances where professional liability may arise.

Bloom’s Taxonomy:  Knowledge

 

131) Historically, how did the law treat negligent misstatement differently than negligent misconduct?

Answer:  Negligent misstatement was not actionable unless some specific duty existed, as in a contract or employment relationship. There was no general duty which allowed an action for negligent words.

Diff: 2      Type: ES      Page Ref: 163

Topic:  Ch. 5 – Liability of Professionals and Other Experts

Skill:  Recall

Objective:  Chapter 5: 8. Describe the circumstances where professional liability may arise.

Bloom’s Taxonomy:  Knowledge

 

132) How is negligent misstatement treated in Canada today?

Answer:  The case of Haig vs. Bamford established in Canada that people could be sued for their careless words. (Note, however, that the test to determine duty may be narrower than when dealing with conduct.)

Diff: 2      Type: ES      Page Ref: 163

Topic:  Ch. 5 – Liability of Professionals and Other Experts

Skill:  Recall

Objective:  Chapter 5: 8. Describe the circumstances where professional liability may arise.

Bloom’s Taxonomy:  Knowledge

 

133) How are professionals treated differently under the rules of negligence?

Answer:  They must live up to the standard of a reasonable accountant, a reasonable lawyer, a reasonable doctor, etc., rather than the general reasonable person standard.

Diff: 2      Type: ES      Page Ref: 163

Topic:  Ch. 5 – Liability of Professionals and Other Experts

Skill:  Recall

Objective:  Chapter 5: 8. Describe the circumstances where professional liability may arise.

Bloom’s Taxonomy:  Knowledge

 

134) What is the role of self-governing professional bodies?

Answer:  Typically, these bodies have varying degrees of control over the relevant practice. This can extend to granting licences, determining membership, setting standards of conduct, setting educational qualifications and continuing training requirements, and disciplinary matters.

Diff: 2      Type: ES      Page Ref: 163

Topic:  Ch. 5 – Liability of Professionals and Other Experts

Skill:  Recall

Objective:  Chapter 5: 8. Describe the circumstances where professional liability may arise.

Bloom’s Taxonomy:  Knowledge

 

 

135) In insurance, what do comprehensive policies cover?

Answer:  These policies cover everything except what is specifically excluded (typically, acts of war, riots, illegal activities).

Diff: 1      Type: ES      Page Ref: 172

Topic:  Ch. 5 – Insurance

Skill:  Recall

Objective:  Chapter 5: 9. Describe the four types of insurance businesses commonly need.

Bloom’s Taxonomy:  Knowledge

136) Joe owned a house that would cost $200,000 to replace. He took out an insurance policy for only $100,000, reasoning that any damage that would take place would likely be under that amount. In fact, there was a fire and the total loss was $50,000. Indicate what problems Joe might run into when he tries to collect.

Answer:  If the value of the house is $200,000 and he has only $100,000 coverage on it, then he may be considered a co-insurer for the difference, depending on the terms of the contract. (For example, if the contract requires him to keep at least 80% of the value covered by insurance and he has only 50% coverage, he would be the co-insurer for the difference of 30%.) On any claim, therefore, he will have to bear a portion of the loss himself.

Diff: 3      Type: ES      Page Ref: 172

Topic:  Ch. 5 – Types of Insurance

Skill:  Applied

Objective:  Chapter 5: 9. Describe the four types of insurance businesses commonly need.

Bloom’s Taxonomy:  Knowledge

 

137) Describe three different types of insurance that a business person might obtain in relationship to his business.

Answer:  Property insurance, business interruption insurance, life insurance (for key personnel), health insurance with respect to the personnel involved, and liability insurance.

Diff: 1      Type: ES      Page Ref: 172

Topic:  Ch. 5 – Types of Insurance

Skill:  Recall

Objective:  Chapter 5: 9. Describe the four types of insurance businesses commonly need.

Bloom’s Taxonomy:  Knowledge

 

138) 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, they step into Sam’s shoes (subrogation) and could sue Joe, just like Sam could have for his negligence, and Joe may be required to pay.

Diff: 2      Type: ES      Page Ref: 180

Topic:  Ch. 5 – Subrogation

Skill:  Applied

Objective:  Chapter 5: 9. Describe the four types of insurance businesses commonly need.

Bloom’s Taxonomy:  Knowledge

 

 

139) What is the typical result when spouses have overlapping extended benefits coverage, such as dental and disability?

Answer:  Usually, there is a deductible amount that must be paid or a limitation on the coverage. When there are two policies, one can often be used to cover the shortfall of the other (but not to overpay).

Diff: 2      Type: ES      Page Ref: 172

Topic:  Ch. 5 – Insurance

Skill:  Recall

Objective:  Chapter 5: 9. Describe the four types of insurance businesses commonly need.

Bloom’s Taxonomy:  Knowledge

140) Does a shareholder have an insurable interest in the assets of a corporation?

Answer:  They do, even though they do not have a direct legal claim to them.

Diff: 3      Type: ES      Page Ref: 172

Topic:  Ch. 5 – Insurance

Skill:  Recall

Objective:  Chapter 5: 10. Identify when an insurable interest exists.

Bloom’s Taxonomy:  Knowledge

 

141) What is the role of an adjuster?

Answer:  An adjuster values the loss for the insurance company after the insured-against event takes place.

Diff: 2      Type: ES      Page Ref: 172

Topic:  Ch. 5 – Insurance

Skill:  Recall

Objective:  Chapter 5: 10. Identify when an insurable interest exists.

Bloom’s Taxonomy:  Knowledge

 

142) What is the forfeiture rule?

Answer:  A criminal should not be permitted to profit from a crime. The principle also extends to those who claim through the criminal’s estate.

Diff: 3      Type: ES      Page Ref: 172

Topic:  Ch. 5 – Insurance

Skill:  Recall

Objective:  Chapter 5: 10. Identify when an insurable interest exists.

Bloom’s Taxonomy:  Knowledge

 

143) In order for an insurance agreement not to be declared void as an illegal contract, what must be demonstrated?

Answer:  That the insured has an insurable interest in the property or matter being insured.

Diff: 2      Type: ES      Page Ref: 172

Topic:  Ch. 5 – Insurance

Skill:  Recall

Objective:  Chapter 5: 10. Identify when an insurable interest exists.

Bloom’s Taxonomy:  Knowledge

 

 

144) 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 will suffer a loss, resulting in the insurance payment compensating him for a loss (indemnity) rather than being a windfall profit.

Diff: 2      Type: ES      Page Ref: 172

Topic:  Ch. 5 – Insurance

Skill:  Recall

Objective:  Chapter 5: 10. Identify when an insurable interest exists.

Bloom’s Taxonomy:  Knowledge

145) Explain what is meant by bonding.

Answer:  Bonding is when a person dealing with another person or company can be assured that they will be compensated if that person or company fails to properly perform their obligations. But note that the person or company that has acted wrongfully will still be required to repay the bonding company if possible, so bonding is quite different from insurance.

Diff: 2      Type: ES      Page Ref: 172

Topic:  Ch. 5 – Insurance

Skill:  Recall

Objective:  Chapter 5: 12. Identify the duties imposed on the insured and the insurer.

Bloom’s Taxonomy:  Knowledge

 

146) Distinguish between a fidelity bond and a surety bond.

Answer:  A fidelity bond involves a person or an employee being bonded against his 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 their side of the contract, for example, a contractor on a construction project.

Diff: 3      Type: ES      Page Ref: 172

Topic:  Ch. 5 – Insurance

Skill:  Recall

Objective:  Chapter 5: 12. Identify the duties imposed on the insured and the insurer.

Bloom’s Taxonomy:  Knowledge

 

 

147) Explain what must be established in order to succeed in a negligence action.

Answer:  Here the 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 qualification from 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 includes emotional and economic injury, in addition to physical injury. Students should also note the effect of contributory negligence and voluntarily assuming the risk. They can also deal with the problem of remoteness.

Diff: 1      Type: ES      Page Ref: 135

Topic:  Ch. 5 – Negligence

Skill:  Applied

Objective:  Chapter 5: 1. Identify the four elements of a negligence claim.

Bloom’s Taxonomy:  Knowledge

148) 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 owed 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.

Diff: 2      Type: ES      Page Ref: 135

Topic:  Ch. 5 – Negligence

Skill:  Applied

Objective:  Chapter 5: 2. State when a duty of care arises, explaining how courts determine whether it is owed.

Bloom’s Taxonomy:  Knowledge

 

149) Discuss how legislation has impacted in the field of negligence.

Answer:  Here students would be expected to give some examples of legislation that has specifically modified the law of negligence, and how this was done. In the process, students should demonstrate an understanding of the law as it was and indicate how the statute changed those rules. Some examples would be the Occupiers’ Liability Act, the Contributory Negligence Act, the Innkeepers Act, and depending on what point in the course this was asked, they might deal with statutes placing duties on directors, partners, merchants, etc.

Diff: 2      Type: ES      Page Ref: 154

Topic:  Ch. 5 – Legislation Impacting Duty of Care

Skill:  Applied

Objective:  Chapter 5: 6. Examine legislation that affects when liability may be imposed.

Bloom’s Taxonomy:  Knowledge

 

 

150) Discuss the development of legal liability for negligent misstatement and how and why the approach to negligent misstatement differs from the approach to negligent conduct.

Answer:  Here students are expected to demonstrate an understanding of how the law with respect to negligent words has developed differently from negligent conduct. This should lead to a discussion of Donoghue v. Stevenson and how the reasonable foreseeability test for determining duty that developed in that case related to conduct not words. Negligent words were initially thought not actionable, but that was changed in England and then in Canada (Haig v. Bamford). Students should show that they understand that the test to determine a person’s responsibility for their careless conduct, as developed in these cases, was different from the test to determine whether a person was responsible for their careless words. Finally they should talk about the Anns case and how this can be applied so that the system is brought together. The second part of the Anns case test is applied to words and the duty reduced, etc. (as was demonstrated in the Hercules case).

Diff: 3      Type: ES      Page Ref: 163

Topic:  Ch. 5 – Liability of Professionals and Other Experts

Skill:  Applied

Objective:  Chapter 5: 8. Describe the circumstances where professional liability may arise.

Bloom’s Taxonomy:  Knowledge

151) Explain the potential liability faced by professionals and how the risks associated with such liability can be minimized.

Answer:  Here students are expected to discuss professional liability related to contract, negligence, and fiduciary duties. In the area of contractual duties, students should note, at a minimum, that a professional is expected to provide a reasonable level of performance. In discussing tort liability, students should identify that the standard is that of a reasonable member of the profession. (Good students will note that common practice may not measure up to the reasonable standard.) When a person places trust in a professional, the professional has a fiduciary obligation to act in the client’s best interests.

Diff: 2      Type: ES      Page Ref: 163

Topic:  Ch. 5 – Liability of Professionals and Other Experts

Skill:  Applied

Objective:  Chapter 5: 8. Describe the circumstances where professional liability may arise.

Bloom’s Taxonomy:  Knowledge

 

 

152) Explain the role of self-governing professional bodies, including a discussion of their disciplinary function.

Answer:  Examples of self-governing professional bodies include the Law Society, Medical Association, the Teachers’ Association, and the Chartered Professional Accountants association. Typically, these bodies have varying degrees of control over the relevant practice. This can extend to granting licences, determining membership, setting standards of conduct, setting educational qualifications and continuing training requirements, and disciplinary matters. The disciplinary process may vary, but whatever process is used must adhere to the rules of procedural fairness or the decision will be subject to judicial review. In particular, a fair hearing is required. The Charter may apply and compliance with human rights statutes is necessary. The penalties that such bodies may impose are usually limited to fines, suspension, or expulsion.

Diff: 2      Type: ES      Page Ref: 163

Topic:  Ch. 5 – Liability of Professionals and Other Experts

Skill:  Applied

Objective:  Chapter 5: 8. Describe the circumstances where professional liability may arise.

Bloom’s Taxonomy:  Knowledge

 

153) 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 the 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 help to avoid that outcome. This leads to some compulsory insurance, such as for motor vehicles, and the introduction of no-fault systems. Students could also discuss the requirement of insurance for professionals.

Diff: 2      Type: ES      Page Ref: 172

Topic:  Ch. 5 – Insurance

Skill:  Recall

Objective:  Chapter 5: 9. Describe the four types of insurance businesses commonly need.

Bloom’s Taxonomy:  Knowledge

154) With respect to limitation clauses in standard form insurance contracts, on what basis do the courts typically interpret clause ambiguity?

Answer:  Insurance contracts take a standard fixed form and often contain limitation clauses favouring the insurer. Where there is ambiguity in the meaning of such clauses the contra proferentum rule allows the court to choose an interpretation that favours the insured. Coverage will be broadly construed while exclusions will be narrowly interpreted. Thus courts will apply an interpretation that favours the insured since it was the insurer that chose the language to use.

Chapter 5: 9. Describe the four types of insurance businesses commonly need.

Diff: 1      Type: ES      Page Ref: 172

Topic:  Ch. 5 – Insurance

Skill:  Recall

Objective:  Chapter 5: 9. Describe the four types of insurance businesses commonly need.

Bloom’s Taxonomy:  Knowledge

 

 

155) Explain what is meant by an insurable interest and what impact the existence of this principle has on the right to collect on an insurance claim.

Answer:  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. The insurable interest requirement is simply that the person purchasing insurance coverage will lose something if the insured-against event happens. There is no windfall to the person taking out the insurance; rather, there is simply compensation for a loss. If you could insure something you didn’t have an interest in, such as your neighbour’s house, you could get a windfall, and it would be like gambling.

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: 3      Type: ES      Page Ref: 172

Topic:  Ch. 5 – Insurance

Skill:  Applied

Objective:  Chapter 5: 10. Identify when an insurable interest exists.

Bloom’s Taxonomy:  Knowledge

Business Law in Canada, 11e (Yates)

Chapter 9   The End of the Contractual Relationship

 

1) Which of the following is true with regard to ending a contract by performance, agreement, or breach?

  1. A) A contract can be ended by breach if there was a either a breach of condition or a breach of warranty.
  2. B) A person has legally tendered performance if he pays a $500 debt in 25-cent coins.
  3. C) If a person properly tenders performance of a service that is rejected by the other party, he is required to try again and again.
  4. D) 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.
  5. E) If one party to the contract has paid for a service, but now the other doesn’t want to perform, the contract is ended by agreement as long as they both agree to call it off.

Answer:  D

Diff: 2      Type: MC      Page Ref: 277

Topic:  Ch. 9 – Discharge by Performance

Skill:  Applied

Objective:  Chapter 9: 1. Illustrate how a contract is discharged by performance.

Bloom’s Taxonomy:  Knowledge

 

2) Pat O’Grady owes Robinson $5000 in cash, but resents Robinson talking about O’Grady’s debt among mutual acquaintances. O’Grady wants to know which of the following tactics would be legal performance.

  1. A) Deliver the money to his house (instead of to his office) at 3:00 a.m. on the due date
  2. B) Not pay Robinson until Robinson came for the money
  3. C) Pay Robinson on time but pay it all in dimes
  4. D) Pay him on time but with a cheque
  5. E) Pay him on time in $5 bills

Answer:  E

Diff: 1      Type: MC      Page Ref: 277

Topic:  Ch. 9 – Discharge by Performance

Skill:  Applied

Objective:  Chapter 9: 1. Illustrate how a contract is discharged by performance.

Bloom’s Taxonomy:  Knowledge

 

 

3) Which one of the following is true with regard to the ending of a contract by performance?

  1. A) In law, a certified cheque is the same as cash.
  2. 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.
  3. C) 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.
  4. D) Legal tender consists of bills or coin in any amount.
  5. E) If a warranty is breached, the victim has no further obligation to perform under the contract.

Answer:  C

Diff: 2      Type: MC      Page Ref: 277

Topic:  Ch. 9 – Discharge by Performance

Skill:  Recall

Objective:  Chapter 9: 1. Illustrate how a contract is discharged by performance.

Bloom’s Taxonomy:  Knowledge

4) Which of the following is false with regard to ending a contract by agreement?

  1. A) A contract can be ended by the happening of a “condition subsequent” provided for in the contract.
  2. 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.
  3. C) A contract can be ended by agreement if neither party to the contract has performed his or her obligation.
  4. D) 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.
  5. E) A contract can be ended by agreement by “mutual release.”

Answer:  B

Diff: 2      Type: MC      Page Ref: 288

Topic:  Ch. 9 – Discharge by Agreement

Skill:  Recall

Objective:  Chapter 9: 1. Illustrate how a contract is discharged by performance.

Bloom’s Taxonomy:  Knowledge

 

 

5) Which of the following is true with regard to tender of performance?

  1. 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.
  2. 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.
  3. C) 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.
  4. D) If Ivan attempts to pay his $25 debt to Jan in 25-cent pieces, that attempt constitutes a lawful tender of Ivan’s obligation.
  5. E) If Sam attempts to deliver the truckload of strawberries at Frank’s produce plant at 8:00 p.m. Saturday, they cannot be refused as long as the delivery was before the specified July 10 deadline.

Answer:  B

Diff: 3      Type: MC      Page Ref: 277

Topic:  Ch. 9 – Discharge by Performance

Skill:  Applied

Objective:  Chapter 9: 1. Illustrate how a contract is discharged by performance.

Bloom’s Taxonomy:  Knowledge

6) Tufts and McDougal were having an argument about the law regarding performance of a contract. Which one of the following statements of theirs is correct?

  1. A) If Jed has to pay $500 to his mechanic, he can pay the whole debt in dimes and the mechanic has to take them.
  2. B) If Jed owes the mechanic $500, a cheque is as good as cash in law even if the mechanic said he wouldn’t take a cheque.
  3. C) If Jed shows up with cash for the mechanic on the day and at the place designated in the contract, and the mechanic refuses to take it for some reason, Jed doesn’t ever have to pay him.
  4. D) If Roscoe tries to deliver lumber to Jed in accordance with their contract and Jed doesn’t take delivery of it, Roscoe can sue Jed for breach of contract without ever trying to deliver it again.
  5. E) If Joan owes a $500 debt due on a specific date, she doesn’t have to pay until the creditor seeks her out for payment.

Answer:  D

Diff: 2      Type: MC      Page Ref: 277

Topic:  Ch. 9 – Discharge by Performance

Skill:  Applied

Objective:  Chapter 9: 1. Illustrate how a contract is discharged by performance.

Bloom’s Taxonomy:  Knowledge

 

 

7) The principle of substantial performance can best be described as when

  1. A) all or most of the contractual obligations are fulfilled.
  2. B) a major term of the contract is mostly fulfilled.
  3. C) minor terms of the contract are yet to be fulfilled.
  4. D) minor terms of the contract are disregarded.
  5. E) only exact compliance with the contract will qualify as performance.

Answer:  A

Diff: 1      Type: MC      Page Ref: 277

Topic:  Ch. 9 – Discharge by Performance

Skill:  Recall

Objective:  Chapter 9: 1. Illustrate how a contract is discharged by performance.

Bloom’s Taxonomy:  Knowledge

 

8) Suppliers of goods and services try to eliminate their liability, and the courts have discouraged this by applying the principle that some failures are so significant that there is no performance of the contract. This concept is known as

  1. A) repudiation.
  2. B) frustration.
  3. C) anticipatory breach.
  4. D) fundamental breach.
  5. E) exculpatory clause.

Answer:  D

Diff: 1      Type: MC      Page Ref: 280

Topic:  Ch. 9 – Discharge by Breach

Skill:  Recall

Objective:  Chapter 9: 1. Illustrate how a contract is discharged by performance.

Bloom’s Taxonomy:  Knowledge

9) The case of Sail Labrador Ltd. v. Challenger One (The) involved an option to purchase and a breach of a contract that was inconsequential and immediately corrected. What did the Supreme Court of Canada hold?

  1. A) The contract had been substantially performed and the option was still available.
  2. B) The breach, although minor, rendered the contract unenforceable.
  3. C) The breach, although minor, rendered the contract voidable at the option of the non-breaching party.
  4. D) The contract had not been perfectly performed, so the contract was void.
  5. E) No breach can be considered inconsequential at law.

Answer:  A

Diff: 2      Type: MC      Page Ref: 278

Topic:  Ch. 9 – Discharge by Performance

Skill:  Recall

Objective:  Chapter 9: 1. Illustrate how a contract is discharged by performance.

Bloom’s Taxonomy:  Knowledge

 

 

10) In Meditek Laboratory Services Ltd. v. Purolator Courier Ltd., a Purolator employee delivered equipment to the wrong address and then falsified documents. In a subsequent lawsuit, Purolator relied on an exemption clause that limited its liability “whether or not from negligence or gross negligence.” What properly described the outcome in this case?

  1. A) The falsification of documents was done by the employee, not the company itself, so Purolator could not be liable.
  2. B) The falsification of documents was wilful, not negligent, so Purolator was not protected by this clause.
  3. C) The exemption clause protected Purolator because of the principle of “freedom to contract.”
  4. D) The exemption clause was severed as being an illegal restraint of trade.
  5. E) The exemption clause was not applied, because it was not evidenced in writing.

Answer:  B

Diff: 2      Type: MC      Page Ref: 283

Topic:  Ch. 9 – Discharge by Breach

Skill:  Applied

Objective:  Chapter 9: 2. Describe when a breach of contract will be sufficient to relieve the opposite party from its obligations.

Bloom’s Taxonomy:  Knowledge

11) Mikael recently started a home-based business selling custom fishing lures. He decided that he could make a lot more money selling his homemade lures on the Internet. Mikael is not the least bit technologically-inclined, but he knows that his next-door neighbour, Perm, does web design on the side. He decides to hire her to create a website for his new venture. Perm has him sign an agreement that includes an exemption clause that limits her liability in cases of negligence. In the course of designing the website, Perm becomes annoyed at Mikael because his dog keeps digging up her rose bushes. Rather than confront Mikael directly, Perm deliberately puts the wrong pricing information on Mikael’s website to get him back. If Mikael suffers damages as a result and wants to sue Perm, what would the likely result be?

  1. A) The exemption clause would protect Perm because of the principle of “freedom to contract.”
  2. B) The exemption clause would be severed as being an illegal restraint of trade.
  3. C) Perm’s actions were outside the scope of the contract, so Mikael would have no claim in law.
  4. D) Perm only did freelance web design; as a non-professional she would not face liability.
  5. E) Perm’s acts were deliberate, not negligent, so Perm would not be protected by the exemption clause.

Answer:  E

Diff: 3      Type: MC      Page Ref: 280

Topic:  Ch. 9 – Discharge by Breach

Skill:  Applied

Objective:  Chapter 9: 2. Describe when a breach of contract will be sufficient to relieve the opposite party from its obligations.

Bloom’s Taxonomy:  Knowledge

 

 

12) In the case of an anticipatory breach

  1. A) you have the right to demand the other side to perform, but you will not be required to perform yourself.
  2. B) you have the right to demand performance or to sue for breach.
  3. C) you must wait until the actual breach occurs before you can take any steps.
  4. D) the contract is declared void ab initio.
  5. E) the contract is unenforceable by either party.

Answer:  B

Diff: 1      Type: MC      Page Ref: 280

Topic:  Ch. 9 – Discharge by Breach

Skill:  Recall

Objective:  Chapter 9: 2. Describe when a breach of contract will be sufficient to relieve the opposite party from its obligations.

Bloom’s Taxonomy:  Knowledge

13) Dagney was an author of a popular series of children’s books. She signed an agreement with her publisher, in which she agreed to have a new book in the series written by October 15th. As noted in the contract, the timing was critical to ensuring the books would be on the shelves before Christmas and in order to coincide with a massive promotion the publisher had been planning. Dagney had a terrible case of writer’s block. By October 3rd, she realized that there was no way that she would have the book finished by the deadline. She emailed her publisher, admitting that she would not have the book finished in time. What are the publisher’s options?

  1. A) The publisher cannot take any steps until October 15th, assuming Dagney does not deliver.
  2. B) The publisher has no recourse because Dagney’s case of writer’s block has made performance impossible.
  3. C) The publisher has the right to demand performance or sue.
  4. D) The contract is voidable at the option of the publisher.
  5. E) The date set out in the contract is not an enforceable term; if Dagney gets the manuscript to the publisher in a reasonable time, she will not be in breach.

Answer:  C

Diff: 3      Type: MC      Page Ref: 280

Topic:  Ch. 9 – Discharge by Breach

Skill:  Applied

Objective:  Chapter 9: 2. Describe when a breach of contract will be sufficient to relieve the opposite party from its obligations.

Bloom’s Taxonomy:  Knowledge

 

 

14) In which one of the following instances would the seller most likely succeed in an attempt to escape liability by the use of an exemption clause when the buyer suffers a loss?

