<p>From Blue Book #4, Section 7, #13:</p>
<p>The labor union is negotiating a contract with the hospital that will satisfy the demands of the workers and be acceptable to all levels of management. </p>
<p>The answer is "No Error". I understand how (A) and (C) are in the right verb tenses, which is the main concept that the question is testing (as seen by the explanations to this question).</p>
<p>My thoughts were resting more upon (B), "that"; how do I distinguish whether "that" refers to the contract (which it does) or to the hospital? Is it even important to make that distinction? And does "that" refer to the contract instead of the hospital because there is a prepositional phrase after "contract", namely "with the hospital"?</p>