Chapter 11
Capacity and Legality
N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows.
N A question new to this edition of the Test Bank.
+ A question modified from the previous edition of the Test Bank,
= A question included in the previous edition of the Test Bank.
TRUE/FALSE QUESTIONS
1. Contractual capacity includes the financial ability to pay for the benefits of a
contract.
2. When both parties to a contract are minors, both of them may disaffirm the
contract.
3. For a minor to disaffirm a contract, he or she must present the contract to a
court.
4. A minor has a reasonable time, after the minor reaches the age of majority, to
disaffirm a contract.
5. The age of majority in most states is eighteen years.
6. If a minor disaffirms a contract, he or she must disaffirm the entire contract.
7. If a contract is fully performed by all parties to it, then it is presumed to have
been ratified.
8. All states’ laws permit minors to disaffirm contracts.
9. When a minor disaffirms a contract, he or she cannot keep whatever he or she
has received as a result of the contract without paying for it.
10. Some states impose a duty on a minor who disaffirms a contract to restore the
adult party to the position he or she held before the contract was made.
11. In some states, misrepresentation of age by a minor is enough to prohibit
disaffirmance.
12. In general, minors are personally liable for their contracts.
13. Parents who sign a contract made by their minor child with an adult have the
same option to disaffirm as the child.
14. A person who enters into a contract when he or she is intoxicated can void the
contract if he or she did not comprehend the legal consequences.
15. A person who enters into a contract when he or she is intoxicated can void the
contract under any circumstances.
16. Contracts entered into by mentally incompetent persons can be valid.
17. Any contract to commit a crime is in violation of a statute and thus is
unenforceable.
18. Statutes often set forth rules specifying the terms of contracts.
19. It is legal to charge any interest rate for an ordinary loan.
20. All forms of gambling are legal in all states.
21. Gambling involves the distribution of property by chance among persons who
have paid valuable consideration for the opportunity to receive it.
22. Any contract entered into with an unlicensed party is unenforceable.
23. All states require that members of certain professions to have licenses.
24. Whether a contract with an unlicensed professional is legal and enforceable
depends on the purpose of the licensing statute.
25. A covenant not to compete is never enforceable.
26. An adhesion contract is a contract drafted by one party and presented to
another on a take-it–or-leave-it basis.
27. Uunconscionability can involve the lack of an opportunity to read a contract or ask
questions about its meaning.
28. All adhesion contracts are unconscionable.
29. In certain circumstances, bargains are so oppressive that the courts relieve
innocent parties of part or all of their duties.
30. In a contract, an exculpatory clause releases a party from liability in the event
of monetary or physical injury no matter who is at fault.
31. An exculpatory clause in an employment contract is not enforceable if it
removes the employer’s potential liability for injuries to employees.
32. In general, if a contract is illegal, a court will not enforce it.
33. In most illegal contracts, both parties are considered to be equally at fault, and
neither party can enforce it or recover damages under it.
34. When a statute protects a certain class of people, a member of that class
cannot enforce an illegal contract.
35. When one party uses fraud to induce another party to enter into an illegal bargain,
the second party will be allowed to recover for the performance or its value.
6 UNIT TWO: CONTRACTS
MULTIPLE CHOICE QUESTIONS
1. Richard is an adult. He enters into a contract to sell sixteen-year-old Jane his
car for $3,000. The next day Richard receives an offer of $4,000 for his car
from twenty-year-old Bill. Richard
a. cannot disaffirm his contract with Jane because he is an adult.
b. can disaffirm his contract with Jane because Bill is an adult and
contracts with adults take precedence over contracts with minors.
c. cannot disaffirm his contract with Jane because she is a minor.
d. can disaffirm his contract with Jane because the contract has not been
ratified.
2. Chris, a minor, signs a contract to purchase alcoholic beverages for Dine &
Drink, his parents’ restaurant. The contract is
a. valid but may be disaffirmed.
b. valid but may not be disaffirmed.
c. void as a matter of law.
d. void unless it is also signed by Edie, the manager of Dine & Drink.
