CHAPTER 10 – LEGALITY, CONSENT, AND WRITING
TRUE/FALSE
1. 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.
2. 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.
3. To be valid, an agreement not to compete must be ancillary to a legitimate bargain.
4. Spencer, age 18 and of sound mind, has the legal capacity to contract.
5. Roger, a minor, buys a stereo from Tuneland, Inc. Roger uses the stereo for a few months, returns it to
Tuneland, and demands his money back. In a majority of states, Roger may return the stereo and he
does not have to pay for the use of the stereo or the damages.
6. If a salesperson says, “This is a great car and it’s really fun to drive,” but the car turns out to be a
lemon, the salesperson has committed fraud.
7. After her 18th birthday Lora may, by words or action, ratify a contract she made during the previous
year.
8. A party injured by fraud generally has the choice of suing for damages or rescinding the contract.
9. A party to a contract has a duty to investigate the other party’s factual statements.
10. Contract rescission can sometimes be based upon a unilateral mistake.
11. Bry, Inc. and Gangl Co. entered into an oral agreement for the sale of 3,000 sweaters. Both parties
performed as required under the contract. Bry delivered the sweaters and Gangl accepted and paid for
them. Since the contract is fully executed, it makes no difference that it was oral.
12. Ramona, age 42, orally agreed to work for Brahma, Inc. for the rest of her life for $50,000 per year.
This agreement would not be enforceable since it violates the one-year rule of the statute of frauds.
13. Under the statute of frauds, the writing must: be signed by the defendant; and must state with
reasonable certainty the name of each party, the subject matter of the agreement, and all of the
essential terms and promises.
14. Whittle sent an order over the Internet for a $1,200 garage door. His name keyed onto the order will
only be effective as a signature sufficient to create a “writing” “signed by the party against whom
enforcement is sought” if he follows up with a signature on paper.
15. Amanda, a recent university graduate, needed a car to get to her new job. To help Amanda secure a
loan for the car, Ted, a friend, agreed to pay the loan should Amanda default. Ted’s promise to pay the
loan is a collateral promise. His promise must be in writing to be enforceable.
MULTIPLE CHOICE
1. 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.
2. 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 of 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.
3. 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.
4. 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.
5. Larry has the largest pizza business in the Reno, Nevada. The restaurant has a small game room with
slot machines and other gambling options. The restaurant allows customers to purchase chips and
tokens for the games on credit. Sam refused to pay his debt, saying the gambling contract is void.
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.
6. In analyzing a claim of economic duress in the formation of a contract a court may consider:
a.
the business purpose of the agreement.
b.
the difference in bargaining power of the parties.
c.
whether or not one party stands to gain substantially more than the other.
d.
All of the above.
7. 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.
8. 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.
9. 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.
10. 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 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.
11. 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.
12. 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.
13. In bailment cases (such as with storage buildings), exculpatory clauses:
a.
are very rarely used.
b.
are somewhat more likely to be enforced than in other cases involving medical facilities.
c.
ordinarily involve an attempt to limit liability for damage to persons rather than property.
d.
None of the above.
14. 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.
15. 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.
16. 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.
17. 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.
18. Marty, a 16-year-old, contracts with Cream-of-the-Crop Cycles to buy an $8,000 motorcycle. Marty
agrees to make monthly payments until the purchase price plus interest are paid in full. Which of the
following is correct?
a.
The contract is voidable by Marty.
b.
The contract is void as soon as it is made.
c.
The contract is voidable by Cream-of-the-Crop Cycles.
d.
The contract is voidable by either Marty or Cream–of-the-Crop Cycles.
19. Which of the following is most likely to constitute fraud?
a.
A false prediction that a painting’s value will rise.
b.
A false statement that a used car is “the best deal in town.”
c.
A false statement that a $30,000 car attracts members of the opposite sex.
d.
Silence as to a toxic waste problem on real property that the buyer would not reasonably
find.
20. Larson entered Forrester’s Auto Mart to purchase a used car. Larson found a vehicle with a sales price
of $11,000. After Forrester answered all of Larson’s questions, Forrester and Larson agreed to a sale.
As Larson was leaving to get the money to pay for the car, Forrester told Larson that Robert Redford
formerly owned the car. Larson later learned that Robert Redford had never owned the car. If Larson
seeks to rescind the deal based on Forrester’s statement, Larson will:
a.
win because he relied on the misrepresentation.
b.
win because there was a misrepresentation of a material fact.
c.
lose because he will not be able to prove reliance on the misrepresentation.
d.
lose because Forrester made a unilateral mistake.
21. Ron and Don make an agreement for Ron to wash Don’s car every week. They agree on price,
schedule and payment terms. After Ron had washed Don’s car the first week, Don refused to pay
because he claimed that Ron had agreed to wax the car as well. There is no mention of waxing in the
written agreement. What is true?
a.
Don must pay for the value of the benefit he received, but doesn’t have to pay the full
price because Ron did not wax the car.
b.
Don must prove that Ron was supposed to wax the car by showing the notes he took
during their negotiations.
c.
Ron is under no obligation to wax the car, even if Ron and Don had discussed the
possibility.
d.
If waxing had been discussed, Ron must wax the car before he can get paid.
22. Vinnie, a used car salesman, tells Gambini while test driving a car, “Yo, Gambini, this is the hottest
car in town!” Gambini buys the car but later is not satisfied that it’s the “hottest” car around.
Vinnie is liable for:
a.
fraud.
b.
duress.
c.
nothing because it was an honest mistake.
d.
nothing because Vinnie was merely stating an opinion.
23. For the purposes of the statute of frauds, an interest in land includes:
a.
a house.
b.
a real estate mortgage.
c.
an easement.
d.
All of the above.
24. In order to satisfy the statute of frauds, a writing must:
a.
be a formal written document drafted by an attorney.
b.
be signed by the defendant and contain the name of each party, the subject matter of the
agreement, and the essential terms and promises.
c.
be notarized.
d.
All of the above.
25. Ethel’s Exercise World promises to buy three weight machines from Pete’s Push, Pedal and Pull, Inc.
for a total of $15,000. Pete’s demands that Ethel’s friend, Moneybags, a wealthy independent
businesswoman (not connected with Ethel’s business in any way) promise to pay Pete’s for the three
machines if Ethel’s Exercise World does not. Which of the promises in this problem must be in writing
to be enforceable?
a.
The promise made by Ethel’s Exercise World to buy the weight machines.
b.
Moneybag’s promise to pay if Ethel’s Exercise World doesn’t.
c.
Both Moneybag’s promise and Ethel’s Exercise World’s promise.
d.
None of the promises in this problem need to be in writing.
ESSAY
1. 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?
ANS:
2. 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 is
unconscionable. What factors will a court look at in determining unconscionabililty?
3. 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.
ANS:
4. Discuss two situations that question reality of consent and how they differ. List the three things a party
must show to rescind a contract based on reality of consent.
5. Explain the reason behind having a statute of frauds and give arguments for and against having such a
statute.