Tuesday, March 27, 2012

Business Law Text And Cases Chapter 13 Capacity and Legality


Chapter 13


Capacity and Legality




true/false questions

A1.      When both parties to a contract are minors, neither of them may disaf­firm the contract.

            answer:    F                              PAGE:     265                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

B1.      An adult may avoid any contract with a minor.

            ANSWER:    F                              PAGE:     265                          TYPE:      +
                        NAT: AACSB Analytic                     AICPA Legal

A2.      A minor’s right to disaffirm a contract terminates sixty days after the contract’s date.

            answer:    F                              PAGE:     265                          TYPE:      N
                        NAT: AACSB Analytic                     AICPA Legal

B2.      Contractual capacity refers to the legal ability to enter into a contract.

            answer:    t                              PAGE:     265                          TYPE:      N
                        NAT: AACSB Analytic                     AICPA Legal

A3.      Contractual capacity refers to the legal ability to disaffirm a contract.

            answer:    F                              PAGE:     265                          TYPE:      N
                        NAT: AACSB Analytic                     AICPA Legal

B3.      A minor may disaffirm a contract only after attaining the age of majority.

            answer:    F                              PAGE:     265                          TYPE:      N
                        NAT: AACSB Reflective                                                   AICPA Legal

A4.      The age of majority in most states is eighteen years.

            answer:    T                              PAGE:     265                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

B4.      A minor may avoid any contract with an adult.

            answer:    F                              PAGE:     266                          TYPE:      N
                        NAT: AACSB Analytic                     AICPA Legal

A5.      All contracts between adults and minors are void.

            ANSWER:    F                              PAGE:     265                          TYPE:      N
                        NAT: AACSB Analytic                     AICPA Legal

B5.      When a minor disaffirms a contract, he or she can keep whatever prop­erty is in his or her possession as a result of the contract.

            answer:    F                              PAGE:     266                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

A6.      A minor may disaffirm a contract only if the subject matter is illegal.

            answer:    f                              PAGE:     265                          TYPE:      N
                        NAT: AACSB Reflective                                                   AICPA Legal

B6.      Clothing is not something that the courts have been willing to define as “necessary.”

            ANSWER:    F                              PAGE:     266                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

A7.      Parents are required by law to provide neces­saries for their minor children.

            answer:    t                              PAGE:     266                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

B7.      A minor who affirmatively misrepresents himself or herself to be an adult will not be able to disaffirm a contract in most states.

            answer:    f                              PAGE:     266                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

A8.      Parents are ordinarily liable for the contracts made by their minor chil­dren, whether or not the children acted on their own.

            ANSWER:    F                              PAGE:     269                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

B8.      A minor may disaffirm a contract for necessaries and thereby avoid li­abil­ity for the reasonable value of the goods.

            ANSWER:    F                              PAGE:     266                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

A9.      A person who enters into a contract when he or she is intoxicated can void the contract only if the intoxication was involuntary.

            ANSWER:    F                              PAGE:     269                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

B9.      Parents who sign a contract made by their minor child with an adult have the same option to disaffirm as the child.

            answer:    f                              PAGE:     269                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

A10.    A person who enters into a contract when he or she is intoxicated can void the contract if the terms are obviously favorable to the other party.

            ANSWER:    F                              PAGE:     269                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

B10.    A person who enters into a contract when he or she is intoxicated can void the contract if he or she did not comprehend the legal consequences.

            ANSWER:    T                              PAGE:     269                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

A11.    A contract is unenforceable if there is a statute that prohibits the action promised by the contract.

            answer:    T                              PAGE:     271                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

B11.    A guardian cannot enter into legally binding contracts on behalf of a mentally incompetent person.

