IAB Business Law & Ethics 3 — Questions and Answers
Question 1: In contract law, 'consideration' refers to:
- The time given to review a contract
- Something of value exchanged between parties to make a contract binding (Correct answer)
- The careful thought process before signing
- A legal review fee paid to an attorney
Correct answer: Something of value exchanged between parties to make a contract binding
Consideration is a bargained-for exchange of something of value — it can be money, goods, a service, or a promise — that makes a contract legally binding.
Question 2: Which of the following best describes 'negligence' in a business law context?
- Intentional harm caused to another party
- Failure to exercise reasonable care that results in harm (Correct answer)
- Breach of a contractual obligation
- Fraudulent misrepresentation of facts
Correct answer: Failure to exercise reasonable care that results in harm
Negligence occurs when a party fails to act with the standard of care a reasonable person would exercise, and this failure causes injury to another.
Question 3: A partnership agreement that does not specify profit distribution means profits are shared:
- Based on each partner's capital contribution
- Based on hours worked by each partner
- Equally among all partners by default (Correct answer)
- Proportionally to each partner's seniority
Correct answer: Equally among all partners by default
Under the Uniform Partnership Act, absent a contrary agreement, partners share profits and losses equally regardless of contribution levels.
Question 4: The Foreign Corrupt Practices Act (FCPA) makes it illegal for US companies to:
- Import goods from embargoed countries
- Pay bribes to foreign government officials to obtain business (Correct answer)
- Hire foreign nationals without proper work visas
- Fail to disclose foreign bank accounts
Correct answer: Pay bribes to foreign government officials to obtain business
The FCPA prohibits US persons and entities from paying bribes to foreign officials to obtain or retain business advantages.
Question 5: Which document formally creates a corporation and is filed with the state government?
- Corporate bylaws
- Operating agreement
- Articles of incorporation (Correct answer)
- Partnership agreement
Correct answer: Articles of incorporation
Articles of incorporation (also called a corporate charter) are the founding documents filed with the state that legally create a corporation.
Question 6: An 'express contract' differs from an 'implied contract' in that an express contract:
- Is always written, while implied contracts are always verbal
- Has terms stated in words (written or spoken), while implied contracts arise from conduct (Correct answer)
- Must be witnessed, while implied contracts need no witnesses
- Requires consideration, while implied contracts do not
Correct answer: Has terms stated in words (written or spoken), while implied contracts arise from conduct
An express contract has its terms explicitly stated in words, either orally or in writing, whereas an implied contract arises from the parties' conduct and circumstances.
Question 7: The Sarbanes-Oxley Act (SOX) was enacted primarily to address:
- International trade disputes between US companies
- Corporate accounting fraud and financial reporting failures (Correct answer)
- Tax evasion by small business owners
- Employment discrimination in large corporations
Correct answer: Corporate accounting fraud and financial reporting failures
SOX was enacted in 2002 in response to major corporate accounting scandals (Enron, WorldCom) to improve corporate governance, financial disclosures, and auditor independence.
IAB Business Law & Ethics 3
In contract law, 'consideration' refers to: