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McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 7: The Nature and Creation of Contracts
True/False Questions
1) In order to decide whether the parties intended to create a legally enforceable agreement,
the courts apply a subjective “reasonable person” test.
a. True
b. False
2) Agreements created between family members or friends are never legally enforceable.
a. True
b. False
3) Anita was required to enter her co-worker’s office to get a file. When she was there, she
saw the draft of an email message on the screen of her co-worker’s computer. The message
was addressed to Anita, but it had not yet been sent. In the message, the co-worker offered
to sell Anita her leather jacket for $100. Once Anita saw the email, she was entitled to
accept the offer.
a. True
b. False
4) An offer, that is not an option contract, is always automatically revoked if either the
offeror or the offeree dies before acceptance.
a. True
b. False
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 7: The Nature and Creation of Contracts
5) On June 1, Sasha agreed to sell a car to Elaine for $10 000. Under the terms of that
agreement, she was required to pay the price to him on June 10 and he was required to
transfer ownership in the car to her on the same day. Once Sasha and Elaine do so, their
contractual relationship will be terminated for all purposes.
a. True
b. False
6) As a general rule, the courts will not enforce an agreement that is not in writing.
a. True
b. False
7) Simon owns 10 000 shares in ABC Inc. He wanted to sell half of them in order to raise
$20 000 in cash. He therefore wrote separate letters to Bronwyn and Gwyneth on June 1. In
each case he said, “I will sell 5000 shares in ABC Inc to you for $20 000. Please respond by
any reasonable means within one week.” Bronwyn replied on June 3 with a letter that said:
“I accept your offer.” Simon received that letter on June 5. On June 6, he received a fax
from Gwyneth that said, “I accept your offer.” Simon then informed Gwyneth by telephone
that he had already sold the shares to Bronwyn. In that situation, there is no contract
between Simon and Gwyneth.
a. True
b. False
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 7: The Nature and Creation of Contracts
8) An advertisement in a newspaper is usually considered an offer if it contains a clear
description of the product and a specific price.
a. True
b. False
9) A statute makes it illegal and a crime for an unlicensed individual to “offer for sale a
switchblade knife.” Mack, who does not hold a licence, owns a store that deals in a variety
of items. The front window display case, which is visible from the street, contains a
switchblade knife that has a price tag on it. Mack has undoubtedly committed a crime
because he does not hold a licence.
a. True
b. False
10) A person may be held liable under a contract even if they did not personally want
(subjectively intend) to enter into an enforceable agreement.
a. True
b. False
11) A firm offer is binding upon the offeror if it was given in writing.
a. True
b. False
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 7: The Nature and Creation of Contracts
12) Marissa had 500 shares in XYZ Corp that she was willing to sell at a price of $10 each.
She wrote a letter to Mark that said, “I will sell 500 shares in XYZ Corp to you at a price of
$10 each. You can accept any time within the next month. This is a firm offer.” Marissa
signed and sealed that document. When he received that letter two days later, Mark decided
to accept Marissa’s offer. He wrote a letter to that effect, but then forgot to mail it. Two
weeks later, the value of the shares increased to $20 each. Marissa therefore no longer
wanted to sell them at the original price. She telephoned Mark and told him that her offer
was revoked. She was entitled to do so.
a. True
b. False
13) An option is valid only if it is placed under seal.
a. True
b. False
14) Under the normal tendering process, a party that submits a bid may have obligations
under both Contract A and Contract B.
a. True
b. False
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 7: The Nature and Creation of Contracts
15) Mysty offered to sell her car to Tim for $15 000. Tim faxed a letter to her that said,
“Consider it sold. I’ll bring the money to you next Monday when I pick up the vehicle. Of
course, for that price, I’ll want you to install a new stereo in it.” Tim did not hear anything
more from Mysty, but he arrived at her door the following Monday with $15 000 in cash.
He was delighted to find that a new stereo had been installed in the car, but disappointed
when Mysty refused to accept his money or hand over the vehicle. Mysty is required to do
so because there was a valid offer and acceptance.
a. True
b. False
Multiple Choice Questions
1) The three elements needed to create most contracts are best described as
a. offer and acceptance, consideration, and a written agreement.
b. an intention to create legal relations, offer and acceptance, and consideration.
c. an intention to create legal relations, an exchange of value, and consideration.
d. offer and acceptance, an invitation to treat, and communication of the offer.
e. quid pro quo, volenti non fit injuria, and consensus ad idem.
