13
Capacity Chapter and Legality
TRUE/FALSE QUESTIONS
A1.
When both parties to a contract are minors, neither of them may
disaffirm the contract.
ANSWER: F
PAGE:
NAT: AACSB Reflective
B1.
TYPE:
+
265
AICPA Legal
TYPE:
N
Contractual capacity refers to the legal ability to enter into a
contract.
ANSWER: T
PAGE:
NAT: AACSB Analytic
A3.
265
AICPA Legal
A minors right to disaffirm a contract terminates sixty days after the
contracts date.
ANSWER: F
PAGE:
NAT: AACSB Analytic
B2.
TYPE:
=
AICPA Legal
An adult may avoid any contract with a minor.
ANSWER: F
PAGE:
NAT: AACSB Analytic
A2.
265
265
AICPA Legal
TYPE:
N
Contractual capacity refers to the legal ability to disaffirm a contract.
ANSWER: F
PAGE:
NAT: AACSB Analytic
127
265
AICPA Legal
TYPE:
N
128
B3.
TEST BANK AUNIT THREE: CONTRACTS AND E-CONTRACTS
A minor may disaffirm a contract only after attaining the age of
majority.
ANSWER: F
PAGE:
NAT: AACSB Reflective
A4.
TYPE:
N
265
AICPA Legal
TYPE:
N
266
AICPA Legal
TYPE:
=
265
TYPE:
N
AICPA Legal
Clothing is not something that the courts have been willing to define
as necessary.
ANSWER: F
PAGE:
NAT: AACSB Reflective
A7.
266
AICPA Legal
A minor may disaffirm a contract only if the subject matter is illegal.
ANSWER: F
PAGE:
NAT: AACSB Reflective
B6.
=
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:
NAT: AACSB Analytic
A6.
TYPE:
All contracts between adults and minors are void.
ANSWER: F
PAGE:
NAT: AACSB Analytic
B5.
265
AICPA Legal
A minor may avoid any contract with an adult.
ANSWER: F
PAGE:
NAT: AACSB Analytic
A5.
TYPE:
N
AICPA Legal
The age of majority in most states is eighteen years.
ANSWER: T
PAGE:
NAT: AACSB Analytic
B4.
265
266
TYPE:
=
AICPA Legal
Parents are required by law to provide necessaries for their minor
children.
ANSWER: T
PAGE:
NAT: AACSB Analytic
266
AICPA Legal
TYPE:
=
CHAPTER 13: CAPACITY AND LEGALITY
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:
NAT: AACSB Reflective
A8.
269
AICPA Legal
TYPE:
=
266
AICPA Legal
TYPE:
=
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:
NAT: AACSB Analytic
B9.
TYPE:
=
AICPA Legal
A minor may disaffirm a contract for necessaries and thereby avoid
liability for the reasonable value of the goods.
ANSWER: F
PAGE:
NAT: AACSB Analytic
A9.
266
Parents are ordinarily liable for the contracts made by their minor
children, whether or not the children acted on their own.
ANSWER: F
PAGE:
NAT: AACSB Analytic
B8.
129
269
AICPA Legal
TYPE:
=
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:
NAT: AACSB Analytic
269
AICPA Legal
TYPE:
=
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:
NAT: AACSB Analytic
269
AICPA Legal
TYPE:
=
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:
NAT: AACSB Analytic
269
AICPA Legal
TYPE:
=
130
TEST BANK AUNIT THREE: CONTRACTS AND E-CONTRACTS
A11. A contract is unenforceable if there is a statute that prohibits the
action promised by the contract.
ANSWER: T
PAGE:
NAT: AACSB Analytic
271
AICPA Legal
TYPE:
=
B11. A guardian cannot enter into legally binding contracts on behalf of a
mentally incompetent person.
ANSWER: F
PAGE:
NAT: AACSB Analytic
270
AICPA Legal
TYPE:
=
A12. A lender who makes a loan at a rate above the lawful maximum
commits usury.
