QUESTION: 13

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?

Yes, because Cleveland needs to seek rescission first before claiming for damages
Yes, because both parties agreed with rescission of their contract
No, because the work had been carried out which could not be returned
No, because the contract does not include any provision on rescission

Answer(s): 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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QUESTION: 14

Which of the following are examples of incentives which can be embedded in contract terms? Select THREE that apply

Gainshare
Indemnity
Contract extensions
Service credits
Liquidated damages
Faster payment

Answer(s): A,C,F

Explanation:

Gainsharing is a system of management used by a business to increase profitability by motivating suppliers to improve their performance. As their performance meets the targets, suppliers share financially in the gain (improvement). Gainshare is an incentive for cost control.
Other incentives for good performance are:
- Contract extensions: Buyer can extend the contract duration as an incentive to supplier for meeting their targets.
- Accelerated payments

Reference:

CIPS study guide page 187-188
LO 3, AC 3.3

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QUESTION: 15

Which of the following should be taken to avoid the conflicts between orally negotiated terms before the conclusion of contract and the final written contract?

Finding signs of misrepresentation of the other contracting party
Prevailing orally negotiated terms over the final written contract
Embedding a term excluding all prior oral discussions that are not mentioned in the final written contract
Avoiding long negotiation

Answer(s): C

Explanation:

When a written contract is based on oral negotiation, to avoid the conflicts between orally negotiated terms and final written contract, the contract should include an express term that specifically excludes all prior oral discussion. However, orally negotiated terms can be used to interpret the final contract.
This practice (excluding prior discussion) is so common in international commercial contract that UNIDROIT Principles of International Commercial Contracts have an article (2.1.17) dealing with this.

Reference:

CIPS study guide page 130 LO 3, AC 3.1

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QUESTION: 16

To check whether supplier actually complies with the labour standards set out in the contract, the purchaser should have...?

Right to penalise the supplier
Right to terminate the contract
Right of audit
Right to rescind the contract

Answer(s): 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

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QUESTION: 13

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QUESTION: 16

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