2) Jose and Mei entered into what appeared to be a contract for the sale of an antique
automobile. Jose agreed to pay the purchase price and Mei agreed to deliver the car to
Jose’s garage. Secretly, however, Mei planned to keep the car for herself. Will a court
enforce the agreement?
a. A court will not enforce the agreement because the existence of Mei’s secret plan meant
that the parties did not really agree to the same thing.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 7: The Nature and Creation of Contracts
b. A court will not enforce the agreement because Mei expected to keep the automobile and
contract law tries to protect reasonable expectations.
c. A court will enforce the agreement because a reasonable person would have concluded
that the parties entered into an exchange of promises for value.
d. A court will enforce the agreement because Mei behaved badly and the court wants to
punish that type of behaviour.
e. A court will not enforce the agreement because business people must be able to rely on
outward appearances.
3) Cindy calls David to accept his offer to trim her hedges in exchange for a haircut. Cindy
is described as the
a. invitee.
b. contracting party.
c. offeree.
d. offeror.
e. proposer.
4) Henrique posts a notice at the racetrack that says he is willing to sell his old horse for
$5000. When he returns to the track the next day two people arrive at the same time to buy
the horse. A court would most likely say that Henrique
a. can keep the horse and refuse to sell to either person.
b. must choose between the buyers and sell the horse for $5000 to one of them.
c. must sell the horse to one buyer and find another horse to sell to the other buyer.
d. must sell the horse to one buyer and pay $5000 to the other buyer.
e. can accept the offer of both buyers.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 7: The Nature and Creation of Contracts
5) Wessam offers to sell Ivan a bicycle for $100. Ivan asks to think about it for a couple
days. The next day, Wessam tells him that she has increased the price to $150. Wessam has
a. lost her capacity to enter into a contract.
b. rejected the offer.
c. allowed a reasonable time to lapse.
d. revoked her original offer.
e. made a counter offer.
6) Morris posted a notice promising to pay a $50 reward to anyone who found his lost cat.
Morris saw Edna, his neighbour, and drew her attention to the notice. She expressed
sympathy, but said that she did not have time to help because she was rushing off to work.
When she returned home early that afternoon, however, she went to Morris’s house to tell
him that she would look for the cat. Although he was not at home, she searched the area,
found the animal, and returned it to his house. Morris now refuses to pay Edna the $50. A
court would most likely say that Edna can
a. do nothing because Morris is entitled to revoke his offer at any time.
b. demand payment because a contract was created through her act of acceptance in acting
on the offer.
c. do nothing because she was required to communicate her acceptance in writing.
d. demand payment because the offeree decides whether an offer has been open for a
reasonable period.
e. do nothing because she rejected Morris’s offer when she said she had to rush to work.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 7: The Nature and Creation of Contracts
7) Joan wants to buy a prime piece of real estate from Guiaumme, but she is waiting to find
out whether the bank will give her a loan. In order to make sure that Guiaumme does not
sell the land to anyone else, Joan gives him $5000 in exchange for his promise not to sell
the land to her within a certain period of time if she decides to go through with the
purchase. This type of agreement is called
a. a firm offer.
b. a tender.
c. a conditional offer.
d. an option.
e. a proposal.
8) By submitting a tender, a party normally
a. creates an enforceable contract, called an option, to create another contract in the future.
b. prevents the other party from revoking its bid.
c. accepts an offer to enter into a contract for services.
d. creates an invitation to treat.
e. accepts an offer to enter into a fair bidding process.
9) Lori offers to sell her season pass to the ballet for $200. Her co-worker, Alan, says that
he will buy the pass for $150. Alan has provided
a. an option.
b. a counter offer.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 7: The Nature and Creation of Contracts
c. a firm offer.
d. a tender.
e. a trust.
10) A battle of the forms usually occurs when
a. each party’s standard form contract contains all of the terms of the agreement.
b. each party insists on multiple copies of a document.
c. each party insists upon using the offeror’s standard form contract for every transaction.
d. each party claims to have entered into a contract on the basis of its own standard form
contract and the two standard form contracts that the parties exchanged do not have the
same terms.
e. each party insists upon using the offeree’s standard form contract for every transaction.
