PSI Contracts and Business Law 3 — Questions and Answers
Question 1: Under contract law, what is the 'mirror image' rule?
- The acceptance must exactly match the offer for a contract to form (Correct answer)
- Contracts must be written in clear language
- Both parties must sign simultaneously
- The consideration must be equal on both sides
Correct answer: The acceptance must exactly match the offer for a contract to form
The mirror image rule requires that acceptance must exactly match the offer; any variation or addition creates a counteroffer, not an acceptance.
Question 2: Which type of business entity offers limited liability to all owners while allowing pass-through taxation?
- General partnership
- Sole proprietorship
- Limited Liability Company (LLC) (Correct answer)
- C-Corporation
Correct answer: Limited Liability Company (LLC)
An LLC provides all members with limited liability protection while defaulting to pass-through taxation, avoiding the double taxation of a C-Corporation.
Question 3: What is the 'parol evidence rule' in contract law?
- Oral contracts are always unenforceable
- Prior or contemporaneous oral agreements cannot contradict a fully integrated written contract (Correct answer)
- Contracts must be witnessed by a notary
- Handwritten contracts override typed ones
Correct answer: Prior or contemporaneous oral agreements cannot contradict a fully integrated written contract
The parol evidence rule bars introduction of prior or contemporaneous oral or written statements to contradict, vary, or add to the terms of a fully integrated written contract.
Question 4: A seller refuses to deliver goods after signing a sales contract, citing a rise in market price. The buyer covers by purchasing similar goods elsewhere at a higher price. What damages may the buyer recover?
- Only nominal damages
- The difference between the contract price and the cover price, plus incidental damages (Correct answer)
- The full cover price
- Consequential damages only
Correct answer: The difference between the contract price and the cover price, plus incidental damages
Under UCC §2-712, a buyer who covers may recover the difference between the cover price and the contract price, plus any incidental or consequential damages.
Question 5: What is a 'novation' in contract law?
- Adding a new term to an existing contract
- Substituting a new party or obligation, releasing the original party from liability (Correct answer)
- Extending the performance deadline
- Converting an oral contract to a written one
Correct answer: Substituting a new party or obligation, releasing the original party from liability
A novation substitutes a new party or obligation for an existing one, with the consent of all parties, and extinguishes the original party's liability.
Question 6: In a limited partnership, which partners have personal liability for the partnership's debts?
- All partners equally
- Only the limited partners
- Only the general partners (Correct answer)
- No partners, since limited partnerships have corporate-like protection
Correct answer: Only the general partners
In a limited partnership, general partners have unlimited personal liability for partnership debts, while limited partners' liability is limited to their investment.
Question 7: What legal doctrine prevents a party from asserting rights that are inconsistent with a position they previously took, when another party relied on that position?
- Accord and satisfaction
- Equitable estoppel (Correct answer)
- Rescission
- Laches
Correct answer: Equitable estoppel
Equitable estoppel prevents a party from taking a legal position inconsistent with a prior representation when another party has reasonably relied on that representation to their detriment.
PSI Contracts and Business Law 3
Under contract law, what is the 'mirror image' rule?