  1. A) A consumer transaction is involved and provincial legislation prohibits such exemption clauses in consumer transactions.
  2. B) The buyer of an expensive computer software program received, a month after the sale, an invoice on which was printed an exemption clause that he hadn’t been shown before.
  3. C) The store had posted at the entrance to the dressing rooms a large sign reading “Not responsible for stolen articles,” and the customer lost a briefcase in a fire that swept through the dressing rooms.
  4. D) There has been a breach of the fundamental obligation of the contract, and the court holds that on its true construction the parties did not mean it to cover a serious breach.
  5. E) Ralph bought a used lawnmower under a written and signed contract that contained an “as is” clause.

Answer:  E

Diff: 3      Type: MC      Page Ref: 280

Topic:  Ch. 9 – Discharge by Breach

Skill:  Applied

Objective:  Chapter 9: 2. Describe when a breach of contract will be sufficient to relieve the opposite party from its obligations.

Bloom’s Taxonomy:  Knowledge

15) Which of the following is false with regard to remedies for breach of contract?

  1. A) The victim of a breach cannot recover damages that he could have avoided if he had tried to mitigate his loss.
  2. B) If the court holds that the liquidated damages clause in the contract is an honest attempt to estimate damages, the amount stated will be forfeited to the victim of the breach, even if he suffered no loss in fact.
  3. C) As a general rule, a person who breaches a contract is liable for all of the foreseeable loss that directly and naturally flows from the breach.
  4. D) Damages are awarded by the court to a person who has suffered loss because of a breach of a condition of the contract, but are not awarded for a breach of a warranty.
  5. E) A person who disobeys a court order (e.g., an order for specific performance) can be cited for contempt of court.

Answer:  D

Diff: 1      Type: MC      Page Ref: 280

Topic:  Ch. 9 – Discharge by Breach

Skill:  Recall

Objective:  Chapter 9: 2. Describe when a breach of contract will be sufficient to relieve the opposite party from its obligations.

Bloom’s Taxonomy:  Knowledge

 

 

16) Cleo entered into a contract with Harvey in June to redecorate his apartment before Christmas. However, in the middle of October, she informed him that she would not be able to do his job because she had been offered a big contract in Japan that would take her away until spring. Which of the following is true with respect to this situation?

  1. A) The most likely remedy would be for the court to award specific performance to make her do the job.
  2. B) Harvey must wait until Christmas to see if Cleo actually performs before he can take legal action.
  3. C) Cleo has repudiated the contract and Harvey can take legal action immediately.
  4. D) Their contract has been frustrated by circumstances outside their original contemplation, and thus they are excused from their previous obligations.
  5. E) Cleo could claim quantum meruit for any work she had done so far and that would be the end of the matter.

Answer:  C

Diff: 2      Type: MC      Page Ref: 280

Topic:  Ch. 9 – Discharge by Breach

Skill:  Applied

Objective:  Chapter 9: 2. Describe when a breach of contract will be sufficient to relieve the opposite party from its obligations.

Bloom’s Taxonomy:  Knowledge

17) On the February 1, Smyth contracted to buy Dupont’s van. They had 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 to Smithers on March 5 for $7600. On February 22, Dupont called Smyth and said he wasn’t going to sell because he had decided to keep the van. On these facts, which of the following is false?

  1. A) Dupont’s call is an express repudiation of the contract and is an anticipatory breach.
  2. B) Smyth could agree to call off the contract; neither of them had yet performed.
  3. C) Smyth could refuse to acknowledge a breach, but that would result in the possibility that the contract could be breached later.
  4. 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.
  5. E) Smyth could refuse to acknowledge a breach and press Dupont to complete the contact.

Answer:  D

Diff: 2      Type: MC      Page Ref: 280

Topic:  Ch. 9 – Discharge by Breach

Skill:  Applied

Objective:  Chapter 9: 2. Describe when a breach of contract will be sufficient to relieve the opposite party from its obligations.

Bloom’s Taxonomy:  Knowledge

 

 

18) Which of the following statements is correct with respect to breach of contract?

  1. A) When a condition is breached, the victim can treat the contract as ended.
  2. B) When a condition is breached, a person can only sue for damages but must perform their part of the contract.
  3. C) When a warranty is breached, the victim can treat the contract as ended.
  4. D) When a contract for the purchase of goods is breached, the warranty will require that the goods be repaired by the seller.
  5. E) When a contract is repudiated before performance is due, the victim must wait until the time of performance before taking any action.

Answer:  A

Diff: 1      Type: MC      Page Ref: 280

Topic:  Ch. 9 – Discharge by Breach

Skill:  Recall

Objective:  Chapter 9: 2. Describe when a breach of contract will be sufficient to relieve the opposite party from its obligations.

Bloom’s Taxonomy:  Knowledge

19) Which one of the following is false with regard to exemption (exclusion) clauses?

  1. A) Such clauses are prohibited in any sale of goods contract.
  2. B) To be part of the contract, such clauses must be brought to the attention of the parties before or at the time of contract.
  3. C) Even if there is an exemption clause in the contract, the court can hold that the exemption clause is of no effect if the breach is a fundamental breach.
  4. D) Where there is an exemption clause in a contract, the court will strictly construe that clause; i.e., the wording of the clause must cover the situation that occurred.
  5. E) An effective exemption clause is a barrier blocking the party wronged from his or her remedy, e.g., from damages.

Answer:  A

Diff: 2      Type: MC      Page Ref: 280

Topic:  Ch. 9 – Discharge by Breach

Skill:  Recall

Objective:  Chapter 9: 2. Describe when a breach of contract will be sufficient to relieve the opposite party from its obligations.

Bloom’s Taxonomy:  Knowledge

 

 

20) When an anticipatory breach has taken place (where a person, before performance is due, states that he will not perform the contract)

  1. A) the victim may sue immediately and not wait to see if the contract is performed or not.
  2. B) the victim must wait to see if the contract is performed, but damages are calculated from the time of the refusal.
  3. 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.
  4. D) such a statement made before performance is due has no effect on the contractual obligations of the parties.
  5. E) the victim may not be able to recover damages that occur after the anticipatory breach.

Answer:  A

Diff: 2      Type: MC      Page Ref: 280

Topic:  Ch. 9 – Discharge by Breach

Skill:  Recall

Objective:  Chapter 9: 2. Describe when a breach of contract will be sufficient to relieve the opposite party from its obligations.

Bloom’s Taxonomy:  Knowledge

 

21) A contract is terminated by agreement in which of the following situations?

  1. A) Breach
  2. B) Frustration
  3. C) Unilateral release
  4. D) A written statement by one party to cancel an accepted order
  5. E) The occurrence of a condition subsequent

Answer:  E

Diff: 1      Type: MC      Page Ref: 280

Topic:  Ch. 9 – Discharge by Breach

Skill:  Recall

Objective:  Chapter 9: 2. Describe when a breach of contract will be sufficient to relieve the opposite party from its obligations.

Bloom’s Taxonomy:  Knowledge

 

22) Which one of the following does not terminate a contract?

  1. A) The buyer and seller agree orally to cancel their contract when neither one has performed his obligations under it.
  2. B) Minnie and Mickey agree that Minnie will take less than the amount Mickey owes as full payment of his debt, and Mickey will pay her two days early.
  3. C) Twain had contracted to build a model of a proposed building for architects who were to meet with their clients on March 10. The model was destroyed the night of March 9 when a car left the road and crashed into the workshop and destroyed the model.
  4. D) Fred no longer wants to honour his contract to sell Mitra his printer but tells Mitra he’ll substitute a $500 boat. Mitra agrees.
  5. E) When Ben’s new car is delivered, the seats are cloth rather than leather as ordered.

Answer:  E

Diff: 2      Type: MC      Page Ref: 280

Topic:  Ch. 9 – Discharge by Breach

Skill:  Applied

Objective:  Chapter 9: 2. Describe when a breach of contract will be sufficient to relieve the opposite party from its obligations.

Bloom’s Taxonomy:  Knowledge

 

23) Which one of the following statements accurately describes the operation of a condition precedent?

  1. A) This occurs when one party shows up at the right time and place ready, willing, and able to carry out his obligations under the contract.
  2. B) This is a term in a contract that must be met before the contract becomes fully operational.
  3. C) This occurs when some event that the parties have not anticipated makes performance radically different from what they agreed to.
  4. D) There is no such thing recognized in the common law.
  5. E) This is a term in a contract that provides for the cessation (ending) of the parties’ obligations upon the occurrence of some particular event.

Answer:  B

Diff: 1      Type: MC      Page Ref: 280

Topic:  Ch. 9 – Discharge by Breach

Skill:  Recall

Objective:  Chapter 9: 2. Describe when a breach of contract will be sufficient to relieve the opposite party from its obligations.

Bloom’s Taxonomy:  Knowledge

 

24) Rahilly entered into a contract with Khan, whereby Rahilly agreed to paint a portrait of Khan’s wife to be completed by her 30th birthday, six months from the time of this agreement. Three months before the portrait was to be completed, Rahilly told Khan that he would not be doing the portrait because he had accepted a job in Boston and was leaving immediately. Which of the following is false with regard to the rights of the parties in this situation?

  1. A) The contract has not been frustrated because there was no unforeseen event beyond the control of either party making it impossible or meaningless to perform the contract.
  2. B) The contract has been repudiated, and Khan can elect to acknowledge the breach and sue Rahilly right away.
  3. C) Khan must wait to see if Rahilly really fails to perform the contract before Khan can sue.
  4. D) If Khan presses Rahilly to perform according to the contract, it is possible that the contract could be ended by frustration.
  5. E) If Khan presses Rahilly to perform according to the contract, it is possible that the contract could be ended by performance.

Answer:  C

Diff: 3      Type: MC      Page Ref: 280

Topic:  Ch. 9 – Discharge by Breach

Skill:  Applied

Objective:  Chapter 9: 2. Describe when a breach of contract will be sufficient to relieve the opposite party from its obligations.

Bloom’s Taxonomy:  Knowledge

 

25) A student bought an elaborate smartphone for the stated purpose of listening to his taped notes while he went for his daily run. The contract he signed with the seller included a clause excusing the seller from liability for the breach of “any term of the contract, whether a breach of condition or warranty whether express, implied, statutory, or otherwise.” After only 30 days, the smartphone failed to function at all. It was totally useless for the student’s purpose, so he took it back to the seller. The seller refused to take it back and pointed out the exemption clause in the signed contract. On these facts, which of the following could be true?

  1. A) The student could get around the exemption clause by arguing insufficient notice.
  2. B) The student could get around the exemption clause by the court’s strict interpretation (construction) of the clause.
  3. C) The student could be awarded damages if the exemption clause were found invalid by the court on the grounds that the clause could not be interpreted to mean it would forgive such a fundamental breach.
  4. D) The student is out of luck because the contract with the exemption clause was in writing.
  5. E) All exemption clauses are illegal, and therefore the student would not be bound by this one.

Answer:  C

Diff: 3      Type: MC      Page Ref: 280

Topic:  Ch. 9 – Discharge by Breach

Skill:  Applied

Objective:  Chapter 9: 2. Describe when a breach of contract will be sufficient to relieve the opposite party from its obligations.

Bloom’s Taxonomy:  Knowledge

 

26) Monroe sold computers. On the purchase of a new StarSystem computer the buyer signed the written contract that contained the following clause: “The seller is not liable for any breach of condition or warranty express or implied in this contract.” The buyer was a businessman who intended to use the machine in his business for a while and then resell it. The machine was used properly but didn’t operate well, and within one week it would not work at all. Monroe refused to take back the machine or to refund any money by relying on the exemption clause. Which of the following would be the buyer’s best argument for avoiding the effect of the exemption clause in this case?

  1. A) Such clauses are prohibited under contract law and are therefore void.
  2. B) The buyer had no notice of the clause; therefore, it is not a term of the contract.
  3. C) On a narrow interpretation of the words used in the exemption clause, they do not cover his complaint.
  4. D) There is a fundamental breach of contract.
  5. E) There is a breach of a non-essential term of the contract.

Answer:  D

Diff: 3      Type: MC      Page Ref: 280

Topic:  Ch. 9 – Discharge by Breach

Skill:  Applied

Objective:  Chapter 9: 2. Describe when a breach of contract will be sufficient to relieve the opposite party from its obligations.

Bloom’s Taxonomy:  Knowledge

 

27) In which of the following is the contract not ended by agreement?

  1. A) The event contained in the condition subsequent provision of the contract has happened.
  2. B) Randy visited Terry two weeks after the contract was formed but one month before the performance date to say he wouldn’t do it. Terry had already paid Randy for the work. After hearing Randy’s story, Terry said, “Just forget it, good bye and good luck.”
  3. C) Sean hired two students to do a market survey for him for $3000. Before the students had begun the work, they both received offers for full-time jobs. They told Sean they wanted out of the contract. Sean said, “Ok, I’m short of cash anyway.”
  4. D) Goode contracted to sell his pony to Reston. Goode then changed his mind and told Reston he didn’t want to sell the pony but would give him two lambs instead. Reston agreed to the substitutes.
  5. E) After party A of the contract paid, party B said he couldn’t perform. Party A agreed to waive B’s obligation if B would return the money paid to him. B agreed.

Answer:  B

Diff: 3      Type: MC      Page Ref: 288

Topic:  Ch. 9 – Discharge by Agreement

Skill:  Applied

Objective:  Chapter 9: 3. Explain how a contract may be discharged by agreement.

Bloom’s Taxonomy:  Knowledge

 

28) Which of the following statements regarding novation is false?

  1. A) Novation refers to the creation of a new contract through the substitution of a third party for one of the original parties to a contract, with everyone’s consent.
  2. B) Novation requires that the new debtor assume complete liability.
  3. C) Novation requires the creditor to accept the new debtor as principal debtor, not merely as a guarantor.
  4. D) Novation requires the creditor to accept the new contract in full satisfaction and substitution for the old contract.
  5. E) Novation requires the inclusion of a force majeure clause in order to be enforceable.

Answer:  E

Diff: 1      Type: MC      Page Ref: 288

Topic:  Ch. 9 – Discharge by Agreement

Skill:  Recall

Objective:  Chapter 9: 3. Explain how a contract may be discharged by agreement.

Bloom’s Taxonomy:  Knowledge

 

29) Which of the following is false with regard to ending a contract by performance, agreement, or breach?

  1. A) A contract can be ended by breach only if there was a breach of condition, not a breach of warranty.
  2. B) A person has not legally tendered performance if he pays a $500 debt in 25-cent coins.
  3. C) If a person properly tenders performance of a service that is rejected by the other party, he is not required to try again.
  4. D) 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.
  5. E) If one party to the contract has paid for a service, but now the other doesn’t want to perform, the contract is ended by agreement as long as they both agree to call it off.

Answer:  E

Diff: 2      Type: MC      Page Ref: 288

Topic:  Ch. 9 – Discharge by Agreement

Skill:  Recall

Objective:  Chapter 9: 3. Explain how a contract may be discharged by agreement.

Bloom’s Taxonomy:  Knowledge

 

 

30) Which of the following is false with regard to ending contracts and remedies?

  1. A) If Lori incurred costs in preparing to perform a contract that is ended by frustration, the court can allow Lori to keep some of the deposit paid by the other party to help cover those costs.
  2. B) If a person ignores a court order (e.g., an injunction), he could be cited for contempt of court.
  3. C) A breach of condition allows the party who suffers the breach to terminate the contract.
  4. D) The equitable remedy of specific performance is available in those situations where monetary compensation would not be adequate.
  5. E) The term “condition precedent” refers to a clause in a contract that brings the contractual obligations of the parties to an end upon the happening of some specific event.

Answer:  E

Diff: 2      Type: MC      Page Ref: 288

Topic:  Ch. 9 – Discharge by Agreement

Skill:  Recall

Objective:  Chapter 9: 3. Explain how a contract may be discharged by agreement.

Bloom’s Taxonomy:  Knowledge

31) In which of the following situations would the contract not be discharged by agreement?

  1. A) Both parties agree to let a new person be substituted into the contract in place of one of the old parties.
  2. B) Both parties to the contract agree to call it off before either one has performed.
  3. C) A condition subsequent that calls for termination of the contract has not been met.
  4. D) The two parties have reached “accord and satisfaction” with regard to terminating the contract.
  5. E) Both parties agree to call off the contract under which one paid the other $5000 for work that has not yet been performed, but the other now promises to return the $5000.

Answer:  C

Diff: 2      Type: MC      Page Ref: 288

Topic:  Ch. 9 – Discharge by Agreement

Skill:  Recall

Objective:  Chapter 9: 3. Explain how a contract may be discharged by agreement.

Bloom’s Taxonomy:  Knowledge

 

32) A term in a contract that says that on the occurrence of a specific event the parties’ obligations will end is an example of a

  1. A) condition subsequent.
  2. B) condition precedent.
  3. C) discharge by frustration.
  4. D) tender of performance.
  5. E) discharge by agreement.

Answer:  A

Diff: 1      Type: MC      Page Ref: 288

Topic:  Ch. 9 – Discharge by Agreement

Skill:  Recall

Objective:  Chapter 9: 3. Explain how a contract may be discharged by agreement.

Bloom’s Taxonomy:  Knowledge

 

 

33) If a contract states that the contract is “subject to the purchaser obtaining financing for $10,000 at 8% by 5:00 p.m. Friday, March 11,” it means that

  1. A) if the purchaser does not obtain the financing, he is in breach of contract.
  2. B) if the purchaser does not obtain the financing, the contract is frustrated.
  3. C) if the purchaser does obtain the financing and properly notifies the seller, the contract is then in full force and effect.
  4. D) there is a contract whether the purchaser gets the financing or not, because the statement is just a statement of intention and doesn’t affect the contract.
  5. E) the obtaining of financing is a condition subsequent and ends the contract.

Answer:  C

Diff: 2      Type: MC      Page Ref: 288

Topic:  Ch. 9 – Discharge by Agreement

Skill:  Applied

Objective:  Chapter 9: 3. Explain how a contract may be discharged by agreement.

Bloom’s Taxonomy:  Knowledge

34) Which one of the following statements accurately describes the operation of a condition subsequent?

  1. A) This occurs when one party shows up at the right time and place ready, able, and willing to carry out his obligations under the contract.
  2. B) This is a term in a contract that must be met before the contract becomes fully operational.
  3. C) This occurs when some event that the parties have not anticipated makes performance radically different from what they agreed to.
  4. D) There is no such thing recognized in the common law.
  5. E) This is a term in the contract that provides for the premature cessation (ending) of the parties’ obligations upon the occurrence of some particular event.

Answer:  E

Diff: 2      Type: MC      Page Ref: 288

Topic:  Ch. 9 – Discharge by Agreement

Skill:  Recall

Objective:  Chapter 9: 3. Explain how a contract may be discharged by agreement.

Bloom’s Taxonomy:  Knowledge

 

 

35) Which of the following is true with regard to ending a contract by agreement?

  1. A) A contract cannot be ended by the happening of a “condition subsequent” provided for in the contract.
  2. 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.
  3. C) A contract cannot be ended by agreement if neither party to the contract has performed his or her obligation.
  4. D) 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.
  5. E) A contract can be ended unilaterally by one party.

Answer:  D

Diff: 2      Type: MC      Page Ref: 288

Topic:  Ch. 9 – Discharge by Agreement

Skill:  Applied

Objective:  Chapter 9: 3. Explain how a contract may be discharged by agreement.

Bloom’s Taxonomy:  Knowledge

 

36) When a contract anticipates some catastrophic event, such as a riot, invasion, earthquake, or flood that will interfere with the performance of the contract, this is referred to as a

  1. A) force majeure
  2. B) condition precedent.
  3. C) “subject to” clause.
  4. D) condition subsequent.
  5. E) frustration clause.

Answer:  A

Diff: 1      Type: MC      Page Ref: 288

Topic:  Ch. 9 – Discharge by Agreement

Skill:  Recall

Objective:  Chapter 9: 3. Explain how a contract may be discharged by agreement.

Bloom’s Taxonomy:  Knowledge

 

37) Connie enters into an agreement with Razmin, a local artist, to showcase a particular one of her sculptures at a prestigious art show. The day before the show, the gallery where the sculpture was being stored burns to the ground. Which of the following represents the most likely outcome?

  1. A) The contract has been discharged through frustration.
  2. B) Razmin has breached the contract by failing to deliver the sculpture.
  3. C) Razmin can simply provide a different sculpture to satisfy the contract.
  4. D) Connie will still need to pay Razmin the same price agreed to in the contract because the fire was not Razmin’s fault.
  5. E) The contract is void.

Answer:  A

Diff: 2      Type: MC      Page Ref: 292

Topic:  Ch. 9 – Discharge by Frustration

Skill:  Applied

Objective:  Chapter 9: 4. Outline the consequences flowing from frustration of contract.

Bloom’s Taxonomy:  Knowledge

 

38) Ellis agreed to paint Lee’s house for $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 stuccoed 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 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?

  1. A) Ellis’s conduct amounted to repudiation, and Lee could have sued for breach of contract immediately after the phone call.
  2. B) Lee could have accepted Ellis’s conduct as an anticipatory breach.
  3. C) The contract has been discharged by frustration.
  4. D) Ellis will be able to successfully claim as damages the amount that he would have made if the contract had been performed.
  5. E) 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.

Answer:  C

Diff: 2      Type: MC      Page Ref: 292

Topic:  Ch. 9 – Discharge by Frustration

Skill:  Applied

Objective:  Chapter 9: 4. Outline the consequences flowing from frustration of contract.

Bloom’s Taxonomy:  Knowledge

 

39) Gill, a wholesale fish seller, agreed to provide Blanchet’s Restaurant with 1000 pounds 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 that much, although other companies did better and other fish was 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 the 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?

  1. A) Gill was under a strict obligation to supply the fish and no excuses for failure are allowed.
  2. B) The contract was frustrated for the whole month of September by Gill’s inability to obtain fish in the way that he intended, and thus he is not liable at all.
  3. C) 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 his failure to deliver any fish in September.
  4. D) 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.
  5. E) The doctrine of frustration does not apply here because this is a sale-of-goods situation.

Answer:  D

Diff: 3      Type: MC      Page Ref: 292

Topic:  Ch. 9 – Discharge by Frustration

Skill:  Applied

Objective:  Chapter 9: 4. Outline the consequences flowing from frustration of contract.

Bloom’s Taxonomy:  Knowledge

 

40) Which of the following would most likely result in the court finding the contract had been discharged by frustration?

  1. A) Cooper contracts to deliver ten bushels of ripe tomatoes to Haig’s restaurant, but Cooper’s tomato crop is destroyed by hail a few days before the delivery date.
  2. B) McGee contracts to give a lecture at a convention on modern marketing, but the convention is cancelled because of an epidemic.
  3. C) 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.
  4. D) Binks agreed to purchase a 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.
  5. E) McDonald agreed to buy Thornburn’s horse, but unknown to both of them, at the time the contract was made the horse was dead.

Answer:  B

Diff: 2      Type: MC      Page Ref: 292

Topic:  Ch. 9 – Discharge by Frustration

Skill:  Applied

Objective:  Chapter 9: 4. Outline the consequences flowing from frustration of contract.

Bloom’s Taxonomy:  Knowledge

 

41) In a jurisdiction other than B.C., Mr. Buyer sued Mr. Seller for breach of contract because Mr. Seller failed to deliver a computer system on time in accordance with their contract. Mr. Seller argued that he was not in breach and that the contract had been frustrated. The computer had been destroyed by water when a careless driver knocked over a fire hydrant outside the warehouse holding the computer. No deposit had been paid. The court held that the contract was frustrated. Based on this ruling, how does the court handle the situation?

  1. A) Buyer will succeed against Seller for damages because the court will treat it as if it were an anticipatory breach.
  2. B) The court will let the losses lie where they fell, despite any of Seller’s costs in preparing the computer system.
  3. C) Buyer will not have to pay anything to Seller unless Seller had requested a deposit at the time of contract.
  4. D) The court will look at the costs incurred and any payments made, and will apportion the losses between the parties.
  5. E) The court will treat the contract as if there were a common mistake about the existence of the subject matter.

Answer:  B

Diff: 2      Type: MC      Page Ref: 292

Topic:  Ch. 9 – Discharge by Frustration

Skill:  Applied

Objective:  Chapter 9: 4. Outline the consequences flowing from frustration of contract.

Bloom’s Taxonomy:  Knowledge

 

42) In B.C., Mr. Buyer sued Mr. Seller for breach of contract because Mr. Seller failed to deliver a computer system on time in accordance with their contract. Mr. Seller argued that he was not in breach and that the contract had been frustrated. The computer was destroyed by water when a careless driver knocked over a fire hydrant outside the warehouse holding the computer. No deposit had been paid. The court held that the contract was frustrated. Based on this ruling, how does the court handle the situation?

