ACCT324 Ch 16

In the context of contracts, the legal capacity of a party refers to ______.

the mental ability to understand his or her rights

Dorian contracts with Julie to post on several social media accounts unflattering and false information about Julie's competitor to ruin the competitor's reputation which in theory would send all the customers towards Julie's business. This contract would be:

unenforceable because Dorian would be committing the tort of defamation.

The enforceability of covenants not to compete in employment contracts: _______.

varies from state to state

oldest limitation on capacity

minors may enter into voidable contracts

In most states, ______ are liable for a minor's personal torts.

minors, not their parents,

state rule that will not enforce any agreement with an unlawfully unlicensed professional

"no license, no contract"

incapacity

(incompetence) the posession of a mental/physical defect that prevents a natural person from being able to enter into a legally binding contract

covenants not to compete

(restrictive covenants) when the courts deem a restraint on trade reasonable, as part of a subordinate or ancillary clause, the restraint is typically allowed

unconscionable agreements

-unequal bargaining power -outcome is grossly unfair to an innocent party

contracts that violate state or federal statutes

1. Agreements to commit a crime or tort 2. Licensing Statutes 3. Usury 4. Gambling 5. Sabbath Laws

When can a minor be given full legal capacity to enter into contracts

1. When the minor marries 2. When the minor moves out of the parents' house and begins supporting himself or herself 3. When the minor's parents or legal guardians give up their right to exercise legal control over the minor

Exceptions to Sabbath laws

1. businesses related to necessities (health, survival) 2. charity work

3 purposes of licensing statutes

1. gov't has control over which people & how many can perform a job 2. gov't makes revenue by charging for licenses 3. protect the public's health, safety, and welfare

exceptions to voidable contracts by intoxicated people

1. if the intoxication only causes poor judgement, the contract is not voidable unless the other party unfairly capitalized on the impaired judgement 2. when the person becomes sober, the contract can be ratified or disaffirmed; however, courts will fairly liberally interpret behavior that seems like ratifying the contract once the person is sober

reasons for making illegal contracts void

1. indicates agreements are not socially acceptable 2. prevents the legal system from being used to promote agreements that are harmful to society

extent of incapacity

1. no capacity: complete inability to enter into contracts 2. limited capacity: the ability to form only voidable contracts

Types of restrictive covenants

1. one made in conjunction with the sale of ongoing business (for reasonable length of time and reasonable location) 2. in employment contracts

A minor is someone under ______ years of age, except in _______ states.

18, 3

exculpatory clause

A clause that releases a contractual party from liability in the event of monetary or physical injury, no matter who is at fault.

In which of the following situations is a contract enforceable?

A contract that can perform legally A contract with a legal subject matter

As a general rule, when an agreement is deemed illegal, courts will usually label it void, meaning neither party can enforce the agreement, and neither is entitled to recovery. What are exceptions to this rule?

A member of a protected class is a party to an agreement that contradicts a statute intended to protect the specific class. One of the parties withdraws from an illegal agreement before an illegality occurs. Justifiable ignorance of facts leaves one party unaware of a provision of an agreement that would make it illegal.

Which of the following is a correct statement regarding a minor's obligations on disaffirmance?

A minor's obligations on disaffirmance vary from state to state

Which of the following is a legally-recognized way to expressly ratify a contract?

After reaching majority, a person states orally or in writing that he or she intends to be bound by the contract entered into as a minor.

gambling

Agreements in which parties pay consideration (money placed during bets) for the chance, or opportunity, to obtain an amount of money or property.

Identify the examples of procedural unconscionability.

Excessive use of legalese A person's inability to fully read a contract Hard-to-read print on the back of an agreement

Identify the legal exception whereby loans may exceed the predetermined maximum in a state despite usury statute.

Corporate loans for facilitating business transactions

Lillian is a minor from an upper-income family. Which of the following is least likely to be considered a "necessary" for her due to her social status? Rent. Psychologist Monthly credit card bill for electricity. Credit card bill for monthly gym membership.Correct Winter boots.

Credit card bill for monthly gym membership.

If a contract is disaffirmed due of intoxication, which of the following statements is true?

Each party to the contract must return the other to the condition he or she was in at the time the contract was entered into.

Which of the following is a correct statement regarding a minor's power to disaffirm or void a contract?

If a minor chooses to disaffirm a contract, he or she must void the entire contract.

In the context of contracts for necessaries, which of the following statements is true of the liability of minors?

Minors can disaffirm contracts for necessaries. Minors can be held liable for the reasonable value of necessaries.

Which states allows casino gambling?

Nevada, New Jersey, Louisiana

express ratification

Occurs when, after reaching age of majority, individual states (either orally or in writing) that he/she intends to be bound by contract entered into while a minor

As a general rule, when an agreement is deemed illegal, courts will usually label it void, meaning neither party can enforce the agreement, and neither is entitled to recovery. Which of the following is not a recognized exception to this rule?

One of the parties withdraws from an illegal agreement after an illegality occurs.

Which of the following is true regarding the ability of persons suffering from a mental illness to enter into a binding contract?

Persons suffering from a mental illness may have full, limited, or no legal capacity to enter into a binding contract depending on the nature and extent of their mental deficiency.

What was the ruling in Lopez v. Kmart Corporation, the case in the text regarding whether a minor could disaffirm an arbitration clause in an employment contract?

Plaintiff entered into a valid arbitration agreement with his employer, but properly exercised his statutory right of disaffirmance, thereby rescinding the arbitration contract and rending it a nullity.

What does a minor need to do to disaffirm a contract?

Show an intention by words or action to rescind the contract

An executed, or fully performed, contract created on a _________ can not be ___________.