            ANSWER:    F                              PAGE:     270                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

A12.    A lender who makes a loan at a rate above the lawful maximum commits usury.

            answer:    T                              PAGE:     272                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

B12.    A usurious contract involves the purchase and sale of usable goods.

            answer:    F                              PAGE:     272                          TYPE:      N
                        NAT: AACSB Analytic                     AICPA Critical Thinking

A13.    An executed contract entered into on Sunday in a state having a Sunday law cannot be rescinded.

            answer:    t                              PAGE:     272                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

B13.    A blue law is a state statute that prohibits loans at an interest above the “blue line.”

            answer:    F                              PAGE:     272                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

A14.    If the purpose of a licensing statute is to raise government revenues, a contract with an unlicensed professional will normally be enforceable.

            answer:    t                              PAGE:     273                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal


B14.    A contract with an unlicensed professional is always enforceable.

            ANSWER:    F                              PAGE:     273                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

A15.    A covenant not to compete between ongoing businesses is always enforceable.

            ANSWER:    F                              PAGE:     273                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

B15.    A covenant not to compete is never enforceable.

            ANSWER:    F                              PAGE:     273                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

A16.    Adhesion contracts are often held to be contrary to public policy.

            ANSWER:    T                              PAGE:     277                          TYPE:      N
                        NAT: AACSB Reflective                                                   AICPA Legal

B16.    A covenant not to compete is enforceable only if it is necessary to restrain trade.

            answer:    F                              PAGE:     273                          TYPE:      N
                        NAT: AACSB Analytic                     AICPA Legal

A17.    An exculpatory clause in an employment contract is always enforceable.

            answer:    f                              PAGE:     280                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

B17.    Most courts are usually very concerned about the fairness of contracts.

            answer:    f                              PAGE:     277                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

A18.    If an illegal contract is executory, either party can enforce it.

            answer:    F                              PAGE:     280                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

B18.    A contract that exculpates one party for negligence or other wrongdoing will not usually be viewed as unconscionable.

            answer:    f                              PAGE:     280                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

A19.    A severable contract is unenforceable as a violation of public policy.

            answer:    f                              PAGE:     281                          TYPE:      N
                        NAT: AACSB Reflective                                                   AICPA Legal

B19.    An exculpatory clause in a residential property lease is usually enforceable.

            answer:    f                              PAGE:     280                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

A20.    When a statute protects a certain class of people, a member of that class cannot enforce an otherwise illegal contract.

            answer:    F                              PAGE:     281                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

B20.    An illegal contract is valid if the parties to it were unaware of the illegality.

            ANSWER:    F                              PAGE:     280                          TYPE:      N
                        NAT: AACSB Analytic                     AICPA Legal


Multiple choice questions

A1.      Don enters into a contract with Edie, who does not have contractual ca­pacity. The law will permit Don to enforce the contract only if Edie

            a.         elects not to avoid the contract.
            b.         is a minor.
            c.         is a minor, intoxicated, or mentally incompetent.
            d.         is intoxicated or men­tally incompetent.

            answer:    A                              PAGE:     265                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

B1.      Boyd is a minor. As a minor, Boyd has the capacity to enter into

a.         an invalid contract.
b.         an unavoidable contract.
c.         a valid contract.
d.         no contract.

            ANSWER:    C                              PAGE:     265                          TYPE:      N
                        NAT: AACSB Reflective                                                   AICPA Legal

A2.      Yvon and Zack are minors who marry each other. Their minority status may be terminated under the laws of

            a.         all states.
            b.         most states.
            c.         some states.
            d.         no states.

            answer:    c                              PAGE:     265                          TYPE:      N
                        NAT: AACSB Reflective                                                   AICPA Legal

B2.      Cary is fifteen. In most states, Cary would be considered a minor because she is under the age of
           
            a.         sixteen.
            b.         eighteen.
            c.         twenty.
            d.         twenty-one.

            answer:    B                              PAGE:     265                          TYPE:      +
                        NAT: AACSB Reflective                                                   AICPA Legal

A3.      Ken relinquishes the right to his son Lee’s control, care, custody, and earnings. This act is

a.         a disaffirmance.
b.         an emancipation.
c.         a ratification.
d.         restitution.

            answer:    B                              PAGE:     265                          TYPE:      N
                        NAT: AACSB Reflective                                                   AICPA Legal

B3.      Nina, a seventeen-year-old, signs a contract to sell her car to OK Used Cars. Nina receives a better offer the next day from Perfect Pre-owned Cars, Inc., and accepts the new offer. Nina is

a.         liable to OK and must sell it a car of comparable value.
b.         liable to OK and must sell it her car.
c.         not liable to OK because she is a minor.
d.         not liable to OK because the sale of the car disaffirmed their deal.

