BUL ch 12

contracts contrary to statute

-contracts to commit a crime -usury -gambling -licensing statutes -contracts in restraint of trade

justification for not allowing either party to sue for breach or recovery involving an illegal contract

-plaintiff who broke the law should not get help -plaintiff who suffers a loss b/c of an illegal bargain should be deterred from entering into similar illegal bargains

people excluded from general rule of no breach of contract or recovery

1. justifiable ignorance of the facts (one party didnt know it was illegal) -obtain restitution -possible for innocent party who has fully performed to enforce contract against guilty 2. members of protected classes: statute protects certain class of people -> enforce a contract in violation even though other party cant *blue sky law* 3. withdrawal from an illegal agreement: illegal party hasnt been performed -> w/draw and recover the performance or its value

An adhesion contract will never be deemed unconscionable.

F

An illegal contract is valid unless it is executory.

F

Covenants not to compete are never enforceable.

F

At the start of the football season, Bob and Murray make a bet about the results of the next Super Bowl. Adam holds their money. Just as the divisional play-offs are beginning, Bob changes his mind and asks for his money back. Gambling on sports events is illegal in their state. Can Bob be held to the bet? Yes. It would be unconscionable to let Bob back out so late in the season. Yes. No party to the contract is innocent, and thus no party can withdraw. No. If an illegal agreement is still executory, either party can withdraw. No. The only party who can be held to the bet is Murray.

No. If an illegal agreement is still executory, either party can withdraw.

In an exculpatory clause, which of the following statements is true? One party agrees that the other party is not mentally incompetent. One party releases the other party from liability in the event of monetary or physical injury, no matter who is at fault. One party is able to sue the other party based on the clear fault of the other party. Both parties agree to use arbitration, not adjudication, to settle any disputes arising under the contract containing the clause.

One party releases the other party from liability in the event of monetary or physical injury, no matter who is at fault.

All states have statutes that regulate gambling.

T

An exculpatory clause may or may not be enforced.

T

Even in states that permit certain types of gambling, courts often find that gambling contracts are illegal.

T

If the purpose of a licensing statute is to protect the public from unlicensed practitioners, a contract entered into with an unlicensed practitioner is unenforceable.

T

Usury is charging an illegal rate of interest.

T

Charging an interest rate that exceeds the maximum rate set by state statute, and is thus illegal, is called: a. usury. b. exculpatory. c. restraint on trade. d. gambling.

a usury

Kevin and Mike make a bet on a boxing match. Mike has the match fixed so that he wins the bet. Kevin sues Mike for breach of contract. What will be the outcome? a. Because this is an illegal contract, it is considered void. The court will not aid Kevin, regardless of the fault involved. b. The court will consider this an adhesion contract and find in favor of Kevin. c. Kevin will prevail; this is an example of substantive unconscionability. d. The judge will likely order reformation of the contract.

a. Because this is an illegal contract, it is considered void. The court will not aid Kevin, regardless of the fault involved.

All of the following are examples of contracts contrary to public policy except: a. a contract to sell property one does not own. b. a contract to sell a child. c. a contract to commit an immoral act. d. a contract that prohibits marriage.

a. a contract to sell property one does not own.

Jackson enters into a contract with Celia. Knowing that Celia is new to the country and only has a basic grasp of English, Jackson writes the contract with inflated language and complicated legal jargon. When Celia fails to uphold her part of the contract, Jackson sues for breach. The court will find the contract: a. unenforceable for procedural unconscionability. b. enforceable regardless of its fairness. c. unenforceable for substantive unconscionability. d. executory and therefore unenforceable.

a. unenforceable for procedural unconscionability.

Town Trust grants Marcia a loan at 20 percent interest. The state maximum interest rate is 8 percent. This is: a. usury. b. a contract in restraint of trade. c. substantively unconscionable. d. exculpatory.

a. usury

adhesion contract

stronger party dictates the terms take it or leave it bases

An illegal contract is: a. valid. b. void. c. voidable. d. enforceable.

b void

Which is the following is a contract contrary to statute? a. Unconscionable contract b. Contract to commit a crime c. Covenant not to compete d. Contract in restraint of trade

b. Contract to commit a crime

Lilly is contacted by telephone from an individual seeking investors to purchase 8-liner gaming machines that will be placed in bars around the country. She is told that the investment is perfectly legal, so she invests $5,000. She contracts with a broker to invest the last of her pension funds in the stock market. The year goes badly, and she loses $50,000. She is too ill to return to work and will be penniless if she cannot avoid the contract. Which of the following applies? a. She can appeal to her governor for clemency. b. She has no legal recourse. c. She can avoid the contract based on the general gambling rule. d. She can avoid the contract because stock market transactions are against public policy.

b. She has no legal recourse.