11) Regarding a battle of the forms, which one of the following does a court often consider
when deciding objectively which contractual terms were agreed to by the parties?
a. the likelihood of future dealings between parties
b. the existence of a duty of care in negligence
c. the availability of insurance
d. the parties’ subjective intentions
e. the usual practice in the industry
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 7: The Nature and Creation of Contracts
12) Gordon sends a letter to Thomas that says, “I will buy your diesel engine for $7000.” At
exactly the same time, Thomas sends a letter to Gordon that says, “I will sell my diesel
engine to you for $7000.” Which of the following statements is TRUE?
a. This situation is described as a “cross-acceptance.”
b. This situation involves a meeting of the minds.
c. Both letters respond to an offer.
d. This situation creates a bilateral contract.
e. Each letter contains an offer, but neither contains an acceptance.
13) In early March, Mathilde offered to rent her cottage to Tom for the first two weeks of
July at a cost of $1200. Mathilde did not impose any restrictions on acceptance. Tom did
not yet know when his vacation was scheduled, so he did not immediately respond to
Mathilde’s offer. Tom learned at the end of June that he was entitled to vacation during the
first two weeks of July. He therefore arrived at the cottage on July 1st and told Mathilde for
the first time that he was accepting her offer. Which of the following statements is most
likely TRUE?
a. Tom has the right to stay at the cottage because he accepted Mathilde’s offer by silence.
b. Tom has the right to stay at the cottage because he accepted Mathilde’s offer by conduct.
c. Tom does not have the right to stay at the cottage because he let Mathilde’s offer lapse as
it was at best open for acceptance for a reasonable time.
d. Tom has the right to stay at the cottage because Mathilde should have known, as a
reasonable person, that he would want to do so.
e. Tom has the right to stay at the cottage because Mathilde gave an offer.
14) “Contract law represents the pathology of commerce.” Which of the following
statements fully explains that quotation?
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 7: The Nature and Creation of Contracts
a. Most contracts eventually develop problems that require a judge’s help.
b. Since most contracts are performed without problems, there is no reason for business
people to study the rules of contract.
c. Most of the problems that affect commercial contracts are unpredictable and
unavoidable.
d. A business person should go to court every time that a commercial contract develops a
problem.
e. Legal issues usually arise only if a commercial relationship becomes unhealthy.
15) Which of the following statements is TRUE?
a. An intention to create legal relations always exists in a commercial context.
b. An intention to create legal relations never exists in a family context.
c. The courts use a subjective test when determining whether or not there is an intention to
create legal relations.
d. When dealing with the intention to create legal relations, courts apply presumptions that
cannot be rebutted.
e. The existence of an intention to create legal relations is generally readily apparent.
16) Which of the following statements best explains why the courts use an objective test to
determine whether or not there is an intention to create legal relations?
a. It would not be fair to recognize a contract unless both parties actually intended to be
bound by that contract.
b. The law of contracts is intended to protect reasonable expectations.
c. The reasonable person test is only useful for determining subjective intentions.
d. The courts are confident that people do not lie in court.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 7: The Nature and Creation of Contracts
e. An objective test is used if a party is a company, while a subjective test is used if a party
is a human being.
17) ABC Inc and XYZ Ltd entered into a written agreement for the purchase and sale of
paper products. That agreement contained a clause that said: “This arrangement is not
entered into, nor is this memorandum written, as a formal or legal agreement, and shall not
be subject to the jurisdiction of the Law Courts or in any other way be enforceable by law.”
ABC Inc wants the paper products, but XYZ Ltd refuses to deliver them. Which of the
following statements is most likely TRUE?
a. The agreement is legally enforceable because the clause in question is inconsistent with
the rules of offer and acceptance.
b. The agreement is legally unenforceable because the clause in question was an invitation
to treat, rather than an offer.
c. The agreement is legally enforceable because the clause in question demonstrates that the
parties had a meeting of the minds.
d. The agreement is legally unenforceable because the parties did not intend to create legal
relations.
e. The agreement is legally enforceable because it was written.
