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CIPS L5M3 Exam Questions
Managing Contractual Risk (Page 3 )

Updated On: 21-Feb-2026
Page 3 of 25
PDF with 120 Questions

An agreement in which an organisation is not accountable for any damages that occur during a contract is known as what?

  1. limited liability
  2. liquidated damages
  3. hold harmless agreement
  4. waiver of subrogation

Answer(s): C

Explanation:

This is a Hold Harmless Agreement and the definition is given on p. 26. A Waiver of Subrogation is a related term which stops an insurance firm claiming money back from someone in the contract - see p.26 for more info.



Which of these statements about Guarantees are TRUE? Select 2

  1. A Guarantee is a secondary obligation of a contract
  2. A guarantor's responsibility is higher than the Principle
  3. A guarantee is a promise to repair or replace an item within a defined period of time
  4. A guarantor's responsibility cannot be higher than the Principle

Answer(s): A,D

Explanation:

"A Guarantee is a secondary obligation of a contract' and 'A guarantor's responsibility cannot be higher than the Principle' are the correct answers. Guarantees are explained on p.28. Be careful not to confuse this with Warranty. A promise to repair or replace an item within a defined period of time is the definition of a warranty. That was put in there to trick you. Sorry. Remember a Guaran-tee is to do something when the Principle of the contract fails to do it. It's most common in leasing agreements- if you're a young person, you'll often need a responsible adult / parent to sign the lease as your Guarantor. As a Guarantor, they promise to pay the rent if you're unable to. Legally they can't be asked to do any more than you are assigned to do in the contract. So if your rent is £500 a month, that's all they can be asked to pay if you don't pay it. The primary obligation is between you and the landlord. The secondary obligation is between the guarantor and you.



Tutu Incorporated has a contract with a software company to provide their IT software. They want to ensure that the supplier pays compensation if there are any issues with service (e.g. the software doesn't work for a day).
Which two items would Tutu Incorporated need to include in the contract?

  1. unliquidated damages
  2. letter of credit
  3. service level agreement
  4. service credit
  5. insurance

Answer(s): C,D

Explanation:

They should include service credits and a service level agreement. Service Credits allow the buyer to claim back if the service drops below an agreed standard. That standard needs to be clearly out-lined in an SLA. See p.31 for more details



Fruity McFruitFace is an exporter of fruit.
Which of the following payment terms would be most advantageous for it?

  1. open account
  2. documentary collection
  3. documentary credits
  4. advance payment

Answer(s): D

Explanation:

Exporters prefer advance payment - this puts the risk with the importer / buyer. There's a table of these four terms on p.36. An importer would prefer an open account arrangements. The other two options are in the middle and the risk is more equally split between the two parties.



A contract term which is difficult to classify at the time of drafting a contract is known as?

  1. condition
  2. warranty
  3. consideration
  4. innominate

Answer(s): D

Explanation:

Innominate - the conflict resolution process would determine if the clause is a condition or a war- ranty. Before there's a breach there's no way to know, so it's classed as an Innominate Term. P. 43. Types of contract terms comes up a lot in the exam. Learn these.






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