Bob owns a local consulting business and wants his employees to sign a covenant not to compete. Which of the following situations would be considered reasonable for a covenant not to compete? a. The covenant prevents the employees from working for any client or vendor with whom the consulting business has a relationship. b. The employees cannot start a competing consulting business in the same city for one year. c. Employees cannot work for any other business consultants in the U.S. d. The covenant not to compete is in effect for 10 years.

b. The employees cannot start a competing consulting business in the same city for one year.

An adhesion contract: a. is also known as an employment contract. b. is a type of unconscionable contract. c. will contain an exculpatory clause.

b. is a type of unconscionable contract.

A doctor makes an agreement with a charitable organization to turn over her unused medicine samples to them for shipment to people in need in developing countries. After the agreement is made, a law is passed making this drug transaction illegal. The contract: a. is unconscionable. b. is discharged by law. c. will likely be reformed by the court. d. is still valid because it was made before the law was passed.

b. is discharged by law.

In the case of an illegal contract: a. a plaintiff who suffers a loss can usually recover for performance. b. there are circumstances in which one party may sue another for breach. c. neither party may recover for performance under any circumstances. d. ignorance of the facts does not work in a plaintiff's favor.

b. there are circumstances in which one party may sue another for breach.

Regan contracted to loan Ray $10,000 so that Ray could place a bet on next Sunday's football game with his bookie. Ray lost the entire amount and refused to repay Regan on the loan contract. Regan then filed a lawsuit in a Kentucky state court against Ray for breaching the contract. Ray claimed that he did not have to repay the loan because gambling was illegal in Kentucky and therefore their contract was void. The court most likely found that the contract was: a. void, because Regan did not get the contract in writing. b. void, because the contract was for an illegal purpose. c. void, because Regan has not registered as a bookie. d. void, because the contract is unconscionable.

b. void, because the contract was for an illegal purpose.

A covenant not to compete in the sale of an ongoing business is: a. illegal. b. voidable. c. valid. d. void.

c valid

Blue sky laws, which allows certain people to enforce a contract that is in violation of a statute, are enacted to protect: a. employers. b. lenders. c. investors. d. flight attendants.

c. investors

contracts contrary to public policy

contracts involving private parties that are not enforceable b/c of the (-) impact on society

Nicole is a senior accounting major at ABC University with two semesters to go before she graduates. She decides to look for an internship with a small accounting firm to gain experience prior to graduating, and obtains an internship with a two-person accounting firm. Her responsibilities are assigned as follows: (1) Assists with administrative work; (2) Assists with client contact; and (3) Provides administrative support to the accountants and staff. Approximately a week after beginning her internship, one of the accountants approaches her with a seven-page document and asks her to sign it. He states that it is a requirement for all individuals working for the accounting firm. She notices the title of the document: "Non-Compete Agreement." She vaguely remembers reading something about a non-compete agreement in her business law class, but does not have an idea of what it really is. The owner, noticing her hesitation, tells her, "This is just to protect the firm." With that, she signs the agreement and goes back to her work. After graduation, she obtains a job at another accounting firm as an accountant. The accounting firm where she interned sends her a letter claiming that she breached her non-compete agreement by working for another accounting firm and is threatening to sue her. A court would most likely hold that the non-compete agreement is: a. unenforceable, because it is an illegal agreement. b. unenforceable, because it violates a licensing statute. c. unenforceable, because it is an unreasonable restraint on trade. d. unenforceable, because it is a usurious agreement.

c. unenforceable, because it is an unreasonable restraint on trade.

