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Name:
Class:
Date:
Ch 12 Legality
1. An agreement may violate public policy even if the agreement does not require a party to commit a crime, tort, or
violate a statute.
a.
True
b.
False
2. If a court finds as a matter of law that a clause of a contract was unconscionable at the time the contract was made, the
court must refuse to enforce the contract.
a.
True
b.
False
3. In many states it is illegal to lend money to help someone gamble.
a.
True
b.
False
4. If a contract is made with a person required by law to hold a license, and the purpose of the license is protection of the
public, the contract made by an unlicensed person will generally be unenforceable.
a.
True
b.
False
5. To raise revenues, the City of St. Cloud required restaurants to purchase a special permit if they wanted to serve food in
an open-air patio. (This is in addition to he sanitation inspection license.) While at Hola Taco, a restaurant in St. Cloud, a
customer notices that Hola Taco's permit expired. This mean the customer is not legally required to pay for her food.
a.
True
b.
False
6. Rudolph overhears Macy's plans to go skydiving over spring break. Not really knowing Macy, but figuring it's worth a
chance, Rudolph rushes out and buys an insurance policy for $100,000 on Macy's life. Macy does in fact meet her demise
jumping out of the airplane. Rudolph can collect the $100,000.
a.
True
b.
False
7. Roger parked his car at a garage that has a large sign at the entrance saying, "This garage is not liable for items stolen
from a car." This type of notice is referred to as an exculpatory clause.
a.
True
b.
False
8. Morality plays no part of gambling contract legality.
a.
True
b.
False
Name:
Class:
Date:
Ch 12 Legality
9. L & M loaned Joan $400 so that she could buy her textbooks for the current semester. L & M's terms for repayment of
the loan (including interest) are, $200 in two months, $200 in four months, and another $100 at the end of the fifth month.
The legal maximum rate of interest on this type of loan is six percent per annum. L & M's loan is usurious.
a.
True
b.
False
10. When Randy accepted a job with Buren Construction, Randy signed the following agreement, "Upon termination of
my employment with Buren Construction, I agree never to work for another employer as an electrician." If Randy resigns
from Buren Construction, this agreement would be upheld under the theory of freedom of contract.
a.
True
b.
False
11. A gambling contract is legal unless it is specifically prohibited by state statute.
a.
True
b.
False
12. Barbara, a skilled welder, was hired at Mainco Enterprises for a welding position. She was asked to sign noncompete
clauses limiting future employment if she left Mainco. A court would be very likely to enforce the noncompete clause
unless the time or geographic restriction is unreasonable.
a.
True
b.
False
13. Cynthia and Brian were friends. Brian was a dare devil. Because of his antics, Cynthia thought that Brian wasn't long
for this life. Cynthia purchased a life insurance policy on Brian's life. Subsequently, Brian was killed in a car accident.
Since Cynthia and Brian were friends, Cynthia had an insurable interest in his life and will be entitled to the insurance
proceeds.
a.
True
b.
False
14. John was a licensed physician in Michigan. When he retired to Florida, he started providing medical services to the
people in his condo, relying on his Michigan license. Isaac, John's next-door neighbor, owed John $2000 for medical
services. John will be able to enforce the contract he made with Isaac.
a.
True
b.
False
15. To be valid, an agreement not to compete must be ancillary to a legitimate bargain.
a.
True
b.
False
Name:
Class:
Date:
Ch 12 Legality
16. Virginia borrowed money from G & L Lending at 35% interest per year. The state maximum interest rate is 20% per
year. Virginia defaulted on the loan. What amount can G& L collect from Virginia?
a.
G & L will be able to collect the principal plus 20% interest per year.
b.
G & L will be able to collect the principal but not any interest.
c.
G & L will not be able to collect either the principal or interest.
d.
Any one of the above may be correct. The answer depends on the particular state law.
17. E-mation, Inc hires Marvin to steal trade secrets from one of its competitors for $10,000. Marvin demands half of the
money up front. E-mation pays Marvin $5000 but Marvin decides not to pursue theft of the trade secrets. E-mation sues
Marvin for the return of the $5000. What will the court do with this contract?
a.
The court will order Marvin to return the $5000.
b.
The court will order Marvin to return the $5000 with interest.
c.
The court will order Marvin to obtain the trade secrets.
d.
The court will not do anything to help E-mation get its money back.