  1. A) Buyer will succeed against Seller for damages because the court will treat it as if it were an anticipatory breach.
  2. B) The court will let the losses lie where they fell, despite any of Seller’s costs in preparing the computer system.
  3. C) Buyer will not have to pay anything to Seller unless Seller had requested a deposit at the time of contract.
  4. D) The court will look at the costs incurred and any payments made, and will apportion the losses between the parties.
  5. E) The court will treat the contract as if there were a common mistake about the existence of the subject matter.

Answer:  D

Diff: 2      Type: MC      Page Ref: 292

Topic:  Ch. 9 – Discharge by Frustration

Skill:  Applied

Objective:  Chapter 9: 4. Outline the consequences flowing from frustration of contract.

Bloom’s Taxonomy:  Knowledge

 

43) Smedlap, a trucker, and Dewdney, a farmer, entered into a contract under which Smedlap agreed to haul all of Dewdney’s pumpkin crop to market in time for the 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 sell his truck, he had sold it and therefore was not able to haul Dewdney’s pumpkins. There was 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 previous years, this turkey order 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 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.

  1. A) Smedlap simply cancelled the contract, which he was entitled to do as long as it was before performance was due.
  2. B) 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.
  3. C) The contract was discharged by frustration.
  4. D) Smedlap is not liable because it was not his fault that Dewdney was unable to make other suitable arrangements.
  5. E) This was a breach that consisted of self-induced frustration.

Answer:  E

Diff: 3      Type: MC      Page Ref: 292

Topic:  Ch. 9 – Discharge by Frustration

Skill:  Applied

Objective:  Chapter 9: 4. Outline the consequences flowing from frustration of contract.

Bloom’s Taxonomy:  Knowledge

 

44) The claim of frustration is not available in which of the following circumstances?

  1. A) The subject matter of the agreement is destroyed.
  2. B) An event that forms the basis of the contract does not take place.
  3. C) The law changes, making performance illegal.
  4. D) A government policy prevents performance.
  5. E) A change in circumstances makes it difficult or more costly for one of the parties to perform.

Answer:  E

Diff: 1      Type: MC      Page Ref: 292

Topic:  Ch. 9 – Discharge by Frustration

Skill:  Recall

Objective:  Chapter 9: 4. Outline the consequences flowing from frustration of contract.

Bloom’s Taxonomy:  Knowledge

 

45) In all but one of the following situations, the contract is frustrated. Identify the exception.

  1. A) Jack contracts with Bill to build a barn on his one-acre lot, but before the permit is obtained, a new law prohibits barns on lots smaller than three acres.
  2. B) Rudolph is due to appear in a local variety theatre that has just been destroyed in a fire of unknown origin.
  3. C) 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.
  4. D) 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.
  5. E) Gregory, a trucker with whom you contracted last month to haul potatoes tomorrow, phones to tell you that his truck has broken down.

Answer:  E

Diff: 3      Type: MC      Page Ref: 292

Topic:  Ch. 9 – Discharge by Frustration

Skill:  Applied

Objective:  Chapter 9: 4. Outline the consequences flowing from frustration of contract.

Bloom’s Taxonomy:  Knowledge

 

46) 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?

  1. A) The first party may continue to refuse to perform, and there is nothing the second party can do about that.
  2. B) The contract may be discharged by frustration.
  3. C) The first party might expressly repudiate the contract and therefore not be liable for breach.
  4. D) The first party might breach a condition subsequent.
  5. E) The second party might receive more damages for which he can’t recover compensation.

Answer:  B

Diff: 1      Type: MC      Page Ref: 292

Topic:  Ch. 9 – Discharge by Frustration

Skill:  Recall

Objective:  Chapter 9: 4. Outline the consequences flowing from frustration of contract.

Bloom’s Taxonomy:  Knowledge

 

47) Which of the following would most likely result in the court’s finding that the contract had been discharged by frustration?

  1. A) Lowe contracted to purchase a business from Lerner, but the interest rates jumped so quickly that, even before closing, he realized he would lose money, so he told Lerner he couldn’t go ahead with it.
  2. B) Thornburn agreed to buy Patterson’s tulip crop, but unknown to both of them, at the time of the contract the crop had been destroyed by frost.
  3. C) Lee Ltd. agrees to haul lumber for Len Lumberjack, but a few days before the delivery date the company’s best truck, the one they wanted to use, broke down.
  4. D) N. Yung contracts to give a performance at Etobicoke stadium, but the performance was cancelled because Yung was poisoned by contaminated food at a local restaurant.
  5. E) Mellowcream Ltd. contracted to deliver 40 dozen donuts to Pat’s Place, but called Pat and told her it couldn’t deliver because another customer needed another 40 dozen for an unexpected event.

Answer:  E

Diff: 3      Type: MC      Page Ref: 292

Topic:  Ch. 9 – Discharge by Frustration

Skill:  Applied

Objective:  Chapter 9: 4. Outline the consequences flowing from frustration of contract.

Bloom’s Taxonomy:  Knowledge

 

48) In all but one of the following situations, the contract is frustrated. Identify the exception.

  1. A) Wacky had contracted to supply a health-food store jars of melatonin, a hormone now thought to be a miracle potion. After the contract but before the delivery, the government banned the sale of melatonin so that it could be properly tested under government auspices.
  2. B) Craig, a trucker with whom you contracted last month to transport stoves tomorrow, phones to tell you that his truck has broken down.
  3. C) Tracey contracted to sing at a local club on March 10, but that morning the club was destroyed by lightning.
  4. D) On December 1, Pak contracted to buy Scott’s horse, to be delivered day December 10. On December 8, the horse contracted rabies and had to be destroyed.
  5. E) You agree to paint Joe’s house on the following Tuesday, but on the Monday before, through no fault of either party, the house is destroyed by fire.

Answer:  B

Diff: 2      Type: MC      Page Ref: 292

Topic:  Ch. 9 – Discharge by Frustration

Skill:  Applied

Objective:  Chapter 9: 4. Outline the consequences flowing from frustration of contract.

Bloom’s Taxonomy:  Knowledge

 

49) Mr. Jones rented an apartment to Ms. Smith under a one-year tenancy agreement. Ms. Smith abandoned the apartment after three months. Jones located Smith and sued her for breach of contract. Which of the following is the best statement with regard to the damages Jones can recover?

  1. A) Jones can recover damages equivalent to nine months’ rent, even if the apartment is rented again.
  2. B) Jones can recover damages equivalent to nine months’ rent less whatever rent was received from a subsequent tenant of that apartment.
  3. C) Jones can recover all the damages that directly and naturally flow from the breach, no matter how unforeseeable.
  4. D) Jones can recover nothing, even if it takes six months to rent the apartment again.
  5. E) Jones can recover nothing. When dealing with land, the appropriate remedy is specific performance.

Answer:  B

Diff: 2      Type: MC      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Applied

Objective:  Chapter 9: 5. Describe how damages for breach of contract are assessed.

Bloom’s Taxonomy:  Knowledge

 

50) When Mr. George sold his house, he rented an apartment and was forced to store some furniture until he bought another house. He attended the downtown office of Security Warehousing Ltd. and entered into a bailment contract that promised to safeguard the furniture. Four months later, his things were stolen from the warehouse, and when he asked for compensation for his loss, the company admitted it was in breach of contract, but said it was exempt from liability because of an exemption clause posted on the wall of the storage area where George had taken the furniture. The sign read “Not liable for loss due to fire or water.” On these facts, which of the following would be his least successful argument to nullify the exemption clause?

  1. A) He failed to receive reasonable notice of the clause at the time of contract.
  2. B) There has been a fundamental breach of the contract.
  3. C) The Sale of Goods Act voids such an exemption clause.
  4. D) On the strict construction of the clause, it doesn’t cover the cause of the loss.
  5. E) Such terms cannot be unilaterally imposed.

Answer:  C

Diff: 2      Type: MC      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Applied

Objective:  Chapter 9: 5. Describe how damages for breach of contract are assessed.

Bloom’s Taxonomy:  Knowledge

 

51) Carson arranged with his brother-in-law, Waxman, that he would try to buy a famous old B.C. coastal airplane, the Spruce Ghost, which Waxman would then buy from him to display in his flight museum. Waxman promised to pay Carson a 10% commission over the price that Carson had to pay to buy the plane, so that their price would be 110% of Carson’s purchase price. Carson and the owner, Wonka, agreed on a price of $80,000. After reconditioning the plane but before delivering it to Carson, Wonka decided to take it up for one last nostalgic flight and, because of his carelessness, he crashed it on take-off. Although Wonka escaped uninjured, the plane caught fire and was totally destroyed. Carson was able to locate a similar plane for only $60,000 but Waxman wasn’t interested. Carson sued his brother-in-law and Wonka. What is the likely outcome of this suit?

  1. A) Waxman will have to pay Carson $8000, the commission on the agreed sale price between Carson and Wonka.
  2. B) Waxman will have to pay Carson $6000 as the commission he would have made on the purchase of the second plane.
  3. C) Wonka will have to pay Carson damages (probably $8000) for breach of contract.
  4. D) Because the contract between Carson and Wonka was frustrated by the destruction of the Spruce Ghost, Carson has no claim against anyone.
  5. E) The Frustrated Contracts Act will require Carson to share in the expense of reconditioning the Spruce Ghost that Wonka had undertaken in preparation for sale.

Answer:  C

Diff: 3      Type: MC      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Applied

Objective:  Chapter 9: 5. Describe how damages for breach of contract are assessed.

Bloom’s Taxonomy:  Knowledge

 

52) 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?

  1. A) This clause requires the injured party to take all reasonable steps to mitigate (lessen) his losses.
  2. B) The plaintiff will likely be awarded a judgment for all the damages that “naturally and directly flow” from the breach.
  3. C) This clause conclusively determines the amount of damages that the court can award.
  4. D) 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.
  5. E) Liquidated damages only apply to losses caused by excess water, such as floods or tidal waves.

Answer:  D

Diff: 2      Type: MC      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Recall

Objective:  Chapter 9: 5. Describe how damages for breach of contract are assessed.

Bloom’s Taxonomy:  Knowledge

 

53) Dubocovich had contracted to supply a health-food store with jars of melatonin, a hormone reported in the media as a miracle potion. After they contracted, but before delivery, the government banned the sale of melatonin so that it could be properly tested under government auspices. Dubocovich told the owner of the store, Mr. Wei, that he wouldn’t be delivering the melatonin because of the government ban. The demand for the melatonin was high. Mr. Wei was very upset with Dubocovich for failing to honour his contractual obligations. Furthermore, he had given Dubocovich $5000 in advance, which Dubocovich needed and used to pay the freight costs in bringing the drug to his warehouse. Wei sued Dubocovich for breach of contract. Which of the following is correct with respect to the legal position of the parties?

  1. A) Wei will be successful in his breach of contract action.
  2. B) This is an example of a frustrated contract and Wei will lose, since the loss will remain where it has fallen.
  3. C) Wei will be able to get back his $5000 minus a portion of any costs Dubocovich incurred in preparing to perform the contract.
  4. D) When a contract is frustrated in this way, the frustrating party is responsible for any losses incurred by the other party.
  5. E) The contract is illegal and void.

Answer:  C

Diff: 3      Type: MC      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Applied

Objective:  Chapter 9: 5. Describe how damages for breach of contract are assessed.

Bloom’s Taxonomy:  Knowledge

 

54) If a supplier failed to honour a contract to supply parts to Mr. Matheson and the court finds the supplier in breach of contract, which of the following would be incorrect with respect to how the court determines the amount of money to award to Matheson?

  1. A) Liquidated damages must be an honest attempt by the parties to pre-estimate damages.
  2. B) The victim of the breach must take all reasonable steps to keep those damages as low as possible.
  3. C) The supplier would not be responsible for any unusual losses lost by Mr. Matheson because of some special use not told to the supplier.
  4. D) If a deposit is involved, the damages will be restricted to that deposit.
  5. E) The supplier is responsible for all damages suffered by Matheson.

Answer:  E

Diff: 2      Type: MC      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Applied

Objective:  Chapter 9: 5. Describe how damages for breach of contract are assessed.

Bloom’s Taxonomy:  Knowledge

 

55) Craig ordered a new car and was required to pay a $500 deposit. Which of the following is correct with respect to that deposit if it is to be non-refundable?

  1. A) If no deposit had been paid, there could be no contract.
  2. B) The deposit must be an honest attempt by the parties to pre-estimate damages in the event of a breach.
  3. C) If the court feels that the damages exceed the deposit, they will order the breaching party to pay any difference.
  4. D) The deposit must be a fair reflection of the loss actually suffered.
  5. E) A down-payment is an amount of money to be forfeited if either party is in breach of contract.

Answer:  B

Diff: 2      Type: MC      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Applied

Objective:  Chapter 9: 5. Describe how damages for breach of contract are assessed.

Bloom’s Taxonomy:  Knowledge

 

56) 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’ remedies?

  1. A) He would be entitled to damages for money lost—$7000 plus selling costs.
  2. B) He would be entitled to the $4000 only, if the court held that the deposit was an honest attempt of the parties to estimate damages.
  3. C) He could sue for an injunction to stop Jefferson from buying another house.
  4. D) He could ask the court to order an accounting.
  5. E) Adams must sue for specific performance, which is the only remedy, an equitable remedy, available to the parties in land transactions.

Answer:  B

Diff: 3      Type: MC      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Applied

Objective:  Chapter 9: 5. Describe how damages for breach of contract are assessed.

Bloom’s Taxonomy:  Knowledge

 

57) In which one of the following instances would the seller most likely succeed in an attempt to escape liability by the use of an exemption clause?

  1. A) The store had posted at the entrance to the dressing rooms a large sign reading “Not responsible for stolen articles,” and the customer lost articles in a fire that swept through the dressing rooms.
  2. B) The purchaser of goods, after the sale, is sent an invoice on which the exemption clause is printed in boldface type at the top of the first page.
  3. C) The clause says there will be no liability for breach of a condition and the breach that occurs is minor in nature.
  4. D) There has been a breach of the fundamental obligation of the contract, and the court holds that, on its true construction, the parties did not mean it to cover a serious breach.
  5. E) The exemption clause that covers the situation was posted in plain view and was brought to the buyer’s attention at the place and time of contract.

Answer:  E

Diff: 2      Type: MC      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Recall

Objective:  Chapter 9: 5. Describe how damages for breach of contract are assessed.

Bloom’s Taxonomy:  Knowledge

 

58) Ibolya entered into an employment contract with a Toronto advertising firm, VertaNet Ltd. The agreement included a non-competition clause that prevented her from participating in the advertising field in Toronto for five years after termination of her employment. In the event of a breach, the contract provided that Ibolya would have to pay VertaNet the sum of $500,000 as liquidated damages. Ibolya worked for VertaNet for a period of time, then took another job in Vancouver where she worked for four and half years. Six months before the expiry of the five-year period in her VertaNet contract, Ibolya returned to Toronto to take a part-time position at a small advertising firm. Although VertaNet did not suffer any damage, VertaNet sued Ibolya claiming $500,000. What is the likely outcome?

  1. A) The non-competition clause is likely a penalty and therefore unenforceable.
  2. B) Although the amount claimed is unconscionable, the clause will be enforced as it is writing.
  3. C) Non-competition clauses generally are void as not being in the public interest.
  4. D) Liquidated damages clauses are illegal and therefore void.
  5. E) Unless the $500,000 had been prepaid, Ibolya has no good defence.

Answer:  A

Diff: 3      Type: MC      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Applied

Objective:  Chapter 9: 5. Describe how damages for breach of contract are assessed.

Bloom’s Taxonomy:  Knowledge

 

59) Which of the following is false with regard to remedies for breach of contract?

  1. A) The victim of a breach cannot recover damages that he could have avoided if he had tried to mitigate his loss.
  2. B) An exemption clause that a seller claims absolves him from liability may be of no effect if the seller has committed a fundamental breach of the contract.
  3. C) A person who breaches a contract is liable for all the foreseeable loss that directly and naturally flows from the breach.
  4. 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 non-essential term (e.g., a warranty).
  5. E) Specific performance is an equitable remedy forcing a person to comply with the terms of the contract.

Answer:  D

Diff: 2      Type: MC      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Recall

Objective:  Chapter 9: 5. Describe how damages for breach of contract are assessed.

Bloom’s Taxonomy:  Knowledge

 

60) 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?

  1. A) If Mike breaches the contract, he will have to pay Rita all the damages that directly and naturally flow from the breach.
  2. B) If Mike breaches the contract, he would not have to pay $10,000, even if Rita suffered a substantial loss.
  3. C) If Mike breaches the contract, he would have to pay $10,000 even if Rita’s actual loss was $40,000.
  4. D) 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.
  5. E) A clause in a contract that provides for the forfeiture of a deposit is called an exemption clause.

Answer:  C

Diff: 2      Type: MC      Page Ref: 280

Topic:  Ch. 9 – Discharge by Breach

Skill:  Applied

Objective:  Chapter 9: 5. Describe how damages for breach of contract are assessed.

Bloom’s Taxonomy:  Knowledge

 

61) Which of the following is true with regard to ending a contract by performance, agreement, frustration, or breach?

  1. A) The victim of a breach can recover damages even for the loss he could have avoided if he had tried to.
  2. B) A person who breaches a contract is liable for all the loss that directly and naturally flows from the breach, no matter how unforeseeable.
  3. C) An exemption clause that a seller claims absolves him from liability may be of no effect if the seller has committed a fundamental breach of the contract.
  4. D) 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.
  5. E) 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.

Answer:  C

Diff: 2      Type: MC      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Recall

Objective:  Chapter 9: 5. Describe how damages for breach of contract are assessed.

Bloom’s Taxonomy:  Knowledge

 

62) Which of the following is true with regard to remedies for breach of contract?

  1. A) The victim of a breach can recover damages that he could have avoided if he had tried to mitigate his loss.
  2. B) If the seller has committed a fundamental breach of the contract, an exemption clause absolves the seller from liability.
  3. C) A person who breaches a contract is liable for all the foreseeable loss that directly and naturally flows from the breach.
  4. 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 non-essential term (e.g., a warranty).
  5. E) Non est factum is an equitable remedy forcing a person to comply with the terms of the contract.

Answer:  C

Diff: 2      Type: MC      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Applied

Objective:  Chapter 9: 5. Describe how damages for breach of contract are assessed.

Bloom’s Taxonomy:  Knowledge

 

63) Which of the following statements is true with respect to the law of damages?

  1. A) Damages are intended to punish the wrongdoer for breaching the contract.
  2. B) Damages are awarded for a breach of a condition but not for a breach of warranty.
  3. C) 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.
  4. D) Damages are an order from the court for the breaching party to perform the contract as he or she agreed to do.
  5. E) A deposit may be 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 Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Recall

Objective:  Chapter 9: 5. Describe how damages for breach of contract are assessed.

Bloom’s Taxonomy:  Knowledge

 

64) Sam agreed to purchase and Joe agreed to sell a brand new Chrysler 300 that was displayed in the showroom at Joe’s Fine Cars. But instead of delivering it to Sam, Joe sold it to another customer who offered him more money. Which of the following is the appropriate remedy in these circumstances?

  1. A) Specific performance
  2. B) Damages
  3. C) Injunction
  4. D) No remedy
  5. E) Rescission

Answer:  B

Diff: 1      Type: MC      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Recall

Objective:  Chapter 9: 5. Describe how damages for breach of contract are assessed.

Bloom’s Taxonomy:  Knowledge

 

 

65) 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, he took the job and refused to finish the violin for Ted. Which of the following is the appropriate remedy in these circumstances?

  1. A) Specific performance
  2. B) Damages
  3. C) Injunction
  4. D) No remedy
  5. E) Rescission

Answer:  B

Diff: 1      Type: MC      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Applied

Objective:  Chapter 9: 5. Describe how damages for breach of contract are assessed.

Bloom’s Taxonomy:  Knowledge

66) 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?

  1. A) This clause requires the injured party to take all reasonable steps to lessen (mitigate) his losses.
  2. B) The plaintiff will likely be awarded a judgment for all the damages that naturally and directly flow from the breach.
  3. C) The court will award the amount specified only if it accurately reflects the losses that actually took place.
  4. D) 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 a breach.
  5. E) Liquidated damages only apply to losses caused by excess water, such as floods or tidal waves.

Answer:  D

Diff: 2      Type: MC      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Recall

Objective:  Chapter 9: 5. Describe how damages for breach of contract are assessed.

Bloom’s Taxonomy:  Knowledge

 

 

67) Perfect Programs Ltd. hired Gill, who had training not only in programming but also in pharmacy management, to create a computer program for use in a pharmacy to take care of all its needs with regard to inventory, billings, prescriptions, etc. The employment contract provided for a three-year term with no provision for early termination and the following covenant: “The employee, upon his leaving the employ of the employer, shall not compete, directly or indirectly, in any capacity whatsoever, within five miles of this place of employment.” After Gill had been there for two years and the project was only months away from completion, he was approached by a representative of Big Big Co. (with offices in the same building), who offered Gill a job with, among other things, a higher salary and more staff to help him complete a program for use by drugstores. Gill accepted. To replace Gill, Perfect Programs Ltd. hired a man from New York with the same training as Gill and sued Gill for breach of contract. Which of the following is true?

  1. A) Gill is not in breach of contract because the restrictive covenant is illegal, so the whole contract is void.
  2. B) Gill will have to pay damages for all the loss that directly flows from the breach no matter how improbable.
  3. C) If Gill knew that there would be a delay before the new employee could reach the level Gill had attained before his departure, the costs of the delay would be factored into the damages.
  4. D) Perfect Programs Ltd. could have abandoned the project and just sued Gill for the entire anticipated lost profit.
  5. E) Perfect Programs Ltd. could get an injunction against Gill because the restrictive covenant is reasonable in this form.

Answer:  C

Diff: 3      Type: MC      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Applied

Objective:  Chapter 9: 5. Describe how damages for breach of contract are assessed.

Bloom’s Taxonomy:  Knowledge

68) Which of the following is false with regard to remedies for breach of contract?

  1. A) Damages are awarded for a breach of a condition (essential term), but not for a breach of a warranty (non-essential term).
  2. B) The amount of damages to be given to the victim of the breach depends on the knowledge of the party who breached the contract. Knowledge includes imputed and actual knowledge.
  3. C) The victim of a breach cannot recover damages that he could have avoided if he had tried to mitigate his loss.
  4. D) An injunction is the proper remedy to stop a person from doing something that he had promised in the contract not to do (e.g., not to compete, not to disclose secrets, etc.).
  5. E) Specific performance is an equitable remedy forcing a person to comply with the terms of the contract.

Answer:  A

Diff: 2      Type: MC      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Recall

Objective:  Chapter 9: 5. Describe how damages for breach of contract are assessed.

Bloom’s Taxonomy:  Knowledge

 

69) Jones entered into a contract to purchase a 1957 Edsel automobile from Smith for $2000. Unknown to Smith, Jones had an opportunity to resell that car for $5000 to Brown, who wanted to use it as a prop in a movie being shot in town. Before the car was delivered and payment made, it was destroyed by fire when one of Smith’s employees carelessly spilled a can of gasoline in the garage where the car was kept. If the court found that the normal market value for such a vehicle was only $3000, which of the following statements is correct with respect to the appropriate remedy that should be awarded by the court for such a breach of contract?

  1. A) Because of the uniqueness of the vehicle, the court should award specific performance.
  2. B) In these circumstances, the court should award $5000, representing the lost profits.
  3. C) In these circumstances, there should be no remedy since the contract has been frustrated.
  4. D) The court should award only $1000, the difference between the market price and the purchase price.
  5. E) The court could award $3000.

Answer:  D

Diff: 3      Type: MC      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Applied

Objective:  Chapter 9: 5. Describe how damages for breach of contract are assessed.

Bloom’s Taxonomy:  Knowledge

70) Sam entered into a contract for the purchase of a used dump truck from Joe’s Heavy Duty Trucks. The written contract clearly specified, among other things, that “it shall be a warranty to this contract that the truck has the capacity of carrying and properly dumping loads of up to 4000 kg of gravel.” In fact, when Sam loaded the truck with 4000 kg of gravel, he discovered that the hoist on the truck was not capable of dumping it. Only if the load was reduced to 3000 kg could the gravel be dumped. Sam obtained an estimate stating that it would cost $8000 to reinforce the hoist mechanism of the truck so that it could handle dumping 4000 kg of gravel. When Sam approached Joe demanding satisfaction, Sam pointed out another term of the agreement that stated that in the event of a breach of contract the “maximum damages payable to the purchaser are limited to $5000.” Sam sued. Which of the following statements is correct with respect to the legal position of the parties?