            ANSWER:    D                              PAGE:     265                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

A4.      Chris, a minor, signs a contract to buy alcoholic beverages for Dine & Drink, his parents’ restaurant.  The contract is

            a.         valid but may be disaffirmed.
            b.         valid but may not be disaffirmed.
            c.         void as a matter of law.
            d.         void unless it is also signed by Ed, the manager of Dine & Drink.

            answer:    c                              PAGE:     265                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

B4.      Jill, a minor, is living at home with her parents, but signs a lease with a land­lord to rent an apartment. Jill can

a.         disaffirm the lease because her parents can be held liable for it.
b.         disaffirm the lease without liability.
c.         not disaffirm the lease because an apartment is a “necessary.”
d.         not disaffirm the lease if she intended to live on her own.

            ANSWER:    B                              PAGE:     266                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

A5.      Olga, a minor, signs a contract to buy a computer from Phil, the owner of Quality Computer Store. Olga’s right to disaffirm the contract

a.         does not change the fact that Phil is bound by the contract.
b.         does not yet exist because Olga is still a minor.
c.         gives Phil, an adult, the right to disaffirm the contract.
d.         is not valid because a computer is a “necessary.”

            ANSWER:    A                              PAGE:     265                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal



B5.      Gary, a minor, buys a car from Hot Cars, Inc., in a state in which a duty of restitution is imposed. After wrecking the car, Gary wants to return it. Gary

a.         can keep the car without paying for it or the damage.
b.         cannot return the car unless it can be fully repaired.
c.         can return the car but must pay for the damage.
d.         can return the car without paying for the damage.

            answer:    C                              PAGE:     266                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

A6.      Cray returns a digital music player that he bought from Discount City, which re­funds the price. Their exchange involves

a.         an emancipation.
b.         a ratification.
c.         restitution.
d.         severability.

            answer:    C                              PAGE:     266                          TYPE:      N
                        NAT: AACSB Reflective                                                   AICPA Legal

B6.      Ann, an emergency medical technician, renders medical care to Brad, a minor. Under the ruling of the court in Case 13.1, Yale Diagnostic Radiology v. Estate of Harun, Ann may recover the cost from

a.         Brad only.
b.         Brad or Brad’s parent.
c.         Brad’s parent only.
d.         no one.

            ANSWER:    B                              PAGE:     267                          TYPE:      =
                        NAT: AACSB Communication       AICPA Legal

A7.      Elmo, a minor, misrepresents his age to be twenty-one and contracts to buy a car from Fine New Autos. Ordinarily, Elmo can disaffirm the contract

a.         only if he can prove that Fine New Autos did not know his true age.
b.         only if he can prove that Fine New Autos knew his true age.
c.         under any circumstances.
d.         under no circumstances.

            answer:    c                              PAGE:     266                          TYPE:      N
                        NAT: AACSB Reflective                                                   AICPA Legal

B7.      Jack, a minor, takes out an automobile insurance policy and pays a $1,000 pre­mi­um. If Jack disaffirms the contract, he can most likely recover

            a.         $500.
            b.         $1,000.
            c.         $1,500.
            d.         nothing.

            answer:    b                              PAGE:     268                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

A8.      Ruth, a minor, charges groceries at Sam’s Mini-Mart. Two days later, Ruth disaffirms the purchase. Ruth owes Sam’s

            a.         the reasonable value of the groceries.
            b.         the retail value of the groceries.
            c.         the wholesale value of the groceries.
            d.         nothing.