ANSWER: T
PAGE:
NAT: AACSB Reflective
272
TYPE:
=
AICPA Legal
B12. A usurious contract involves the purchase and sale of usable goods.
ANSWER: F
PAGE:
NAT: AACSB Analytic
272
TYPE:
AICPA Critical Thinking
N
A13. An executed contract entered into on Sunday in a state having a
Sunday law cannot be rescinded.
ANSWER: T
PAGE:
NAT: AACSB Reflective
272
TYPE:
=
AICPA Legal
B13. A blue law is a state statute that prohibits loans at an interest above
the blue line.
ANSWER: F
PAGE:
NAT: AACSB Analytic
272
AICPA Legal
TYPE:
=
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:
NAT: AACSB Analytic
273
AICPA Legal
TYPE:
=
CHAPTER 13: CAPACITY AND LEGALITY
131
B14. A contract with an unlicensed professional is always enforceable.
ANSWER: F
PAGE:
NAT: AACSB Analytic
273
AICPA Legal
TYPE:
=
A15. A covenant not to compete between ongoing businesses is always
enforceable.
ANSWER: F
PAGE:
NAT: AACSB Reflective
273
TYPE:
=
AICPA Legal
B15. A covenant not to compete is never enforceable.
ANSWER: F
PAGE:
NAT: AACSB Analytic
273
AICPA Legal
TYPE:
=
A16. Adhesion contracts are often held to be contrary to public policy.
ANSWER: T
PAGE:
NAT: AACSB Reflective
277
TYPE:
N
AICPA Legal
B16. A covenant not to compete is enforceable only if it is necessary to
restrain trade.
ANSWER: F
PAGE:
NAT: AACSB Analytic
273
AICPA Legal
TYPE:
N
A17. An exculpatory clause in an employment contract is always
enforceable.
ANSWER: F
PAGE:
NAT: AACSB Analytic
280
AICPA Legal
TYPE:
=
B17. Most courts are usually very concerned about the fairness of
contracts.
ANSWER: F
PAGE:
NAT: AACSB Analytic
277
AICPA Legal
TYPE:
=
A18. If an illegal contract is executory, either party can enforce it.
ANSWER: F
PAGE:
NAT: AACSB Analytic
280
AICPA Legal
TYPE:
=
TEST BANK AUNIT THREE: CONTRACTS AND E-CONTRACTS
132
B18. A contract that exculpates one party for negligence or other
wrongdoing will not usually be viewed as unconscionable.
ANSWER: F
PAGE:
NAT: AACSB Reflective
280
TYPE:
=
AICPA Legal
A19. A severable contract is unenforceable as a violation of public policy.
ANSWER: F
PAGE:
NAT: AACSB Reflective
281
TYPE:
N
AICPA Legal
B19. An exculpatory clause in a residential property lease is usually
enforceable.
ANSWER: F
PAGE:
NAT: AACSB Reflective
280
TYPE:
=
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:
NAT: AACSB Analytic
281
AICPA Legal
TYPE:
=
B20. An illegal contract is valid if the parties to it were unaware of the
illegality.
ANSWER: F
PAGE:
NAT: AACSB Analytic
280
AICPA Legal
TYPE:
N
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.
b.
c.
d.
elects not to avoid the contract.
is a minor.
is a minor, intoxicated, or mentally incompetent.
is intoxicated or mentally incompetent.
ANSWER: A
PAGE:
NAT: AACSB Reflective
B1.
265
TYPE:
=
AICPA Legal
Boyd is a minor. As a minor, Boyd has the capacity to enter into
CHAPTER 13: CAPACITY AND LEGALITY
a.
b.
c.
d.
an invalid contract.
an unavoidable contract.
a valid contract.
no contract.
ANSWER: C
PAGE:
NAT: AACSB Reflective
A2.
TYPE:
N
AICPA Legal
all states.
most states.
some states.
no states.
ANSWER: C
PAGE:
NAT: AACSB Reflective
265
TYPE:
N
AICPA Legal
Cary is fifteen. In most states, Cary would be considered a minor
because she is under the age of
a.
b.
c.
d.
sixteen.
eighteen.
twenty.
twenty-one.
