chapter 14

A contract may violate public policy even if the agreement does not violate a statute.

true

In many states it is illegal to lend money to help someone gamble.

true

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. Barb wins. The agreement is not reasonable as to time. b. Barb wins. The agreement is not enforceable because it is not ancillary to a legitimate bargain. c. Ken wins. The agreement is enforceable. d. Barb wins. The agreement is denying her the right to do the only thing she knows how to do.

Ken wins. The agreement is enforceable.

Which of the following is an example of an exculpatory clause? a. Employee agrees to never work for a competing company b. Seller is not responsible for property damage regardless of the cause of the injury c. Creditor charges 38% interest on a loan d. Buyer agrees to pay any costs of litigation

Seller is not responsible for property damage regardless of the cause of the injury

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 illegal and void. b. The contract is voidable at Larry's option. c. The contract is enforceable. d. The contract is void for lack of consideration.

The contract is illegal and void.

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 enforceable, but only up to the value of the water system. c. The contract is unenforceable because it is exculpatory. d. The contract is unenforceable because it is unconscionable.

The contract is unenforceable because it is unconscionable.

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 unenforceable if Lenny did not get the agreement in writing. b. The contract will be void as violating a statute. Lenny will not be able to recover anything. c. The contract will be voidable at Cindy's option. d. The contract will be valid. Cindy would not have been able to afford an attorney otherwise and therefore Lenny was doing a public service.

The contract will be void as violating a statute. Lenny will not be able to recover anything

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.

a contract provision requiring arbitration and then permitting appeal by either party was void as unconscionable

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.

a trade secret, and an employment noncompete clause would be enforceable to protect it

The UCC deals with unconscionability in a contract by providing that a court may: a. enforce the remainder of the contract without the unconscionable clause. b. refuse to enforce the contract. c. limit the application of any unconscionable clause as to avoid any unconscionable result. d. All of the above.

all of the above

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.

all of the above

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.

alpha wins; this exculpatory clause is enforceable

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 usurious agreement. b. an enforceable bailment agreement. c. an unenforceable exculpatory agreement. d. an enforceable agreement not to compete.

an enforceable agreement not to compete.

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.

an exculpatory clause that relieves a riding stable of negligence

In bailment cases, exculpatory clauses a. are very rarely used. b. ordinarily involve an attempt to limit liability for damage to persons rather than property. c. are not enforced because any harm is to property and not persons. d. are somewhat more likely to be enforced than in other types of cases.

are somewhat more likely to be enforced than in other types of cases.

Giving possession and control of personal property to another person is referred to as a. bailment. b. unconscionability. c. adhesion. d. usury.

bailment

Usury laws are designed to protect consumers from a. companies charging excess interest on loans. b. obtaining loans to gamble on credit. c. taking insurance polices out on the life of another. d. professionals practicing a trade without a valid license.

companies charging excess interest on loans.

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.

courts that decide what would have a negative impact on society

Which of the following relationships generally fails to create an insurable interest? a. Debtor and creditor b. Chief executive officer and corporation c. Husband and wife d. Doctor and patient

doctor and patient

A gambling contract is legal unless it is specifically prohibited by state statute.

false

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.

false

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.

false

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.

false

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.

false

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.

false

Morality plays no part of gambling contract legality.

false

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.

false

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.

false

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.

false

An unconscionable contract is one that a court refuses to enforce because of a. fundamental unfairness. b. its limit to free trade. c. overt vagueness. d. illegality.

fundamental unfairness.

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.

grant an injunction barring her from operating the new office

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.

it involves public transportation

A contract most likely will be declared unconscionable if a. it allows for an extremely high rate of interest to be charged. b. it is oppressive and one-sided. c. it contains a cancellation clause. d. it is signed by a minor for an item of luxury.

it is oppressive and one-sided

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.

no, but the court is likely to take the position that it is not in the publics best interests to enforce contracts with unlicensed doctors

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 $2,000 but not the $10,000. b. be able to recover the $12,000. c. be able to recover the $3 million lost on the contract. d. not be able to recover the $12,000.

not be able to recover the $12,000

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.

one must have an insurable interest in the person being insured

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. the money being paid out comes from premiums collected over time. d. insurance activities are regulated by the state department of insurance.

one must have an insurable interest in the person being insured.

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.

since this is a revenue-raising statue, The Little Nipper wins

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.

the contract is unenforceable because it is unconscionable

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.

the court will not do anything to help E-mation get its money back

An agreement may violate public policy even if the agreement does not require a party to commit a crime, tort, or violate a statute.

true

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.

true

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.

true

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.

true

To be valid, an agreement not to compete must be ancillary to a legitimate bargain.

true

When a licensing requirement is designed merely to raise revenue, a contract made by an unlicensed person is generally enforceable.

true