Business Law Chapter 14 Homework End The 1a Covenants Not Compete

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CHAPTER 14

CAPACITY AND LEGALITY

ANSWERS TO CRITICAL THINKING QUESTIONS

IN THE FEATURE

MANAGERIAL STRATEGY—BUSINESS QUESTIONS

1A. If you are running a business, why would you opt to include overly broad waivers

in your contracts with consumers? Even if you know that a court might throw out an overly

broad waiver as unconscionable, you might still include it in your standard form contracts. The

2A. Under what circumstances would you, as a business owner, choose to

aggressively defend your business against a customer’s liability lawsuit? Business

owners choose to aggressively defend liability lawsuits when they are certain that the customer

ANSWERS TO QUESTIONS

AT THE ENDS OF THE CASES

CASE 14.1—CRITICAL THINKING

LEGAL ENVIRONMENT

Could PAK Foods successfully contend that S.L.’s minority does not bar enforcement of

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ETHICAL

Is it fair that a minor can work for an employer yet not be bound by a contract with the

employer? Why or why not? It could be argued either way—from perspective of the

employer or the minor. It is not fair because every adult who works at the same KFC is bound

by the arbitration clause they signed with PAK Foods, whereas minors like S.L. are not. A

CASE 14.2—CRITICAL THINKING

LEGAL ENVIRONMENT

In Tennessee, at common law, unlicensed contractors had no right to recover anything

on their contracts. The Contractors Licensing Act changed this rule to permit unlicensed

contractors to recover documented expenses proven by clear and convincing evidence.

Why? The Tennessee legislature changed the state’s common-law rule that prohibited

unlicensed contractors from recovering anything on their contracts. Under the Contractors

Licensing Act, an unlicensed contractor can recover documented expenses proven by clear and

CHAPTER 14: CAPACITY AND LEGALITY 3

WHAT IF THE FACTS WERE DIFFERENT?

Suppose that McNatt had held a valid contractor’s license when he entered into the

contract with Vestal but that the license had expired while he was overseeing the

construction of Henderson Villa. Would the result in that case have been different?

CASE 14.3—LEGAL REASONING QUESTIONS

1A. When do courts enforce exculpatory clauses? Courts enforce exculpatory clauses if

they are reasonable, do not violate public policy, and do not protect parties from liability for

intentional misconduct. The language used must not be ambiguous, and the parties need to be

2A. What are the specific requirements for an exculpatory clause to be enforceable in

Missouri? To be enforceable in Missouri, an exculpatory clause must contain clear,

unambiguous, unmistakable, and conspicuous language to release a party from his or her future

negligence. The exculpatory language must effectively notify a party that he or she is releasing

3A. Was the exculpatory clause at issue in this case enforceable? Why or why not?

Yes, the court held that the exculpatory clause at issue in this case was enforceable. The clause

released “any Event sponsors and their agents and employees” from liability for future

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ANSWERS TO QUESTIONS IN THE REVIEWING FEATURE

AT THE END OF THE CHAPTER

1A. Capacity

Yes, she could enter the contract but as a minor could later disaffirm it. A minor can enter into

any contract an adult can, provided that that contract is not one prohibited by law for minors

(such as the sale of alcoholic beverages). A contract entered into by a minor is voidable at the

2A. Disaffirmance or ratification

She disaffirmed it by filing a suit against the race organizers. A minor may disaffirm a contract at

any time by expressing an intent in words or conduct not to be bound. Filing a suit would

3A. Age of majority

Beaver’s misrepresentation of age would not usually affect her right to disaffirm the contract. In

some jurisdictions, the minor would not even be liable for the tort of fraudulent

misrepresentation, because such a judgment might force the minor to perform the contract. In

4A. Implied contract

Exculpatory clauses found in certain types of agreements, such as those relating to property

leases and employment, are typically not enforced. They may be enforced when the parties

seeking enforcement are not involved in businesses considered important to the public interest.