ANSWER: B
PAGE:
NAT: AACSB Reflective
A3.
265
Yvon and Zack are minors who marry each other. Their minority
status may be terminated under the laws of
a.
b.
c.
d.
B2.
133
265
TYPE:
+
AICPA Legal
Ken relinquishes the right to his son Lees control, care, custody, and
earnings. This act is
a.
b.
c.
d.
a disaffirmance.
an emancipation.
a ratification.
restitution.
ANSWER: B
PAGE:
NAT: AACSB Reflective
265
TYPE:
N
AICPA Legal
TEST BANK AUNIT THREE: CONTRACTS AND E-CONTRACTS
134
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.
b.
c.
d.
liable to OK and must sell it a car of comparable value.
liable to OK and must sell it her car.
not liable to OK because she is a minor.
not liable to OK because the sale of the car disaffirmed their
deal.
ANSWER: D
PAGE:
NAT: AACSB Reflective
A4.
265
TYPE:
=
AICPA Legal
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:
NAT: AACSB Reflective
B4.
TYPE:
=
AICPA Legal
Jill, a minor, is living at home with her parents, but signs a lease with
a landlord to rent an apartment. Jill can
a.
b.
c.
d.
disaffirm the lease because her parents can be held liable for
it.
disaffirm the lease without liability.
not disaffirm the lease because an apartment is a necessary.
not disaffirm the lease if she intended to live on her own.
ANSWER: B
PAGE:
NAT: AACSB Reflective
A5.
265
266
TYPE:
=
AICPA Legal
Olga, a minor, signs a contract to buy a computer from Phil, the
owner of Quality Computer Store. Olgas right to disaffirm the
contract
a.
b.
c.
does not change the fact that Phil is bound by the contract.
does not yet exist because Olga is still a minor.
gives Phil, an adult, the right to disaffirm the contract.
CHAPTER 13: CAPACITY AND LEGALITY
d.
is not valid because a computer is a necessary.
ANSWER: A
PAGE:
NAT: AACSB Reflective
265
TYPE:
=
AICPA Legal
135
TEST BANK AUNIT THREE: CONTRACTS AND E-CONTRACTS
136
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.
b.
c.
d.
can keep the car without paying for it or the damage.
cannot return the car unless it can be fully repaired.
can return the car but must pay for the damage.
can return the car without paying for the damage.
ANSWER: C
PAGE:
NAT: AACSB Reflective
A6.
an emancipation.
a ratification.
restitution.
severability.
ANSWER: C
PAGE:
NAT: AACSB Reflective
266
TYPE:
N
AICPA Legal
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.
b.
c.
d.
Brad only.
Brad or Brads parent.
Brads parent only.
no one.
ANSWER: B
PAGE:
NAT: AACSB Communication
A7.
TYPE:
=
AICPA Legal
Cray returns a digital music player that he bought from Discount
City, which refunds the price. Their exchange involves
a.
b.
c.
d.
B6.
266
267
AICPA Legal
TYPE:
=
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.
b.
c.
only if he can prove that Fine New Autos did not know his true
age.
only if he can prove that Fine New Autos knew his true age.
under any circumstances.
CHAPTER 13: CAPACITY AND LEGALITY
d.
under no circumstances.
ANSWER: C
PAGE:
NAT: AACSB Reflective
B7.
268
TYPE:
=
AICPA Legal
Ruth, a minor, charges groceries at Sams Mini-Mart. Two days later,
Ruth disaffirms the purchase. Ruth owes Sams
a.
b.
c.
d.
the reasonable value of the groceries.
the retail value of the groceries.
the wholesale value of the groceries.
nothing.
ANSWER: A
PAGE:
NAT: AACSB Reflective
266
TYPE:
=
AICPA Legal
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.
b.
c.
d.
a disaffirmance.
an emancipation.
a ratification.
a restitution.
ANSWER: C
PAGE:
NAT: AACSB Reflective
A9.