A contract involving the services of an unlicensed physician would likely be: a. enforceable, because the purpose of the license is to protect the public from unauthorized practitioners. b. enforceable, because the purpose of the license is to raise government revenues. c. unenforceable, because the purpose of the license is to protect the public from unauthorized practitioners. d. unenforceable, because the purpose of the license is to raise government revenues.

c. unenforceable, because the purpose of the license is to protect the public from unauthorized practitioners.

Adam files a lawsuit against Larry, a landowner on whose property Adam was injured. Larry believes that Greg is a lawyer and hires Greg to defend him in the lawsuit. Greg is not a lawyer, so the contract between Larry and Greg: a. will be enforced despite Greg's winning or losing. b. will be enforced only if Greg wins. c. will not be enforced. d. will be enforced unless Greg loses the case.

c. will not be enforced.

Amy contracts to buy Kim's business. Kim agrees not to compete with Amy for one year in the same county. Six months later, Kim opens a competing business six blocks away. Amy cannot enforce the contract because it is unconscionable. cannot enforce the contract because it is a restraint of trade. can enforce the contract because all covenants not to compete are valid. can enforce the contract because it is reasonable in scope and duration.

can enforce the contract because it is reasonable in scope and duration.

usury

charging an illegal rate of interest

exculpatory clause

contract clause that releases a party from liability of wrongful acts no matter who is at fault -often held unenforceable

unconscionable contract or clause

contract or clause that is so unfair that it is rendered void- courts relieve innocent parties -shock the conscience of the court

if any covenants are unreasonable

court may reform the covenant- convert the terms to reasonable ones *reformation*

Which of the following types of contracts is not among the types of contracts and clauses that are often held to be contrary to public policy? a. An unconscionable contract b. An exculpatory clause c. A contract in restraint of trade d. A commercial contract

d. A commercial contract

Caroline tells her friend Mario that she's been having back problems. Mario offers to help put her back "into alignment" if she comes to him every week for a period of eight weeks. Though Mario is not a licensed professional, he "does this for his friends all the time." Caroline is between jobs and does not have health insurance, so she agrees to see Mario for a discounted fee. After the eight weeks, Caroline's back is worse. She is forced to see a doctor, who determines that Mario's ministrations have exacerbated the problem and made it necessary for Caroline to have surgery. Caroline sues Mario for her medical expenses. What will be the outcome? a. Caroline will recover from Mario because the contract between them was unconscionable. b. Because the licensing purpose in this case is one of public protection, the contract is enforceable. Caroline, therefore, will be able to recover from Mario. c. Because the licensing purpose in this case is to raise government revenues, the contract is unenforceable. Caroline, therefore, will not be able to recover from Mario. d. Because the licensing purpose in this case is one of public protection, the contract is unenforceable. Caroline, therefore, will not be able to recover from Mario.

d. Because the licensing purpose in this case is one of public protection, the contract is unenforceable. Caroline, therefore, will not be able to recover from Mario.

Jerome is hired by a manufacturing company that requires him to sign an employment contract. The contract states that the company will not be liable for any injuries Jerome sustains on the job, regardless of whether the injury is caused by the company's negligence. Which of the following is true? a. This contract is an example of procedural unconscionability. b. This contract is enforceable because Jerome is a member of a protected class. c. This contract will likely be reformed by a judge. d. This part of the contract is unenforceable due to the unconscionable exculpatory clause.

d. This part of the contract is unenforceable due to the unconscionable exculpatory clause.

Jason enters into an insurance contract with SafeWest Insurance Co. in order to insure his home and personal property in Oklahoma. Unbeknownst to Jason, the insurance contract violates an Oklahoma state statute that regulates the sale of insurance. Soon after, his home is damaged by fire and Jason files a claim with SafeWest. SafeWest refuses to pay on the insurance claim. The contract: a. is enforceable because the contract violates only one Oklahoma state statute. b. is unenforceable because the insurance contract is usurious and is thus illegal. c. is unenforceable because the insurance contract violates Oklahoma state law and is thus illegal. d. is enforceable because Jason is a member of a protected class that permits enforcement of a contract in violation of a statute.

d. is enforceable because Jason is a member of a protected class that permits enforcement of a contract in violation of a statute.