Sunday, rescinded

Which of the following is a correct statement regarding a competent party's recourse against a minor who disaffirms when the consideration the minor received is damaged or destroyed?

The competent party has no recourse against the minor.

Which of the following is true of anticompetitive agreements?

They are against public policy. They restrain trade.

Which of the following are true of states where the purpose of licensing is to provide government control over the profession or generate revenue?

They enforce contracts with unlicensed professionals. They require unlicensed professionals to pay fine.

Which of the following statements is correct regarding the legal exceptions to usury statutes?

To facilitate business, most states with usury statutes allow corporations to borrow at rates exceeding the maximum.

Because their contracts are _______, minors have the right, until a reasonable time after reaching the age of majority, to _______ or void their contracts.

Voidable; disaffirm

contracts made by _________ people are voidable

intoxicated

capacity

a person who has the mental ability to understand his/her rights and obligations under a contract and therefore, presumably, to comply with the terms

procedural unconscionability usually arises in a(n) _____________________.

adhesion contract

adhesion contract

agreement presented on a take it or leave it basis or as the only chance the presented party will have to enter into it

According to Section 2-302 of the Uniform Commercial Code, if a court -- as a matter of law -- finds a contract or any clause of the contract to have been unconscionable at the time it was made, the court may do all of the following except: _______.

award the affected party treble damages

in pari delicto

both parties are equally responsible for an illegal agreement

Public policy involves: _______.

both the government's concern for its citizens and the beliefs people hold regarding the proper subject of business transaction

Procedural Unconscionability

conditions that impair one parties understanding of a contract , as well as the integration of terms into a contract

Severable contracts (divisible contracts)

contain multiple parts that can each be performed separately and for which separate consideration is offered

capacity is an element of a legally binding __________.

contract

Contracts in restraint of trade:

contracts that restrain trade or unreasonably restrict competition; anticompetitive agreements

Covenants not to compete in connection with the sale of a business are generally: _______.

enforceable

If a minor enters into a contract with an adult, both parties may disaffirm the contract based upon the minor's lack of majority. (t/f)

false (It is only the minor who has the right to disaffirm, never the adult with whom the minor entered into the agreement.)

Once a young person reaches the age of majority and ratifies a contract made as a minor, he or she has a reasonable period of time to void the contract. (t/f)

false (Once a person reaches the age of majority, he or she may ratify, or legally affirm, contracts made as a minor. Once ratified, the contract is no longer voidable)

All exculpatory clauses are unlawful. (t/f)

false (While businesses closely linked to the public interest cannot enforce exculpatory clauses, not all such clauses are unlawful.)

Industry officials prefer to use the term ______, rather than gambling, to refer to agreements in which parties pay consideration for the chance, or opportunity, to obtain an amount of money or property.

gaming

Agreements against generally accepted public policy are...

illegal and unenforceable

if the court can sever the ________ part of a contract from the _______ part, it will generally do so and enforce only the ________ part; if indivisible, then it generally will be unenforceable

illegal, legal, legal

Gordon is 17 years old. He enters into a contract with Constance for a new stereo system. When Gordon turns 18, he moves away to college, taking the stereo system with him. This is a form of:

implied ratification

Which of the following occurs when a former minor takes some action after reaching the age of majority consistent with the intent to ratify a contract?

implied ratification

According to the Restatement (Second) of Contracts, if a court -- as a matter of law -- finds a contract or any clause of the contract to have been unconscionable at the time it was made, the court may do all of the following except: _______.

impose statutory sanctions on the party who drafted the contract

ratification

legal affirmation of contracts made by a minor when the reach majority age; this makes the contract no longer voidable; can be expressed or implied

to be enforceable, contracts must have ________ subject matter and be able to be performed __________.

legal, legally

types of contracts the minors do not have the right to disaffirm:

life insurance health insurance psychological counseling performance of duties related to stock and bond transfers and bank accounts education loan contracts child supporting contracts marriage contracts enlistment in the armed services

Sabbath laws

limit the types of business activities in which parties can legally engage on Sundays

As a general rule, any contract entered into by a ________ is voidable by the _________ until he/she reaches the age of majority or a reasonable time thereafter.

minor

dissafirmance by minor

minor's intention to rescind, by words or action, their entire contract

Which of the following businesses would most likely be able to enforce an exculpatory clause?

night club

Substantive Unconscionability

occurs when an agreement is overly harsh or lopsided

implied ratification

occurs when the former minor takes some action after reaching the age of majority consistent with intent to ratify the contract

As a general rule, _______ are not liable for contracts entered into by their __________.

parents, minor

As a general rule, covenants not to compete in employment contracts are: _______.

permissable

A party seeking enforcement of an exculpatory clause must be a(n) ______ business or individual not important to the ______ interest.

private, public

licensing statutes

require formal authorization to engage in certain trades, professions, or businesses

indivisible contract

requires complete performance by both parties, even if it appears to contain multiple parts

The public policy argument in favor of supporting the enforceability of a restrictive covenant regarding the sale of a business involves the ______

the fairness of the sale

In the context of general rules for illegal agreements, a party is allowed to sue for performance if ______.

the violated statute is intended to protect the specific class to which the party belongs

A person who has the mental ability to understand his or her obligations under the contract is presumed to have capacity. (t/f)

true

Some types of agreements that are not illegal per se, are nevertheless unenforceable because courts deemed them to be against public policy. (t/f)

true

The common law would not enforce contracts the courts deemed ______.

unconscionable

Generally, contracts made by intoxicated persons are ______.

voidable

emancipation

when a minor's parents or legal guardians give up their right to exercise legal control over the minor

usury

when a party gives a loan at an interest rate exceeding the legal maximum