18) Which of the following statements is TRUE?
a. An offer is automatically terminated as soon as it is accepted by one person.
b. An invitation to treat indicates that the offeror is willing to receive an acceptance.
c. The courts sometimes recognize a difference between an offeree’s harmless inquiry and a
counter offer.
d. The courts use a subjective test to determine whether a statement is an offer or an
invitation to treat.
e. An invitation to treat indicates that the offeree is willing to receive an acceptance.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 7: The Nature and Creation of Contracts
19) Which of the following statements is TRUE?
a. A firm offer can only be revoked in writing.
b. An offeree may never communicate a revocation in the same way that it communicated
its offer.
c. The offeree cannot require acceptance to be made in writing.
d. An offer that appeared in a newspaper can only be terminated by a revocation that
appears in the same newspaper.
e. An counter-offer destroys the original offer so as to act as a revocation of that offer.
20) An offer can be revoked
a. even if it was a firm offer.
b. if it was made under seal.
c. within a reasonable time of acceptance.
d. if it is contained in an option.
e. as long as the offeror communicates that intention to a judge.
21) Simon believed that he might want to buy certain shares from Melinda in the near
future. On June 1. He therefore paid her $1000 in exchange for an option to purchase 5000
shares in Acme Inc at $10 each on or before October 1. Which of the following statements
is TRUE?
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 7: The Nature and Creation of Contracts
a. If the market value of the shares immediately dropped to $5 each and stayed there
throughout the option period, Simon would be obligated to buy 5000 shares from Melinda
at double their actual value.
b. If the market value of the shares immediately increased to $20 each and stayed there
throughout the option period, Melinda might be obligated to sell 5000 shares to Simon at
half of their market value.
c. If the market value of the shares immediately increased to $20 each, Melinda could
revoke her offer to sell the shares any time before Simon accepted it.
d. The option would create enforceable obligations only if and when Simon agreed to buy
the shares.
e. Simon will be entitled to enforce the option only if Melinda cannot find any other
potential buyers.
22) The Town of Oxbridge wants to build a new arts centre, but it is not sure which
construction company it should hire for the job. Which type of action is the town most
likely to make?
a. a call for tenders
b. an auction
c. an option
d. an irrevocable bid
e. a request for invitations to treat
23) Rabby Inc is an oil exploration company that wants a sophisticated piece of equipment
to be designed for its operations in northern Alberta. It therefore wants to receive bids from
various engineering companies. In the context of a normal tendering process, which of the
following statements is TRUE?
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 7: The Nature and Creation of Contracts
a. Each engineering company that participates will issue an invitation to treat, an offer, and
an acceptance.
b. An engineering company should carefully check its cost calculations before submitting
its bid because that bid will be turned into Contract A if Rabby Inc accepts it.
c. The law will recognize Contract B in order to protect the Rabby Inc while it evaluates the
bids that it has received.
d. Rabby Inc will communicate an offer to enter into a fair bidding process, issue an
invitation to treat for the offers for the design contract, and accept one engineering
company’s offer to design the equipment.
e. The tendering process requires the parties to satisfy a number of statutory requirements.
24) Which of the following statements is TRUE?
a. The death or insanity of either the offeror or the offeree will always prevent acceptance.
b. An option will never come to an end by the mere lapse of time.
c. Neither party can revive an offer once a counter offer has been made.
d. A firm offer can be accepted any time before it is terminated.
e. There cannot be a “meeting of the minds” if the offeror accepts the offeree’s counter
offer.
25) A bilateral contract
a. can occur as a result of a tendering process.
b. always imposes obligations on only one party.
c. must always be accepted through spoken words rather than through conduct.
d. does not require a meeting of the minds.
e. always starts with an invitation to treat.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 7: The Nature and Creation of Contracts
26) The “master of the offer”
a. can insist that silence will be treated as acceptance.
b. can change the terms of an offer after it has been accepted.
c. is a concept that occurs under a bilateral contract but not under a unilateral contract.
d. is a description of the offeree, who can either accept or reject an offer.
e. is always the same party that made and communicated the offer.
27) On March 1st, Janet, who lives in Edmonton, sent a letter to Tad, who lives in Toronto.