  1. A) Sam must keep the truck and sue for damages, but those damages are limited to $5000.
  2. B) Sam can treat his obligation as over, return the truck, and demand the return of his purchase price.
  3. C) Sam must keep the truck but can obtain the $8000 in damages or what it takes to repair the hoist mechanism.
  4. D) Sam can get an order of specific performance, which will force the seller, Joe, to fix the truck even if it does cost $8000.
  5. E) There is nothing Sam can do as this was a breach of warranty.

Answer:  A

Diff: 3      Type: MC      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Applied

Objective:  Chapter 9: 5. Describe how damages for breach of contract are assessed.

Bloom’s Taxonomy:  Knowledge

 

 

71) Which of the following is one of the remedies generally available for a breach of contract?

  1. A) Repudiation
  2. B) Specific performance
  3. C) Punitive damages
  4. D) Anticipatory breach
  5. E) Novation

Answer:  B

Diff: 1      Type: MC      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Recall

Objective:  Chapter 9: 6. Differentiate the equitable remedies available for a breach of contract.

Bloom’s Taxonomy:  Knowledge

72) Which of the following is true with regard to remedies for breach of contract?

  1. A) 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 her contract.
  2. B) The victim of a breach can recover damages that he could have avoided if he had tried to mitigate his loss.
  3. C) A person who breaches a contract is liable for all the loss that directly and naturally flows from the breach, no matter how unforeseeable.
  4. D) An injunction is an equitable remedy forcing a person to comply with the terms of the contract.
  5. E) Specific performance is the proper remedy to stop a person from doing something that he had promised in the contract not to do (e.g., not to compete, not to disclose secrets, etc.).

Answer:  A

Diff: 2      Type: MC      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Applied

Objective:  Chapter 9: 6. Differentiate the equitable remedies available for a breach of contract.

Bloom’s Taxonomy:  Knowledge

 

 

73) 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, he 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?

  1. A) Specific performance
  2. B) Accounting
  3. C) Injunction
  4. D) No remedy
  5. E) Rescission

Answer:  C

Diff: 1      Type: MC      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Applied

Objective:  Chapter 9: 6. Differentiate the equitable remedies available for a breach of contract.

Bloom’s Taxonomy:  Knowledge

 

74) Alan entered into a written contract for the purchase of a house owned by Joe. 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 into which he had intended to move. Which of the following is the appropriate remedy in these circumstances for Alan, who really wants the house?

  1. A) Specific performance
  2. B) Damages
  3. C) Injunction
  4. D) No remedy
  5. E) Rescission

Answer:  A

Diff: 1      Type: MC      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Applied

Objective:  Chapter 9: 6. Differentiate the equitable remedies available for a breach of contract.

Bloom’s Taxonomy:  Knowledge

 

75) If neighbours have a contract agreeing not to erect a building that blocks the other’s view, which remedy might the court impose if that agreement is breached?

  1. A) Accounting
  2. B) Quantum meruit
  3. C) Mandatory injunction
  4. D) Laches
  5. E) Punitive damages

Answer:  C

Diff: 1      Type: MC      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Recall

Objective:  Chapter 9: 6. Differentiate the equitable remedies available for a breach of contract.

Bloom’s Taxonomy:  Knowledge

 

76) In awarding damages for breach of contract

  1. A) the plaintiff should be, to the extent possible, placed in the same position as he was prior to the agreement being made.
  2. B) the defendant should be, to the extent possible, punished for the breach in order to deter him from repeating this course of behaviour.
  3. C) the plaintiff should be, to the extent possible, placed in the same position as he would have been if the contract had been performed.
  4. D) the defendant should only be required to pay what he can reasonably afford.
  5. E) the plaintiff should only be entitled to compensation for specific and calculable costs and expenses.

Answer:  C

Diff: 1      Type: MC      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Recall

Objective:  Chapter 9: 6. Differentiate the equitable remedies available for a breach of contract.

Bloom’s Taxonomy:  Knowledge

 

77) Where a developer signs agreements to buy several adjacent properties, and one property owner refuses to go through with the deal, it would be appropriate to obtain a court order for

  1. A) an equitable remedy.
  2. B) specific performance.
  3. C) an injunction.
  4. D) quantum meruit.
  5. E) damages

Answer:  B

Diff: 2      Type: MC      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Recall

Objective:  Chapter 9: 6. Differentiate the equitable remedies available for a breach of contract.

Bloom’s Taxonomy:  Knowledge

 

78) On the theory that all land is unique, the courts in the past have been willing to award ________ whenever the parties to the purchase of land breached their contract.

  1. A) damages
  2. B) equitable remedies
  3. C) quantum meruit
  4. D) specific performance
  5. E) an injunction

Answer:  D

Diff: 1      Type: MC      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Recall

Objective:  Chapter 9: 6. Differentiate the equitable remedies available for a breach of contract.

Bloom’s Taxonomy:  Knowledge

 

79) ________ occurs when the court orders the defaulting party to live up to the terms of the contract.

  1. A) An injunction
  2. B) Specific performance
  3. C) An accounting
  4. D) Quantum meruit
  5. E) Compensation

Answer:  B

Diff: 1      Type: MC      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Recall

Objective:  Chapter 9: 6. Differentiate the equitable remedies available for a breach of contract.

Bloom’s Taxonomy:  Knowledge

 

80) Specific performance involves a court order to do something (to perform the contract), whereas a(n) ________ usually involves an order to refrain from some offensive conduct.

  1. A) injunction
  2. B) damages award
  3. C) equitable remedy
  4. D) quantum meruit award
  5. E) limitation period

Answer:  A

Diff: 2      Type: MC      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Recall

Objective:  Chapter 9: 6. Differentiate the equitable remedies available for a breach of contract.

Bloom’s Taxonomy:  Knowledge

 

 

81) For a contract to be frustrated, performance must be impossible.

Answer:  FALSE

Diff: 1      Type: TF      Page Ref: 288

Topic:  Ch. 9 – Discharge by Agreement

Skill:  Recall

Objective:  Chapter 9: 1. Illustrate how a contract is discharged by performance.

Bloom’s Taxonomy:  Knowledge

82) Legal tender in Canada consists of government-produced coins and bills of any amount or quantity.

Answer:  FALSE

Diff: 3      Type: TF      Page Ref: 277

Topic:  Ch. 9 – Discharge by Performance

Skill:  Recall

Objective:  Chapter 9: 1. Illustrate how a contract is discharged by performance.

Bloom’s Taxonomy:  Knowledge

 

83) A breach of warranty allows a victim to sue for damages, but they must go through with their obligations under the contract.

Answer:  TRUE

Diff: 3      Type: TF      Page Ref: 280

Topic:  Ch. 9 – Discharge by Breach

Skill:  Recall

Objective:  Chapter 9: 2. Describe when a breach of contract will be sufficient to relieve the opposite party from its obligations.

Bloom’s Taxonomy:  Knowledge

 

84) Courts enforce exemption clauses because it is assumed that they reflect the will of the parties to the contract.

Answer:  TRUE

Diff: 2      Type: TF      Page Ref: 280

Topic:  Ch. 9 – Discharge by Breach

Skill:  Recall

Objective:  Chapter 9: 2. Describe when a breach of contract will be sufficient to relieve the opposite party from its obligations.

Bloom’s Taxonomy:  Knowledge

 

85) Repudiation occurs when one party indicates that they do not intend to follow through with their end of the deal.

Answer:  TRUE

Diff: 2      Type: TF      Page Ref: 280

Topic:  Ch. 9 – Discharge by Breach

Skill:  Recall

Objective:  Chapter 9: 2. Describe when a breach of contract will be sufficient to relieve the opposite party from its obligations.

Bloom’s Taxonomy:  Knowledge

 

86) When a person informs you before performance is due that he is not going to perform the contract, you don’t have to wait to see if he does perform. You can make other arrangements and sue right away.

Answer:  TRUE

Diff: 3      Type: TF      Page Ref: 280

Topic:  Ch. 9 – Discharge by Breach

Skill:  Applied

Objective:  Chapter 9: 2. Describe when a breach of contract will be sufficient to relieve the opposite party from its obligations.

Bloom’s Taxonomy:  Knowledge

87) When a condition is breached, the victim can only sue for damages but must continue to perform their obligations under the contract.

Answer:  FALSE

Diff: 3      Type: TF      Page Ref: 280

Topic:  Ch. 9 – Discharge by Breach

Skill:  Recall

Objective:  Chapter 9: 2. Describe when a breach of contract will be sufficient to relieve the opposite party from its obligations.

Bloom’s Taxonomy:  Knowledge

 

88) A breach of warranty will bring the contract to an end.

Answer:  FALSE

Diff: 1      Type: TF      Page Ref: 280

Topic:  Ch. 9 – Discharge by Breach

Skill:  Recall

Objective:  Chapter 9: 2. Describe when a breach of contract will be sufficient to relieve the opposite party from its obligations.

Bloom’s Taxonomy:  Knowledge

 

89) A condition precedent is an example of a contract being ended by agreement.

Answer:  FALSE

Diff: 3      Type: TF      Page Ref: 288

Topic:  Ch. 9 – Discharge by Agreement

Skill:  Recall

Objective:  Chapter 9: 3. Explain how a contract may be discharged by agreement.

Bloom’s Taxonomy:  Knowledge

 

90) A condition subsequent is an example of a contract being ended by agreement.

Answer:  TRUE

Diff: 3      Type: TF      Page Ref: 288

Topic:  Ch. 9 – Discharge by Agreement

Skill:  Recall

Objective:  Chapter 9: 3. Explain how a contract may be discharged by agreement.

Bloom’s Taxonomy:  Knowledge

 

 

91) For a contract to be ended by agreement, there must be consideration as well as agreement on both sides.

Answer:  TRUE

Diff: 2      Type: TF      Page Ref: 288

Topic:  Ch. 9 – Discharge by Agreement

Skill:  Recall

Objective:  Chapter 9: 3. Explain how a contract may be discharged by agreement.

Bloom’s Taxonomy:  Knowledge

 

92) A condition precedent is a term of a contract that will bring that contract to an end when the specified condition is met.

Answer:  FALSE

Diff: 3      Type: TF      Page Ref: 288

Topic:  Ch. 9 – Discharge by Agreement

Skill:  Recall

Objective:  Chapter 9: 3. Explain how a contract may be discharged by agreement.

Bloom’s Taxonomy:  Knowledge

93) All rules of contract formation apply when parties agree to discharge a contract.

Answer:  TRUE

Diff: 2      Type: TF      Page Ref: 288

Topic:  Ch. 9 – Discharge by Agreement

Skill:  Recall

Objective:  Chapter 9: 3. Explain how a contract may be discharged by agreement.

Bloom’s Taxonomy:  Knowledge

 

94) 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.

Answer:  TRUE

Diff: 3      Type: TF      Page Ref: 292

Topic:  Ch. 9 – Discharge by Frustration

Skill:  Recall

Objective:  Chapter 9: 4. Outline the consequences flowing from frustration of contract.

Bloom’s Taxonomy:  Knowledge

 

95) The Frustrated Contracts Act today requires that when a deposit is paid, the costs incurred can be split out of the deposit.

Answer:  TRUE

Diff: 2      Type: TF      Page Ref: 292

Topic:  Ch. 9 – Discharge by Frustration

Skill:  Recall

Objective:  Chapter 9: 4. Outline the consequences flowing from frustration of contract.

Bloom’s Taxonomy:  Knowledge

 

 

96) When one party is responsible for an act that frustrates a contract, it is treated as a breach.

Answer:  TRUE

Diff: 1      Type: TF      Page Ref: 292

Topic:  Ch. 9 – Discharge by Frustration

Skill:  Recall

Objective:  Chapter 9: 4. Outline the consequences flowing from frustration of contract.

Bloom’s Taxonomy:  Knowledge

 

97) Lack of financial ability, if proven, will establish frustration.

Answer:  FALSE

Diff: 1      Type: TF      Page Ref: 292

Topic:  Ch. 9 – Discharge by Frustration

Skill:  Recall

Objective:  Chapter 9: 4. Outline the consequences flowing from frustration of contract.

Bloom’s Taxonomy:  Knowledge

 

98) A person who breaches a contract is responsible for all of the loss that flows from the breach, no matter how unforeseeable.

Answer:  FALSE

Diff: 2      Type: TF      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Recall

Objective:  Chapter 9: 5. Describe how damages for breach of contract are assessed.

Bloom’s Taxonomy:  Knowledge

99) The purpose of damages in contract law is to put the victim in the position he would have been in had the contract been properly performed.

Answer:  TRUE

Diff: 2      Type: TF      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Recall

Objective:  Chapter 9: 5. Describe how damages for breach of contract are assessed.

Bloom’s Taxonomy:  Knowledge

 

100) “Clean hands” refers to the absence of wrongdoing on the part of a person seeking an equitable remedy.

Answer:  TRUE

Diff: 2      Type: TF      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Recall

Objective:  Chapter 9: 5. Describe how damages for breach of contract are assessed.

Bloom’s Taxonomy:  Knowledge

 

 

101) A deposit must be returned if no damage has taken place.

Answer:  FALSE

Diff: 2      Type: TF      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Recall

Objective:  Chapter 9: 5. Describe how damages for breach of contract are assessed.

Bloom’s Taxonomy:  Knowledge

 

102) Failure to make an installment payment will often trigger an acceleration clause, which makes the entire outstanding debt due and payable immediately.

Answer:  TRUE

Diff: 2      Type: TF      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Recall

Objective:  Chapter 9: 5. Describe how damages for breach of contract are assessed.

Bloom’s Taxonomy:  Knowledge

 

103) A breaching party is responsible for all lost profits flowing from a breach of contract.

Answer:  FALSE

Diff: 1      Type: TF      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Recall

Objective:  Chapter 9: 5. Describe how damages for breach of contract are assessed.

Bloom’s Taxonomy:  Knowledge

 

104) The victim of a breach cannot recover damages that he could have avoided if he had made a reasonable effort.

Answer:  TRUE

Diff: 2      Type: TF      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Recall

Objective:  Chapter 9: 5. Describe how damages for breach of contract are assessed.

Bloom’s Taxonomy:  Knowledge

105) Victims of breach have a duty to mitigate damages, meaning they must do what they can to keep those damages as low as possible.

Answer:  TRUE

Diff: 2      Type: TF      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Recall

Objective:  Chapter 9: 5. Describe how damages for breach of contract are assessed.

Bloom’s Taxonomy:  Knowledge

 

 

106) Damages are an example of an equitable remedy.

Answer:  FALSE

Diff: 1      Type: TF      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Recall

Objective:  Chapter 9: 6. Differentiate the equitable remedies available for a breach of contract.

Bloom’s Taxonomy:  Knowledge

 

107) Injunction is an example of an equitable remedy.

Answer:  TRUE

Diff: 1      Type: TF      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Recall

Objective:  Chapter 9: 6. Differentiate the equitable remedies available for a breach of contract.

Bloom’s Taxonomy:  Knowledge

 

108) The courts prefer to grant an equitable remedy where a breach of contract has taken place.

Answer:  FALSE

Diff: 2      Type: TF      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Recall

Objective:  Chapter 9: 6. Differentiate the equitable remedies available for a breach of contract.

Bloom’s Taxonomy:  Knowledge

 

109) The courts will grant an order of specific performance to compel performance of a contract for personal services.

Answer:  FALSE

Diff: 2      Type: TF      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Recall

Objective:  Chapter 9: 6. Differentiate the equitable remedies available for a breach of contract.

Bloom’s Taxonomy:  Knowledge

 

110) The courts are extremely reluctant to grant any compensation for the breaching party’s partial performance of the agreement, unless the contractual obligations have been substantially performed.

Answer:  TRUE

Diff: 1      Type: TF      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Recall

Objective:  Chapter 9: 6. Differentiate the equitable remedies available for a breach of contract.

Bloom’s Taxonomy:  Knowledge

 

111) An injunction is designed to punish someone for breaching a contract.

Answer:  FALSE

Diff: 2      Type: TF      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Recall

Objective:  Chapter 9: 6. Differentiate the equitable remedies available for a breach of contract.

Bloom’s Taxonomy:  Knowledge

 

112) If a contractor has agreed to build a house with payment due upon completion of the job and refuses to continue after completing half, he will not be successful in claiming compensation for what he has done.

Answer:  TRUE

Diff: 1      Type: TF      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Recall

Objective:  Chapter 9: 6. Differentiate the equitable remedies available for a breach of contract.

Bloom’s Taxonomy:  Knowledge

 

113) In rare circumstances, the courts may issue a mandatory injunction when a person does something to violate a contractual term and thereby creates an ongoing problem.

Answer:  TRUE

Diff: 1      Type: TF      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Recall

Objective:  Chapter 9: 6. Differentiate the equitable remedies available for a breach of contract.

Bloom’s Taxonomy:  Knowledge

 

114) An injunction involves a court order to do something (to perform the contract), whereas specific performance usually involves an order to refrain from some offensive conduct.

Answer:  FALSE

Diff: 2      Type: TF      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Recall

Objective:  Chapter 9: 6. Differentiate the equitable remedies available for a breach of contract.

Bloom’s Taxonomy:  Knowledge

 

115) Indicate the various ways that the contractual relationship can come to an end.

Answer:  A contractual relationship can end by performance of the contractual obligations either as required or substantially as required, by breach of contract, by agreement between the parties, and by frustration.

Diff: 1      Type: ES      Page Ref: 277

Topic:  Ch. 9 – Discharge by Performance

Skill:  Recall

Objective:  Chapter 9: 1. Illustrate how a contract is discharged by performance.

Bloom’s Taxonomy:  Knowledge

 

116) 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.

Diff: 2      Type: ES      Page Ref: 277

Topic:  Ch. 9 – Discharge by Performance

Skill:  Recall

Objective:  Chapter 9: 1. Illustrate how a contract is discharged by performance.

Bloom’s Taxonomy:  Knowledge

 

117) Joe owed Harry $500, but Harry was confused when Joe came to pay it back and Harry 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.

Diff: 2      Type: ES      Page Ref: 277

Topic:  Ch. 9 – Discharge by Performance

Skill:  Applied

Objective:  Chapter 9: 1. Illustrate how a contract is discharged by performance.

Bloom’s Taxonomy:  Knowledge

 

118) Explain under what circumstances the tender of performance and its refusal will be treated as performance of the contractual obligation.

Answer:  When goods or services are involved, the tendering of performance is treated as fulfilling of the contractual obligation to perform, even where such tendering is refused. The person then is free to sue for breach of contract even though he hasn’t actually performed the service required. Where money is involved, however, the money is considered to be still owed, although the creditor must bear the costs of collection.

Diff: 2      Type: ES      Page Ref: 277

Topic:  Ch. 9 – Discharge by Performance

Skill:  Recall

Objective:  Chapter 9: 1. Illustrate how a contract is discharged by performance.

Bloom’s Taxonomy:  Knowledge

 

119) Explain under what circumstances a creditor would be entitled to refuse to accept payment proffered to him on or before the payment due date.

Answer:  A creditor might refuse payment if they are away from the workplace, out of working hours, or if the payment is not made in legal tender. Cheques are only acceptable where there is a history of such use, or where the parties have agreed. Otherwise legal tender is appropriate.

Diff: 1      Type: ES      Page Ref: 277

Topic:  Ch. 9 – Discharge by Performance

Skill:  Recall

Objective:  Chapter 9: 1. Illustrate how a contract is discharged by performance.

Bloom’s Taxonomy:  Knowledge

120) 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:  Coin is not involved here and any amount of bills constitute legal tender. Therefore, he should have taken the money.

Diff: 1      Type: ES      Page Ref: 277

Topic:  Ch. 9 – Discharge by Performance

Skill:  Applied

Objective:  Chapter 9: 1. Illustrate how a contract is discharged by performance.

Bloom’s Taxonomy:  Knowledge

 

121) What does it mean when a party has “tendered performance”?

Answer:  A tender of performance is an unsuccessful (because it is rejected or prevented by the other party) attempt by one of the parties to a contract to perform its obligations under the contract.

Diff: 2      Type: ES      Page Ref: 277

Topic:  Ch. 9 – Discharge by Performance

Skill:  Recall

Objective:  Chapter 9: 1. Illustrate how a contract is discharged by performance.

Bloom’s Taxonomy:  Knowledge

 

122) When a contract has been performed in all but a minor aspect of it, this is known as ________.

Answer:  substantial performance

Diff: 1      Type: ES      Page Ref: 277

Topic:  Ch. 9 – Discharge by Performance

Skill:  Recall

Objective:  Chapter 9: 1. Illustrate how a contract is discharged by performance.

Bloom’s Taxonomy:  Knowledge

 

123) What is the usual impact of an exemption clause in the event of fundamental breach?

Answer:  It is usually ineffective in the case of a fundamental breach, unless it is absolutely clear that the parties understood the exemption clause to cover such a basic failure to perform.

Diff: 2      Type: ES      Page Ref: 280

Topic:  Ch. 9 – Discharge by Breach

Skill:  Recall

Objective:  Chapter 9: 2. Describe when a breach of contract will be sufficient to relieve the opposite party from its obligations.

Bloom’s Taxonomy:  Knowledge

 

 

124) When faced with an anticipatory breach, what is the risk if the innocent party insists on performance?

Answer:  That party is bound by the choice. If that party cannot perform, then he or she would also be in breach.

Diff: 2      Type: ES      Page Ref: 280

Topic:  Ch. 9 – Discharge by Breach

Skill:  Recall

Objective:  Chapter 9: 2. Describe when a breach of contract will be sufficient to relieve the opposite party from its obligations.

Bloom’s Taxonomy:  Knowledge

125) What is the result of a breach of a minor contractual term?

Answer:  The other party must perform but can seek damages.

Diff: 1      Type: ES      Page Ref: 280

Topic:  Ch. 9 – Discharge by Breach

Skill:  Recall

Objective:  Chapter 9: 2. Describe when a breach of contract will be sufficient to relieve the opposite party from its obligations.

Bloom’s Taxonomy:  Knowledge

 

126) What is the result of a repudiation?

Answer:  If the victim chooses to perform in light of a major refusal, the contract is binding on both. If the victim chooses to discharge, the contract ends but the victim can seek damages.

Diff: 2      Type: ES      Page Ref: 280

Topic:  Ch. 9 – Discharge by Breach

Skill:  Recall

Objective:  Chapter 9: 2. Describe when a breach of contract will be sufficient to relieve the opposite party from its obligations.

Bloom’s Taxonomy:  Knowledge

 

127) What is the result of a breach of a significant term of a contract resulting in a major failure to perform?

Answer:  The other party can be discharged.

Diff: 2      Type: ES      Page Ref: 280

Topic:  Ch. 9 – Discharge by Breach

Skill:  Recall

Objective:  Chapter 9: 2. Describe when a breach of contract will be sufficient to relieve the opposite party from its obligations.

Bloom’s Taxonomy:  Knowledge

 

 

128) What is the result of a breach of a significant term of a contract where there is a minor failure to perform?

Answer:  The other party must perform but can seek damages.

Diff: 2      Type: ES      Page Ref: 280

Topic:  Ch. 9 – Discharge by Breach

Skill:  Recall

Objective:  Chapter 9: 2. Describe when a breach of contract will be sufficient to relieve the opposite party from its obligations.

Bloom’s Taxonomy:  Knowledge

 

129) 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 one is entitled to treat the contract as discharged, not perform his 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 his side of the agreement, although he can still bring an action for compensation for the imperfect performance.

Diff: 1      Type: ES      Page Ref: 280

Topic:  Ch. 9 – Discharge by Breach

Skill:  Recall

Objective:  Chapter 9: 2. Describe when a breach of contract will be sufficient to relieve the opposite party from its obligations.

Bloom’s Taxonomy:  Knowledge

130) “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 their contractual obligations as ended. They are, however, entitled to seek compensation for the imperfect performance.

Diff: 2      Type: ES      Page Ref: 280

Topic:  Ch. 9 – Discharge by Breach

Skill:  Recall

Objective:  Chapter 9: 2. Describe when a breach of contract will be sufficient to relieve the opposite party from its obligations.

Bloom’s Taxonomy:  Knowledge

 

 

131) Explain what restrictions are put on the effect of exemption clauses (sometimes referred to as exclusion or exculpatory clauses) in a contract.

Answer:  Such clauses are strictly interpreted against the position of the person who is favoured by them. For the other party of the contract to be bound by them, they must be brought to his attention and clearly included as part of the contractual agreement.

Diff: 3      Type: ES      Page Ref: 280

Topic:  Ch. 9 – Discharge by Breach

Skill:  Recall

Objective:  Chapter 9: 2. Describe when a breach of contract will be sufficient to relieve the opposite party from its obligations.

Bloom’s Taxonomy:  Knowledge

 

132) Explain how a fundamental breach affects the application of an exemption clause.

