CIPS L4M3 Commercial Contracting Online Training
CIPS L4M3 Online Training
The questions for L4M3 were last updated at Nov 23,2024.
- Exam Code: L4M3
- Exam Name: Commercial Contracting
- Certification Provider: CIPS
- Latest update: Nov 23,2024
According to rule of contract formation, which of the following is a valid acceptance?
- A . The person orally agrees to pay the offered price
- B . The person states that she is able to pay the offered price
- C . The person asks for a lower price
- D . The person says that she will think about it overnight
A
Explanation:
Once a valid acceptance takes place, a binding contract is formed. It is therefore important to know what constitutes a valid acceptance in order to establish if the parties are bound by the agreement. There are three main rules relating to acceptance:
Which of the following is used to detail the complex matter that may be verbiage to the main document?
- A . Contract variation
- B . Schedule
- C . Subcontracting
- D . Standard terms and conditions
B
Explanation:
Without further explanation, a schedule may be deemed to form an integral part of the obligations of either or both parties. Obviously, the scope or binding nature of such schedule depends on the way it is referred to in the obligatory language of the main agreement. Accordingly, merely attaching the general terms and conditions of sale without explaining to which part of the sale they apply or which provisions apply does not subject a sale pursuant to the body text of the agreement to those general terms and conditions. Subcontracting is the practice of assigning, or outsourcing, part of the obligations and tasks under a contract to another party known as a subcontractor.
Reference:
– Schedules, annexes and exhibits
– CIPS study guide page 22-26 LO 1, AC 1.1
Which of the following is a key feature of liquidated damage clauses?
- A . The amount of damage is predetermined
- B . Liquidated damage is a penalty
- C . The amount of liquidated damages must be exceptionally larger than the actual damages incurred
- D . The liquidated damages are non-negotiable
A
Explanation:
Liquidated damages are presented in certain legal contracts as an estimate of otherwise intangible or hard-to-define losses to one of the parties. It is a provision that allows for the payment of a specified sum should one of the parties be in breach of contract. Understanding Liquidated Damages
Liquidated damages are meant as a fair representation of losses in situations where actual damages are difficult to ascertain. In general, liquidated damages are meant to be fair, rather than punitive.
Liquidated damages may be referred to in a specific contract clause to cover circumstances where a party faces a loss from assets that do not have a direct monetary correlation. For example, if a party in a contract were to leak supply chain pricing information that is vital to a business, this could fall under liquidated damages.
A common example is a design phase for a new product that may involve consultation with outside suppliers and consultants in addition to a company’s employees. The underlying plans or designs for a product might not have a set market value. This may be true even if the subsequent product is crucial to the progress and growth of a company. These plans may be deemed to be trade secrets of the business and highly sensitive. If the plans were exposed by a disgruntled employee or supplier, it could greatly hamper the ability to generate revenue from the release of that product. A company would have to make an estimation in advance of what such losses could cost in order to include this in a liquidated damages clause of a contract.
Limitations of Liquidated Damages
It is possible that a liquidated damages clause might not be enforced by the courts. This can occur if the monetary amount of liquidated damages cited in the clause is extraordinarily disproportional to the scope of what was affected by the breached contract. Such limitations prevent a plaintiff from attempting to claim an unsubstantiated exorbitant amount from a defendant. For instance, a plaintiff might not be able to claim liquidated damages that amount to multiples of its gross revenue if the breach only affected a specific portion of its operations. The concept of liquidated damages is framed around compensation related to some harm and injury to the party rather than a fine imposed on the defendant.
The courts typically require that the parties involved make the most reasonable assessment possible for the liquidated damages clause at the time the contract is signed. This can provide a sense of understanding and reassurance of what is at stake if that aspect of the contract is breached. A liquidated damages clause can also give the parties involved a basis to negotiate from for an out-of-court settlement.
Explanation:
Reference:
– Liquidated Damages
– CIPS study guide page 158-159 LO 3, AC 3.2
To check whether supplier actually complies with the labour standards set out in the contract, the purchaser should have…?
- A . Right to penalise the supplier
- B . Right to terminate the contract
- C . Right of audit
- D . Right to rescind the contract
C
Explanation:
Many firms have compliance policies for suppliers in place. To ensure that the supplier actually comply with the standards set out, the purchaser can employ the right to audit. The buyer usually obtains the right to examine records of a vendor to determine if a fraud or a violation of company policy has occurred through the following methods:
– Right-to-audit agreement The agreement can be printed on the back of a purchase order, contract, or other procurement form.