3. Katie buys a car when she is seventeen. When she is twenty-five, Katie tries to
disaffirm the contract and recover all her car payments. A court will likely find
that the contract was
a. ratified and Katie cannot recover her payments.
b. not ratified and Katie can recover her payments.
c. not a valid contract because Katie was a minor when she entered into it
and she can recover her payments.
d. ratified, but Katie can still recover her payments because she was a
minor when she entered into the contract.
4. At age seventeen, Daryl enters into a contract to buy a dozen movies from eHD
TV Stream, Inc., an online video service. Soon after reaching the age of ma–
jority, Daryl attempts to disaffirm the contract. eHD files a suit against him. The
court will most likely consider the contract ratified if it is
a. executed.
b. exculpatory.
c. express or implied.
d. emancipated.
5. Olivia, a minor, signs a contract to buy a bike from Phil, the owner of
SuperCycles Bike Store. Olivia’s right to disaffirm the contract
a. does not change the fact that Phil is bound by the contract.
b. does not yet exist because Olivia is still a minor.
c. gives Phil, an adult, the right to disaffirm the contract.
d. is not valid because a bike is a “necessary.”
6. Gabriella and Esteban are emancipated minors who, after their emancipation,
marry each other. Later, they enter into a contract to buy a condominium. In
this sequence of events, most likely, their minority status
a. terminated on their emancipation.
b. terminated on their marriage.
c. terminated on entering into the contract to buy a condominium.
d. has not yet terminated.
7. Fletcher signs a contract to buy a new electric guitar and amplifier just before
reaching the age of majority. After reaching the age of majority, Fletcher does
not take possession or make payments. With respect to the contract, most
courts would hold that this is
a. disaffirmance.
b. emancipation.
c. ratification.
d. rescission.
8. Chet, a minor, signs a contract with Porsha, an adult. The contract is
a. neither void nor voidable.
b. voidable at the option of Chet.
c. void as a matter of law.
d. voidable at the option of Porsha.
9. On Mitchell’s eighteenth birthday, he decides that he no longer wants to keep a
fishing boat he bought from Water Craft, Inc., when he was seventeen. His
right to disaffirm the deal will depend on
a. why Mitchell no longer wants to keep the boat.
b. why Mitchell entered into the contract to buy the boat.
c. whether Mitchell acts within a reasonable period of time.
d. whether Water Craft has the right to disaffirm.
10. Eli, a minor, buys an automobile insurance policy from Faithful Insurance
Company and pays a $1,000 premium. If Eli can disaffirm the contract, he can
most likely recover
a. $500.
b. $1,000.
c. $1,500.
d. nothing.
11. Gaye, a minor, signs a contract to buy a motorcycle from Hi-Valu Cycles by
misrepresenting her age as twenty-one. Gaye fails to make the payments. Hi-
Valu sues. Ordinarily, Gaye can
a. not return the motorcycle nor avoid further liability.
b. not return the motorcycle but can avoid further liability.
c. return the motorcycle and avoid further liability.
d. return the motorcycle but cannot avoid further liability.
12. Beth is a minor. She buys a set of sessions with a personal trainer, and a water
bottle and some weights from a fitness store. Later, Beth decides that she does
not want the water bottle or weights. In most states, Beth
a. can disaffirm the contract and return the water bottle and weights, but
keep the training sessions.
b. can only disaffirm the contract if she returns all the goods.
c. cannot disaffirm the contract.
d. can disaffirm the contract and keep all the goods.
13. Ruthie, a minor, charges the cost of an expensive leather jacket at a Girl’s
Trend store. Two nights later, Ruthie loses the jacket at Minors Only Club. She
disaffirms the jacket’s purchase. Ruthie owes Girl’s Trend the reasonable value
of the jacket
a. if it is deemed a “necessary.”
b. if it is deemed unnecessary.
c. under any circumstances.
d. under no circumstances.
14. Lucy, a minor, disaffirms a contract for necessaries without returning the
goods. To Manny’s Food Mart, the seller, Lucy is required to pay
a. nothing.
b. the reasonable value of the goods.
c. the sales price of the goods.
d. the ultimate worth of the goods.