Answer:  A fundamental breach is a breach that’s so basic as to override the operation of an exemption clause. The courts will look at the wording of the exemption clause to see if it was clearly within the intention of the parties to have it cover such a fundamental breach of contractual obligation. Although it may technically be possible to word the exemption clause broadly enough to cover it, the courts will usually find that the parties have not.

Diff: 3      Type: ES      Page Ref: 280

Topic:  Ch. 9 – Discharge by Breach

Skill:  Recall

Objective:  Chapter 9: 2. Describe when a breach of contract will be sufficient to relieve the opposite party from its obligations.

Bloom’s Taxonomy:  Knowledge

 

133) Explain what is meant by an anticipatory breach.

Answer:  This is where one of the parties, some time before their performance is due, states clearly to the other that they will not go through with the contract as agreed to.

Diff: 2      Type: ES      Page Ref: 280

Topic:  Ch. 9 – Discharge by Breach

Skill:  Recall

Objective:  Chapter 9: 2. Describe when a breach of contract will be sufficient to relieve the opposite party from its obligations.

Bloom’s Taxonomy:  Knowledge

134) What is the legal position of the victim of an anticipatory breach?

Answer:  The victim of such a breach has a choice. He can either insist that performance take place and wait until the date of performance is due to find out if the contract is breached or not, or he can treat the contract as breached at the time that the anticipatory breach was made and seek a remedy immediately, making other arrangements for the performance of the job he has to do.

Diff: 2      Type: ES      Page Ref: 280

Topic:  Ch. 9 – Discharge by Breach

Skill:  Recall

Objective:  Chapter 9: 2. Describe when a breach of contract will be sufficient to relieve the opposite party from its obligations.

Bloom’s Taxonomy:  Knowledge

 

135) Joe was a student at the local college and agreed to paint Harry’s house during the Easter Break. A month before that time, he informed Harry that he had an opportunity to go to Hawaii and that he wouldn’t be painting the house. What can Harry do in these circumstances?

Answer:  Either he can demand performance, wait for the performance date, and then sue for breach of contract if Joe fails to paint the house, or he can treat the contract as ended by breach, make other arrangements to have the house painted, and sue Joe for what he has lost.

Diff: 3      Type: ES      Page Ref: 280

Topic:  Ch. 9 – Discharge by Breach

Skill:  Applied

Objective:  Chapter 9: 2. Describe when a breach of contract will be sufficient to relieve the opposite party from its obligations.

Bloom’s Taxonomy:  Knowledge

 

136) Distinguish between a condition precedent and a condition subsequent.

Answer:  A condition subsequent involves the term of the contract that requires some event to take place that will bring the ongoing contractual relationship to an end (i.e., “until the project is ended”). A condition precedent involves the term of the contract that requires some event or condition to be met before the contractual obligation between the parties arises. This is the famous “subject to” clause.

Diff: 3      Type: ES      Page Ref: 280

Topic:  Ch. 9 – Discharge by Breach

Skill:  Recall

Objective:  Chapter 9: 2. Describe when a breach of contract will be sufficient to relieve the opposite party from its obligations.

Bloom’s Taxonomy:  Knowledge

 

137) If a victim of an anticipatory breach continues to insist on performance, what danger does he face?

Answer:  That some outside, unforeseen event will make it impossible to perform the contract, and the contract will be frustrated, or else, for some reason, circumstances will change and he won’t want go through with his side of the deal, and he will be in breach of the contract.

Diff: 2      Type: ES      Page Ref: 280

Topic:  Ch. 9 – Discharge by Breach

Skill:  Recall

Objective:  Chapter 9: 2. Describe when a breach of contract will be sufficient to relieve the opposite party from its obligations.

Bloom’s Taxonomy:  Knowledge

 

138) What is the three-part test for determining if novation has occurred?

Answer:  1) The new debtor must assume the complete liability. 2) The creditor must accept the new debtor as principal and not merely guarantor. 3) The creditor must accept the new contract in full satisfaction and substitution for the old contract.

Diff: 2      Type: ES      Page Ref: 288

Topic:  Ch. 9 – Discharge by Agreement

Skill:  Recall

Objective:  Chapter 9: 3. Explain how a contract may be discharged by agreement.

Bloom’s Taxonomy:  Knowledge

 

139) The creation of a new contract through the substitution of a third party for one of the original parties to a contract, with consent by all, is known as ________.

Answer:  novation

Diff: 1      Type: ES      Page Ref: 288

Topic:  Ch. 9 – Discharge by Agreement

Skill:  Recall

Objective:  Chapter 9: 3. Explain how a contract may be discharged by agreement.

Bloom’s Taxonomy:  Knowledge

 

140) An agreement to end a contract, with extra consideration to be supplied by the party benefiting from the discharge, is known as ________.

Answer:  accord and satisfaction

Diff: 1      Type: ES      Page Ref: 288

Topic:  Ch. 9 – Discharge by Agreement

Skill:  Recall

Objective:  Chapter 9: 3. Explain how a contract may be discharged by agreement.

Bloom’s Taxonomy:  Knowledge

 

141) An agreement by both sides to terminate the contract or to disregard a term of the contract is known as ________.

Answer:  bilateral discharge

Diff: 1      Type: ES      Page Ref: 288

Topic:  Ch. 9 – Discharge by Agreement

Skill:  Recall

Objective:  Chapter 9: 3. Explain how a contract may be discharged by agreement.

Bloom’s Taxonomy:  Knowledge

 

142) What is a force majeure clause?

Answer:  A force majeure clause is a contract term anticipating some catastrophic event usually exempting liability when such an event interferes with performance of the contract.

Diff: 1      Type: ES      Page Ref: 288

Topic:  Ch. 9 – Discharge by Agreement

Skill:  Recall

Objective:  Chapter 9: 3. Explain how a contract may be discharged by agreement.

Bloom’s Taxonomy:  Knowledge

 

143) Where a contract is discharged or modified by a unilateral discharge, explain the problem that arises and its solution.

Answer:  A unilateral discharge involves one person allowing the other out of his contractual obligation without receiving anything in return. The problem is with consideration, and the solution is to provide some added consideration in the form of accord and satisfaction to satisfy the requirement that both sides receive some kind of consideration for the discharge.

Diff: 2      Type: ES      Page Ref: 288

Topic:  Ch. 9 – Discharge by Agreement

Skill:  Recall

Objective:  Chapter 9: 3. Explain how a contract may be discharged by agreement.

Bloom’s Taxonomy:  Knowledge

 

144) Joe owed Sam $5000. After the money was due, he approached Sam and told him that he couldn’t pay the money, but if Sam was willing to take $3000 that day in full satisfaction of the debt, he could come up with that money. Sam agreed to take the money and, in fact, took the money. Once he had it in his possession, he then turned around and sued Joe for the other $2000. Explain the likely outcome.

Answer:  The outcome depends on the jurisdiction. At common law, the reduction of debt would be a gratuitous promise and not binding (for want of consideration). However, many jurisdictions have passed legislation providing that when a creditor has agreed to take less in full satisfaction of a debt (and has actually received the money) the creditor cannot later sue for the difference.

Diff: 3      Type: ES      Page Ref: 288

Topic:  Ch. 9 – Discharge by Agreement

Skill:  Applied

Objective:  Chapter 9: 3. Explain how a contract may be discharged by agreement.

Bloom’s Taxonomy:  Knowledge

 

145) Indicate three conditions under which a contract may come to an end on the basis of frustration.

Answer:

  1. Where the contract is rendered impossible by performance because of some outside, unforeseen event out of control of either party.
  2. Where the event that forms the basis of the contract fails to take place.
  3. Where some act of government affects the performance of the contract.

Diff: 3      Type: ES      Page Ref: 292

Topic:  Ch. 9 – Discharge by Frustration

Skill:  Recall

Objective:  Chapter 9: 4. Outline the consequences flowing from frustration of contract.

Bloom’s Taxonomy:  Knowledge

 

 

146) “For a contract to be frustrated, performance of the contractual obligation must be impossible.” Discuss the accuracy of that statement.

Answer:  This statement is inaccurate. It still may be possible to perform a contractual obligation, and the contract may be frustrated where the event that forms the basis of the contract fails to take place.

Diff: 2      Type: ES      Page Ref: 292

Topic:  Ch. 9 – Discharge by Frustration

Skill:  Recall

Objective:  Chapter 9: 4. Outline the consequences flowing from frustration of contract.

Bloom’s Taxonomy:  Knowledge

147) Joe agreed to sell Sam his model-T Ford automobile. The day before delivery, he took it out for one last drive. Through his own fault, he got into a collision in which the car was destroyed. Because it was impossible to go through with the terms of the contract, he claimed that it was frustrated. Discuss the legal position of the parties.

Answer:  This is not frustration. This is self-induced frustration and therefore simple breach of contract.

Diff: 2      Type: ES      Page Ref: 292

Topic:  Ch. 9 – Discharge by Frustration

Skill:  Applied

Objective:  Chapter 9: 4. Outline the consequences flowing from frustration of contract.

Bloom’s Taxonomy:  Knowledge

 

148) Mable grew a field of corn and agreed to provide 300 ears of corn to Jan’s Produce in the months of August and September. Unfortunately, her crop was destroyed by hail and she was unable to make the delivery. Jan sued for breach of contract. Discuss the likely outcome.

Answer:  Jan would win. Mable should have obtained her corn from some other source. This is not an example of frustration.

Diff: 3      Type: ES      Page Ref: 292

Topic:  Ch. 9 – Discharge by Frustration

Skill:  Applied

Objective:  Chapter 9: 4. Outline the consequences flowing from frustration of contract.

Bloom’s Taxonomy:  Knowledge

 

149) Frustration arising when one of the parties to a contract causes or fails to prevent a frustrating event is referred to as ________.

Answer:  self-induced frustration

Diff: 1      Type: ES      Page Ref: 292

Topic:  Ch. 9 – Discharge by Frustration

Skill:  Recall

Objective:  Chapter 9: 4. Outline the consequences flowing from frustration of contract.

Bloom’s Taxonomy:  Knowledge

 

 

150) Sam agreed to manufacture and supply 25 specially adapted computers for Joe to use for simulated horse racing in his string of hotels throughout the province. Unfortunately, after Sam almost completed the computers, the province passed a law prohibiting the manufacture and sale of this kind of machine. Joe had paid a deposit of $5000, but Sam had incurred $30,000 of expenses in manufacturing these machines. The total purchase price agree upon between these parties was $50,000. Joe sued Sam for the return of his $5000 deposit. Sam, in turn, sued Joe for a contribution towards his loss. Discuss the legal position of the parties.

Answer:  The effect will vary to some extent with nature of the legislation in place in the province. At least the deposit of $5000 will be made available to pay Sam’s costs, but in some provinces, such as British Columbia, Sam will be able to keep the deposit plus seek contribution from Joe for at least some of the expense he has incurred.

Diff: 3      Type: ES      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Applied

Objective:  Chapter 9: 5. Describe how damages for breach of contract are assessed.

Bloom’s Taxonomy:  Knowledge

151) Joe agreed to buy a car from Sam at Sam’s Used Car Lot for $10,000 with a $100 deposit. The next day, before he took delivery, he changed his mind and refused to go through with the deal. Sam kept the deposit and sued Joe for breach of contract. Indicate what kind of remedy he would be entitled to.

Answer:  He’s entitled to keep the $100 deposit, assuming that it’s a true deposit, in that there was a forfeiture clause in the contract. This is an example of liquidated damages, where the parties agree to the amount of damages that are payable in the event of a breach ahead of time.

Diff: 3      Type: ES      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Applied

Objective:  Chapter 9: 5. Describe how damages for breach of contract are assessed.

Bloom’s Taxonomy:  Knowledge

 

152) Distinguish between a down payment and a deposit.

Answer:  A down payment is merely the first payment of many, but a deposit is an example of liquidated damages. If a true deposit is involved, the deposit will be forfeited as the agreed upon amount of damages owed in the event of a breach.

Diff: 2      Type: ES      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Recall

Objective:  Chapter 9: 5. Describe how damages for breach of contract are assessed.

Bloom’s Taxonomy:  Knowledge

 

 

153) When a court determines that a breach of contract has taken place and awards damages, what is the purpose of such an award?

Answer:  The purpose is to provide compensation to the victim for the loss suffered.

Diff: 2      Type: ES      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Recall

Objective:  Chapter 9: 5. Describe how damages for breach of contract are assessed.

Bloom’s Taxonomy:  Knowledge

 

154) “When the court determines that a breach of contract has taken place, they will award monetary compensation in the form of damages to put the person in the position he would have been in had the contract been properly performed.” Discuss the accuracy of this statement.

Answer:  The statement is accurate. When determining what the person has lost, the court will look at the position they would have been in had the contract been properly performed.

Diff: 2      Type: ES      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Recall

Objective:  Chapter 9: 5. Describe how damages for breach of contract are assessed.

Bloom’s Taxonomy:  Knowledge

155) The purpose of damages in the form of monetary compensation under a breach of contract action is to compensate the injured party for the losses suffered. Indicate two limitations on this principle.

Answer:  Limitations on this principle are remoteness and mitigation. Remoteness is where the contracting party is responsible only for those damages that could be reasonably foreseeable at the time they entered into the contract. Mitigation is where the victim of the breach has an obligation to keep his damages as low as reasonably possible.

Diff: 3      Type: ES      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Recall

Objective:  Chapter 9: 5. Describe how damages for breach of contract are assessed.

Bloom’s Taxonomy:  Knowledge

 

156) Explain what is meant by an accounting as a remedy in contract law.

Answer:  The accounting is a remedy whereby the court orders the breaching party to not only indicate what profits he has made because of his breach, but also to pay over those profits to the victim of the breach of contract.

Diff: 2      Type: ES      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Recall

Objective:  Chapter 9: 5. Describe how damages for breach of contract are assessed.

Bloom’s Taxonomy:  Knowledge

 

 

157) Explain how the principle of remoteness affects the availability of damages in a breach of contract action.

Answer:  The victim of a breach can only recover such damages as were reasonably foreseeable by the breaching party at the time they entered into the contract.

Diff: 2      Type: ES      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Recall

Objective:  Chapter 9: 5. Describe how damages for breach of contract are assessed.

Bloom’s Taxonomy:  Knowledge

 

158) Explain the principle of mitigation in contract law.

Answer:  The victim of a breach of contract has an obligation to take reasonable steps to keep the damages he suffers as low as possible. He will only recover damages that would have taken place had he properly mitigated.

Diff: 2      Type: ES      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Recall

Objective:  Chapter 9: 5. Describe how damages for breach of contract are assessed.

Bloom’s Taxonomy:  Knowledge

 

159) Explain what is meant by quantum meruit.

Answer:  When a person requests a service such as lawyer’s services, doctor’s services, mechanic’s services, plumber’s services, etc., and no price is agreed on or stated before the service is rendered, that person is obligated to pay a reasonable amount for the service rendered.

Diff: 2      Type: ES      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Recall

Objective:  Chapter 9: 6. Differentiate the equitable remedies available for a breach of contract.

Bloom’s Taxonomy:  Knowledge

160) 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 been 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 Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Recall

Objective:  Chapter 9: 6. Differentiate the equitable remedies available for a breach of contract.

Bloom’s Taxonomy:  Knowledge

 

 

161) Indicate three different types of equitable remedies and distinguish among them.

Answer:

  1. Specific performance. Here the court orders the person to perform his contractual obligation.
  2. Injunction. Here the court orders the breaching party to stop acting in a way that is inconsistent with the terms of the contract.
  3. An accounting. Here the court orders the breaching party to account for any profits that have been made through that breach and pay them over to the victim.

Diff: 3      Type: ES      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Recall

Objective:  Chapter 9: 6. Differentiate the equitable remedies available for a breach of contract.

Bloom’s Taxonomy:  Knowledge

 

162) Explain what is meant by specific performance in contract law.

Answer:  This is an order by the courts to the breaching party to a contract to perform the duty or obligation set out in the contract.

Diff: 2      Type: ES      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Recall

Objective:  Chapter 9: 6. Differentiate the equitable remedies available for a breach of contract.

Bloom’s Taxonomy:  Knowledge

 

163) Explain the injunction as it is available in contract law.

Answer:  The breaching party is ordered by the court not to do something that is inconsistent with the terms set out in the contract.

Diff: 1      Type: ES      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Recall

Objective:  Chapter 9: 6. Differentiate the equitable remedies available for a breach of contract.

Bloom’s Taxonomy:  Knowledge

 

164) Explain how a contract can be discharged by agreement.

Answer:  Students should begin by explaining that discharge by agreement refers to one of a variety of different ways in which a contract can be brought to an end. Discharge by agreement simply refers to the situation when parties agree that a contract will be brought to an end. This requires the presence of all ingredients necessary to form a contract, including consensus and consideration. A bilateral discharge occurs when both parties have something left to do under the original contract and the agreement to discharge relieves them of their respective obligations. The problem arises when such a discharge is one-sided because there must be consideration or the agreement to discharge will be invalid. This problem can be avoided by putting the agreement under seal. (Promissory estoppel arises in the context of such one-sided discharges.) Good students will go on to discuss the concept of accord and satisfaction, in which extra consideration is supplied by a party who is benefiting from the discharge. The critical element, however, is that when a contract is being discharged, there must be complete agreement among all the parties before the new agreement (to end the original contract) will become binding.

Diff: 2      Type: ES      Page Ref: 288

Topic:  Ch. 9 – Discharge by Agreement

Skill:  Applied

Objective:  Chapter 9: 3. Explain how a contract may be discharged by agreement.

Bloom’s Taxonomy:  Knowledge

 

165) Discuss how and why promissory estoppel might come into play when a contract is being discharged or changed by agreement.

Answer:  Promissory estoppel is one of the most difficult principles to explain and for students to grasp. Students must show that they understand that promissory estoppel only applies where there is a lack of consideration to support the contract. Where one party has made a one-sided promise that would normally be unenforceable against them, this lack of consideration may still have an effect on the relationship because of promissory estoppel. Where one party has promised to do something in the future and the other party relies on it to their detriment, the promising party can be held to that promise in a very limited way. The promise can be used only as a defence, not as a cause of action (as a shield but not as a sword). In almost all situations you can think of, the victim of the breach of promise would be suing to enforce that promise. This they cannot do because of the lack of consideration, and promissory estoppel will not help. It is only used where the victim of the breach of promise is for some reason defending himself against an action by the person who made the promise. The only situation in which this happens is where there is already some legal relationship between the parties (usually a pre-existing contract) that is being modified by the promise that has been breached. The promise maker then would be ignoring his promise and trying to enforce the original legal obligations that were modified by the promise. Here, the victim of the breached promise raises that promise as a defence, and it is in these circumstances that promissory estoppel would be effective.

Diff: 3      Type: ES      Page Ref: 288

Topic:  Ch. 9 – Discharge by Agreement

Skill:  Applied

Objective:  Chapter 9: 3. Explain how a contract may be discharged by agreement.

Bloom’s Taxonomy:  Knowledge

 

166) 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 where 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 as 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 has to be paid. This was found to be unworkable in some situations, and with the Fibrosa case, in which 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 where one party received a benefit, they 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 might vary from jurisdiction to jurisdiction.

Diff: 3      Type: ES      Page Ref: 292

Topic:  Ch. 9 – Discharge by Frustration

Skill:  Applied

Objective:  Chapter 9: 4. Outline the consequences flowing from frustration of contract.

Bloom’s Taxonomy:  Knowledge

 

167) Discuss exculpatory (exemption) clauses and how the courts treat them.

Answer:  Here students should explain what an exculpatory clause is, how they favour one of the parties, and the court’s reluctance to enforce them, especially in consumer transactions. They should explain how the court takes a very narrow interpretation of such clauses, interpreting them strictly against the party that is benefited by them. The discussion should include an examination of the concept of fundamental breach. At first the courts took the approach that there were some basic obligations in a contract that you could not contract out of. But later, the Supreme Court of Canada changed this, saying that the whole idea of freedom of contract is that the parties can agree to whatever they want. But it must be very clear that when such an exculpatory clause referring to some basic obligation is used, the parties clearly intended the exemption clause to cover even that basic event.

Diff: 2      Type: ES      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Applied

Objective:  Chapter 9: 5. Describe how damages for breach of contract are assessed.

Bloom’s Taxonomy:  Knowledge

 

168) Explain how the remedy of damages is applied in contract law and any limitation on the availability of damages.

Answer:  The idea here is that students should understand that damages are monetary payment designed to compensate the victim of the breach for the losses suffered. Punitive damages are not generally available for breach of contract. Students should also point out that the objective of awarding damages in contract law is to put the victims in the position they would have been in had the contract been properly performed (looking forward), as opposed to the position they would have been in had the contract never been entered into (looking backward, as is done in tort law). It is also appropriate for students to indicate the difference between general damages and special damages. Most important here is the discussion of the limitation on the availability of damages in contract law. First, if a specified amount of damages has been agreed to in the contract, the victim is limited to that amount (liquidated damages or a deposit). Second, the victim is only entitled to those damages that flow directly from the breach and were reasonably foreseeable at the time they entered the contract. Finally, students should show an understanding of the obligation of the victim of the breach to mitigate those damages. Students should explain these principles in their essay.

Diff: 2      Type: ES      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Applied

Objective:  Chapter 9: 5. Describe how damages for breach of contract are assessed.

Bloom’s Taxonomy:  Knowledge

 

169) Explain the limitations on the ability to request and receive equitable remedies in breach of contract cases.

Answer:  Students should begin by noting that equitable remedies are discretionary and will be granted only when the judge thinks it fair and right to do so. Accordingly, a person seeking equity must come to the court with “clean hands.” This means that a remedy will be denied when the person seeking the equitable remedy is also guilty of some wrongdoing. In the event that a plaintiff has engaged in some misconduct, the equitable remedies of specific performance, injunction, accounting, and quantum meruit may be unavailable. In such a case, the plaintiff will be limited to ordinary remedies, such as damages, for the breach.

In addition, students should also identify that the courts can refuse to grant an equitable remedy when there has been an undue delay on the part of the party seeking equity. This delay is known as laches. Subject to any limitation period, the plaintiff can still seek common law remedies (such as damages). Limitation periods also limit the availability of equitable remedies.

Diff: 1      Type: ES      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Applied

Objective:  Chapter 9: 6. Differentiate the equitable remedies available for a breach of contract.

Bloom’s Taxonomy:  Knowledge

 

170) Discuss the equitable remedies that were developed in contract law and why they were necessary.

Answer:  Students must show an understanding of the law of equity from Chapter 1, as well as examine the various equitable remedies discussed in this chapter. Of course, there are many situations where monetary compensation will not provide an adequate remedy. Equitable remedies were developed to overcome these problems that arise where damages are not adequate. After explaining this, students should examine the various equitable remedies that are applicable to contract law and explain what they are and what they accomplish. Some examples are specific performance, injunction, accounting, and quantum meruit.

Diff: 1      Type: ES      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Applied

Objective:  Chapter 9: 6. Differentiate the equitable remedies available for a breach of contract.

Bloom’s Taxonomy:  Knowledge

 

171) Under what circumstances will a court order a mandatory injunction? Illustrate with a real-world example.

Answer:  In rare circumstances, the courts may issue a mandatory injunction when a person does something to violate a contractual term and thereby creates an ongoing problem. Striking workers involved in an illegal work stoppage are often ordered to stop breaching their contract and return to work. Another example might involve a shopping centre that erects signs exceeding the permitted height limit set out in a restrictive covenant or a municipal bylaw. The courts may order the shopping centre to remove the signs or reduce them to the permitted height. Such mandatory injunctions are not common.

Diff: 3      Type: ES      Page Ref: 296

Topic:  Ch. 9 – Remedies for Breach of Contract

Skill:  Applied

Objective:  Chapter 9: 6. Differentiate the equitable remedies available for a breach of contract.

Bloom’s Taxonomy:  Knowledge

Business Law in Canada, 11e (Yates)

Chapter 15   Priority of Creditors

 

1) Which of the following is false with regard to property?

  1. A) Both real and personal property can be given as security to a creditor that he will be repaid.
  2. B) Real property consists of land but does not include the buildings on that land.
  3. C) Personal property includes intangible rights.
  4. D) Personal property includes chattels.
  5. E) Real property includes fixtures.

Answer:  B

Diff: 1      Type: MC      Page Ref: 501

Topic:  Ch. 15 – Personal Property

Skill:  Recall

Objective:  Chapter 15: 1. Outline the process of securing debt by using personal property.

Bloom’s Taxonomy:  Knowledge

 

2) If you want to buy a car from a private party (other than a dealer), which of the following is false?

