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 Cary
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 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
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 Café, 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 North Dakota
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
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
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 Ohio
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.
PAGE: 273 type: =
NAT:
AACSB Reflective AICPA Decision
Modeling
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.
PAGE: 281 type: =
NAT:
AACSB Reflective AICPA Decision
Modeling
THANKS :)
ReplyDeletethanks this helped out alot
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