18. Which of the following exculpatory clauses will most likely be enforceable?
a.
An exculpatory clause that relieves a riding stable of negligence.
b.
An exculpatory clause that relieves a riding stable of gross negligence.
c.
An exculpatory clause that relieves a riding stable from intentional torts.
d.
A riding stable’s exculpatory clause that is hidden in an eight-page document that all riders are required to
sign.
19. E-mation entered into a contract with a consumer, Ezra, a recent immigrant to the United States, who spoke very little
English, and had no formal education. The contract provided for Ezra to pay $2500 for a computer system. The system
was worth $400. If E-mation sued Ezra for enforcement the contract, what is the most likely result?
a.
The contract is enforceable because of the Statute of Frauds.
b.
The contract is enforceable because of the parol evidence rule.
c.
The contract is enforceable because of the underlying reference rule.
d.
The contract is unenforceable because it is unconscionable.
20. Mark works as a bartender at The Little Nipper, a local bar. Under state law, bartenders are required to be licensed.
The licensing requires filling out an application and submitting a $50 application fee. The application does not require any
special education or experience, just the $50 fee. Craig enters Mark's bar, orders a round of drinks for the house, then
notices that Mark's license is not on display behind the bar. Craig learns that Mark is not licensed and refuses to pay for
the round of drinks. The Little Nipper sues. What result?
a.
Since this is an illegal contract, the courts will not enforce it.
b.
Since Mark violated a regulatory statute, the contract is unenforceable.
c.
Since this is a revenue-raising statute, The Little Nipper wins.
d.
Since this is a revenue-raising statute, the licensing law is unconstitutional. Craig wins.
Name:
Class:
Date:
Ch 12 Legality
21. Barb has been a children's day care provider for several years in the small town of Sallton. She has decided to give it
all up and move to the big city for excitement and adventure. She sells her business to Ken, agreeing not to open a
competing business within five miles of Sallton for a period of nine months. After five months of the big city life, Barb is
broke and moves back to Sallton. She opens a small day care business. Ken sues on the noncompete clause. What is the
most likely result?
a.
Ken wins. The agreement is enforceable.
b.
Barb wins. The agreement is denying her the right to do the only thing she knows how to do.
c.
Barb wins. The agreement is not enforceable because it is not ancillary to a legitimate bargain.
d.
Barb wins. The agreement is not reasonable as to time.
22. In the case of Worldwide Insurance v. Klopp, the Supreme Court of Delaware found that:
a.
a contract provision requiring arbitration and then permitting appeal by either party was void as
unconscionable.
b.
the contract provision requiring arbitration was clear, unambiguous, and fair to both parties.
c.
the arbitration clause in Klopp’s auto insurance contract was valid because it furthered the state policy
favoring the use of arbitration to resolve disputes.
d.
the automobile insurance policy was governed by UCC, Article 3.
23. Which of the following is an example of an exculpatory clause?
a.
Creditor charges 38% interest on a loan.
b.
Seller is not responsible for property damage regardless of the cause of the injury.
c.
Buyer agrees to pay any costs of litigation.
d.
Employee agrees to never work for a competing company.
24. Larry has the largest pizza business in the city. He learns that Henry is thinking of opening a competing pizza and
pasta delivery business. Larry gives Henry $25,000 to not open his proposed business in the same city. Which statement is
correct?
a.
The contract is voidable at Larry's option.
b.
The contract is void for lack of consideration.
c.
The contract is illegal and void.
d.
The contract is enforceable.
25. The UCC deals with unconscionability in a contract by providing that a court may:
a.
refuse to enforce the contract.
b.
enforce the remainder of the contract without the unconscionable clause.
c.
limit the application of any unconscionable clause as to avoid any unconscionable result.
d.
All of the above.
Name:
Class:
Date:
Ch 12 Legality
26. A contract most likely will be declared unconscionable if:
a.
it is unbalanced, making it unfair to one party.
b.
it contains a cancellation clause.
c.
it is oppressive and the weaker party did not fully understand the consequences of the agreement.
d.
it is signed by a minor for an item of luxury.
27. Which of the following relationships will ordinarily not create an insurable interest?
a.
Husband and wife.
b.
Doctor and patient.
c.
Debtor and creditor.
d.
Chief executive officer and corporation.