  1. A) If you request a search and the Personal Property Registry states that the car is free and clear of liens and encumbrances, then title is clear.
  2. B) If the seller tells you that the car is free and clear, and two months later a holder of a properly perfected and attached security interest claims a right to the car, you could lose the car.
  3. C) Even if both the seller and the Personal Property Registry indicate to you that the car’s title is clear, you could still lose it to a third party.
  4. D) If the seller indicates to you that the title is clear, but after the sale the car is seized by someone with the legal right to do so, you could still sue the seller.
  5. E) If the seller makes no representations whatsoever about the car and the car is seized by a creditor, you can still sue the seller because he had an obligation to deliver good title.

Answer:  C

Diff: 3      Type: MC      Page Ref: 501

Topic:  Ch. 15 – Personal Property

Skill:  Applied

Objective:  Chapter 15: 1. Outline the process of securing debt by using personal property.

Bloom’s Taxonomy:  Knowledge

 

3) When the transaction is registered, the creditor’s rights include all of the following except

  1. A) contractual remedies upon default.
  2. B) the right to seize the security.
  3. C) the right to resell the security.
  4. D) the right to sue the debtor rather than seize security.
  5. E) the right to order the debtor arrested or detained.

Answer:  E

Diff: 1      Type: MC      Page Ref: 501

Topic:  Ch. 15 – Personal Property

Skill:  Recall

Objective:  Chapter 15: 1. Outline the process of securing debt by using personal property.

Bloom’s Taxonomy:  Knowledge

4) Hank sold three properties for Mr. W and had been paid his commission for the first, but not for the last two. Hank had done everything according to the contract and according to the relevant statutes, but Mr. W wouldn’t pay. Hank knows that Mr. W has a bank account with the Bank of Winnipeg and has money owing to him from a Mr. Gregory. With regard to the collecting of the debt owed, which of the following is false?

  1. A) Hank could sue Mr. W for breach of contract.
  2. B) After obtaining judgment, Hank could force the bank to pay into court an amount of money from Mr. W’s account to satisfy the debt.
  3. C) Hank’s claim for commission is unenforceable because he failed to secure the debt by retaining title until the amounts were paid.
  4. D) If Hank got judgment against Mr. W, he could get an order commanding seizure of enough of Mr. W’s goods to satisfy the judgment debt.
  5. E) If Mr. W goes into bankruptcy, Hank may not get paid.

Answer:  C

Diff: 3      Type: MC      Page Ref: 501

Topic:  Ch. 15 – Personal Property

Skill:  Applied

Objective:  Chapter 15: 1. Outline the process of securing debt by using personal property.

Bloom’s Taxonomy:  Knowledge

 

5) After a creditor has taken possession of collateral, the debtor’s right to reclaim it on payment of any money owing is known as a

  1. A) right to salvage.
  2. B) right of settlement.
  3. C) right to redeem.
  4. D) constructive trust.
  5. E) collateral contract.

Answer:  C

Diff: 1      Type: MC      Page Ref: 501

Topic:  Ch. 15 – Personal Property

Skill:  Recall

Objective:  Chapter 15: 1. Outline the process of securing debt by using personal property.

Bloom’s Taxonomy:  Knowledge

 

6) Attachment takes place when

  1. A) a contract is executed.
  2. B) notice of a security arrangement is given.
  3. C) after-acquired assets are secured.
  4. D) a debtor receives some value under the contract.
  5. E) a purchase money security interest arises.

Answer:  D

Diff: 1      Type: MC      Page Ref: 501

Topic:  Ch. 15 – Personal Property

Skill:  Recall

Objective:  Chapter 15: 1. Outline the process of securing debt by using personal property.

Bloom’s Taxonomy:  Knowledge

7) A company named Printers World Ltd. bought a $9000 plotter secured by a Security Agreement and, because of business reverses, is unable to make the payments. Which of the following is accurate with respect to the legal position of the parties?

  1. A) The seller could seize the goods only if it obtained a court order.
  2. B) The seller could seize the goods without a court order only if it had properly registered the conditional sale contract.
  3. C) The seller could seize the goods but, before resale can take place, the debtor must be given notice and an opportunity to redeem.
  4. D) The seller could only seize the goods and could not instead opt to sue the company.
  5. E) The seller could seize and sell the same day because it had already waited three months after default before taking any action.

Answer:  C

Diff: 2      Type: MC      Page Ref: 501

Topic:  Ch. 15 – Personal Property

Skill:  Applied

Objective:  Chapter 15: 1. Outline the process of securing debt by using personal property.

Bloom’s Taxonomy:  Knowledge

 

8) Consider the following statements about the use of personal property as security for a creditor in a creditor-debtor transaction. Indicate the false statement.

  1. A) If the transaction involves the use of consumer goods as collateral, upon default of payment by the debtor, the creditor can seize the goods and sell them, but also always retains the right to sue the debtor on his personal covenant to pay for any deficiency.
  2. B) Regardless of the type of personal property involved, whether tangible or intangible, as long as it is being used as security then the transaction is governed by the Personal Property Security Act, and therefore an unpaid creditor may be able to repossess them.
  3. C) Real estate professionals need to be aware of the Personal Property Security Act because items that constitute fixtures under real property law may also constitute chattel security, and thus an unpaid creditor may be able to repossess them.
  4. D) Before a creditor who has been promised an interest in personal property as security can claim priority rights, two processes must have taken place: the security interest must have attached to the collateral item, and the security must have been perfected.
  5. E) If the required procedures have taken place, a potential buyer from an unscrupulous debtor who has already given personal property as security will be protected; i.e., the creditor will either have registered his interest in the Personal Property Registry or will have actual possession of the collateral.

Answer:  A

Diff: 2      Type: MC      Page Ref: 501

Topic:  Ch. 15 – Personal Property

Skill:  Recall

Objective:  Chapter 15: 1. Outline the process of securing debt by using personal property.

Bloom’s Taxonomy:  Knowledge

 

9) Identify which of the following statements is true about secured transactions in provinces having a personal property security act.

  1. A) This kind of transaction, which formerly was legal, is now prohibited by law in all provinces.
  2. B) Various kinds of secured transactions, such as conditional sales, chattel mortgages, etc., are regulated by their own distinct statutes.
  3. C) An assignment of an account receivable does not qualify as a security arrangement because no tangible property is involved.
  4. D) All kinds of security arrangements involving personal property as collateral now come under one statute.
  5. E) Only tangible personal property can be used as security.

Answer:  D

Diff: 2      Type: MC      Page Ref: 501

Topic:  Ch. 15 – Personal Property

Skill:  Recall

Objective:  Chapter 15: 1. Outline the process of securing debt by using personal property.

Bloom’s Taxonomy:  Knowledge

 

10) As the fishing season slowed down in the fall, Bob decided that it 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 $5,000 from the bank. He also signed a Security Agreement 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 over $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?

  1. A) Because Bob transferred the boat and equipment to Claude, that was an assignment of his obligations and he no longer owed the debt.
  2. B) Claude is right, and the bank’s only remedy is to sue Bob.
  3. C) If Claude is unwilling to pay off the $3000, the bank has the right to remove the equipment from the boat.
  4. D) If the bank does seize the equipment and sells it for $2000, the bank can still sue Claude for the $5000.
  5. 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:  C

Diff: 3      Type: MC      Page Ref: 501

Topic:  Ch. 15 – Personal Property

Skill:  Applied

Objective:  Chapter 15: 1. Outline the process of securing debt by using personal property.

Bloom’s Taxonomy:  Knowledge

 

11) Identify which of the following statements best describes the legal position of a conditional seller.

  1. A) The conditional seller must comply with the provisions of the Personal Property Security Act to protect his interest.
  2. B) He is given first priority over all of the other creditors with respect to all of the conditional buyer’s assets.
  3. C) The conditional seller is in a better legal position than if instead he had been the chattel mortgagee of the same assets.
  4. D) The conditional seller loses all legal rights against the conditional buyer if he fails to register.
  5. E) The conditional seller has no legal rights because such contracts are void.

Answer:  A

Diff: 2      Type: MC      Page Ref: 501

Topic:  Ch. 15 – Personal Property

Skill:  Recall

Objective:  Chapter 15: 1. Outline the process of securing debt by using personal property.

Bloom’s Taxonomy:  Knowledge

 

12) Which one of the following statements about the Personal Property Security Act is true?

  1. A) This legislation applies only to all present transactions where personal property is given as security interest to enforce an obligation.
  2. B) 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.
  3. C) In a situation where a debtor fraudulently attempts to transfer property that he has given as security, the Act is designed to protect both the debtor and the secured creditor.
  4. D) If a secured creditor fails to register his security interest in the Personal Property Registry, he loses his rights against the debtor.
  5. E) If someone suspects that an item of personal property has been given as security by a particular person, he can sue on the breach of a condition.

Answer:  B

Diff: 3      Type: MC      Page Ref: 501

Topic:  Ch. 15 – Personal Property

Skill:  Recall

Objective:  Chapter 15: 1. Outline the process of securing debt by using personal property.

Bloom’s Taxonomy:  Knowledge

 

13) Amy Carr looked at a 2016 Ford being sold by a private party who told Carr that the car was free and clear of all encumbrances. Carr had the Ford inspected by Automobile Association, which reported it to be in good condition. Carr bought the Ford for $8000. Two months later, the car was seized by a bank that had properly perfected and attached its security interest. On these facts, which of the following is true?

  1. A) Carr would be able to keep the Ford because the seller had represented that the Ford was free and clear of encumbrances.
  2. B) Carr would be able to keep the Ford because she was an innocent purchaser without notice of any lien or charge.
  3. C) The bank would get the Ford because it had title to it as security, and it could claim its right to title whether it perfected and attached the security interest or not.
  4. D) The bank would get the Ford because it properly perfected and attached its security interest.
  5. E) Carr will lose the car and has no recourse against anyone.

Answer:  D

Diff: 1      Type: MC      Page Ref: 501

Topic:  Ch. 15 – Personal Property

Skill:  Applied

Objective:  Chapter 15: 1. Outline the process of securing debt by using personal property.

Bloom’s Taxonomy:  Knowledge

 

14) With regard to guarantees and indemnities, which of the following is false?

  1. A) A guarantor can use any defence against the creditor that the debtor could use.
  2. B) A legally binding promise to be primarily responsible for someone else’s obligation is an indemnity.
  3. C) A guarantee cannot be enforced in court unless it satisfies the writing requirements set out in statute.
  4. D) Subrogation can result in a guarantor’s being able to sue successfully the very debtor whose obligation he guaranteed.
  5. E) A legally enforceable guarantee must satisfy all the elements required to create a binding contract except consideration.

Answer:  E

Diff: 2      Type: MC      Page Ref: 508

Topic:  Ch. 15 – Guarantees

Skill:  Recall

Objective:  Chapter 15: 2. Outline the process of securing debt by using guarantees.

Bloom’s Taxonomy:  Knowledge

 

15) Which of the following statements regarding the securing of debt is true?

  1. A) The term guarantee, otherwise known as an indemnity, refers to a primary debt obligation.
  2. B) To avoid problems related to consideration, lending institutions often require that guarantees be placed under seal.
  3. C) In every province, there is now a requirement that a guarantor appear before a notary public.
  4. D) Because of the principle of caveat emptor, a creditor has no obligation to protect the interests of a guarantor.
  5. E) As guarantees are mere formalities, there is little point in getting legal advice prior to executing one.

Answer:  B

Diff: 3      Type: MC      Page Ref: 508

Topic:  Ch. 15 – Guarantees

Skill:  Recall

Objective:  Chapter 15: 2. Outline the process of securing debt by using guarantees.

Bloom’s Taxonomy:  Knowledge

 

16) A continuing guarantee

  1. A) allows a creditor to advance further funds without affecting the obligation of the guarantor to pay in the event of default.
  2. B) is a primary obligation of a third party to pay a debt along with a debtor.
  3. C) is a written commitment not to pursue a legal claim against another.
  4. D) is an equitable principle assuring that when security is repossessed, there will be a period of time during which the debtor can still make payment.
  5. E) allows a breaching party to pay an amount specified in a contract, rather than facing a lawsuit for damages.

Answer:  A

Diff: 1      Type: MC      Page Ref: 508

Topic:  Ch. 15 – Guarantees

Skill:  Recall

Objective:  Chapter 15: 2. Outline the process of securing debt by using guarantees.

Bloom’s Taxonomy:  Knowledge

 

 

17) 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?

  1. A) Elizabeth is bound by the changes to the loan because guarantees are, by their nature, continuing.
  2. B) Guarantees are a mere formality; only Tomasz has obligations to the Bank.
  3. C) The guarantees are likely to be invalid and unenforceable against Elizabeth.
  4. D) A guarantee is executed under seal, therefore it will be presumed valid regardless of defect.
  5. E) The failure to notify Elizabeth would release both Elizabeth and Tomasz from their obligations.

Answer:  C

Diff: 3      Type: MC      Page Ref: 508

Topic:  Ch. 15 – Guarantees

Skill:  Applied

Objective:  Chapter 15: 2. Outline the process of securing debt by using guarantees.

Bloom’s Taxonomy:  Knowledge

18) With regard to guarantees, which of the following is false?

  1. A) A guarantor can use any defence against the creditor that the debtor could use.
  2. B) A legally binding promise to be primarily responsible for someone else’s obligation is an indemnity.
  3. C) A verbal guarantee is as enforceable as a written one.
  4. D) Subrogation can result in a guarantor’s being able to sue successfully the very debtor whose obligation he guaranteed.
  5. E) A legally enforceable guarantee must satisfy all the elements required to create a binding contract.

Answer:  C

Diff: 1      Type: MC      Page Ref: 508

Topic:  Ch. 15 – Guarantees

Skill:  Recall

Objective:  Chapter 15: 2. Outline the process of securing debt by using guarantees.

Bloom’s Taxonomy:  Knowledge

 

 

19) Which of the following is the consequence of an unpaid subcontractor failing to file his lien on time? The owner had contracted with the general contractor who in turn had contracted with this subcontractor.

  1. A) He can submit documents giving his reason and he will be allowed to file the lien late.
  2. B) He will lose all of his remedies.
  3. C) He will lose his right to place a charge against the owner’s property, but he can sue the owner directly for the amount owed him, because his work and materials went into the owner’s house.
  4. D) He would lose his right to place a charge against the owner’s property, but he can sue the contractor on the contract.
  5. E) He loses his right to claim against the building but can sue the owner of the property directly.

Answer:  D

Diff: 1      Type: MC      Page Ref: 501

Topic:  Ch. 15 – Builders’ Liens

Skill:  Recall

Objective:  Chapter 15: 3. Outline the process of securing debt by using other forms of security.

Bloom’s Taxonomy:  Knowledge

 

20) Which one of the following is true with respect to the builder’s lien acts?

  1. A) Various provincial statutes give suppliers of work and materials a claim for payment against the land enhanced by their services.
  2. B) If a lien claimant files his lien within the time set, he can be assured that he will collect the full amount of his claim.
  3. C) Compliance with the statutory holdback provisions is required, but gives an owner no protection against potential lien claims.
  4. D) If a lien claimant loses the right to file a lien, he also loses the right to sue for breach of contract.
  5. E) A lien claimant owed money by a general contractor can choose to pursue either the general contractor or the property owner for the full amount of the claim.

Answer:  A

Diff: 2      Type: MC      Page Ref: 512

Topic:  Ch. 15 – Builders’ Liens

Skill:  Applied

Objective:  Chapter 15: 3. Outline the process of securing debt by using other forms of security.

Bloom’s Taxonomy:  Knowledge

 

21) Which one of the following is false with respect to the Builders’ Lien Act?

  1. A) The lien claim is required to be filed at the appropriate registry in order to establish a claim against the property.
  2. B) If a lien claimant files his lien within the time set, he can be assured that he will collect the full amount of his claim.
  3. C) The Builders’ Lien Act gives some protection for those in the building trades, and these include contractors, subcontractors, workers, and materialmen.
  4. D) If a lien claimant loses the right to file a lien, he still has the right to sue the party who failed to pay him for breach of contract.
  5. E) A lien claimant has a limited period of time from filing his lien within which to begin his court action.

Answer:  B

Diff: 3      Type: MC      Page Ref: 512

Topic:  Ch. 15 – Builders’ Liens

Skill:  Applied

Objective:  Chapter 15: 3. Outline the process of securing debt by using other forms of security.

Bloom’s Taxonomy:  Knowledge

 

22) A purchase money security interest

  1. A) will be automatically subordinate to any general security agreement, even if registered within the specified time period.
  2. B) will prevail over a general security agreement covering all of a merchant’s assets if it registered within the specified time period.
  3. C) is also known as a floating charge.
  4. D) is now obsolete in light of the Personal Property Security Act.
  5. E) is prohibited in most provinces.

Answer:  B

Diff: 2      Type: MC      Page Ref: 501

Topic:  Ch. 15 – Personal Property

Skill:  Recall

Objective:  Chapter 15: 3. Outline the process of securing debt by using other forms of security.

Bloom’s Taxonomy:  Knowledge

 

23) They couldn’t remember exactly how it happened, but the Mauri’s ended up a three-computer family with the consequent mess of books and papers in three different rooms. Mr. Mauri hired a general contractor, Mr. Wip, to build a “computer room.” Wip had several qualified workers but still sub-contracted with an electrician and a carpenter. The work went well. Mauri held back 10%, but paid out 90% in good faith. That is, when he paid, there were no complaints or liens filed. It turned out, however, that before anyone had completed his work—and no one expected payment until the job was finished—Wip disappeared with the money. On these facts, which of the following is true?

  1. A) The subcontractors, but not the workers, are entitled to place a lien on Mauri’s property.
  2. B) If the electrician fails to file his lien on time, he can file it late if he uses the right form.
  3. C) If the carpenter properly files a lien in the appropriate office, he can be assured that he will recover the entire amount owed.
  4. D) If all those entitled to file a lien do file and prove in court the amounts owed, Mauri is responsible for the sum total of those claims.
  5. E) The workers and subcontractors have an action against Wip for breach of contract.

Answer:  E

Diff: 3      Type: MC      Page Ref: 512

Topic:  Ch. 15 – Builders’ Liens

Skill:  Applied

Objective:  Chapter 15: 3. Outline the process of securing debt by using other forms of security.

Bloom’s Taxonomy:  Knowledge

 

24) Holtz hires Joe, a builder, to convert his attic into an apartment so that Holtz’s mother can move in. Joe employs two carpenters, an electrician, and a plumber to do the actual work. When making payments to Joe, Holtz holds back the 10% required by statute. After waiting the legislated minimum period, Holtz discovers that several liens have been registered against his property. It turns out that Joe failed to pay the various subcontractors for their work. Which one of the following statements best describes Holtz’s position?

  1. A) Holtz has no liability to any of those involved with the job except Joe, because he has a contract only with Joe.
  2. B) Holtz and Joe are equally liable to the lien claimants because of recent amendments to the builders’ lien legislation.
  3. C) Holtz bears the sole liability to the lien claimants for any debts arising out of their work on his property.
  4. D) Holtz’s mother will be liable to both Holtz and the lien claimants, as she will be taking the benefit of the renovations.
  5. E) If Holtz has complied with the statutory requirements, his obligation will be limited to the amount of the holdback, even if the amount owed under the liens far greater.

Answer:  E

Diff: 3      Type: MC      Page Ref: 512

Topic:  Ch. 15 – Builders’ Liens

Skill:  Applied

Objective:  Chapter 15: 3. Outline the process of securing debt by using other forms of security.

Bloom’s Taxonomy:  Knowledge

 

25) The owner of the house had contracted with a general contractor, Mr. Hadrian, for a greenhouse addition to the house at a cost of $20,000. In accordance with legislation, the owner withheld 10% and waited the legislated period of time within which any liens were to be filed. Which of the following correctly describes the owner’s liability?

  1. A) The owner is liable to any unpaid subcontractors, whether or not a lien was filed, but can use the holdback money to reduce his liability a certain extent.
  2. B) Whether or not there are liens registered, the owner is free to pay out the retained holdback once the legislated time period has expired.
  3. C) Unpaid subcontractors can no longer place liens on the owner’s property because of the doctrine of privity of contract.
  4. D) If the owner checks the registry and there are no liens registered, he is free to pay out the retained holdback.
  5. E) Lien holders would have no claim against the property but would be entitled to the 10% holdback, in addition to being able to sue the owner for the amount not satisfied by the holdback.

Answer:  D

Diff: 2      Type: MC      Page Ref: 512

Topic:  Ch. 15 – Builders’ Liens

Skill:  Applied

Objective:  Chapter 15: 3. Outline the process of securing debt by using other forms of security.

Bloom’s Taxonomy:  Knowledge

 

26) Bret decided to enlarge the fishpond in his backyard. He contracted with a general contractor, Conan. Conan subcontracted with Darson to do the excavation and with Ericson to do the plumbing. Conan’s own workers did the masonry work. Bret made “progress payments” to Conan, since Conan said such payments were necessary to pay his workers and subcontractors. Bret learned that the workers and subcontractors had not been paid and Conan had used the payments to pay debts unrelated to the job on Bret’s pond. Which of the following best describes Bret’s position?

  1. A) Because of the doctrine of privity of contract, Bret will not face any liability whatsoever.
  2. B) If Bret held back the 10% required by statute from his payments to Conan, but then later paid it out despite liens having been filed against his property, Bret would still face no liability as he technically complied with the legislation.
  3. C) Bret will be liable for all unpaid amounts because the work was on his land and for his benefit.
  4. D) If Bret held back the 10% required by statute from his payments to Conan, his obligation would generally be limited to the amount of that holdback.
  5. E) Bret had no obligation to hold back any amount of the payments made to Conan as the hold back requirement doesn’t apply to progress payments.

Answer:  D

Diff: 3      Type: MC      Page Ref: 512

Topic:  Ch. 15 – Builders’ Liens

Skill:  Applied

Objective:  Chapter 15: 3. Outline the process of securing debt by using other forms of security.

Bloom’s Taxonomy:  Knowledge

 

27) Which of the following is primarily liable on an accepted bill of exchange?

  1. A) Drawer of the bill
  2. B) Drawee or acceptor
  3. C) Endorser
  4. D) Payee
  5. E) No one

Answer:  B

Diff: 1      Type: MC      Page Ref: 512

Topic:  Ch. 15 – Negotiable Instruments

Skill:  Recall

Objective:  Chapter 15: 4. Review other laws related to creditors.

Bloom’s Taxonomy:  Knowledge

 

28) With regard to negotiable instruments, which of the following is false?

  1. A) A cheque is a bill of exchange drawn on a bank, payable on demand.
  2. B) A cheque that has been certified cannot be countermanded by the drawer.
  3. C) A negotiable instrument used to advance credit in a consumer transaction must be marked “consumer purchase.”
  4. D) Bills of exchange can be made payable for some future date.
  5. E) A drawer of a cheque can refuse to pay any holder of it if the drawer can prove that the payee obtained the cheque by fraud.

Answer:  E

Diff: 1      Type: MC      Page Ref: 512

Topic:  Ch. 15 – Negotiable Instruments

Skill:  Recall

Objective:  Chapter 15: 4. Review other laws related to creditors.

Bloom’s Taxonomy:  Knowledge

 

29) Jones did work for Smith, who agreed to pay him in advance by cheque. Smith prepared a cheque for Jones. In which of the following situations would Smith have to honour the cheque to Green after it had been transferred to her by Jones?

  1. A) Where Green was Jones’ girlfriend who had been given the note as a gift. Jones had not yet started the job.
  2. B) Where Green knew that Jones had taken the completed cheque from Smith’s desk while Smith was out to lunch.
  3. C) Where Green and Jones had worked together in a scheme to cheat Smith.
  4. D) Where Green operated a finance company and, while not knowing Jones but recognizing Smith’s signature and knowing his good reputation, had given Jones $400 for the $500 cheque.
  5. E) Where Jones had changed the $500 to read $5000 by adding a zero and rubbing out the word hundred and writing thousand over it. The alteration was clearly visible on the cheque.

Answer:  A

Diff: 2      Type: MC      Page Ref: 512

Topic:  Ch. 15 – Negotiable Instruments

Skill:  Applied

Objective:  Chapter 15: 4. Review other laws related to creditors.

Bloom’s Taxonomy:  Knowledge

30) The bulk sales acts in place in some provinces are designed to do which of the following?

  1. A) To set minimum statutory standards for goods sold by description in large, unpackaged quantities
  2. B) To provide relief to commercial purchasers when a ship’s cargo is destroyed
  3. C) To enable commercial debtors to sell their products at a reduced price in order to pay back their creditors in a more timely way
  4. D) To give priority to creditors who are owed money in respect of inventory sold to the debtor within the last 30 days
  5. E) To prevent merchants from selling all or almost all of their business’s assets before a creditor can take action to stop them

Answer:  E

Diff: 3      Type: MC      Page Ref: 513

Topic:  Ch. 15 – Related Laws

Skill:  Applied

Objective:  Chapter 15: 4. Review other laws related to creditors.