Brandt and Jenni create a Web site to sell raffle tickets for $1 for a chance to win their house. They sell 250,000 lottery tickets. Andy buys a ticket and wins. Brandt and Jenni then change their minds and decide to not give Andy their house. If Andy sues Brandt and Jenni, the court: a. will enforce the contract, but only if they sold enough raffle tickets to equal the fair market value of their house. b. will find that the contract is voidable, and that Brandt and Jenni have a right to disaffirm the contract. c. will enforce the contract and require Brandt and Jenni to transfer their house to Andy. d. will find that the contract is illegal and will not enforce it.

d. will find that the contract is illegal and will not enforce it.

William, a 27-year-old with a third-grade reading level, buys a used 32" LCD flat-screen TV from a local pawn shop for $1,750. Because he has limited funds as a welfare recipient, the pawn shop agrees to finance the purchase with a 42% interest rate and a $100 monthly payment. William makes five payments and then stops on the advice of a friend. A court would find that the contract is: a. valid. b. void. c. voidable. d. unconscionable

d.. unconscionable

Sam signs an employment contract that contains a clause absolving the employer of any liability if Sam is injured on the job. If Sam is injured on the job due to the employer's negligence, the clause will protect the employer from liability. likely not protect the employer from liability. likely be held unconscionable. do both b and c.

do both b and c.

Al sells his business to Dan and, as part of the agreement, promises not to engage in a business of the same kind within thirty miles for three years. Competition within thirty miles would hurt Dan's business. Al's promise violates public policy, because it is part of the sale of a business. violates public policy, because it unreasonably restrains Al from competing. does not violate public policy, because it is no broader than necessary. does none of the above.

does not violate public policy, because it is no broader than necessary.

courts (do/dont) look at fairness, or equity of a contract

dont -people are assumed to be reasonably intelligent

covenant not to compete in sale of an ongoing business

enable the seller to sell and the purchaser to buy the "goodwill" & "reputation" of an ongoing business

procedural unconscionability

how a term becomes part of a contract -relates to factors on a party's lack of knowledge or understanding of the contract -print hard to see or legalese (lang hard to understand) -unequal bargaining power -adhesion contract

gambling

illegal-void -allow horse racing, video poker machines, charity-sponsored bingo, state lotteries, gambling on native american reservation -gambling contracts are illegal in even states that allow gambling

contracts in restraint of trade

interfering w/ free competition-adversely affect the public & violates one or more of federal or state statutes

Fred signs a covenant not to compete with his employer, General Sales Corporation. This covenant is enforceable if it is not connected with the sale of an ongoing business. is reasonable in terms of geographic area and time. is supported by consideration. requires both parties to obtain business licenses.

is reasonable in terms of geographic area and time.

Luke practices law without an attorney's license. The state requires a license to protect the public from unauthorized practitioners. Clark hires Luke to handle a legal matter. Luke cannot enforce their contract because it is illegal. Luke has no contractual capacity. Luke did not give consideration. none of the above.

it is illegal.

covenant not to compete in employment

legal: reasonable time, geographic restriction, necessary to protect legitimate business

if illegal contract- executory

neither party can enforce it

if illegal contract- executed

no recovery

substantive unconscionability

oppressive or overly harsh- courts focus on provisions that deprive one party of benefits or leave party w/o remedy for nonperformance by the other party

two types of unconscionability

procedural & substantive

licensing statutes

some req extensive schooling & exams some pay a fee -when a person has a contract with an unlicensed individual-> may be enforceable depending on nature of licensing statute

blue sky laws

state law regulates the offer and sale of securities regulate investment companies for the protection of the public -stop sale of stock in fly-by-night concerns (non existing oil wells, gold mines) -investors are protected as a class & can sue to recover

Ann contracts with Bob, a financial planner, who is required by the state to have a license. Bob does not have a license. Their contract is enforceable if the purpose of the statute is to protect the public from unlicensed practitioners. the purpose of the statute is to raise government revenue. Bob does not know that he is required to have a license. Ann does not know that Bob is required to have a license.

the purpose of the statute is to raise government revenue.

A contract that is full of hard-to-read print and hard-to-understand language and that is presented to someone who is not given an opportunity to read it is always unenforceable. always enforceable. unenforceable under some circumstances. void.

unenforceable under some circumstances.

exceptions to contracts in restraint of trade

when the restraint is reasonable & integral part of the contract -covenant not to compete