28. An insurance contract is not considered to be a legalized form of gambling because:
a.
one must have an insurable interest in the person being insured.
b.
insurance contracts are underwritten by reputable companies.
c.
insurance activities are regulated by the state department of insurance.
d.
All of the above.
29. Suppose that Lenny Lawyer enters into an agreement with Cindy Client that his fee will be a percentage of the
recovery Lenny obtains for Cindy in her pending divorce. State law makes such a contingency fee arrangement illegal in
divorce actions. What will be the probable outcome if Lenny attempts to enforce the agreement?
a.
The contract will be valid. Cindy would not have been able to afford an attorney otherwise and therefore
Lenny was doing a public service.
b.
The contract will be voidable at Cindy's option.
c.
The contract will be void as violating a statute. Lenny will not be able to recover anything.
d.
The contract will be unenforceable if Lenny did not get the agreement in writing.
30. When Mohammed was hired by Pomico, Inc., he signed the following agreement, "Upon termination of my
employment with Pomico, I agree not to work for a competing company within 30 miles of Pomico's headquarters for one
year." This agreement, important to protecting secret information developed in the employer's business, is:
a.
an unenforceable exculpatory agreement.
b.
an unenforceable usurious agreement.
c.
an enforceable bailment agreement.
d.
an enforceable agreement not to compete.
31. Alpha and Xenon companies are both major international conglomerates. They are negotiating a contract whereby
Alpha will install a computer system for Xenon. One clause in the contract states that Alpha will not be liable for damages
caused by the negligent installation of the computer system, except that Alpha warrants the system and will fix any
problem for a period of two years following installation. Alpha completes the installation of the computer system. Xenon
loads extensive amounts of information on the system, but all of it is destroyed because Alpha negligently installed the
Name:
Class:
Date:
Ch 12 Legality
memory chips. Alpha fixes the memory, but Xenon incurred significant expenses in recreating the lost information. Xenon
sues for these expenses. Alpha defends with the noted clause in the contract.
a.
Xenon wins; these types of clauses are never enforceable.
b.
Xenon wins; exculpatory clauses are sometimes valid, but this one would not be valid.
c.
Xenon wins; this exculpatory clause is not valid because it is unconscionable.
d.
Alpha wins; this exculpatory clause is enforceable.
32. Mike owns a house in a poor area of a large city. Mike is on disability and his total monthly income is $700. A sales
representative visits his home, selling a water purification system. Mike signs a contract that calls for monthly payments
of $500 for the next 10 years. The water system is worth no more than $1000. Mike thought he was signing a permission
slip allowing the salesman to conduct a free water test to determine the toxins in the water. How would a court most likely
describe this contract?
a.
The contract is fully enforceable as written.
b.
The contract is unenforceable because it is unconscionable.
c.
The contract is enforceable, but only up to the value of the water system.
d.
The contract is unenforceable because it is exculpatory.
33. Eintz Corp. hired Jose to bribe a foreign government official into awarding a $3 million contract to Eintz. Eintz gave
Jose $10,000 in cash to make the bribe payment and $2000 for Jose's efforts. Instead of paying the bribe, Jose pocketed all
of the money. If Eintz sues Jose, Eintz will:
a.
be able to recover the $12,000.
b.
be able to recover the $3 million lost on the contract.
c.
be able to recover the $2,000 but not the $10,000.
d.
not be able to recover the $12,000.
34. In bailment cases, exculpatory clauses:
a.
are very rarely used.
b.
are somewhat more likely to be enforced than in other types of cases.
c.
ordinarily involve an attempt to limit liability for damage to persons rather than property.
d.
None of the above.
35. Judith is a CPA with an excellent reputation and client base. She sells her tax preparation business to Shawn, and the
sales contract includes a noncompete clause restricting Judith from opening a similar business for two years within a 10-
mile radius of her former office. If she opens a tax preparation office five miles away after one year, a court would
probably:
a.
grant an injunction barring her from operating the new office.
b.
order confiscation of all of her new client files and turn them over to Shawn.
c.
refuse to become involved, as the noncompete clause was illegal.
d.
refuse to enforce the noncompete clause, as it is unreasonable regarding time and geographic area.
Name:
Class:
Date:
Ch 12 Legality
36. An exculpatory clause is generally unenforceable when:
a.
it attempts to release a party from liability for ordinarily negligent behavior.
b.
it involves public transportation.
c.
it is written clearly and in bold, large print.
d.
the affected activity is a recreational activity.
