Mike Contracted to Buy Rita's House in a Written Contract

question 57

Multiple Choice

Mike contracted to buy Rita's house in a written contract that provided for a deposit of $10,000 to be forfeited in the event of Mike's failing to go through with the deal. This deposit was an honest estimate of the damages Rita would suffer. On these facts, which of the following is true?

• A) If Mike breaches the contract, he will have to pay Rita all the damages that directly and naturally flow from the breach.
• B) If Mike breaches the contract, he would not have to pay $10,000, even if Rita suffered a substantial loss.
• C) If Mike breaches the contract, he would have to pay $10,000 even if Rita's actual loss was $40,000.
• D) If the contract price agreed upon was $150,000 and Rita, after Mike breaches the contract, sells the house in one week for $138,000, she will still be able to recoup all her losses.
• E) A clause in a contract that provides for the forfeiture of a deposit is called an exemption clause.

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Definitions:

Corporation

A legal entity that is separate and distinct from its owners, offering limited liability protection and the ability to raise capital through issuing shares.

Partnership

A legally recognized arrangement in which two or more persons co-manage a business and distribute its profits among themselves.

Sole Proprietorship

A business owned and operated by a single individual, with no legal distinction between the owner and the business.

Bankruptcy

A legal status of a person or entity that cannot repay debts to creditors and seeks relief through court proceedings.