– A simple request If the right-to-audit agreement wasn’t included on the procurement form,
and the buyer suspects irregularities, he may have to beg the vendor to allow an audit to be
performed. If the buyer is a major customer of the vendor, the buyer may be able to wield a big enough stick to obtain permission to look at the records.
– Right-to-audit Pitfalls
Reference:
– CIPS study guide page 160
– Reserving the Right to Audit the Suspicious Vendor: Right-to-audit clauses in vendor contracts help control fraud and abuse by affording discovery devices in examinations.
LO 3, AC 3.2
Which of the following is the international standard for labelling hazardous substances?
- A . GPS
- B . HSE
- C . CODEX STAN 1-1985
- D . GHS
D
Explanation:
GHS stands for the Globally Harmonized System of Classification and Labelling of Chemicals. GHS defines and classifies the hazards of chemical products, and communicates health and safety information on labels and safety data sheets). The goal is that the same set of rules for classifying hazards, and the same format and content for labels and safety data sheets (SDS) will be adopted and used around the world. An international team of hazard communication experts developed GHS.
The Global Positioning System (GPS), originally NAVSTAR GPS, is a satellite-based radionavigation system owned by the United States government and operated by the United States Space Force. It is one of the global navigation satellite systems (GNSS) that provides geolocation and time information to a GPS receiver anywhere on or near the Earth where there is an unobstructed line of sight to four or more GPS satellites. Obstacles such as mountains and buildings block the relatively weak GPS signals.
CODEX STAN 1-1985 is general standard for the labelling of packaged goods. Environment (E), health (H) and safety (S) (together EHS) is a discipline and specialty that studies and implements practical aspects of environmental protection and safety at work. In simple terms it is what organizations must do to make sure that their activities do not cause harm to anyone.
Reference: CIPS study guide page 95
LO 2, AC 2.1
Under hire purchase agreement, when will the ownership of asset legally belong to the purchaser?
- A . When the final instalment is paid
- B . When the purchaser takes possession of the asset
- C . When the down payment is made
- D . When the agreement is signed
A
Explanation:
Hire purchase is an arrangement for buying expensive consumer goods, where the buyer makes an initial down payment and pays the balance plus interest in installments. Ownership is not transferred until the end of the agreement, hire purchase plans offer more protection to the vendor than other sales or leasing methods for unsecured items. That’s because the items can be repossessed more easily should the buyer be unable to keep up with the repayments.
The answer is ‘When the final instalment is paid’.
Reference:
– Hire Purchase Agreements
– CIPS study guide page 70 LO 1, AC 1.3
Is the government only source of industrial standards within a country?
- A . No, the government can only adopt standards regarding security and defence
- B . Yes, while ISO make standards for international trade, the government standardises other facets of their country
- C . No, an organisation can also generate its own internal standards
- D . Yes, the standards must be made by legislative branch of the country
C
Explanation:
A standard is a document that sets out requirements for a specific item, material, component, system or service, or describes in detail a particular method or procedure. Standards are established by consensus and approved by recognized standardization bodies.
There are several different types of standards. Some of the most commonly-used standards set out the requirements that a particular kind of product, service or process must fulfil, in order to establish that it is ‘fit for purpose’. Other types of standard relate to methods of testing, terminology and definitions, information requirements, or the compatibility of connections.
Standards provide individuals, businesses and all kinds of organizations with a common basis for mutual understanding. They are especially useful for communication, measurement, commerce and manufacturing.
Standards make trade easier by ensuring compatibility and interoperability of components, products and services. They bring benefits to businesses and consumers in terms of reducing costs, enhancing performance and improving safety.
Standards are voluntary, which means that businesses and other organizations are not legally obliged to apply them. However, in certain cases standards may facilitate compliance with legal requirements, such as those contained in European directives and regulations.
Standards can be made by a company, a standard organisation (such as ISO or BSI) or regulatory bodies.