37. Public policy means the law that comes from the:
a.
state legislature.
b.
executive branch of the government.
c.
courts that decide what would have a negative impact on society.
d.
Constitution.
38. To be valid, a noncompete clause must be:
a.
ancillary to a legitimate bargain.
b.
reasonable in time, geographical area, and scope of activity when ancillary to the sale of a business.
c.
necessary to protect trade secrets, confidential information, or customer lists developed over an extended time
when ancillary to an employment contract.
d.
All of the above.
39. The Tavern's secret recipe for its pizza sauce would be considered:
a.
a trade secret, and an employment noncompete clause would be enforceable to protect it.
b.
a trade secret, and an employment noncompete clause would NOT be enforceable to protect it.
c.
just a secret recipe and not something the Tavern could protect in a noncompete clause.
d.
an exculpatory clause and not enforceable.
40. Wendell, new to the area, selects a doctor from the telephone book and visits that doctor to have a splinter extracted.
Unbeknownst to Wendell, the doctor has never passed the state licensing exams. Later, when Wendell discovers the truth,
he refuses to pay his bill. If the doctor sues for recovery of the fee, will the court support the doctor's claim?
a.
Yes, it was up to Wendell to verify the doctor's qualifications prior to having the splinter extracted.
b.
No, the court is likely to take the position that it is not in the public's best interests to enforce contracts with
unlicensed doctors.
c.
It depends on whether Wendell's injury healed properly.
d.
No, but the doctor could probably recover under quasi-contract.
41. Zach sold a restaurant to Shane for $295,000. As part of the agreement, Zach promised not to open another restaurant
business for three years within a 50-mile radius of the one sold. Is this agreement enforceable against Zach?
Name:
Class:
Date:
Ch 12 Legality
42. Marcy and Elliot are both sophisticated merchants who deal in diamonds. Marcy contracted to purchase a diamond for
$20,000. The day after the purchase, Marcy took the diamond to a jeweler's show but the highest offer for the diamond
was only $10,000. Is Marcy's contract for purchase of the diamond for $20,000 unconscionable?
43. Discuss the pros and cons of gambling and whether there might be any reason for a court or legislature to treat
gambling on credit any differently from gambling itself.
44. Mabel, an 85-year-old widow who is in poor health, signs a contract with the only nursing home in Anytown (the
nearest alternative facility is 75 miles away). The contract obligates Mabel to pay $4,000 per month for the rest of her life
and for her estate to pay the same amount for the period of time that the unit sits empty upon her death. Mabel's daughter
believes this agreement amounts to an adhesion contract. What is an adhesion contract? What factors will a court look at
in determining whether an adhesion contract exists?
45. In 1970, Continental Airlines agreed to buy a number of DC-10 airplanes from McDonnell Douglas Corporation
(MDC). Their contract included a limited warranty in which MDC undertook certain servicing obligations and an
exculpatory clause in which Continental waived "all other remedies" against MDC. On March 1, 1978, one of these DC-
10s was nearing takeoff at Los Angeles International Airport when the two front tires of its left-side landing gear blew
out. The pilot aborted the takeoff, but the uncushioned landing gear tore through the tarmac and broke away from the
plane. This ruptured the left wing fuel tank, which burst into flames. The emergency escape slides failed, apparently due
to the heat of the fire. Some passengers evacuated through the copilot's window, others jumped from the exits. Four
passengers died, and over 70 suffered injuries. The plane was destroyed. It should be noted that the exculpatory clause did
not prevent the passengers from suing Continental and/or MDC. Continental sued MDC and MDC defended based on the
exculpatory clause. Is this type of clause enforceable? Discuss exculpatory clauses, particularly the one involved here.
46. Cherise contacted her insurance agent and said she was interested in purchasing several life insurance policies: (a) a
policy on her own life for $100,000, naming her son and daughter as beneficiaries; (b) a policy on her neighbor’s life for
$100,000, since she had observed him engaging in reckless behavior, naming herself as beneficiary; (c) a $5,000 policy on
another neighbor to cover a loan Cherise made to him, naming herself as beneficiary; and (d) a $250,000 policy on her
business partner, naming herself as beneficiary. Discuss the legality of each of these potential contracts.