            answer:    A                              PAGE:     266                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

B8.      Mica, a minor, signs a contract to pay Natural Health Club a monthly fee for twenty-four months to use its facilities. Six months later, after reaching the age of majority, Mica continues to use the club. This act is

a.         a disaffirmance.
b.         an emancipation.
c.         a ratification.
d.         a restitution.

            answer:    C                              PAGE:     269                          TYPE:      N
                        NAT: AACSB Reflective                                                   AICPA Legal

A9.      Max, a minor subject to his parents’ care and control, signs a contract to rent an apartment from Noel for one year. Before the end of the term, Max moves out. Noel sues for the rent for the rest of the term. Max can

            a.         avoid liability for the rent but not disaffirm the contract.
            b.         disaffirm the contract and avoid liability for the rent.
            c.         disaffirm the contract but not avoid liability for the rent.
            d.         not disaffirm the contract nor avoid liability for the rent.

            answer:    B                              PAGE:     266                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

B9.      Intoxicated, Clio agrees to sell her restaurant, Diners CafĂ©, to Evan for half of its real market value. This deal is most likely void if

            a.         Clio appeared intoxicated to Evan.
            b.         Clio disaffirms the contract after becoming sober.
            c.         Clio was so intoxicated as to have no memory of the deal.
            d.         Evan fraudulently induced Clio to become intoxicated.

            answer:    D                              PAGE:     269                          TYPE:      N
                        NAT: AACSB Reflective                                                   AICPA Legal

A10.    Curt, a doctor, renders medical care to Dora, a minor. According to the reasoning of the court in Case 13.1, Yale Diagnostic Radiology v. Estate of Harun, a contract between Curt and Dora is

a.         express.
b.         implied in fact.
c.         implied in law.
d.         non-existent.

            ANSWER:    C                              PAGE:     267                          TYPE:      =
                        NAT: AACSB Communication       AICPA Legal

B10.    Opie enters into a contract with Pia. Later, Opie is adjudged mentally incompetent and Quint is appointed Opie’s guardian. Raye, Opie’s daughter, attempts to void Opie’s contract with Pia on the ground of Opie’s incompetency. The contract is

a.         enforceable if Opie does not attempt to disaffirm it.
b.         enforceable if Pia is also incompetent.
c.         enforceable if Quint knew of the contract when he was appointed.
d.         void.

            answer:    A                              PAGE:     270                          TYPE:      N
                        NAT: AACSB Reflective                                                   AICPA Legal

A11.    Delia enters into, and fails to disaffirm soon after reaching the age of ma­jority, a contract with Electronics Stores, Inc. (ESI). Later Delia attempts to disaffirm the contract. ESI files a suit against her. The court will most likely consider the contract ratified if it is

            a.         executed.
            b.         executory.
            c.         executed or executory.
            d.         neither executed nor executory.

            answer:    A                              PAGE:     269                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

B11.    A court adjudicates Huck mentally incompetent and appoints Inez to be his guard­ian. Later, without Inez’s knowledge, Huck signs a contract to sell his farm to Kyle for its real market value. The contract is

a.         enforceable if Huck comprehended the consequences.
b.         enforceable if Huck knew the market value of the farm.
c.         enforceable if Huck was the record owner of the farm.
d.         void.

            ANSWER:    D                              PAGE:     270                          TYPE:      N
                        NAT: AACSB Reflective                                                   AICPA Legal

A12.    Nora signs a contract to buy a car just before reaching the age of major­ity. After reaching the age of majority, Nora does not take possession or make payments. Most courts would hold that she had

a.         disaffirmed the contract.
b.         executed the contract.
c.         ratified the contract.
d.         rescinded the contract.