The letter said: “I want to buy your car. I’ll pay $10 000 for it. If I don’t hear anything more
from you, I’ll assume that I can drive the car away when I’m in Toronto at the beginning of
April.” When he received that letter on March 5th, Tad phoned Janet. She was not home,
but he left a message on her answering machine that said: “I’m willing to sell my car to you,
but only if you promise to pay $15 000. I need your answer sent by mail within one week.”
Janet listened to that message on March 6. That same day, she sent a second letter to Tad
that said, “I received your message. I’ll pay $15 000, but not one cent more.” On March 10,
Tad decided that he did not want to sell the car after all. He immediately left a message on
Janet’s answering machine that said: “The deal is off. I’m keeping my car.” An hour later,
he received Janet’s second letter. Which of the following statements is most likely TRUE?
a. The parties do not have a contract because an offer that is received by telephone cannot
be accepted by mail.
b. A contract was created in Edmonton on March 6.
c. The parties do not have a contract because Janet was not entitled to say that her initial
offer would be accepted through silence.
d. A contract was created in Toronto on March 10.
e. Tad successfully revoked his offer before he received Janet’s acceptance.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 7: The Nature and Creation of Contracts
28) Bentley sent a letter to Helene that said: “I’ll sell 5000 widgets to you for $50 000. This
offer is open for acceptance until August 10.” As soon as she received that letter on August
1, Helene replied with a letter that said: “That sounds like a good deal. I will bring the
money to your office on August 15. I’ll also collect the widgets at that time.” When Helene
arrived at Bentley’s office on August 15, however, he refused to accept the money or hand
over the widgets. He explained that he had not yet received her letter. He also said that he
was no longer willing to do business with her. Helene’s letter finally reached Bentley on
August 20. By that time, the market value of the widgets had increased to $75 000.
Applying the general rules for communication of acceptance, which statement is most
likely TRUE?
a. Bentley revoked his offer on August 15.
b. A court would refuse to recognize a contract because it would be unfair to require
Bentley to sell $75 000 worth of widgets for $50 000.
c. A contract was created on August 1.
d. Bentley’s offer was terminated by lapse of time.
e. A contract was created on August 20.
29) Eric bought a house for $150 000. He paid $25 000 immediately and promised the
seller that he would pay the remainder in monthly installments over the next 10 years. Eric
then told his daughter, Naomi, that he would transfer the house to her if and when she paid
all of the monthly payments. Naomi was reluctant to commit herself to that arrangement
because she was not sure if she would always have enough money to make the payments.
Eric said to her, “Well, let’s see how it goes.” Naomi made the monthly payments for six
years. Unfortunately, she and her father then began to fight. At that point, he told her that
the deal was off. Eric has offered to repay Naomi for all of the payments that she had made,
but he insists that the house will always belong to him. The market value of the house has
recently and unexpectedly increased from $150 000 to $400000. Which of the following
statements is most likely TRUE?
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 7: The Nature and Creation of Contracts
a. Eric and Naomi never had a contract because they never had an intention to create legal
relations.
b. Eric and Naomi never had a contract because he revoked his offer before she completed
making the payments.
c. Eric is required to give Naomi an opportunity to finish completing the payments, and if
she does so, she is entitled to the house.
d. Since the parties created a unilateral contract, Naomi still has an obligation to make the
monthly payments.
e. A court would not recognize a contract because no reasonable person would ever offer to
sell a $400 000 house for less than half that amount.
30) The case of Carlill v Carbolic Smoke Ball Co is best known for dealing with the issue
of
a. tenders.
b. counter-offers.
c. unilateral contracts.
d. invitations to treat.
e. insanity.
31) Quality Kitchens Inc operates a store that sells kitchen utensils and gadgets. In an
attempt to increase sales, the store ran an advertisement in a newspaper that featured Juicy
Brand Blenders for $49.99. Martha rushed to the store with the intention of buying a
blender. When she arrived however, she was told that while there were no such blenders in
stock, the store did have several Swirl Brand Blenders to sell for $99.99 each. After a bit of
investigation, Martha discovered that the store knew that it never had any Juicy Brand
Blenders, and that it was simply hoping that shoppers would buy the Swirl Brand Blenders
once they got inside the store. Which of the following statements is TRUE?