CHAPTER 14: CAPACITY AND LEGALITY 5

ANSWER TO DEBATE THIS QUESTION IN THE REVIEWING FEATURE

AT THE END OF THE CHAPTER

After agreeing to an exculpatory clause or purchasing some item, minors often

seek to avoid the contracts. Today’s minors are far from naïve and should not be

allowed to avoid their contractual obligations. Today, teenagers, and most certainly, those

just under the age of majority, are exposed to what is happening in the business world on a

constant basis because of the ubiquity of media outlets—at home, at school, and everywhere

there is a Wi-Fi connection. When a minor avoids an otherwise valid contract, the seller of the

ANSWERS TO ISSUE SPOTTERS

AT THE END OF THE CHAPTER

1A. Joan, who is sixteen years old, moves out of her parents’ home and signs a lone–

year lease for an apartment at Kenwood Apartments. Joan’s parents tell her that she can

return to live with them at any time. Unable to pay the rent, Joan moves back to her

parents’ home two months later. Can Kenwood enforce the lease against Joan? Why or

2A Sun Airlines, Inc., prints on its tickets that it is not liable for any injury to a

passenger caused by the airline’s negligence. If the cause of an accident is found to be

the airline’s negligence, can it use the clause as a defense to liability? Why or why not?

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ANSWERS TO BUSINESS SCENARIOS

AT THE END OF THE CHAPTER

14-1A. Covenants not to compete

Contracts in restraint of trade are usually illegal and unenforceable. An exception to this rule

applies to a covenant not to compete that is ancillary to certain types of business contracts in

which some fair protection is deemed appropriate (such as in the sale of a business). The

covenant, however, must be reasonable in terms of time and area to be legally enforceable. If

either term is excessive, the court can declare that the restraint goes beyond what is necessary

14-2A. Capacity

Contracts made by mentally incompetent persons can be void, voidable, or valid. The chief

circumstance on which this status depends is whether a court has judged a person incompetent.

A contract is void if a court has previously determined that a person is mentally incompetent and

has appointed a guardian for the person. A contract is voidable, and may be disaffirmed, if a

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ANSWERS TO BUSINESS CASE PROBLEMS

AT THE END OF THE CHAPTER

14–3A. BUSINESS CASE PROBLEM WITH SAMPLE ANSWER—Unconscionable contracts or

clauses

In this case, the agreement that restricted the buyer’s options for resolution of a dispute to

arbitration and limited the amount of damages was both procedurally and substantively

unconscionable. Procedural unconscionability concerns the manner in which the parties enter

14–4A . Mental incompetence

No. Contracts made by mentally incompetent persons can be void, voidable, or valid. Mentally

incompetent persons not previously so adjudged by a court may enter voidable contracts if they

do not know they are entering into a contract or if they lack the mental capacity to comprehend

its subject matter, nature, and consequences. Whenever there is no prior adjudication of mental

incompetence, most courts examine whether the party was able to understand the nature,

14–5A. Licensing statutes

Whether a contract with an unlicensed person is legal and enforceable depends on the purpose

of the statute. If the purpose is to protect the public from unauthorized practitioners, then a

contract involving an unlicensed practitioner is generally illegal and unenforceable.

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14–6A. Minors

No, a minor does not so lack the capacity to contract that he or she cannot enter into a binding

settlement without court approval. The general rule is that a minor can enter into any contract an

adult can, unless the contract is prohibited by law for minors (for example, the sale of tobacco or

alcoholic beverages). A contract entered into by a minor, however, is voidable at the option of

14–7A. Adhesion contracts

Desgro’s complaint was filed too late—the contract’s twelve-month limit was enforceable.

Standard-form contracts often contain fine-print provisions that shift a risk ordinarily borne by

one party to the other or otherwise impose limitations on claims and disputes. Many businesses

use such contracts. Life insurance policies, residential leases, loan agreements, and

employment agency contracts are often standard-form contracts. To avoid enforcement of the

14–8A. Legality

An exculpatory clause releases a party from liability for injury or damage. A court may refuse to

enforce an exculpatory clause when the parties are seen to possess unequal bargaining

power—in a case involving an employment contract, for example. A business that offers non-

essential services is not considered to be at a relative advantage in bargaining strength, so

anyone contracting for its services is thought to do so voluntarily, making an exculpatory clause

potentially enforceable as a part of the deal. This is especially likely if the clause is

14-9A. A QUESTION OF ETHICS—Covenants not to compete

(a) The appellate court did not uphold the non-compete clause because it was invalid

and unenforceable because it contained no time or territorial limitations.

(b) Quite clearly, Coleman had converted funds that were in a joint account that the

company and Coleman had used. Therefore, it was reasonable for the court to require return of

these funds.

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ANSWERS TO LEGAL REASONING GROUP ACTIVITY QUESTIONS

AT THE END OF THE CHAPTER

14–10A. Covenants not to compete

(a) A covenant not to compete can be part of an employment contract. Such an

(b) A covenant not to compete that does not protect a legitimate business interest or

restrains trade and is contrary to public policy.

(c) A covenant not to compete clause would be unreasonable if there are no limits to