            ANSWER:    A                              PAGE:     269                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

B12.    Jock and Kyla decide to wager, in violation of a state statute, on the out­come of a football game. They each deposit money with Len, who agrees to pay the winner of the bet. Before the game begins, Kyla tells Len that she changed her mind about the bet. Kyla can recover

            a.         the amount of her bet and the amount of Jock’s bet.
            b.         the amount of her bet minus Len’s expenses.
            c.         the amount of her bet only.
            d.         nothing.

            answer:    C                              PAGE:     272                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

A13.    On Tad’s eighteenth birthday, he decides that he no longer wants to keep a car he bought from U-Pick Autos, Inc., when he was seventeen. His right to disaffirm the deal will depend on

a.         the car’s condition when Tad bought it.
b.         the car’s current condition.
c.         whether Tad acts within a reasonable period of time.
d.         whether U-Pick has the right to disaffirm.

            ANSWER:    C                              PAGE:     269                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal


B13.    Lara is a real estate broker licensed only in Minnesota. Lara concludes a sale in North Dakota. She can successfully sue to

a.         collect the commission only.
b.         collect the commission or keep it if it has already been paid.
c.         keep the commission if it has already been paid but not to collect it.
d.         neither collect the commission nor keep it.

            ANSWER:    D                              PAGE:     273                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

A14.    Intoxicated but fully aware of the consequences, Uri agrees to a two-year cell-phone service contract with Wander Talk, Inc., at more than the average market price. This contract is

a.         enforceable.
b.         not enforceable because contracting parties can change their minds.
c.         not enforceable because the contract clearly favors Wander Talk.
d.         not enforceable because Uri was intoxicated when he agreed to it.

            ANSWER:    A                              PAGE:     269                          TYPE:      N
                        NAT: AACSB Reflective                                                   AICPA Legal

B14.    Jon agrees to sell his K9 Sports Equipment store to Lacy. As part of the sale, Jon promises never to open a similar, competing store anywhere. Jon’s promise is most likely

a.         invalid because it is part of a sale of an ongoing business.
b.         invalid because of the unreasonable terms of area and time.
c.         valid because it is part of a sale of an ongoing business.
d.         valid because Jon and Lacy apparently have the capacity to contract.

            ANSWER:    B                              PAGE:     276                          TYPE:      N
                        NAT: AACSB Reflective                                                   AICPA Legal

A15.    Fay is mentally incompetent but has not been so adjudged by a court. Any contract Fay enters into is

a.         voidable if Fay has a lucid interval at the time of contracting.
b.         voidable if Fay lacks the capacity to comprehend the consequences.
c.         voidable if the other party does not realize that Fay is incompetent.
d.         unavoidable.

            answer:    C                              PAGE:     271                          TYPE:      N
                        NAT: AACSB Reflective                                                   AICPA Legal

B15.    U-Can-Own-It Corporation sells appliances to less educated consumers, including Viv, on installment plans. U-Can-Own-It files a suit against Viv when she stops making payments. Viv claims that the deal is unconscionable. The court will most likely consider

a.         the geographic area of the relevant market.
b.         the parties’ relative bargaining power.
c.         the quality of related products in the general market.
d.         the relation of this deal to those of other customers.

            answer:    B                              PAGE:     277                          TYPE:      N
                        NAT: AACSB Reflective                                                   AICPA Legal

A16.    Eli obtains a consumer loan from First State Bank at an interest rate that exceeds the state’s maximum. First State has

a.         calculated the optimum rate that the market will bear.
b          engaged in a restraint of trade.
c.         underestimated the risk of the loan’s nonpayment.
d.         violated the usury laws.

            ANSWER:    D                              PAGE:     272                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

B16.    A contract between Eppie and Fab to lease real property contains an ex­cul­patory clause. This clause is

a.         enforceable as a matter of public policy.
b.         enforceable if either party is in a business important to the pub­lic.
c.         enforceable if the lease involves residential property.
d.         generally unenforceable.

            ANSWER:    D                              PAGE:     280                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

A17.    Joy signs a contract with Kent, an unlicensed physician, to perform a medical procedure. This contract is enforceable by

a.         Joy only.
b.         Joy or Kent.
c.         Kent only.
d.         no one.

