Chapter 16: Capacity and Legality

In which of the following situations is a contract enforceable?

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

Some states hold that when a minor who appears to be of the age of majority misrepresents his or her age and a competent party relies on that misrepresentation in good faith, the minor gives up the right to disaffirm the agreement and can be treated as an adult. Which of the following is a recognized justification for this rule?

A minor who misrepresents his or her age does not need the protection that disaffirmance is designed to provide

Which of the following statements is most accurate regarding a restrictive covenant made in conjunction with the sale of an ongoing business?

A restrictive covenant made in conjunction with the sale of an ongoing business is enforceable.

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.

In which of the following scenarios would a court be least likely to find substantive unconscionability?

An agreement in which the value of the consideration can vary depending on market forces

Which of the following statements is correct regarding the legality and enforceability of contracts?

Both a contract that requires an illegal act for performance and a contract for an illegal purpose are unenforceable.

What happens if a legal contract is formed and its subject later becomes illegal under a new statute?

Both parties are discharged from their obligations.

Which of the following is a type of legal capacity a person suffering from a mental illness may have, depending on the nature and extent of their deficiency?

Full

Which of the following refers to agreements in which parties pay consideration for the chance, or opportunity, to obtain an amount of money or property?

Gambling

Which of the following is correct regarding express ratification?

It can occur either orally or in writing.

Which of the following is correct regarding the legal maximum interest rate?

It varies from state to state.

Julie, a 16-year-old student, enters a three-year modeling contract with a local ad agency. After two months, she realizes that the modeling schedule is too hectic and interferes with her school and other activities. She does not want to continue modeling. Which of the following statements is true in the given scenario?

Julie can void the contract immediately.

Which of the following is a type of legal capacity a person suffering from a mental illness may have, depending on the nature and extent of their deficiency?

Limited

Why are contracts that are made for an illegal purpose void?

Making them void prevents the legal system's being used to promote agreements that are harmful to society. Making them void clearly indicates that such agreements are not socially acceptable.

Which of the following is a correct statement regarding minors and contracts?

Minors may enter into only voidable contracts.

______ unconscionability occurs when an agreement is overly harsh or lopsided.

Substantive

Which of the following terms refers to an agreement that is overly harsh or lopsided?

Substantive unconscionability

Which of the following is correct regarding a minor's misrepresentation of his or her age and the right to disaffirm a contract?

The majority rule is that a minor's misrepresentation of age does not affect the minor's right to disaffirm a contract.

Which of the following are true of anticompetitive agreements?

They are against public policy. They restrain trade.

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

True

Which of the following terms refers to an agreement so unfair that it is void of conscience?

Unconscionable

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

Usury

A(n) ______ contract is an agreement presented on a take-it-or-leave-it basis.

adhesion

Public policy involves: ______.

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

A contract for necessaries by a person suffering from a mental deficiency: ______.

can be enforced for the reasonable value of the necessaries

When a court determines a restraint on trade is reasonable and the restraint is part of a subordinate, or ancillary, clause in a contract, the restraint is typically allowed. Such restraints are known as a covenant not to: ______.

compete

The requirement of legal capacity presumes the ability of a party to: ______.

comply with the contract terms

Capacity is an element of a legally binding: ______.

contract

A severable contract is also known as a(n) ______ contract.

divisible

A(n) ______ ratification occurs when, after reaching the age of majority, the person states she intends to be bound by the contract entered into as a minor.

express

Ratification may be either ______ or ______.

express; implied

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

fairness of the sale

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

When an agreement is deemed ______, courts will usually label it void.

illegal

Most courts find that continuing to act in accordance with a contract, such as continuing to make regular payments after reaching the age of majority, constitutes a(n) ______.

implied ratification

Adhesion contracts are : ______.

legal

Once a person reaches the age of majority, she may ratify, or ______, contracts made as a minor.

legally affirm

Essentially, a severable contract is: ______.

like numerous contracts in one

If intoxication causes a person to exercise poor judgment in making a contract, the contract is ______ unless the other party unfairly capitalized on the impaired judgment.

not voidable

An implied ______ occurs when a former minor takes some action after reaching the age of majority consistent with intent to ratify a contract.

ratification

A covenant not to compete is also known as a(n) ______ covenant.

restrictive

A covenant not to compete is also known as a: ______.

restrictive covenant

A divisible contract is also known as a(n) ______ contract.

severable

Once a former minor ratifies a contract, ______.

the contract is no longer voidable

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

the mental ability to understand his or her rights

A basic test to determine whether an exculpatory clause is enforceable is to see whether the enforcing party engages in a business directly related to: ______.

the public interest

Currently, in all but ______ states, a minor is someone under the age of ______.

three; 18

Heavily one-sided agreements are known as ______ contracts.

unconscionable

A contract overturned for illegal subject matter or for being illegal to perform is generally declared: ______.

void

Courts will usually consider an illegal agreement: ______.

void

When an agreement is deemed illegal, courts will usually label it ______.

void

Generally, contracts made by intoxicated persons are ______.

voidable

Agreements that restrain trade, called ______ agreements, are viewed as being harmful to consumers and against public policy.

anticompetitive

An exculpatory clause releases one of the contracting parties from all liability: ______.

regardless of who is at fault