TYPE:
N
AICPA Legal
$500.
$1,000.
$1,500.
nothing.
ANSWER: B
PAGE:
NAT: AACSB Reflective
B8.
266
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.
b.
c.
d.
A8.
137
269
TYPE:
N
AICPA Legal
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
TEST BANK AUNIT THREE: CONTRACTS AND E-CONTRACTS
138
of the term, Max moves out. Noel sues for the rent for the rest of the
term. Max can
a.
b.
c.
d.
avoid liability for the rent but not disaffirm the contract.
disaffirm the contract and avoid liability for the rent.
disaffirm the contract but not avoid liability for the rent.
not disaffirm the contract nor avoid liability for the rent.
ANSWER: B
PAGE:
NAT: AACSB Reflective
B9.
266
TYPE:
=
AICPA Legal
Intoxicated, Clio agrees to sell her restaurant, Diners Caf, to Evan
for half of its real market value. This deal is most likely void if
a.
b.
c.
d.
Clio appeared intoxicated to Evan.
Clio disaffirms the contract after becoming sober.
Clio was so intoxicated as to have no memory of the deal.
Evan fraudulently induced Clio to become intoxicated.
ANSWER: D
PAGE:
NAT: AACSB Reflective
269
TYPE:
N
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.
b.
c.
d.
express.
implied in fact.
implied in law.
non-existent.
ANSWER: C
PAGE:
NAT: AACSB Communication
267
AICPA Legal
TYPE:
=
B10. Opie enters into a contract with Pia. Later, Opie is adjudged mentally
incompetent and Quint is appointed Opies guardian. Raye, Opies
daughter, attempts to void Opies contract with Pia on the ground of
Opies incompetency. The contract is
a.
b.
c.
d.
enforceable if Opie does not attempt to disaffirm it.
enforceable if Pia is also incompetent.
enforceable if Quint knew of the contract when he was
appointed.
void.
CHAPTER 13: CAPACITY AND LEGALITY
ANSWER: A
PAGE:
NAT: AACSB Reflective
270
139
TYPE:
N
AICPA Legal
A11. Delia enters into, and fails to disaffirm soon after reaching the age of
majority, a contract with Electronics Stores, Inc. Later (ESI). 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.
b.
c.
d.
executed.
executory.
executed or executory.
neither executed nor executory.
ANSWER: A
PAGE:
NAT: AACSB Reflective
269
TYPE:
=
AICPA Legal
B11. A court adjudicates Huck mentally incompetent and appoints Inez to
be his guardian. Later, without Inezs knowledge, Huck signs a
contract to sell his farm to Kyle for its real market value. The
contract is
a.
b.
c.
d.
enforceable if Huck comprehended the consequences.
enforceable if Huck knew the market value of the farm.
enforceable if Huck was the record owner of the farm.
void.
ANSWER: D
PAGE:
NAT: AACSB Reflective
270
TYPE:
N
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.
b.
c.
d.
disaffirmed the contract.
executed the contract.
ratified the contract.
rescinded the contract.
ANSWER: A
PAGE:
NAT: AACSB Reflective
269
TYPE:
=
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
TEST BANK AUNIT THREE: CONTRACTS AND E-CONTRACTS
140
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.
b.
c.
d.
the amount of her bet and the amount of Jocks bet.
the amount of her bet minus Lens expenses.
the amount of her bet only.
nothing.
ANSWER: C
PAGE:
NAT: AACSB Reflective
272
TYPE:
=
AICPA Legal
A13. On Tads 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.
b.
c.
d.
the cars condition when Tad bought it.
the cars current condition.
whether Tad acts within a reasonable period of time.
whether U-Pick has the right to disaffirm.
ANSWER: C
PAGE:
NAT: AACSB Reflective
269
TYPE:
=
AICPA Legal
CHAPTER 13: CAPACITY AND LEGALITY
141
B13. Lara is a real estate broker licensed only in Minnesota. Lara
concludes a sale in North Dakota. She can successfully sue to
a.
b.
c.
d.
collect the commission only.
collect the commission or keep it if it has already been paid.
keep the commission if it has already been paid but not to
collect it.
neither collect the commission nor keep it.