Reference:
– CIPS study guide page 93-94
– Standards and your business LO 2, AC 2.1
Which of the following are most likely to be substantive elements of the specification of a truck? Select TWO that apply:
- A . Guarantee
- B . Foreword
- C . Expected lifespan
- D . Ethics
- E . Abbreviation
A,C
Explanation:
The key substantive elements to be included in a specification are:
– Characteristics of the product or service
– Time scale for delivery
– Response times for defects
– KPIs relating to performance and reliability
– Lifespan and durability expectations
– Documentary requirement for training/user manual and/or management information
– Any specific requirements regarding implementation
Reference: CIPS study guide page 90-92
LO 2, AC 2.1
Cleveland Insurance (Cleveland) offers a range of insurance services. The main software used in the call centre is a customer relationship management (CRM) system. Cleveland perceived an urgent need to replace the existing CRM system to deal with the increasing number of customers and services.
Urgent Digital Ltd (Digital) is one of the bidders of Cleveland’s ITT for designing, building and managing the new CRM system. Its bid team is led by Hank Irvine, its technical director. Hank realises that winning the Cleveland contract (valued at approximately £50M) will enhance his career. During discussions with Cleveland, Hank offers certain assurances regarding timescales for the project. He has not carried out any investigations into the viability of the timescales. Hank has little idea whether the timescales can be met.
Cleveland decides that Digital’s bid meets with its requirements, especially given the assurances in timescale offered by Hank, and decides to proceed with it, subject to a formal contract. Eventually, a formal contract is signed by both parties. The initial assurances given by Hank about the timing of the project are never going to be achieved and are at best grossly exaggerated.
Cleveland brought the case to the court and sought rescission of contract with Digital. Is Cleveland’s claim appropriate in this case?
- A . Yes, because Cleveland needs to seek rescission first before claiming for damages
- B . Yes, because both parties agreed with rescission of their contract
- C . No, because the work had been carried out which could not be returned
- D . No, because the contract does not include any provision on rescission
C
Explanation:
Hank’s pre-contractual assurances may amount to misrepresentation. Remedies for misrepresentation could be rescission of contract or damages.
Rescission will be impossible in the following instance:
– Where the innocent party has affirmed the contract; that is, acted in a way confirming that they wish it to continue
– Where the claim has not been brought within a reasonable time (this is a point of general law)
– Where restitution (returning to the pre-contractual position) is impossible (e.g. because the goods have been consumed or have deteriorated)
– Where there has been intervention of innocent third-party (e.g., if the goods have been sold on)
In this case, the subject of contract is designing, building and managing the new CRM system which is impossible to be restituted. Therefore, the contract cannot be rescinded.
Reference: CIPS study guide page 53-55
LO 1, AC 1.2
Cleveland Insurance (Cleveland) offers a range of insurance services. The main software used in the call centre is a customer relationship management (CRM) system. Cleveland perceived an urgent need to replace the existing CRM system to deal with the increasing number of customers and services.
Urgent Digital Ltd (Digital) is one of the bidders of Cleveland’s ITT for designing, building and managing the new CRM system. Its bid team is led by Hank Irvine, its technical director. Hank realises that winning the Cleveland contract (valued at approximately £50M) will enhance his career. During discussions with Cleveland, Hank offers certain assurances regarding timescales for the project. He has not carried out any investigations into the viability of the timescales. Hank has little idea whether the timescales can be met.
Cleveland decides that Digital’s bid meets with its requirements, especially given the assurances in timescale offered by Hank, and decides to proceed with it, subject to a formal contract. Eventually, a formal contract is signed by both parties. The initial assurances given by Hank about the timing of the project are never going to be achieved and are at best grossly exaggerated.
Cleveland brought the case to the court and sought rescission of contract with Digital. Is Cleveland’s claim appropriate in this case?
- A . Yes, because Cleveland needs to seek rescission first before claiming for damages
- B . Yes, because both parties agreed with rescission of their contract
- C . No, because the work had been carried out which could not be returned
- D . No, because the contract does not include any provision on rescission
C
Explanation:
Hank’s pre-contractual assurances may amount to misrepresentation. Remedies for misrepresentation could be rescission of contract or damages.
Rescission will be impossible in the following instance:
– Where the innocent party has affirmed the contract; that is, acted in a way confirming that they wish it to continue
– Where the claim has not been brought within a reasonable time (this is a point of general law)
– Where restitution (returning to the pre-contractual position) is impossible (e.g. because the goods have been consumed or have deteriorated)
– Where there has been intervention of innocent third-party (e.g., if the goods have been sold on)
In this case, the subject of contract is designing, building and managing the new CRM system which is impossible to be restituted. Therefore, the contract cannot be rescinded.
Reference: CIPS study guide page 53-55
LO 1, AC 1.2
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