Free Access to CIPS.L4M3.v2025-07-07.q116 with Valid Practice Test (Page 2)

Question 1

Which of the following are reasons why a purchaser wants to embed a subcontracting clause into the main contract? Select TWO that apply:

A.To induce the conflicts between the main contractor and subcontractors
B.To improve supply chain transparency
C.To reduce the main contract complexity
D.To keep main contractor liable
E.To condemn whole liabilities to subcontractors

Question 2

Which of the following KPIs is qualitative?
1. Openness and co-operation of supplier
2. Responsiveness of supplier
3. Customer satisfactory ratings
4. Cost management
5. OTIF deliveries

A.2 and 5 only
B.1 and 3 only
C.2 and 3 only
D.1 and 4 only

Question 3

John Powers is the managing director of ACC Trading Ltd, which provides components to the automotive industry. His company has been providing number plates to Elite Motors Ltd for many years. As John Powers and Peter Ellis, the MD of Elite, have been friends for a long time, there has never been a formal contract agreed between the companies. Following a downturn in the market, Elite Motors Ltd has now been placed in administration. ACC recently delivered 200 number plates but have not received payment. As the number plates have been fitted to some vehicles, the administrators are being very slow to return them. Which clause in a formal agreement would have helped John?

A.Force Majeure
B.Retention of Title (Romalpa)
C.Liquidated Damages
D.Penalty Clause

Question 4

Which of the following are implied terms in sales contracts? Select THREE that apply.

A.Payment method
B.Customer satisfaction
C.Transfer of ownership
D.Risk transfer
E.Fitness for purpose
F.Mode of transportation

Question 5

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

Correct Answer: A

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.
Reference:
- Liquidated Damages
- CIPS study guide page 158-159
LO 3, AC 3.2

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