Marking Key for AFM 231 Fall 2015 Mid-Term

All questions were marked twice to ensure consistency.

Question 1

There are TEN (10) multiple choice questions. ALL are to be answered. Please be sure to
indicate very clearly your answer. Each question is worth TWO (2) marks, for TWENTY (20)
marks in total. There is also ONE (1) bonus question worth ONE (1) mark.

1. You have retained a lawyer to file a lawsuit against your business partner for theft of
money. What form of dispute resolution have you undertaken?

a. arbitration
b. mediation
c. litigation
d. negotiation

2. You have heard of the rules of equity. How would you best explain them to a friend?

a. rules that set out the correct procedures to follow in court

b. rules that require wrongdoers to compensate their victims for losses
c. rules that focus on what would be fair given the specific circumstances
d. strict rules that dictate the outcome of particular disputes

3. You heard of an option agreement in contracts class. What is its defining characteristic?

a. the offer will remain open for acceptance for a reasonable period of time
b. the offer can only be revoked in writing
c. it prohibits the offer from being revoked before a time set for acceptance
d. it is a standard form agreement governed by the provincial Options Act

4, What is the definition of the legal term “voidable contract”? It is a contract that:

a. cannot be enforced because it is contrary to legislation or public policy

b. fails to meet the requirements imposed by the Voidable Contracts Act
c. contains a defect so substantial that it is of no force or effect
d. allows an aggrieved party to choose to keep it in force or bring it to an end

5. You bring your car into an auto repair shop and sign a contract with the auto shop setting
out the repairs needed. What will have occurred if a mechanic employed by the repair
shop does the actual work under the contract?

a. novational performance
b. substitutional performance
c. novational performance
d. vicarious performance

6. A flood will require your company to shut down for many months. How would a force
majeure clause affect your company’s obligations under its supply contracts?

a. your company will have no future obligations under the supply contracts
b. the other parties will have the right to terminate the supply contracts
c. the other parties cannot terminate but have the right to sue for damages
d. your company’s obligations are suspended until it recovers from the flood
 7. You are thinking of entering into a contract with a retailer to supply a unique product you
make in time for the holiday season. Which of the following clauses would you look at to
determine your maximum liability if you were ever to breach the contract?

a. the condition precedent clause

b. the limitation of liability clause
c. the liquidated damages clause
d. the exemption clause

8. Which of the following clauses would establish that agreed-upon damages will be
payable if you fail to deliver your product on time ($100 for every day you are late in
delivering the product)?

a. the condition precedent clause

b. the limitation of liability clause
c. the liquidated damages clause
d. the liquidated damages clause

9. You have bought software from an electronics store (i.e., not an on-line purchase) for
your business. Which of the following is best characteristic of a shrink-wrap license
agreement?

a. repeated use (i.e., more than once) of the software constitutes acceptance of the terms
and conditions of the license
b. until you notify the software company that you agree to the terms and conditions, you
are not bound by the license agreement
c. the philosophy behind a shrink-wrap license agreement is that opening the package
constitutes acceptance of the terms and conditions
d. the software company will call you to explain the terms and conditions

10. A court has found you in breach of contract and has ordered you to stop acting in a
particular way. What legal remedy did the court apply?

a. specific performance
b. rescission
c. quantum meruit
d. injunction

Bonus Question (ONE (1) Mark)

You have given your final sales pitch to a customer, offering 10 percent off list price, 60
days for payment, a delivery date, and delivery terms. How would you best describe the
state of the negotiations?

a. a consensus on the parties’ rights and obligations has been reached

b. there has been a mutual expression of willingness to do business
c. you have extended a complete offer which is now open for acceptance
d. until you put the sales pitch in writing, there can be no offer
Question 2

Answer any TWO (2) of the following three (3) short answer questions. Each question is worth
FIVE (5) marks, for TEN (10) marks in total. You may answer all three (3) questions if you wish
in which case your best two (2) answers will be counted. You may answer in point form.

1. You received an award from a court for your inability to sleep for 14 months following
the collapse of the roof over a newly built addition to your home, and for the amount paid
for a cleaning person to clean your home because you were too tired to do it yourself.
Name the 2 categories of damages available under law, and their 3 sub-categories. Under
which category and sub-category would each of your damage awards fall? Explain.

See text p. 229 for non-pecuniary damages and pecuniary damages and the 3 categories under
each. Depending on how you viewed the facts, the cleaning person costs would fall under out-
of-pocket expenses or maybe cost of future care (pecuniary). Damages for inability to sleep
would most likely fall under loss of enjoyment of life (non-pecuniary).

2. Your company buys the debts of other companies who are in need of a quick infusion of
money. One such company, NeedCash Inc, will be owed $100,000 by Acme once it
supplies the balance of an order to Acme. As you think about this opportunity, what
concern should you have about Acme, and what two concerns should you have about
NeedCash? How do you deal with each concern?

See text pp. 197-8. Concern about Acme: are they a good credit risk (i.e., does it have the
ability to pay the $100,000)? Concerns about Need Cash: (1) will it perform under the contract
because if it does not, it might become entitled to less than $100,000 from Acme and Acme
need pay your company only what it legally owes NeedCash. (2) will NeedCash do something
improper and sell the debt to several companies? How to deal with the concerns? Acme –
investigate its credit worthiness. NeedCash – check its performance under the contract, and
provide notice immediately to Acme that it is now to pay your company directly. Note: most
students missed the need for notice. Considerable judgment was exercised in marking this
question. It was the least commonly answered question of the three.

