L5M3 Managing Contractual Risk Questions and Answers

Explanation

Exporters prefer advance payment - this puts the risk with the importer / buyer. There's a table of these four terms on p.36. An importer would prefer an open account arrangements. The other two options are in the middle and the risk is more equally split between the two parties.

Explanation

Adjudication has strict timescales (this is one of the advantages of using this conflict resolution method). It has roots in the construction industry and has been widely used since the 1990s. See p.76 for more information

Explanation

Documentary collection is used in international transactions where there is trust. This is explained on p. 35 It's basically when supplier and buyer delegate collection of payments to their respective banks. They need to trust that each other will actually pay - otherwise they wouldn't delegate this. A Letter of Credit is a documentary credit confirmed by a bank, usually for export. A Bill of Ex-change is a promise to pay at a later date, usually supported by a bank. Stage payments are used in big purchases, such as construction projects where payment is given to the contractor when certain milestones are hit.

Explanation

The correct answers are as follows:

Table Description automatically generated

This is a condition. Again the food being organic would be fundamental to the contract as the health of the llamas depend on it.

Explanation

The correct answers are as follows:

The answer is compromise as they're seeking a solution that will satisy everyone.

Explanation

No - There is no consideration. For a document to be considered a contract there must be consideration. This means something of value must be exchanged. In this example John gives Larry something but Larry doesn't give John anything. Therefore there is no consideration and this is not a contract. See p.12

Explanation

"A Guarantee is a secondary obligation of a contract' and 'A guarantor's responsibility cannot be higher than the Principle' are the correct answers. Guarantees are explained on p.28. Be careful not to confuse this with Warranty. A promise to repair or replace an item within a defined period of time is the definition of a warranty. That was put in there to trick you. Sorry. Remember a Guaran-tee is to do something when the Principle of the contract fails to do it. It's most common in leasing agreements- if you're a young person, you'll often need a responsible adult / parent to sign the lease as your Guarantor. As a Guarantor, they promise to pay the rent if you're unable to. Legally they can't be asked to do any more than you are assigned to do in the contract. So if your rent is £500 a month, that's all they can be asked to pay if you don't pay it. The primary obligation is between you and the landlord. The secondary obligation is between the guarantor and you.

Explanation

The correct answers are as follows:

This is a contract variation as they are changing the number of staff and their hours

Explanation

Negotiation is usually the default method for resolving disputes. This is a direct quote from p.63

Explanation

The correct answers are as follows:

This is arbitration as it involves a panel.

Explanation

Adjudication is written. The other conflict resolution methods involve talking to the other person, or presenting arguments orally to a judge. See p.77 for more info.

Explanation

A breach of representation is a major/ fundamental breach and allows the innocent party to rescind the contract and claim damages. A Breach of Representation is when you provide false information about who you are- this might have been a fundamental reason as to why the contract went ahead. If it turns out not to be true, the other party has the right to cancel the contract and claim damages. See p.126

Explanation

Arbitration ticks all of the boxes required by R3D3. Mediation isn't correct because it's not binding. Negotiation isn't correct because there's no 3rd party. Litigation isn't correct because it's not confidential. See p. 80 for more on arbitration.

Explanation

They can claim damages but not terminate the contract. If Blue company has broken a Condition, they would be able to terminate the contract, but this isn't the case for a breach of a Warranty. See p.43 for more details

Explanation

The correct answers are 1 and 3. The other options are false; Mediation does not produce legal precedents- only litigation can do this. Mediation is a cheap dispute resolution option (much cheaper than arbitration or litigation) and the third party has no authority on the matter- they are there as a facilitator of dialogue, not to make a judgement. For more information on mediation see p.74

Explanation

The correct answers are as follows:

Table Description automatically generated

This is litigation as it involves a legal team and it's public. Out of the 4 options only litigation is a public dispute resolution.