15. Carly is a minor. Without her parents’ knowledge, she signs a contract to buy
an airplane ticket to Hawaii for spring break. Carly’s parents are
a. liable for the contract.
b. not liable for the contract.
c. liable for up to half the value of the goods in the contract.
d. liable for up to one third of the value of the goods in the contract.
16. Colleen is intoxicated, but still mentally capable of understanding the
consequences of her actions when she signs a contract to sell the rights to her
latest phone app design to Addie. The contract is
a. enforceable only if Colleen does not attempt to disaffirm it.
b. enforceable even if Colleen attempts to disaffirm it.
c. unenforceable if Addie attempts to disaffirm it.
d. enforceable only if Addie does not attempt to disaffirm it.
17. Vijay enters into a contract to sell his laptop to Winnie. Winnie takes
possession of the laptop as a minor and continues to use it well after reaching
the age of majority. Winnie has
a. expressly ratified the contract.
b. impliedly ratified the contract.
c. disaffirmed the contract.
d. none of the choices.
18. A court has not previously judged Ace to be mentally incompetent. Any contract
Ace enters into is
a. voidable if Ace has a lucid interval at the time of contracting.
b. voidable if Ace lacks the capacity to comprehend the consequences.
c. voidable if other party does not realize that Ace is incompetent.
d. valid.
19. A court adjudicates Jimi mentally incompetent and appoints Krispin to be his
guardian. Later, without Krispin’s knowledge, Jimi signs a contract to sell his
lake cabin to Lazar for its real market value. The contract is
a. enforceable if Jimi comprehended the consequences.
b. enforceable if Jimi knew the market value of the farm.
c. enforceable if Lazar has been recorded to be the owner of the cabin.
d. void.
20. John obtains a loan from Liberty Credit Bank at an interest rate that exceeds
the state’s maximum. Liberty has
a. created a risk for the purpose of assuming it.
b engaged in a restraint of trade.
c. violated a licensing statute.
d. committed usury.
21. The state of Illinois enacts a usury statute. The purpose is to
a. establish a maximum rate of interest that may be charged for loans.
b. establish a minimum rate of interest that may be charged for loans.
c. prevent the misuse of money advanced as loans.
d. prevent the misuse of money paid back on loans.
22. Jolie signs a contract with Keaton, an unlicensed physician, to perform a
medical procedure. This contract is enforceable by
a. Jolie.
b. Jolie’s medical insurance company.
c. Keaton.
d. no one.
23. Brasilia, a real estate broker licensed only in Connecticut, concludes a land
sale in Delaware. She can
a. collect the commission if it has not been paid.
b. keep the commission if it has already been paid.
c. foreclose on the property to obtain any unpaid amount.
d. not collect the commission, keep it, or foreclose on the property.
24. Odina signs a covenant not to compete with her employer, Penultimate Sales
Corporation. A court decides that the covenant is overly restrictive. The court
will likely
a. enforce it as written so as not to undercut the freedom of contract.
b. enforce it but evaluate its effects over time.
c. reform its terms to prevent any undue burden.
d. refuse to enforce it unless Penultimate pays additional consideration.
25. Betty is selling her used clothing shop on Main Street. In the sale agreement,
there is a covenant not to compete that prohibits Betty from opening another
used clothing shop within 300 miles of the shop she is selling. A court will most
likely conclude that this restriction on competition is
a. reasonable.
b. unreasonable and order Betty’s successor to stop doing business.
c. unreasonable and may reform the covenant .
d. unreasonable and prohibit both parties from opening used clothing
shops.
26. SuperBumperCars, Inc. requires all customers to sign a release that contains a
clause that releases SuperBumperCars from all liability in the event of an injury
occurring during a bumper car ride, no matter who is at fault. This is an
example of
a. a covenant not to compete.
b. an adhesion contract.
c. an exculpatory clause.
d. an illusory promise.
CHAPTER 11: CAPACITY AND LEGALITY 15
Fact Pattern 11-1 (Questions 27–28 apply)
Bay City Mall requires its tenants to sign a lease that includes a clause releasing
Metro from liability in the event of monetary or physical injury no matter who is at fault.