3. (i) Define ‘privity of contract’ and explain by referring to any court case or fact situation
which we discussed in class or which is mentioned in the text. (ii) Define the ‘parol
evidence rule’ and provide one obvious situation where the rule does not apply.

Privity of contract is explained at text pp. 201-2. Any court case or fact situation could be used.
E.g., in the London Drugs case, London Drugs and K&N were parties to the contract and thus
privity of contract existed between them. The K&N employees were not parties to the contract
and thus no privity of contract existed between them and London Drugs or K&N. You needed
to show that you understood the concept. The parol evidence rule is explained at text pp. 148-
9. An example where the rule does not apply is with a contract that is part written and part
oral. Again, you needed to show that you understood the concept.
Question 3

There are two (2) parts to this question. Both parts must be answered. Part 1 is worth TWELVE
(12) marks and Part 2 EIGHT (8) marks for TWENTY (20) marks in total. You may answer in
point form if you wish.

Part 1 (12 marks)

You have always wanted to sail from Toronto to Bermuda during the summer or fall. After many
hours scouring the Internet, you find a local company, Ocean Yachts Limited, that shows on its
website a beautiful-looking yacht with a catchy name, Live Your Dream, that seems perfect. You
visit the company and immediately fall in love with the yacht. The salesperson, who says she
also has a yacht of her own, tells you that in her opinion Live Your Dream will easily be able to
take you to Bermuda. The contract is signed, money paid, and your yacht is delivered to your
yacht club on Lake Ontario. Several weeks later, while out on the lake, you miss the channel and
run aground, slightly damaging the propeller. While the boat is out of the water for repair, you
mention to the repairman that you are planning to sail to Bermuda. He tells you that the yacht
was never meant to be ocean-going and strongly advises you not to sail it on the Atlantic Ocean.
A few weeks later you decide to research the issue and to your horror learn he was right. In a
panic you look at the contract with Ocean Yachts and realize it is silent on whether the yacht is
ocean-going or not. All you want to do now is return the yacht and get your money back.

1. You have a contract with Ocean Yachts. What general legal principle allows you to
argue, in this fact situation, that you are entitled to a legal remedy even though the
contract is silent on whether the yacht is ocean-going or not? (1 mark)

Misrepresentation.

2. The general legal principle you identified (in 1 above) takes various forms, each
allowing for a slightly different legal remedy. Since all you want to do is return the
yacht, identify the particular legal principle that best allows you to do so? Explain,
and be sure to identify the other particular legal principle(s) you did not choose.
Using the correct legal language, what legal remedy would you ask for? (3 marks)

Argue innocent misrepresentation, and seek rescission of the contract. Innocent

misrepresentation permits rescission of the contract once it is proven the statements were
made regardless of the reason. The other types of misrepresentation are negligent and
fraudulent. The latter is harder to establish as it requires you to prove the statements were
made knowing them to be false. The former is also harder to prove.

3. The general legal principle you identified (in 1 above) requires that you prove 5
things about the statement that the yacht was ocean-going. What are they? (3 marks)

See text p. 176.

4. Of the 5 things (identified in 3 above), which one might not be supported by the facts,
and why? Can you argue otherwise? (2 marks)

Was the salesperson’s statement opinion or fact? She used the word opinion. However, as she
sells yachts for a company called Ocean Yachts, and has a yacht of her own, argue that she
has expertise and thus her statement should be considered a fact rather than her opinion.
 5. What 2 defences might Ocean Yachts raise against the legal remedy you are seeking?
Explain. (2 marks)

First, delay in returning the yacht. The repairman tells you the yacht is not ocean-going
several weeks before you actually return it. Second, damage to the yacht. But does it matter as
you have repaired the damage? Note: most students missed the defense of delay.

6. Will you be successful in returning the yacht and getting your money back? Explain.
(1 mark)

Sum up your argument taking care to ensure it is logical.

Part 2 (8 marks)

Your company has a fleet of vehicles all of which are the same model and same colour. You
order another 10 cars for your business and specify in the contract the model and colour. The
wrong models are delivered.

1. In class we discussed two different types of contractual breach. Name the two types
of breach, and explain how they differ including what legal remedy or remedies each
provides. (3 marks)

See text pp. 202-3 for discussion of breach of condition (major) and breach of warranty
(minor). You needed to show you understood the 2 types of breach. Both allow for damages.
Major breach also allows for rescission of the contract.

2. What type of breach has occurred in this particular situation? Explain. (2 marks)

Likely a major breach. Providing the wrong model cannot be easily fixed by a damage award.
Also, having a different model might impact your company’s “reputation” – it may be
recognized by its type of vehicle.

3. Why is it necessary to be careful that you correctly identify the type of breach? (1
mark)

If you proceed as if the breach is major and it turns out to be minor, and you act as if the
contract is rescinded, you will be in breach of contract.

4. Suppose that the right model of car was delivered, but in the wrong colour. What type
of breach has occurred in this particular situation? Explain. (2 marks)

Likely a minor breach. Can easily be fixed by a damage award to cover the cost of repainting
the vehicles.