            ANSWER:    D                              PAGE:     273                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

B17.    Dina signs a contract with Ellen to kill Frank. Dina pays Ellen but she re­fuses to perform. Dina can

a.         do nothing with respect to the contract.
b.         enforce the contract or recover the payment.
c.         only enforce the contract.
d.         only recover the payment.

            ANSWER:    A                              PAGE:     280                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

A18.    Neil represents himself as a contractor in Ohio, but he is not licensed in that state. A contract between Pam and Neil by which Neil agrees to build a warehouse for Pam in Ohio is

a.         enforceable only if Pam does not object after learning of Neil’s status.
b.         enforceable only if Pam knows that Neil is unlicensed.
c.         enforceable only if the outcome is successful.
d.         not enforceable.

            ANSWER:    D                              PAGE:     273                          TYPE:      +
                        NAT: AACSB Reflective                                                   AICPA Legal

B18.    Boz runs an illegal gambling business and pays Colin, a law enforcement officer, not to interfere. The payments are discovered. Boz and Colin are sent to prison. With respect to the amount of the payments, Boz can recover

a.         all of it.
b.         none of it.
c.         only as much as Colin has not spent.
d.         only as much as Colin has spent.

            ANSWER:    B                              PAGE:     280                          TYPE:      +
                        NAT: AACSB Reflective                                                   AICPA Legal

A19.    Ralph signs a covenant not to compete with his employer, Super Sales Company. A court decides that the covenant is overly restrictive. The court will most likely

a.         enforce it so as not to interfere with the parties’ freedom to contract.
b.         enforce it but evaluate its effects over time.
c.         reform its terms to prevent any undue burdens.
d.         refuse to enforce it unless Super pays additional consideration.

            ANSWER:    C                              PAGE:     273                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

B19.    National Insurance Company violates a state statute when selling an insur­ance policy to Opal. The policy may be enforced by

            a.         National Insurance only.
            b.         National Insurance or Opal.
            c.         no one.
            d.         Opal only.

            answer:    D                              PAGE:     281                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

A20.    Odell owns Payroll Company, a bookkeeping service losing market share to Quik Work, Inc. Odell pays Remy $5,000 to steal a list of Quik’s clients, to whom Odell will aggressively market Payroll‘s services. This deal is

            a.         enforceable.
            b.         void.
            c.         voidable at the option of either party.
            d.         voidable at the option of the party having less bargaining power.

            answer:    B                              Page:     280                          TYPE:      +
                        NAT: AACSB Reflective                                                   AICPA Legal

B20.    Through fraudulent means, Fred induces Gail to sign a contract to in­vest with him the profits from High Styles, her clothing store. When Gail learns the truth, she may

a.         do nothing with respect to the contract.
b.         enforce the contract or recover the payment.
c.         only enforce the contract.
d.         only recover the payment.

            answer:    B                              PAGE:     281                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal



Essay Questions

A1.  In State X, persons must be at least eighteen years old before they can purchase alcoholic beverages. The state also has passed a law requiring that persons who prepare and serve liquor in the form of drinks in com­mercial establishments be licensed. The only requirement for obtaining a yearly license is that the person be at least eighteen years old. Moffitt, aged thirty-five, is hired as a bartender for the Lone Star Restaurant.  Bekins, a staunch alumnus of a nearby university, brings twenty of his friends to the restaurant to celebrate a football victory. Bekins has or­dered four rounds of drinks, and the bar bill exceeds $200. Bekins learns that Moffitt has failed to renew his bartender’s license, and Bekins re­fuses to pay, claiming the contract is unenforceable. Is Bekins correct?

