L4M3 Commercial Contracting - Practice Questions

Question 7

A supermarket purchases a new batch of house cleaner from new supplier. The supermarket is concerned about possible damage that the house cleaner may cause to consumers' floor. What type of insurance must they cover?

Select an option, then click Submit answer.

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Fire and explosion insurance
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Product liability insurance
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Professional indemnity insurance
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Public liability insurance

Reference / correct answer:

Product liability insurance

Product Liability Insurance is a form of general liability insurance meant to protect a business from financial and legal consequences as a result of bodily injury or property damage due to the use of the business’s sold goods or products. Situations that are typically covered by Product Liability Insurance may include:

- A customer harms herself because of the faulty packaging on one of your products

- A drapery set that a customer purchased from your business was highly flammable and caught on fire, eventually damaging her entire kitchen

- A customer with a severe allergy finds trace amounts of tree nuts in your homemade gourmet muffins

- A homemade house cleaner that you sell damaged one of your customer’s entire hardwood floor

- A customer becomes sick with food poisoning after eating old shellfish at your restaurant, goes to the hospital, and incurs medical costs caused by your contaminated food products

- A customer’s pet becomes ill from ingesting some lining in a pet toy product that you sell

In the scenario above, the supermarket is purchasing and reselling house cleaner, which can be covered by product liability insurance.

Public liability insurance is a type of business insurance that covers the cost of claims made by the public that happen in connection with the business activities.

Professional indemnity (PI) insurance is a commercial policy designed to protect business owners, freelancers and the self-employed if clients claim a service is inadequate.

Reference: CIPS study guide page 150-153

LO 3, AC 3.2

Question 8

Which of the following should be specially noticed in market dialogue with suppliers in specification development?

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Both parties must respect confidentiality
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The buying organisation must avoid social media at all cost
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Market dialogue is banned in the public sector
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Market dialogue should only be conducted with well-known supplier

Question 9

Which of the following is the reason why liquidated damage clauses are embedded into a contract?

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Because liquidated damages are the only remedy
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To penalise the supplier for their wrongdoing
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To avoid argument on correct measure of damage
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Because compensation will be awarded immediately

Reference / correct answer:

To avoid argument on correct measure of damage

Liquidated damages are an amount of money, agreed upon by the parties at the time of the contract signing, that establishes the damages that can be recovered in the event a party breaches the contract. The amount is supposed to reflect the best estimate of actual damages when the parties sign the contract. These usually apply to a specific type of breach, and in construction, it is frequently the failure to complete work on time.

Liquidated damages clauses are usually written as some sort of formula, for example:

Total Contract Price – [(X amount of $ per day) x (number of days late)]

Including a liquidated damages clause can provide many benefits, the most important of which is predictability. When setting a predetermined amount of damages, it allows both parties a chance to negotiate and settle on a number they both feel is fair and reasonable.

From the owner’s perspective, this acts like a cheap form of insurance against your contractors. In the event of a breach, the owner can immediately calculate the damages without going through the trouble of proving actual damages. Proving actual damages can be a complicated, lengthy, and costly process.

From a contractor perspective, this allows them to analyze the level of risk involved, and schedule appropriately. It also allows them the opportunity to limit the damage claims of the owner.

Reference:

- Construction Contract Clauses: What Is a Liquidated Damages Clause?

- CIPS study guide page 158-159

LO 3, AC 3.2

L4M3 – Commercial Contracting