CIPS L5M3 Sample questions Elements of a valid contract

CIPS L5M3 Sample questions Elements of a valid contract

Remember you access video lesson, downloads and practice exercises on CIPS L5M3 Managing contractual risks here

Understanding the elements of a valid contract is important if you want to manage contractual risks.

Why is that?

A lot of things can go wrong in a commercial agreement

Imaging arranging dinner plans with a special someone and then they text you saying “something come up”

Depending on the circumstance that could annoy you but it wont necessarily destroy your bank account.

Think of the same in a business

Not the dinner, but the idea of having an agreement with a supplier or a buyer then they either don’t do what the agreement required or they do it poorly

This is where managing contractual risks come in

You see, business agreements are summed up in a contract and just like any agreement, things can go wrong

So, what can you do about such? Well, lets start by identifying the issues relating to the formation of contracts and the associated risks

Here are some CIPS L5M3 sample questions the elements of a valid contract being the focus

Question 1:

Alice makes an offer to sell her car to Robert for $5,000, and Robert agrees to buy the car for that price. From the choices below¸ which element of a valid contract does this scenario illustrate?

1. Capacity to contract
2. Consideration
3. Acceptance
4. Legality

Answer: C

Explanation

By agreeing to purchase the car at the price Alice suggest, without making any changes to it, Robert has accepted the offer

Question 2

XYZ Ltd enters into a contract with John to paint the company’s office building for $3,000. In this case what is the consideration in this contract?

1. The office building
2. $3,000
3. The paint used
4. XYZ Ltd

Answer: B

Explanation:

Consideration is the price you pay to be in a contract or something of value that you lose or exchange in the contract. In this case the company exchanges $3000 for John’s painting services

Question 3

Jesica, a minor, enters a contract to buy a new laptop from a Tech dealer store for $1,200. Which element of a valid contract might be missing in this scenario?

1. Offer
2. Capacity
3. Consideration
4. Legality

Answer: B

A minor is a person under the legal age to the age of the majority. As a general rule minors are not allowed to contract unless its a contract for necessaries or a contract of beneficial service to the minor.

In this case Jesica lacks the legal capacity to enter into a binding contract.

Question 4

A business owner looking to increase their sales offers a 10% discount on future purchases to any customer who refers a new client.

What kind of contract will result when a customer refers a new client and claims the discount?

1. Implied contract
2. Unilateral contract
3. Contract of utmost good faith
4. Voidable contract

Answer B

Explanation

The contract is unilateral because the customers are under no obligation to refer new clients, but the shop owner is under contractual obligation to give the 10% discount if a customer decides to go ahead and refer a new client. A unilateral contract is a contract in which one party is bound by the actual contract

Question 5

An electronics company enters into a contract with a supplier for components. Later the transaction, it is discovered that the supplier does not have a valid license to operate. Which element of the contract is violated in this case?

1. Offer
2. Capacity
3. Legality
4. Consideration

Answer: C

Explanation

Intention to create a legal relationship is one of the elements of a contract and the relationship cannot be legal if one of the parties performs the contract in an illegal manner.

In this case the supplier’s lack of a valid license violates the legality element.

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