Coco’s Chocolate Creations signs a lease with Bay City that contains the clause.
27. Refer to Fact pattern 11-1. This clause is
a. a covenant not to compete.
b. an adhesion contract.
c. an exculpatory clause.
d. an illusory promise.
28. Refer to Fact pattern 11-1. The clause is most likely
a. enforceable as a matter of public policy.
b. enforceable if either party is considered to be a business for essential
services.
c. enforceable if the lease also involves residential property.
d. unenforceable.
29. Nancy and Owen negotiate a deal to transfer stolen body building equipment for
counterfeit currency that Owen will attempt to spend at Plenty Good! Discount Mart.
This contract is
a. enforceable.
b. void.
c. voidable at the option of Nancy or Owen.
d. voidable at the option of Plenty Good!
30. Duffy and Elbert agree to hijack a truck carrying a load of pecans. If Duffy later
refuses to go through with the crime, Elbert can
a. enforce the agreement.
b. obtain damages from Duffy in the amount of Duffy’s probable share of
the illegal profits.
c. recover in quasi contract for the loss of his share of the illegal profits.
d. do nothing.
31. Jake and John make an illegal contract that unjustly enriches Jake at the
expense of John. A court will
a. not be concerned with the unjust enrichment of Jake.
b. force Jake to pay damages to John.
c. reform the contract to prevent undue burdens.
d. enforce the contract as it was originally written.
32. Doug agrees with Elinor to sell methamphetamine to patrons of Elinor’s
nightclub Garden of Eden for 25 percent of the take. Doug sells the drugs but
keeps all of the money. Elinor can
a. recover her share of the money only if she did not aid in the crime.
b. not enforce the deal.
c. recover the total amount of the sales.
d. recover her costs but none of the illegal profit.
33. Frugal Insurance Company sells a policy to Grover Company, insuring the life
of one of Grover’s key executives. When the executive dies, Frugal refuses to
pay, noting that it was not licensed to sell insurance in Grover’s state and
arguing that thus, its policy cannot be enforced. Grover can recover
a. the amount of the policy from Frugal in full.
b. the amount of the premiums that Grover paid to Frugal.
c. as much of the amount of the policy from Frugal as will cover Grover’s
costs.
d. nothing.
34. Rolf is an emergency medical technician. Medical personnel such as Rolf are
prohibited by state statute from working more than a certain number of
consecutive hours. One month, Rolf works more than the legal limit. Rolf can
recover for
a. the hours up to the statutory maximum but not more.
b. the hours up to the statutory maximum and the extra hours.
c. the hours up to the statutory maximum or the extra hours.
d. nothing.
35. Omni Insurance Company violates a state licensing statute when selling an
insurance policy to Petra, in whose state Omni is not licensed to sell insurance.
As a member of the class of persons protected by the statute, Petra can
a. do nothing with respect to the policy.
b. enforce the policy or recover the amount of the premiums paid.
c. only enforce the policy.
d. only recover the amount of the premiums paid.
ESSAY QUESTIONS
1. J.T., a minor, is a motocross competitor. At Monster Mountain MX Park, he
signs a waiver of liability to “hold harmless the park for any loss due to
18 UNIT TWO: CONTRACTS
negligence.” Riding around the Monster Mountain track, J.T. rides over a blind
jump, becomes airborne, and crashes into a tractor that he does not see until
he is in the air. To recover for his consequent injuries, J.T. files a suit against
Monster Mountain, alleging negligence for its failure to remove the tractor from
the track. Does the liability waiver bar this claim? Explain.
2. Best Products, Inc., hires Cole to develop and implement an e-commerce
strategy for marketing Best’s products. Cole signs a contract that includes a
clause prohibiting him from competing with Best during and after the
employment. Before the strategy is implemented, Cole resigns from Best’s
employ and opens a business to compete with Best. In Best’s suit against
Cole, what is the most important factor the court should consider in determining
whether Cole should be allowed to compete with Best?