Explanation

The correct answers are: 1) the painter using magnolia instead of white, and 5) the supplier who was late on his delivery. These are considered minor breaches because the contract was still fulfilled and it didn't affect the contract in any significant way. In this type of question you have to use logic to deduce the right answer; 2) A consultant giving bad advice would be a major breach - it would be a huge issue, particularly if that advice led to an accident or death. Think about an Architect advising on a type of pillar, and it turns out that pillar can't support the weight of the building. That would be bad. 3) Lions and Tigers are not the same thing - so that would be a pretty fundamental mistake in a contract. 4) Breaching a non-disclosure agreement is usually considered a major breach of a contract (this is mentioned in chapter 2.1). See p. 48 for more information on minor breaches.

Explanation

A Time is of the Essence Clause should be included. This stresses the importance of obligations being completed on time, with any delays (e.g. in delivery of ingredients) being treated as a breach of a condition. The other three options are probably important to have in a contract, but don't relate specifically to this example. See p.45 for more information on Time is of the Essence Clauses

Explanation

1 is the correct answer. This is a direct quote from p. 104 of the study guide.

Explanation

The purpose of liability clauses is "to limit commercial and financial exposure"- this is a direct quote from p.2. Liability is the amount that a company owes to another party- this is why contracts will focus on limiting their liability as much as possible.

Explanation

"restitution damages cannot be mitigated by the actions of the innocent party" is the untrue state-ment out of these four. The general principle of Restitution Damages is that the innocent party is expected to be proactive in mitigating the consequences of any breach and should not allow costs to spiral out of control. See p. 124

Explanation

The correct answers are as follows:

Table Description automatically generated

This is the specification as it talks about types of fabric.

Explanation

A limitation of liability caps a company's exposure to risk. In SOME cases this may mean that the responsibility passes to the other party- but not always. For this reason option 2 is correct and 4 isn't. Option 1 is the definition of liquidated damages and 3 is just a made-up answer. See p.20 for more information on Liability

Explanation

The correct answers are as follows:

The answer is avoid because they have postponed a meeting.

Explanation

Unliquidated damages would be the best to include as there is no way of identifying a figure for liquidated damages. This would be the safest thing for the buyer to do. P.108 - section on Unliqui-dated Damages.

Explanation

Silence is not acceptance. Acceptance can be in writing, verbal or implied by conduct. The three other options are ways in which a contract could be accepted by conduct. See p.8 of the study guide

Explanation

The correct answers are 1, 3 and 5: exclusions should be narrowly defined and clearly state which types of liabilities are excluded, liability is a legal responsibility and liability cannot be excluded for injury resulting from negligence. These are all explained on p. 22. Liability is never there to publish anyone (this is a red herring answer that CIPS like to put into different questions and it's usually the wrong answer - no one should look to publish anyone else). The option 'Liability can only be limited where there is valid insurance' is not true. A contract can state any limitations on liability so long as it's agreed by both parties, they're fair and don't contradict any laws. The thing about not being able to exclude liability regarding personal injury is a Law in the UK.

Explanation

3 is the correct answer. Damages cannot be claimed is there has not been any loss. This is stated on p. 122

Explanation

The correct answers are as follows:

Table Description automatically generated

This is mediation - there's a third party with no powers. The answer can't be negotiation as negotiation doesn't have a third party. The answer can't be litigation or arbitration as the third party here does have decision making power.

Explanation

This is affirmation of the contract. When a breach occurs the injured party has two options; termi-nate the contract or affirm the contract. In this example they have affirmed the contract- they have chosen to continue working with the offending party. See p.60.

Explanation

yes- if there is a variation clause and both parties agree. This would usually be written in as a 'price adjustment clause' but if it's not, then it could be agreed and signed by both parties as a 'contract variation'. See p.16 for more details

Explanation

The correct answers are as follows:

This is payment terms - the discussion is about amending the payment terms from 60 days to 30 days.

Explanation

They should include service credits and a service level agreement. Service Credits allow the buyer to claim back if the service drops below an agreed standard. That standard needs to be clearly out-lined in an SLA. See p.31 for more details