1. A contract may violate public policy even if the agreement does not violate a statute.
a.
True
b.
False
2. According to section 2-302 of the UCC, 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
False
Moderate
3. In many states it is illegal to lend money to help someone gamble.
a.
True
b.
False
True
Easy
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
True
Moderate
5. When a licensing requirement is designed merely to raise revenue, a contract made by an unlicensed person is generally
enforceable.
a.
True
b.
False
True
Easy
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
True
Easy
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
True
Easy
8. Morality plays no part of gambling contract legality.
a.
True
b.
False
False
Easy
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, an electrician, 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 illegal unless it is a type of wagering specifically authorized by state statute.
a.
True
b.
False
True
False
Moderate
12. Barbara, a skilled welder, was hired at Mainco Enterprises for a welding position. She was asked to sign a noncompete
clause 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
False
Moderate
Bloom’s: Comprehension
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 since he did not have a Florida license and there is no reciprocity
between the two states. 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
True
Easy
Bloom’s: Knowledge
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.
Easy
Bloom’s: Knowledge
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.
Moderate
Bloom’s: Comprehension
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.
Moderate
Bloom’s: Comprehension
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 usury statues.
b.
The contract is unenforceable because it is ancillary to a legitimate bargain.
c.
The contract is enforceable because of the exculpatory clause.
d.
The contract is unenforceable because it is unconscionable.
Moderate
Bloom’s: Comprehension
20. Usury laws are designed to protect consumers from
a.
obtaining loans to gamble on credit.
b.
taking insurance polices out on the life of another.
c.
companies charging excess interest on loans.
d.
professionals practicing a trade without a valid license.
Moderate
Bloom’s: Application
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. An unconscionable contract is one that a court refuses to enforce because of
a.
fundamental unfairness.
b.
illegality.
c.
its limit to free trade.
d.
overt vagueness.
Easy
Bloom’s: Knowledge
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.
Easy
Bloom’s: Knowledge
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.
26. A contract most likely will be declared unconscionable if
a.
it allows for an extremely high rate of interest to be charged.
b.
it contains a cancellation clause.
c.
it is oppressive and one-sided.
d.
it is signed by a minor for an item of luxury.
Bloom’s: Comprehension
27. Which of the following relationships generally fails to create an insurable interest?
a.
Husband and wife
b.
Doctor and patient
c.
Debtor and creditor
d.
Chief executive officer and corporation
Bloom’s: Knowledge
28. An insurance contract is NOT considered to be an illegal form of “wagering” 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.
the money being paid out comes from premiums collected over time.
Blooms: Comprehension
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
Bloom’s: Comprehension
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 20 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. Giving possession and control of personal property to another person is referred to as
a.
adhesion.
b.
usury.
c.
unconscionability.
d.
bailment.
Easy
Bloom’s: Knowledge
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.
Moderate
Bloom’s: Application
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.
are not enforced because any harm is to property and not persons.
Bloom’s: Comprehension
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 one year 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.
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.
Bloom’s: Comprehension
37. In a noncompete agreement, the term “ancillary” means that
a.
both parties must have a stake in the outcome.
Bloom’s: Application
b.
the agreement is harmless to the general public.
c.
the noncompetition agreement must be part of a larger agreement.
d.
the noncompetition agreement is unfair to the employee, but not the employer.
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.
Bloom’s: Comprehension
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.
Bloom’s: Comprehension
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 interest to enforce contracts with
unlicensed doctors.
c.
It depends on whether Wendell’s injury healed properly.
d.
Yes, it is unconscionable that Wendell would not pay a bill he owed.
41. 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?
Probably not. The parties had equal bargaining power in that they were both experts in this field. Elliot
Bloom’s: Knowledge
42. Discuss the pros and cons of gambling and state what the California Court of Appeals ruled regarding the treatment of
gambling on credit.
43. Discuss exculpatory clauses, and designate when an exculpatory clause is unenforceable.
44. 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.
45. Differentiate between licensing requirements designed to protect the public and those designed to generate revenue.