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First of all, this is an LSAT-style LR question, called a "Principle" question, a type that does not appear on the GMAT, so this is more for fun than for real GMAT prep. That being said:

The Ethicist argues as follows: Because they signed an agreement not to sue the contractor, it's immoral for the company to go ahead and sue them anyway.

(A) We are not told that the company's abiding by the agreement is necessary for the moral judgment ("only if" implies necessity in formal logic -- this is one of those things that's tested on the LSAT and not the GMAT).
(B) We are not told anything about the contractor's ability to make restitution.
(C) There is no evidence that the company "induced" the contractor to screw up, nor is this the basis of the ethicist's reasoning: it's the signed agreement.
(D) Very tempting, but again, the "only if" means that the legal permissibility of the signed agreement is a necessary condition of this moral judgment, and the ethicist does not claim that.
(E) This is correct: the "context" described is that the construction took place under an agreement not to sue. Thus, the situation above is accurately described: While working under an agreement not to sue, the contractor performed an "action" -- screwing up -- and the comapny is morally wrong to "seek compensation" -- that is, sue -- for this action.
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Tough language but option E it is.

Quote:
It is morally wrong to seek compensation for an action performed in the context of a promise to forgo such compensation.

It is morally wrong to seek compensation for the job done badly when that job was done with the understanding that the company has promised to excuse the quality of the job.
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