Bloom’s Taxonomy:  Knowledge

 

31) Which one of the following actions by a debtor constitutes an act of bankruptcy?

  1. A) A fraudulent conveyance of liabilities to one of the creditors
  2. B) A fraudulent transfer of money or assets
  3. C) Assignment of liabilities to a trustee
  4. D) Having more debts than assets
  5. E) Generally meeting liabilities as they become due

Answer:  B

Diff: 2      Type: MC      Page Ref: 515

Topic:  Ch. 15 – Bankruptcy

Skill:  Recall

Objective:  Chapter 15: 5. Explain the process of bankruptcy.

Bloom’s Taxonomy:  Knowledge

 

32) Which one of the following statements about bankruptcy is true?

  1. A) Bankruptcy law is different in every province of Canada.
  2. B) Bankruptcy refers to a situation in which a debtor who cannot pay debts transfers his assets to the creditors directly.
  3. C) Bankruptcy law forces a debtor to pay all his debts, regardless of his financial position.
  4. D) All creditors of a bankrupt debtor are treated equally and will receive shares of the assets directly in proportion to how much is owed to each of them.
  5. E) A debtor who has been discharged from bankruptcy is free from recovery proceedings from most of his unsecured creditors previous to bankruptcy.

Answer:  E

Diff: 2      Type: MC      Page Ref: 515

Topic:  Ch. 15 – Bankruptcy

Skill:  Recall

Objective:  Chapter 15: 5. Explain the process of bankruptcy.

Bloom’s Taxonomy:  Knowledge

 

33) Which of the following is a goal of the Bankruptcy and Insolvency Act?

  1. A) To determine the process by which debtors convey their assets to a trustee in bankruptcy who distributes them to the creditors
  2. B) To provide an alternative to criminal charges
  3. C) To allow persons with impossible burdens of debt to discharge all of their debts
  4. D) To protect the interests of debtors
  5. E) To help incorporated companies after discharge to carry on without the same burden of debt

Answer:  A

Diff: 2      Type: MC      Page Ref: 515

Topic:  Ch. 15 – Bankruptcy

Skill:  Recall

Objective:  Chapter 15: 5. Explain the process of bankruptcy.

Bloom’s Taxonomy:  Knowledge

 

34) You are in debt to three creditors for $200,000, and the debt is increasing because you are not able to meet your monthly financial obligations. Which of the following is false with regard to your situation?

  1. A) It is illegal for you to transfer assets to a spouse or friend to shield them from your creditors.
  2. B) If you become bankrupt, your assets are conveyed to a trustee in bankruptcy who deals with them for the benefit of your creditors.
  3. C) If you become bankrupt, you are restricted from carrying on certain activities until you are discharged.
  4. D) If your long-time financial well-being would be served by bankruptcy, you must ask your creditors to begin the procedure, since you cannot begin it yourself.
  5. E) The Bankruptcy and Insolvency Act provides a procedure to avoid bankruptcy by making a proposal to your creditors for satisfying their claims.

Answer:  D

Diff: 2      Type: MC      Page Ref: 515

Topic:  Ch. 15 – Bankruptcy

Skill:  Applied

Objective:  Chapter 15: 5. Explain the process of bankruptcy.

Bloom’s Taxonomy:  Knowledge

 

35) Which of the following debts is not subject to a stay of proceedings even after a bankrupt has been discharged?

  1. A) Past maintenance for dependents
  2. B) Family loans
  3. C) Judgment debts
  4. D) Ordinary debt
  5. E) Unsecured loans

Answer:  A

Diff: 1      Type: MC      Page Ref: 515

Topic:  Ch. 15 – Bankruptcy

Skill:  Recall

Objective:  Chapter 15: 5. Explain the process of bankruptcy.

Bloom’s Taxonomy:  Knowledge

36) Greg told Rick that he would be willing to pay a high rate of interest for a two-month loan of $2000. Rick agreed to lend Greg this amount at an annual rate of 20%, repayable March 1, 2016. Greg agreed to these terms. Greg did not pay on March 1. Rick learned that Greg had recently completed some work for Martinson for which Greg was owed $2000. Now that Greg is in default, which of the following is false?

  1. A) Rick could sue Greg for breach of contract.
  2. B) Rick could execute against Greg even if Rick had not obtained judgment against him.
  3. C) Rick could not place Greg into bankruptcy unless Greg had committed an act of bankruptcy.
  4. D) If Rick obtained a judgment against Greg, he could compel him to be examined about his income, property, and debts.
  5. E) Once he has obtained judgment, Rick can garnishee the money owed to Greg by Martinson.

Answer:  B

Diff: 2      Type: MC      Page Ref: 515

Topic:  Ch. 15 – Bankruptcy

Skill:  Applied

Objective:  Chapter 15: 5. Explain the process of bankruptcy.

Bloom’s Taxonomy:  Knowledge

 

37) Which one of the following statements about bankruptcy is false?

  1. A) Bankruptcy law is identical in every province of Canada.
  2. B) Bankruptcy refers to a situation in which a debtor who cannot pay debts transfers his assets to a trustee who acts on behalf of creditors.
  3. C) Bankruptcy law may allow a debtor to escape from having to pay his debts.
  4. D) All creditors of a bankrupt debtor are treated equally and will receive shares of the assets directly in proportion to how much is owed to each of them.
  5. E) A debtor who has been discharged from bankruptcy is released from his previous financial obligations.

Answer:  D

Diff: 2      Type: MC      Page Ref: 515

Topic:  Ch. 15 – Bankruptcy

Skill:  Recall

Objective:  Chapter 15: 5. Explain the process of bankruptcy.

Bloom’s Taxonomy:  Knowledge

 

 

38) Which one of the following is false with regard to creditors’ remedies?

  1. A) A garnisheeing order is an order to the sheriff or civil enforcement agent to seize assets of a judgment creditor to satisfy a judgment debt.
  2. B) A person who wins in an action and is awarded damages is called a judgment creditor.
  3. C) A guarantor is a person who agrees to be responsible for a debt if the borrower (the person primarily liable) defaults.
  4. D) A General Security Agreement debenture can create a security interest in “all present and after acquired property.”
  5. E) A guarantor may avoid liability if the creditor does some act or enters into an agreement that weakens the guarantor’s position.

Answer:  A

Diff: 2      Type: MC      Page Ref: 518

Topic:  Ch. 15 – Priority Among Creditors

Skill:  Recall

Objective:  Chapter 15: 6. Distinguish the priorities among creditors in a bankruptcy.

Bloom’s Taxonomy:  Knowledge

39) ________ requires the debtor to make the stipulated payments into court, such that all of his debts will be paid in full within three years, unless the creditors consent to a longer period.

  1. A) An OPD program
  2. B) Restructuring
  3. C) An unsecured creditor
  4. D) A consolidation order
  5. E) A Division 1 proposal

Answer:  D

Diff: 2      Type: MC      Page Ref: 515

Topic:  Ch. 15 – Bankruptcy

Skill:  Recall

Objective:  Chapter 15: 6. Distinguish the priorities among creditors in a bankruptcy.

Bloom’s Taxonomy:  Knowledge

 

 

40) With regard to bankruptcy and debt collection, which of the following is false?

  1. A) The Bankruptcy and Insolvency Act provides for a procedure for an insolvent debtor to make a proposal to his creditors that may or may not result in bankruptcy for the debtor.
  2. B) Both fraudulent conveyance and fraudulent preferences acts attempt to prohibit the debtor from delaying, hindering, or defrauding the creditor.
  3. C) Corporations that go into receivership may not be involved in bankruptcy; the receivership may be based on contract.
  4. D) The commission of a bankruptcy offence could prevent a bankrupt debtor from being discharged.
  5. E) Any assets obtained by a discharged bankrupt can still be claimed by former unsecured creditors who placed the former bankrupt into bankruptcy.

Answer:  E

Diff: 3      Type: MC      Page Ref: 515

Topic:  Ch. 15 – Bankruptcy

Skill:  Applied

Objective:  Chapter 15: 7. Present the bankruptcy offences.

Bloom’s Taxonomy:  Knowledge

 

41) In Re Fancy, 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?

  1. A) The Court reversed the transfer, because it was unnecessary: The wife would automatically receive the matrimonial home once the bankruptcy took effect.
  2. B) The Court allowed the transfer, determining the wife was not a co-conspirator.
  3. C) The Court allowed the transfer, because transfers between spouses are exempt under the Bankruptcy and Insolvency Act.
  4. D) The Court reversed the transfer, determining it was a prohibited settlement under the Bankruptcy and Insolvency Act.
  5. E) The Court declined to exercise jurisdiction because a bankrupt has no status to appear in court.

Answer:  D

Diff: 2      Type: MC      Page Ref: 519

Topic:  Ch. 15 – Bankruptcy

Skill:  Applied

Objective:  Chapter 15: 7. Present the bankruptcy offences.

Bloom’s Taxonomy:  Knowledge

42) Real and personal property can be used to secure a loan.

Answer:  TRUE

Diff: 1      Type: TF      Page Ref: 501

Topic:  Ch. 15 – Personal Property

Skill:  Recall

Objective:  Chapter 15: 1. Outline the process of securing debt by using personal property.

Bloom’s Taxonomy:  Knowledge

 

 

43) Both a chattel and a chose in action can be used to secure a debt.

Answer:  TRUE

Diff: 1      Type: TF      Page Ref: 501

Topic:  Ch. 15 – Personal Property

Skill:  Recall

Objective:  Chapter 15: 1. Outline the process of securing debt by using personal property.

Bloom’s Taxonomy:  Knowledge

 

44) The debtor usually retains possession of the goods used to secure a debt while the creditor has the right to seize them for default.

Answer:  TRUE

Diff: 2      Type: TF      Page Ref: 501

Topic:  Ch. 15 – Personal Property

Skill:  Recall

Objective:  Chapter 15: 1. Outline the process of securing debt by using personal property.

Bloom’s Taxonomy:  Knowledge

 

45) In case of default by either the creditor or debtor, breach of contract remedies apply.

Answer:  TRUE

Diff: 1      Type: TF      Page Ref: 501

Topic:  Ch. 15 – Personal Property

Skill:  Recall

Objective:  Chapter 15: 1. Outline the process of securing debt by using personal property.

Bloom’s Taxonomy:  Knowledge

 

46) When the value of the security is not great enough to cover the debt, a secured creditor is an unsecured creditor for that outstanding amount.

Answer:  TRUE

Diff: 3      Type: TF      Page Ref: 501

Topic:  Ch. 15 – Personal Property

Skill:  Applied

Objective:  Chapter 15: 1. Outline the process of securing debt by using personal property.

Bloom’s Taxonomy:  Knowledge

 

47) When a security interest is taken on personal property in a PPSA jurisdiction, the borrower temporarily transfers title to lender.

Answer:  FALSE

Diff: 2      Type: TF      Page Ref: 501

Topic:  Ch. 15 – Personal Property

Skill:  Recall

Objective:  Chapter 15: 1. Outline the process of securing debt by using personal property.

Bloom’s Taxonomy:  Knowledge

 

48) Legislation and the principles of contract and common law primarily protect the interests of the debtor in the event of a default.

Answer:  FALSE

Diff: 2      Type: TF      Page Ref: 501

Topic:  Ch. 15 – Personal Property

Skill:  Recall

Objective:  Chapter 15: 1. Outline the process of securing debt by using personal property.

Bloom’s Taxonomy:  Knowledge

 

49) 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.

Answer:  TRUE

Diff: 3      Type: TF      Page Ref: 508

Topic:  Ch. 15 – Guarantees

Skill:  Applied

Objective:  Chapter 15: 2. Outline the process of securing debt by using guarantees.

Bloom’s Taxonomy:  Knowledge

 

50) Because of the special nature of a guarantee, there is no requirement for consideration.

Answer:  FALSE

Diff: 2      Type: TF      Page Ref: 508

Topic:  Ch. 15 – Guarantees

Skill:  Recall

Objective:  Chapter 15: 2. Outline the process of securing debt by using guarantees.

Bloom’s Taxonomy:  Knowledge

 

51) If no builders’ liens are registered within the specified time, the owner gives the holdback to the general contractor.

Answer:  TRUE

Diff: 2      Type: TF      Page Ref: 512

Topic:  Ch. 15 – Builders’ Liens

Skill:  Recall

Objective:  Chapter 15: 3. Outline the process of securing debt by using other forms of security.

Bloom’s Taxonomy:  Knowledge

 

52) Crops still in the ground and products in the process of being made can be used by Chartered Banks as security.

Answer:  TRUE

Diff: 2      Type: TF      Page Ref: 501

Topic:  Ch. 15 – Personal Property

Skill:  Recall

Objective:  Chapter 15: 3. Outline the process of securing debt by using other forms of security.

Bloom’s Taxonomy:  Knowledge

 

 

53) A “confirmed letter of credit” is another name for a “standby letter of credit.”

Answer:  FALSE

Diff: 2      Type: TF      Page Ref: 501

Topic:  Ch. 15 – Personal Property

Skill:  Recall

Objective:  Chapter 15: 3. Outline the process of securing debt by using other forms of security.

Bloom’s Taxonomy:  Knowledge

54) When a tenant fails to pay rent on a leased commercial property, the common law right of distress is available to the landlord.

Answer:  TRUE

Diff: 2      Type: TF      Page Ref: 513

Topic:  Ch. 15 – Related Laws

Skill:  Recall

Objective:  Chapter 15: 4. Review other laws related to creditors.

Bloom’s Taxonomy:  Knowledge

 

55) If a fraudulent transfer is made to a bona fide purchaser for value, the transaction can still be reversed for a period of one year.

Answer:  FALSE

Diff: 3      Type: TF      Page Ref: 501

Topic:  Ch. 15 – Personal Property

Skill:  Applied

Objective:  Chapter 15: 4. Review other laws related to creditors.

Bloom’s Taxonomy:  Knowledge

 

56) When creditors receive notice of a consumer proposal from an insolvent debtor, they must demand a meeting or the proposal will be automatically accepted.

Answer:  TRUE

Diff: 3      Type: TF      Page Ref: 515

Topic:  Ch. 15 – Bankruptcy

Skill:  Applied

Objective:  Chapter 15: 5. Explain the process of bankruptcy.

Bloom’s Taxonomy:  Knowledge

 

57) The Bankruptcy and Insolvency Act allows a supplier of goods to a bankrupt to seek return of those goods.

Answer:  TRUE

Diff: 2      Type: TF      Page Ref: 515

Topic:  Ch. 15 – Bankruptcy

Skill:  Recall

Objective:  Chapter 15: 5. Explain the process of bankruptcy.

Bloom’s Taxonomy:  Knowledge

 

 

58) As long as the debtor lives up to the terms of an accepted consumer proposal, creditors cannot take action against him/her.

Answer:  TRUE

Diff: 1      Type: TF      Page Ref: 515

Topic:  Ch. 15 – Bankruptcy

Skill:  Recall

Objective:  Chapter 15: 5. Explain the process of bankruptcy.

Bloom’s Taxonomy:  Knowledge

 

59) Bankruptcy is a wholly voluntary process designed primarily to protect debtors from abusive creditors.

Answer:  FALSE

Diff: 1      Type: TF      Page Ref: 515

Topic:  Ch. 15 – Bankruptcy

Skill:  Recall

Objective:  Chapter 15: 5. Explain the process of bankruptcy.

Bloom’s Taxonomy:  Knowledge

60) Some debtors can submit a reorganization proposal to avoid bankruptcy.

Answer:  TRUE

Diff: 1      Type: TF      Page Ref: 515

Topic:  Ch. 15 – Bankruptcy

Skill:  Recall

Objective:  Chapter 15: 6. Distinguish the priorities among creditors in a bankruptcy.

Bloom’s Taxonomy:  Knowledge

 

61) The practice of paying out one creditor over another is known as fraudulent preference.

Answer:  TRUE

Diff: 2      Type: TF      Page Ref: 515

Topic:  Ch. 15 – Bankruptcy

Skill:  Recall

Objective:  Chapter 15: 7. Present the bankruptcy offences.

Bloom’s Taxonomy:  Knowledge

 

62) Settlements involve the transfer of assets for nominal or no consideration.

Answer:  TRUE

Diff: 2      Type: TF      Page Ref: 515

Topic:  Ch. 15 – Bankruptcy

Skill:  Recall

Objective:  Chapter 15: 7. Present the bankruptcy offences.

Bloom’s Taxonomy:  Knowledge

 

 

63) Student loans survive bankruptcy and remain payable for up to seven years after the debtor ceases to be a student.

Answer:  TRUE

Diff: 3      Type: TF      Page Ref: 515

Topic:  Ch. 15 – Bankruptcy

Skill:  Applied

Objective:  Chapter 15: 8. Describe the situation after discharge from bankruptcy.

Bloom’s Taxonomy:  Knowledge

 

64) With few exceptions, once a bankrupt is discharged, there is no longer an obligation to pay back the unsecured creditors.

Answer:  TRUE

Diff: 2      Type: TF      Page Ref: 515

Topic:  Ch. 15 – Bankruptcy

Skill:  Recall

Objective:  Chapter 15: 8. Describe the situation after discharge from bankruptcy.

Bloom’s Taxonomy:  Knowledge

 

65) A Division I proposal is available only to consumer debtors with less than $75,000 in claims against them.

Answer:  FALSE

Diff: 3      Type: TF      Page Ref: 515

Topic:  Ch. 15 – Bankruptcy

Skill:  Recall

Objective:  Chapter 15: 9. Describe the alternatives to bankruptcy.

Bloom’s Taxonomy:  Knowledge

66) Explain what is meant by a “chose in action.”

Answer:  A chose in action is a non-tangible form of personal property where one person has a right or a claim against another that has some value, such a debt.

Diff: 2      Type: ES      Page Ref: 501

Topic:  Ch. 15 – Personal Property

Skill:  Recall

Objective:  Chapter 15: 1. Outline the process of securing debt by using personal property.

Bloom’s Taxonomy:  Knowledge

 

67) “The main purpose of security is to provide some recourse to the person claiming to be paid if some dispute arises about the quality of the performance of the contract.” Discuss the accuracy of this statement.

Answer:  This statement is inaccurate. The main purpose of the security is to make sure that there are assets to pay the creditor when the obligation of the creditor has been properly performed.

Diff: 2      Type: ES      Page Ref: 501

Topic:  Ch. 15 – Personal Property

Skill:  Applied

Objective:  Chapter 15: 1. Outline the process of securing debt by using personal property.

Bloom’s Taxonomy:  Knowledge

 

68) “Joe bought a car from Harry’s Fine Cars on time secured by a Security Agreement. It ran fine for a while, then he had a series of problems with it that made Joe regret ever entering into the transaction. Joe simply stopped paying, knowing that the only thing that Harry could do was repossess the goods.” Explain the accuracy of the final statement.

Answer:  The statement is inaccurate. In fact, Harry can do anything that he can do under a breach of contract action. If he doesn’t want to retake the goods, he can sue for breach of contract and damages instead.

Diff: 2      Type: ES      Page Ref: 501

Topic:  Ch. 15 – Personal Property

Skill:  Applied

Objective:  Chapter 15: 1. Outline the process of securing debt by using personal property.

Bloom’s Taxonomy:  Knowledge

 

69) In a secured transaction pursuant to the Personal Property Security Act, etc., what is the purpose of a registration?

Answer:  The purpose of registration is to notify third parties of the existence of the security, and to ensure that the claims of the creditor, once properly registered, prevail against all such third parties, even where they be subsequent purchasers or other money lenders. It is the most common method of perfecting the security interest.

Diff: 3      Type: ES      Page Ref: 501

Topic:  Ch. 15 – Personal Property

Skill:  Applied

Objective:  Chapter 15: 1. Outline the process of securing debt by using personal property.

Bloom’s Taxonomy:  Knowledge

70) Joe bought a car from Harry’s Fine Car Lot and owed him $5000 on the deal, which he was paying back at $500 a month under a Security Agreement. Harry assigned that Security Agreement to Ace Finance Company, and they served notice on Joe that he was to make his payments in future to them. Joe knew, however, that his deal was with Harry, and he ignored the notification and continued to make the payments to Harry. What danger does he face in these circumstances?

Answer:  Harry’s Fine Car Lot had the right to assign under these circumstances since the notification creates a statutory assignment giving Ace Finance the right to collect the payment that otherwise would have gone to Harry. Joe must make these payments to Ace. If he fails to do it, and Harry fails to pass them on to Ace, Ace will be able to successfully sue Joe for payments not received or seize the car.

Diff: 2      Type: ES      Page Ref: 501

Topic:  Ch. 15 – Personal Property

Skill:  Applied

Objective:  Chapter 15: 1. Outline the process of securing debt by using personal property.

Bloom’s Taxonomy:  Knowledge

 

 

71) What is the primary remedy available when goods have been used to secure a loan which has been defaulted?

Answer:  Seizure of the goods

Diff: 1      Type: ES      Page Ref: 501

Topic:  Ch. 15 – Personal Property

Skill:  Recall

Objective:  Chapter 15: 1. Outline the process of securing debt by using personal property.

Bloom’s Taxonomy:  Knowledge

 

72) Who is responsible for repossessing the goods?

Answer:  The creditor instructs a civil enforcement agent or sheriff.

Diff: 1      Type: ES      Page Ref: 501

Topic:  Ch. 15 – Personal Property

Skill:  Recall

Objective:  Chapter 15: 1. Outline the process of securing debt by using personal property.

Bloom’s Taxonomy:  Knowledge

 

73) Where, in the face of default, goods are repossessed and resold, but the amount recovered is not enough to cover what is owing, what are the rights of the creditor?

Answer:  This varies from jurisdiction to jurisdiction and with the type of subject matter. In some provinces, with consumer sales, once you have repossessed and resold, that exhausts the remedies. In other provinces, so long as the resale has taken place in a proper manner, the deficit may be recovered as damages in a breach of contract action.

Diff: 2      Type: ES      Page Ref: 501

Topic:  Ch. 15 – Personal Property

Skill:  Applied

Objective:  Chapter 15: 1. Outline the process of securing debt by using personal property.

Bloom’s Taxonomy:  Knowledge

74) Explain the purpose of the Personal Property Security Act.

Answer:  Its purpose is to bring all of the various methods of using personal property to secure debt under one process and one act.

Diff: 2      Type: ES      Page Ref: 501

Topic:  Ch. 15 – Personal Property

Skill:  Recall

Objective:  Chapter 15: 1. Outline the process of securing debt by using personal property.

Bloom’s Taxonomy:  Knowledge

 

 

75) Give three examples of types of things that can be used as security under the Personal Property Security Act.

Answer:  Tangible goods such as cars, boats, and machinery; as well, intangible personal property such as assignment of contracts, debts, leasing arrangements, negotiable instruments, share certificates and the like can all be used as security.

Diff: 2      Type: ES      Page Ref: 501

Topic:  Ch. 15 – Personal Property

Skill:  Recall

Objective:  Chapter 15: 1. Outline the process of securing debt by using personal property.

Bloom’s Taxonomy:  Knowledge

 

76) 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 chattel, or anything used as security, when the contract is executed or partially executed, such as when the monies are advanced. 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 took as security.

Diff: 3      Type: ES      Page Ref: 501

Topic:  Ch. 15 – Personal Property

Skill:  Applied

Objective:  Chapter 15: 1. Outline the process of securing debt by using personal property.

Bloom’s Taxonomy:  Knowledge

 

77) In the event of a default, if the creditor elects to repossess and resell the goods, how does he protect his right to claim for deficit?

Answer:  This varies from province to province. Generally, proper notices must be given. Also, the goods must be disposed of in a commercially reasonable manner, which may involve public auction or even a private sale, providing that the parties are at arm’s length.

Diff: 3      Type: ES      Page Ref: 501

Topic:  Ch. 15 – Personal Property

Skill:  Applied

Objective:  Chapter 15: 1. Outline the process of securing debt by using personal property.

Bloom’s Taxonomy:  Knowledge

 

78) Where a debtor has defaulted and the creditor, under the Personal Property Security Act, repossesses and resells the goods, what is his obligation with respect to overages or underages?

Answer:  Any surplus must be returned to the debtor. The right to sue for a deficit varies from province to province.

Diff: 2      Type: ES      Page Ref: 501

Topic:  Ch. 15 – Personal Property

Skill:  Recall

Objective:  Chapter 15: 1. Outline the process of securing debt by using personal property.

Bloom’s Taxonomy:  Knowledge

 

79) Distinguish between a guarantee and an indemnity.

Answer:  A guarantee is an agreement to pay a debt if the debtor fails to pay. An indemnity, however, is involved where the indemnifier assumes the obligation along with the debtor. This is not a contingent or secondary liability, but involves a direct obligation.

