CIMA BA4 · Chapter 11
Law of contract: terms, breach and remedies MCQs with Answers
10 multiple-choice questions on Law of contract: terms, breach and remedies for CIMA BA4 Fundamentals of Ethics, Corporate Governance and Business Law. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Under English law, what is the remedy for breach of a warranty?
- A) Termination of the contract and damages
- B) Damages only
- C) Specific performance only
- D) Rescission of the contract only
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Answer: B) Damages only
A warranty is a minor term, collateral to the main purpose of the contract, and breach entitles the innocent party to damages only. Breach of a condition, which goes to the root of the contract, allows the innocent party to terminate and claim damages.
Question 2
Under English law, what is the standard limitation period for bringing an action for breach of a simple contract?
- A) Twelve years from the date the contract was made
- B) Three years from the date of breach
- C) One year from the date of breach
- D) Six years from the date of breach
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Answer: D) Six years from the date of breach
Under the Limitation Act 1980, an action for breach of a simple contract must be brought within six years from the date the cause of action accrued, normally the date of breach. For contracts made by deed, the period is twelve years.
Question 3
Under English law, which of the following is an equitable remedy?
- A) Specific performance
- B) Liquidated damages
- C) Nominal damages
- D) An action for the price
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Answer: A) Specific performance
Specific performance is an equitable remedy ordering a party to perform its contractual obligations. Equitable remedies are discretionary and are generally granted only where damages would be inadequate, for example in contracts for land or unique goods. Damages and actions for the price are common law remedies.
Question 4
A contract states that the seller will deliver goods by 1 June. On 1 May, the seller tells the buyer it will not deliver at all. Under English law, what is the buyer's position?
- A) The buyer must wait until 1 June before taking any action
- B) There is no breach until the goods are due, so the buyer has no remedy
- C) This is anticipatory breach; the buyer may sue immediately or wait until the performance date
- D) The contract is automatically discharged by frustration
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Answer: C) This is anticipatory breach; the buyer may sue immediately or wait until the performance date
When one party indicates before performance is due that it will not perform, this is anticipatory breach. The innocent party may treat the contract as ended and sue immediately (Hochster v De la Tour), or affirm it and wait for the performance date, accepting the risk of later events. Refusal to perform is not frustration.
Question 5
Under English law, which statement about exclusion clauses is correct?
- A) Any exclusion clause is valid if it appears anywhere in a signed contract, regardless of statute
- B) An exclusion clause printed on a receipt given after the contract is made is always incorporated
- C) Ambiguities in an exclusion clause are interpreted in favour of the party relying on it
- D) Liability for death or personal injury resulting from negligence cannot be excluded
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Answer: D) Liability for death or personal injury resulting from negligence cannot be excluded
Under statute (the Unfair Contract Terms Act 1977 for business contracts, and the Consumer Rights Act 2015 for consumer contracts), liability for death or personal injury caused by negligence cannot be excluded. Notice must be given before or at the time of contracting (Olley v Marlborough Court Hotel), and ambiguities are construed against the party relying on the clause (contra proferentem).
Question 6
Under English law, the rule in Hadley v Baxendale concerns which aspect of damages?
- A) Mitigation: the claimant must take reasonable steps to reduce the loss
- B) Penalties: a clause imposing a disproportionate sum is unenforceable
- C) Remoteness: losses are recoverable if they arise naturally from the breach or were in the reasonable contemplation of both parties when contracting
- D) Nominal damages: a small sum is awarded where no loss is proven
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Answer: C) Remoteness: losses are recoverable if they arise naturally from the breach or were in the reasonable contemplation of both parties when contracting
Hadley v Baxendale established the two limbs of remoteness: losses arising naturally in the usual course of things from the breach, and losses that may reasonably be supposed to have been in the contemplation of both parties at the time of contracting as the probable result of breach. Other losses are too remote to recover.
Question 7
Kiran agreed to buy machinery from Lee for £40,000. Lee breached the contract by failing to deliver. Kiran bought an identical machine elsewhere for £46,000. Kiran also lost profits of £3,000 that were in both parties' reasonable contemplation. Under English law, what damages can Kiran most likely claim?
- A) £6,000
- B) £9,000
- C) £46,000
- D) £49,000
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Answer: B) £9,000
Expectation damages aim to put Kiran in the position she would have been in had the contract been performed. Extra cost of a substitute machine = £46,000 - £40,000 = £6,000. Add the foreseeable lost profit of £3,000, giving £6,000 + £3,000 = £9,000. She cannot recover the full £46,000, because she would have paid £40,000 in any event.
Question 8
Under English law, what is the effect of a valid liquidated damages clause?
- A) The innocent party recovers the agreed sum on breach, regardless of whether actual loss is higher or lower
- B) The innocent party must prove its actual loss before recovering anything
- C) The clause is void because damages can only be set by a court
- D) The innocent party recovers the agreed sum plus any additional actual loss
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Answer: A) The innocent party recovers the agreed sum on breach, regardless of whether actual loss is higher or lower
A liquidated damages clause fixes in advance the sum payable on breach. If valid, the agreed sum is recoverable whether actual loss turns out to be greater or smaller, and the innocent party need not prove its loss. Following Cavendish Square Holding v Makdessi (2015), a clause is an unenforceable penalty only if it imposes a detriment out of all proportion to any legitimate interest of the innocent party in performance; it no longer has to be a strict genuine pre-estimate of loss.
Question 9
A singer contracts to perform at a concert but refuses to attend. The organiser asks the court to order her to perform. Under English law, what is the court most likely to do?
- A) Order specific performance, because it is available as of right for any breach
- B) Refuse specific performance, because the courts will not order performance of contracts for personal services, and award damages instead
- C) Order the singer to be imprisoned until she performs
- D) Refuse any remedy, because the organiser should have included a penalty clause
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Answer: B) Refuse specific performance, because the courts will not order performance of contracts for personal services, and award damages instead
Specific performance is discretionary and is not granted for contracts of personal service, because forcing someone to work would be oppressive and impossible to supervise. The organiser would be awarded damages. In some cases an injunction may restrain the singer from performing elsewhere in breach of an express negative stipulation.
Question 10
Under English law, a ship is chartered for 24 months. Due to the owner's breach of a term requiring the ship to be 'seaworthy', the ship is out of service for five weeks. The term could be broken in trivial or serious ways. How is the term classified and what is the charterer's remedy?
- A) A condition; the charterer may always terminate the contract
- B) A warranty; the charterer may never terminate, whatever the consequences
- C) An exclusion clause; the charterer has no remedy
- D) An innominate term; the charterer can claim damages but can only terminate if the breach deprives it of substantially the whole benefit of the contract
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Answer: D) An innominate term; the charterer can claim damages but can only terminate if the breach deprives it of substantially the whole benefit of the contract
Following Hong Kong Fir Shipping v Kawasaki Kisen Kaisha, a term that can be broken in ways ranging from trivial to serious is innominate. The remedy depends on the seriousness of the consequences: termination is available only if the breach deprives the innocent party of substantially the whole benefit intended, otherwise damages only. Losing five weeks of a 24-month charter is unlikely to meet that test, so the charterer would be limited to damages.