ANSWER:    Contracts made with unlicensed persons may or may not be enforceable.  There are basi­cally two types of licensing statutes: those considered regulatory (designed to protect the public welfare from unau­thorized and unqualified prac­titioners) and those whose under­lying pur­pose is to raise revenues or whose control of practice is not tied to spe­cific, re­quired skills.  Under the statutes de­clared regulatory, contracts made with an unlicensed person are illegal and unenforceable.  For stat­utes declared other than regulatory, con­tracts are en­forceable.  In some cases, the statute itself expressly bars en­force­ment of contracts made with an unlicensed person.  These statutes are ob­vi­ously regulatory.  For all other statutes, the courts will look to the under­lying purpose of the requirement of the license.  In this case, it ap­pears that the li­cense requirement is not tied to any skill necessary for the pro­tection of the wel­fare of society.  The only requirement is that the person be age eighteen, but this is also the requirement for any person to be able to pur­chase liquors dispensed.  Therefore, most courts would en­force the contract for the bar bill that Bekins owes but would rule Moffitt guilty of a misdemeanor.

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B1.  Inventory Control Corporation (ICC) hires Jim, a minor, to create customized software for ICC’s clients.  Jim signs a contract that requires him to work for ICC for eighteen months.  Before beginning work, Jim tells ICC that he will not work for ICC but is going to work for Kwik Kounts, Inc., an ICC competitor.  Is ICC’s contract with Jim en­forceable?  Why or why not?

ANSWER:    The contract is not enforceable.  Jim is a minor and a con­tract entered by him is thus voidable by him.  In other words, Jim had the option to disaffirm the contract.  A contract entered into by a minor can be disaffirmed at any time during minority, or for a reasonable time after the minor comes of age.  Jim’s announcement that he would not be bound by the contract was sufficient to disaffirm it.  Jim had not re­ceived any­thing under the contract, so there is nothing to return under a duty of res­titution.  Also, there is no significance to Jim’s agreeing to work for Kwik, ICC’s competitor.

PAGES:         265–266                 type:      N
                        NAT: AACSB Reflective                                                   AICPA Decision Modeling

A2.  Baby Products, Inc., hires Cole to develop and implement an e-commerce strategy for marketing Baby’s products. Cole signs a contract that in­cludes a clause prohibiting him from competing with Baby during and af­ter the employment. Before the strategy is implemented, Cole resigns from Baby’s employ and opens a business to compete with Baby. In Baby’s suit against Cole, to determine whether Cole may compete with Baby, what is the most important factor the court should consider?

ANSWER:    In determining whether Cole may compete with Baby, the court should consider, most importantly, whether the covenant not to compete is necessary to protect Baby’s legitimate business interests. A covenant not to compete can violate the public policy to promote competi­tion in the economy. If so, it would be an unreasonable restraint of trade. To be enforceable, a covenant not to compete should be ancillary to an oth­erwise enforceable contract, which, in this question, is the employ­ment contract. A covenant not to compete should contain reasonable re­stric­tions in terms of duration and geographic area. The covenant should not unreasonably burden the party who is prohibited from com­peting. If the restrictions are unreasonable, a court can void the cove­nant. Whether a party resigns under an employment contract does not affect the enforce­ability of a covenant not to compete.

PAGES:         273–277                 type:      =
                        NAT: AACSB Reflective                                                   AICPA Decision Modeling

B2.      Airway International, Inc., is a commercial passenger airline. Airway includes on its tickets a clause that states the airline is not liable for any injury to, or the death of, any passenger caused by its, or its employees’, negligence. An Airway flight from Boston to New York crashes into Long Island sound, resulting in the deaths of all passengers. The cause of the ac­cident is found to be due to Airway’s negligence. Based on the clause on its tickets, can Airway avoid liability?

ANSWER:    Airway cannot avoid liability for the deaths of the passen­gers in an accident that is found to be due to the airline’s negligence. Generally, an exculpatory clause—like the clause in this problem, at­tempting to absolve a party of negligence or some other wrong—is not en­forceable if the party seeking its en­forcement is in­volved in a business important to the public as a matter of practical necessity. Such busi­nesses include air­lines. Because of the essential nature of their ser­vices, airlines have an ad­vantage in bargaining strength and could insist that anyone contract­ing for their ser­vices agree not to hold them liable.

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                        NAT: AACSB Reflective                                                   AICPA Decision Modeling


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