Diff: 2      Type: ES      Page Ref: 508

Topic:  Ch. 15 – Guarantees

Skill:  Applied

Objective:  Chapter 15: 2. Outline the process of securing debt by using guarantees.

Bloom’s Taxonomy:  Knowledge

 

80) Why is the distinction between a guarantee and an indemnity important?

Answer:  In some provinces, a guarantee has to be evidenced in writing under the Statute of Frauds, but an indemnity does not. In practice, most financial institutions take a combined guarantee and indemnity.

Diff: 2      Type: ES      Page Ref: 508

Topic:  Ch. 15 – Personal Property

Skill:  Applied

Objective:  Chapter 15: 2. Outline the process of securing debt by using guarantees.

Bloom’s Taxonomy:  Knowledge

 

81) A guarantee must be supported by consideration, just like any other contractual obligation. Explain what consideration is present when one person guarantees the debt of another.

Answer:  If a creditor would not have advanced the money without such a guarantee, then the advancement of the money to the debtor provides consideration to the guarantor. Where the creditor has refrained from suing the debtor because of such a guarantee, that also qualifies as consideration.

Diff: 3      Type: ES      Page Ref: 508

Topic:  Ch. 15 – Guarantees

Skill:  Applied

Objective:  Chapter 15: 2. Outline the process of securing debt by using guarantees.

Bloom’s Taxonomy:  Knowledge

 

 

82) Owen had borrowed money from a credit union to purchase a car, and the credit union had required a security interest against the car, which they registered under the Personal Property Security Act. As well, Owen’s father guaranteed the loan. Some months later, Owen decided to go back to school, and he had to sell the car to do so. He returned to the credit union and, at his request, the credit union gave up the security they had against the vehicle, knowing that they still had the loan guaranteed by Owen’s father. Explain the wisdom of this move.

Answer:  It was foolish on the part of the credit union, because if Owen defaults, they will not be able to go against the father unless the father actually was consulted and gave his permission to the change. This is a fundamental change in the relationship between the debtor and the creditor that can hurt the guarantor and to which the guarantor is not party. He is relieved from his guarantee under these circumstances.

Diff: 3      Type: ES      Page Ref: 508

Topic:  Ch. 15 – Guarantees

Skill:  Applied

Objective:  Chapter 15: 2. Outline the process of securing debt by using guarantees.

Bloom’s Taxonomy:  Knowledge

83) 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 like the credit union did.

Diff: 3      Type: ES      Page Ref: 508

Topic:  Ch. 15 – Guarantees

Skill:  Applied

Objective:  Chapter 15: 2. Outline the process of securing debt by using guarantees.

Bloom’s Taxonomy:  Knowledge

 

84) Owen bought a car from Ace Fancy Cars Ltd. on time. The salesman claimed that it had a new engine and a new transmission. Security was registered against the vehicle under the Personal Property Security Act, and Owen’s father was required to sign a guarantee to support the debt. Two months later, the car broke down, and upon inspection, it was discovered that, in fact, a used motor and transmission had been installed, not a new one. Owen refused to make any further payments and demanded his money back. The car dealership ignored their right to repossess the vehicle and demanded payment from Owen’s father. Explain Owen’s father’s rights in these circumstances.

Answer:  Owen’s father has the same defences available to him that are available to Owen. The fraudulent misrepresentation involved would give Owen the right to rescind the contract and refuse to make further payments. The guarantor has similar rights and can raise the same defences.

Diff: 3      Type: ES      Page Ref: 508

Topic:  Ch. 15 – Guarantees

Skill:  Applied

Objective:  Chapter 15: 2. Outline the process of securing debt by using guarantees.

Bloom’s Taxonomy:  Knowledge

 

85) 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.

Diff: 2      Type: ES      Page Ref: 512

Topic:  Ch. 15 – Builders’ Liens

Skill:  Applied

Objective:  Chapter 15: 3. Outline the process of securing debt by using other forms of security.

Bloom’s Taxonomy:  Knowledge

 

86) 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 they would otherwise pay to a general contractor, called the “holdback.” In most provinces, the amount is set at 10%. After the short period of time during which liens must be registered, the owner will check the registry or land titles office and, if there are no liens, the owner will pay the holdback to the general contractor.

Diff: 2      Type: ES      Page Ref: 512

Topic:  Ch. 15 – Builders’ Liens

Skill:  Recall

Objective:  Chapter 15: 3. Outline the process of securing debt by using other forms of security.

Bloom’s Taxonomy:  Knowledge

87) Explain what happens when the owner of property fails to hold back the appropriate amount when making payments to the general contractor.

Answer:  He can be required to pay out, in addition to what he has already paid out to the general contractor, the amounts of the liens filed by subcontractors and suppliers, failing which the property may be sold by Court order to pay them.

Diff: 3      Type: ES      Page Ref: 512

Topic:  Ch. 15 – Builders’ Liens

Skill:  Applied

Objective:  Chapter 15: 3. Outline the process of securing debt by using other forms of security.

Bloom’s Taxonomy:  Knowledge

 

88) A security not fixed on any specific assets is called a security interest ________.

Answer:  on all present and after acquired personal property

Diff: 1      Type: ES      Page Ref: 501

Topic:  Ch. 15 – Personal Property

Skill:  Recall

Objective:  Chapter 15: 3. Outline the process of securing debt by using other forms of security.

Bloom’s Taxonomy:  Knowledge

 

 

89) Explain what constitutes a bulk sale and how they are controlled in some jurisdictions.

Answer:  A bulk sale is where a business sells not only its normal stock and trade, but such a large portion of that stock and trade or other assets of the business that normally wouldn’t be sold (such as shelving, counters, etc.), that it is no longer consistent with the debtor continuing business. In these circumstances in some jurisdictions, the Bulk Sales Act requires that all creditors be notified of the sale and approve it.

Diff: 2      Type: ES      Page Ref: 513

Topic:  Ch. 15 – Related Laws

Skill:  Applied

Objective:  Chapter 15: 4. Review other laws related to creditors.

Bloom’s Taxonomy:  Knowledge

 

90) Explain the purpose of the Fraudulent Preferences Act (name will vary from province to province).

Answer:  This act prohibits the debtor from favouring one creditor over another by paying them first and having no money left to pay the other(s).

Diff: 2      Type: ES      Page Ref: 513

Topic:  Ch. 15 – Related Laws

Skill:  Recall

Objective:  Chapter 15: 4. Review other laws related to creditors.

Bloom’s Taxonomy:  Knowledge

 

91) What is the purpose of the Fraudulent Conveyances Act? (The name varies with the province.)

Answer:  This act is designed to prohibit a debtor from conveying property and assets to others, such as a spouse, relative, or friend, in order to make those assets unavailable to creditors.

Diff: 2      Type: ES      Page Ref: 513

Topic:  Ch. 15 – Related Laws

Skill:  Recall

Objective:  Chapter 15: 4. Review other laws related to creditors.

Bloom’s Taxonomy:  Knowledge

92) What is the effect if a debtor fraudulently transfers property to a bona fide purchaser for value?

Answer:  The transaction is valid and cannot be reversed.

Diff: 1      Type: ES      Page Ref: 513

Topic:  Ch. 15 – Related Laws

Skill:  Recall

Objective:  Chapter 15: 4. Review other laws related to creditors.

Bloom’s Taxonomy:  Knowledge

 

 

93) Explain the purpose of the bankruptcy process.

Answer:  The bankruptcy process is intended to ensure that creditors realize as much as possible on their debts, and 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 Ref: 515

Topic:  Ch. 15 – Bankruptcy

Skill:  Recall

Objective:  Chapter 15: 5. Explain the process of bankruptcy.

Bloom’s Taxonomy:  Knowledge

 

94) 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 for liquidation.

Diff: 1      Type: ES      Page Ref: 515

Topic:  Ch. 15 – Bankruptcy

Skill:  Recall

Objective:  Chapter 15: 5. Explain the process of bankruptcy.

Bloom’s Taxonomy:  Knowledge

 

95) Explain two methods for a debtor becoming bankrupt.

Answer:  Voluntary assignment is where the debtor chooses to go to a trustee in bankruptcy and voluntarily assigns his assets to that trustee. In a bankruptcy order, creditors go to court to obtain an order to forcibly transfer the assets of the debtor to a trustee in bankruptcy.

Diff: 2      Type: ES      Page Ref: 515

Topic:  Ch. 15 – Bankruptcy

Skill:  Applied

Objective:  Chapter 15: 5. Explain the process of bankruptcy.

Bloom’s Taxonomy:  Knowledge

 

96) 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 then sells them or otherwise deals with them in such a way as to ensure as much as possible is paid to the unsecured creditors, after preferred and secured creditors are paid.

Diff: 2      Type: ES      Page Ref: 515

Topic:  Ch. 15 – Bankruptcy

Skill:  Recall

Objective:  Chapter 15: 5. Explain the process of bankruptcy.

Bloom’s Taxonomy:  Knowledge

 

97) What is the effect on a corporation when it goes bankrupt?

Answer:  If it goes through the bankruptcy process, it must pay all of its debts before it may apply for discharge from bankruptcy, which is beyond rare.

Diff: 2      Type: ES      Page Ref: 515

Topic:  Ch. 15 – Bankruptcy

Skill:  Recall

Objective:  Chapter 15: 5. Explain the process of bankruptcy.

Bloom’s Taxonomy:  Knowledge

 

98) Distinguish between receivership and bankruptcy where corporations are concerned.

Answer:  Bankruptcy is the formal process done under the bankruptcy and insolvency legislation. Receivership can be a private arrangement made with a creditor, whereby the creditor, as a condition of loaning money, has the right to take over the management of the company in the event of a default. A creditor can also apply to court for a receiver to be appointed. The receiver (receiver-manager) operates the corporation, displacing the authority of directors and officers.

Diff: 3      Type: ES      Page Ref: 515

Topic:  Ch. 15 – Bankruptcy

Skill:  Applied

Objective:  Chapter 15: 5. Explain the process of bankruptcy.

Bloom’s Taxonomy:  Knowledge

 

99) Explain the role of the trustee in bankruptcy proceedings.

Answer:  The function of the trustee is to receive the assets of the debtor, deal with them in such a way that as much as possible is realized from them, and then distribute those funds to the creditors.

Diff: 1      Type: ES      Page Ref: 515

Topic:  Ch. 15 – Bankruptcy

Skill:  Recall

Objective:  Chapter 15: 5. Explain the process of bankruptcy.

Bloom’s Taxonomy:  Knowledge

 

100) What is the role of the Superintendent of Bankruptcy?

Answer:  The Superintendent of Bankruptcy is the government official in charge of this area and the one responsible for appointing official receivers in various bankruptcy districts in Canada.

Diff: 1      Type: ES      Page Ref: 515

Topic:  Ch. 15 – Bankruptcy

Skill:  Recall

Objective:  Chapter 15: 5. Explain the process of bankruptcy.

Bloom’s Taxonomy:  Knowledge

 

101) What is the result of a settlement that takes place within a year of bankruptcy?

Answer:  It is void.

Diff: 1      Type: ES      Page Ref: 515

Topic:  Ch. 15 – Bankruptcy

Skill:  Recall

Objective:  Chapter 15: 5. Explain the process of bankruptcy.

Bloom’s Taxonomy:  Knowledge

102) Provide an example of legislation that gives the federal government priority over all other creditors, including secured creditors.

Answer:  Examples include the Income Tax Act , Employment Insurance Act, Excise Tax Act , Workers’ Compensation Act, and the Canada Pension Plan.

Diff: 3      Type: ES      Page Ref: 515

Topic:  Ch. 15 – Bankruptcy

Skill:  Applied

Objective:  Chapter 15: 6. Distinguish the priorities among creditors in a bankruptcy.

Bloom’s Taxonomy:  Knowledge

 

103) What is the effect of a payment made in preference to one creditor over another?

Answer:  It is void.

Diff: 1      Type: ES      Page Ref: 515

Topic:  Ch. 15 – Bankruptcy

Skill:  Recall

Objective:  Chapter 15: 6. Distinguish the priorities among creditors in a bankruptcy.

Bloom’s Taxonomy:  Knowledge

 

104) When a supplier of goods such as a wholesaler transfers those goods to a debtor, who then goes bankrupt, explain the supplier’s legal position.

Answer:  So long as those goods remain in the possession of the bankrupt debtor or the trustee and haven’t been resold, destroyed, or otherwise disposed of, the supplier can reclaim them within a period of 30 days of supplying those goods.

Diff: 2      Type: ES      Page Ref: 518

Topic:  Ch. 15 – Priority Among Creditors

Skill:  Applied

Objective:  Chapter 15: 6. Distinguish the priorities among creditors in a bankruptcy.

Bloom’s Taxonomy:  Knowledge

 

105) What alternatives are available to the bankruptcy process?

Answer:  The Bankruptcy and Insolvency Act allows the debtor, in both commercial and consumer situations, to make a proposal to his creditors. For a certain period of time, those creditors are prohibited from taking other actions while the proposal is considered. If the creditors agree to the proposal, which is usually to pay back a portion of the amount owed in full satisfaction of the debt owed, or to pay over a longer period of time, and the debtor does that, bankruptcy is avoided.

Diff: 3      Type: ES      Page Ref: 515

Topic:  Ch. 15 – Bankruptcy

Skill:  Applied

Objective:  Chapter 15: 9. Describe the alternatives to bankruptcy.

Bloom’s Taxonomy:  Knowledge

 

 

106) What is a bankruptcy offence? Give an example.

Answer:  A bankruptcy offence is some act on the part of the debtor whereby he tries to cheat the creditors. This can be by lying, hiding assets, transferring assets to other people, falsifying records, refusing to disclose information, etc.

Diff: 1      Type: ES      Page Ref: 515

Topic:  Ch. 15 – Bankruptcy

Skill:  Recall

Objective:  Chapter 15: 7. Present the bankruptcy offences.

Bloom’s Taxonomy:  Knowledge

107) Once the bankrupt has been discharged, explain his status.

Answer:  He is free of debt and is no longer responsible for the debts and obligations he had prior to the bankruptcy process. There are exceptions (student loans, family maintenance payments).

Diff: 1      Type: ES      Page Ref: 515

Topic:  Ch. 15 – Bankruptcy

Skill:  Recall

Objective:  Chapter 15: 8. Describe the situation after discharge from bankruptcy.

Bloom’s Taxonomy:  Knowledge

 

108) What are the practical consequences affecting the individual who declares personal bankruptcy?

Answer:  If he becomes bankrupt, he will lose most of his property. He will also find it difficult in the future to conduct business or make personal credit purchases due to a poor credit rating. A personal bankruptcy will remain on an individual’s credit record for about six or seven years. Even after that period of time, it will be obvious to a credit grantor that there must have been serious financial problems, because of the lack of credit transactions during that six-year period.

Diff: 2      Type: ES      Page Ref: 515

Topic:  Ch. 15 – Bankruptcy

Skill:  Recall

Objective:  Chapter 15: 9. Describe the alternatives to bankruptcy.

Bloom’s Taxonomy:  Knowledge

 

 

109) In a creditor/debtor transaction, explain the purpose of security and how that purpose can be realized.

Answer:  This requires that students understand and demonstrate a knowledge of both the nature of security and the reasons for it. The object is to assure the creditor that they will be paid even if the debtor falls on hard times and finds himself in a position of not being able to honour his obligations even where he wants to. Students should then go on to explain the different ways that this assurance can be given. They should do this in depth, showing they understand the nature of each example. Some examples are using tangibles such as personal property as security under the Personal Property Security Act or intangibles like accounts receivable as well. Students should also indicate other ways security can be obtained, such as builders’ liens, real property mortgages, and various forms of negotiable instruments that also have some advantage to the creditor. They should also have something to say about the procedure required to protect their security, such as attachment and perfection under the Personal Property Security Act, and how that is accomplished. They can also talk about how the goods have to be kept for a time before being resold and the requirement to handle the repossession and resale in a businesslike manner.

Diff: 2      Type: ES      Page Ref: 501

Topic:  Ch. 15 – Personal Property

Skill:  Applied

Objective:  Chapter 15: 1. Outline the process of securing debt by using personal property.

Bloom’s Taxonomy:  Knowledge

110) Discuss situations in which a secured creditor may opt not to seize property used as security and the rationale for taking this approach.

Answer:  When a debtor defaults, a secured creditor should be careful in seizing property used as security. While the creditor may have this right, there may be other remedies the creditor may wish to pursue that may end up being more effective. By seizing property, the creditor may lose the right to pursue some of the alternative avenues.

 

In several jurisdictions, the right to sue for a deficiency is lost once the creditor elects to take possession of the goods. (Students should refer to the specific situation in their province.) Even in jurisdictions where a creditor retains the right to sue for a shortfall after goods have been sold, this right may be subject to the goods having been properly cared for and sold in a way that is commercially reasonable. It is important for the creditor to balance the risks of suing (with the risk that nothing may be realized) with the benefits of taking possession of the collateral (which will at least provide something).

 

Good students will also note that there is a possibility that the debtor can be rehabilitated (and even kept as a good customer). This should also be weighed as part of the creditor’s decision.

Diff: 2      Type: ES      Page Ref: 501

Topic:  Ch. 15 – Personal Property

Skill:  Applied

Objective:  Chapter 15: 1. Outline the process of securing debt by using personal property.

Bloom’s Taxonomy:  Knowledge

 

 

111) Explain how, in a creditor/debtor transaction, the exposure of a guarantor is limited and his rights protected.

Answer:  A guarantor is in a unique position and the parties must ensure they do nothing to weaken the position of the guarantor. First, it should be observed that the guarantor is in no worse position than the debtor. That is, any defence that the debtor has against the creditor, the guarantor has as well (except infancy). Where the debtor defaults and the creditor turns to the guarantor for payment, the guarantor is subrogated to the rights of the creditor, taking over the creditor’s position and rights against the debtor. The main thrust of the question, however, is to ensure that students understand that the creditor and debtor cannot change their agreement in any way that weakens the position of the guarantor without the permission of the guarantor. If there is a security as well as the guarantee, the creditor cannot release that security without the consent of the guarantor, or the guarantor will no longer be obligated under the debt. Similarly, if interest rates or terms of payment are changed or more money advanced without the approval of the guarantor, he will be released from the debt. It should be noted that permission to advance more funds and make these changes may be included in the original agreement, and the guarantor will then have no complaint. In practice, most of these permissions and defences are dealt with in the forms of guarantee and indemnity taken by most financial institutions.

Diff: 1      Type: ES      Page Ref: 508

Topic:  Ch. 15 – Personal Property

Skill:  Applied

Objective:  Chapter 15: 1. Outline the process of securing debt by using personal property.

Bloom’s Taxonomy:  Knowledge

112) Compare assignment of contractual rights with negotiation of a negotiable instrument, indicating the advantages and disadvantages of each.

Answer:  This can be a relatively short response but the principles here are the heart of negotiable instruments. Students should first make it clear that they understand what an assignment of contractual rights is, and what the consequences are for the rights of the parties. When contractual rights are assigned from one party to another, the person receiving them is generally in no better position than is the person who assigned those rights to him. Any defence that the creditor had against the assignor, he has against the assignee as well. Another way of saying this is that the assignee takes subject to the equities between the parties. Students must show that they understand what a negotiable instrument is (a cheque, bill of exchange, or promissory note) and also indicate an understanding of negotiation—that is, after the delivery of the completed instrument from the maker/drawer to the payee, the subsequent transfer from the payee through the various third-party holders that may come into possession of the instrument. The key here is that students show that if a holder of the instrument is innocent and otherwise qualifies as a holder in due course (this should be expanded as well), that holder in due course will actually get better rights than the initial party to the instrument. The holder in due course will be able to enforce it against the drawer despite the presence of breach of contract, fraud, or any but the most serious of problems, and even then that must relate to the authenticity of the instrument itself.

Diff: 3      Type: ES      Page Ref: 501

Topic:  Ch. 15 – Personal Property

Skill:  Applied

Objective:  Chapter 15: 3. Outline the process of securing debt by using other forms of security.

Bloom’s Taxonomy:  Knowledge

113) Discuss the bankruptcy and insolvency process from the point of view of the creditor, indicating how that creditor’s interests are or are not protected.

Answer:  Bankruptcy involves the assets of the debtor being transferred to a trustee in bankruptcy, who then deals with those assets (usually selling them) and distributes the proceeds to the general unsecured creditors on a pro rata basis, after preferred and secured creditors are satisfied. Secured creditors maintain their security in the goods used as security, and so have first claim with respect to them. There are other preferred creditors, such as the trustee, government and municipal claimants, landlords, and employees, who have the next claim for a specified amount. Anything left is distributed to the general creditors. Often, after these first claims have been met, there is nothing left for the general creditors. To make matters worse from the point of view of the creditor, the trustee will not take all of the debtor’s assets. Some jurisdictions will exempt tools, certain furniture, and even the matrimonial home in some circumstances. Also, the trustee will not bother with assets that he will have difficulty selling or that are more trouble than they are worth.

After the bankruptcy process is completed, an individual bankrupt is then discharged and the creditors can no longer proceed with any claim. From the point of view of a general creditor in such circumstances, the process probably gets them as much as possible and prevents the debtor from dissipating what assets she does have. When a corporation is involved, the trustee in bankruptcy will take over the business and may continue to operate it if also appointed a receiver-manager, sometimes putting in a different management team in order to realize as much as possible for the creditors.

 

Students should also point out the alternatives to bankruptcy available to the individual as well as a company. Here the parties try to make a deal with their creditors to try to avoid the bankruptcy process. Usually the creditors will be paid a certain percentage of their claim. This is attractive to creditors because they keep a customer and usually get more than they would have if the debtor had gone through bankruptcy liquidation. The rights for the creditors to seek judgment and seize property are delayed while these proposals are worked out. Good students will differentiate between Division I proposals (used to protect commercial debtors from action by creditors) and Division II proposals (used to protect consumers), and protection available for large corporations under the Companies’ Creditors Arrangements Act.

Diff: 3      Type: ES      Page Ref: 515

Topic:  Ch. 15 – Bankruptcy

Skill:  Applied

Objective:  Chapter 15: 5. Explain the process of bankruptcy.

Bloom’s Taxonomy:  Knowledge

 

114) “Bankruptcy is a convenient way to avoid paying your debts.” Discuss the accuracy of this statement.

Answer:  Students should note that this attitude is one taken by some debtors, who may even declare bankruptcy on more than one occasion. This attitude, however, is clearly an abuse of the process. Those debtors who are tempted to abuse the process should realize that committing bankruptcy offences will likely result in fines and/or imprisonment. Also, when a debtor has been abusing the process (e.g., by failing to cooperate, hiding assets, etc.) the courts will be reluctant to grant an unconditional discharge. Conditions can include, for example, a requirement that the bankrupt first pay a significant amount to creditors.

 

Bankruptcy does not allow a bankrupt to simply walk away from his or her debts. If a debtor becomes bankrupt, he or she will lose most of his or her property. A bankrupt will also find it difficult in the future to conduct business or to make personal credit purchases. During the bankruptcy process, the bankrupt is required to continue to make regular surplus income payments to the Trustee for distribution to creditors. Furthermore, some obligations even survive a discharge from bankruptcy (such as fines, alimony and maintenance payments, some civil damage awards, student loans, etc.).

Diff: 1      Type: ES      Page Ref: 515

Topic:  Ch. 15 – Bankruptcy

Skill:  Applied

Objective:  Chapter 15: 8. Describe the situation after discharge from bankruptcy.

Bloom’s Taxonomy:  Knowledge

 

115) Discuss alternatives to bankruptcy and why these alternatives might be preferable to bankruptcy itself.

Answer:  To avoid bankruptcy, students should identify a variety of possible alternatives. First, a debtor should contact creditors to try to work out alternative arrangements for paying the debt in question. A second possibility is a consolidation loan to enable a debtor to consolidate various debts owed. This can facilitate a more manageable payment schedule and often a lower rate of interest. Sometimes individual creditors will agree to take less than they are owed.

 

Under the BIA, there are also formal alternatives. The first is a Division I proposal for corporations and people with debts over $25,000. These proposals are very flexible. Division II proposals are available for people with debts less than $250,000. Consumer proposals stop all legal actions by unsecured creditors. In either case, if a proposal is accepted and properly performed, the debtor’s obligation is complete. Another alternative may include an orderly payment of debt program (available in some provinces).

 

For corporations owing in excess of $5 million, there is a further alternative available under the Companies’ Creditors Arrangement Act (which provides protection to debtors with some advantages over the BIA).

Diff: 2      Type: ES      Page Ref: 515

Topic:  Ch. 15 – Bankruptcy

Skill:  Applied

Objective:  Chapter 15: 9. Describe the alternatives to bankruptcy.

Bloom’s Taxonomy:  Knowledge

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