ANSWER: D
PAGE:
NAT: AACSB Reflective
273
TYPE:
=
AICPA Legal
A14. Intoxicated but fully aware of the consequences, Uri agrees to a twoyear cell-phone service contract with Wander Talk, Inc., at more than
the average market price. This contract is
a.
b.
c.
d.
enforceable.
not enforceable because contracting parties can change their
minds.
not enforceable because the contract clearly favors Wander
Talk.
not enforceable because Uri was intoxicated when he agreed
to it.
ANSWER: A
PAGE:
NAT: AACSB Reflective
269
TYPE:
N
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. Jons promise is most likely
a.
b.
c.
d.
invalid because it is part of a sale of an ongoing business.
invalid because of the unreasonable terms of area and time.
valid because it is part of a sale of an ongoing business.
valid because Jon and Lacy apparently have the capacity to
contract.
ANSWER: B
PAGE:
NAT: AACSB Reflective
276
TYPE:
N
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.
TEST BANK AUNIT THREE: CONTRACTS AND E-CONTRACTS
142
b.
c.
d.
voidable if Fay lacks the capacity to comprehend the
consequences.
voidable if the other party does not realize that Fay is
incompetent.
unavoidable.
ANSWER: C
PAGE:
NAT: AACSB Reflective
271
TYPE:
N
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.
b.
c.
d.
the
the
the
the
geographic area of the relevant market.
parties relative bargaining power.
quality of related products in the general market.
relation of this deal to those of other customers.
ANSWER: B
PAGE:
NAT: AACSB Reflective
277
TYPE:
N
AICPA Legal
A16. Eli obtains a consumer loan from First State Bank at an interest rate
that exceeds the states maximum. First State has
a.
b
c.
d.
calculated the optimum rate that the market will bear.
engaged in a restraint of trade.
underestimated the risk of the loans nonpayment.
violated the usury laws.
ANSWER: D
PAGE:
NAT: AACSB Reflective
272
TYPE:
=
AICPA Legal
B16. A contract between Eppie and Fab to lease real property contains an
exculpatory clause. This clause is
a.
b.
c.
d.
enforceable as a matter of public policy.
enforceable if either party is in a business important to the
public.
enforceable if the lease involves residential property.
generally unenforceable.
ANSWER: D
PAGE:
NAT: AACSB Reflective
280
TYPE:
=
AICPA Legal
CHAPTER 13: CAPACITY AND LEGALITY
143
A17. Joy signs a contract with Kent, an unlicensed physician, to perform a
medical procedure. This contract is enforceable by
a.
b.
c.
d.
Joy only.
Joy or Kent.
Kent only.
no one.
ANSWER: D
PAGE:
NAT: AACSB Reflective
273
TYPE:
=
AICPA Legal
B17. Dina signs a contract with Ellen to kill Frank. Dina pays Ellen but she
refuses to perform. Dina can
a.
b.
c.
d.
do nothing with respect to the contract.
enforce the contract or recover the payment.
only enforce the contract.
only recover the payment.
ANSWER: A
PAGE:
NAT: AACSB Reflective
280
TYPE:
=
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.
b.
c.
d.
enforceable only if Pam does not object after learning of Neils
status.
enforceable only if Pam knows that Neil is unlicensed.
enforceable only if the outcome is successful.
not enforceable.
ANSWER: D
PAGE:
NAT: AACSB Reflective
273
TYPE:
+
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.
b.
c.
all of it.
none of it.
only as much as Colin has not spent.
TEST BANK AUNIT THREE: CONTRACTS AND E-CONTRACTS
144
d.
only as much as Colin has spent.
ANSWER: B
PAGE:
NAT: AACSB Reflective
280
TYPE:
+
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.
b.
c.
d.
enforce it so as not to interfere with the parties freedom to
contract.
enforce it but evaluate its effects over time.
reform its terms to prevent any undue burdens.
refuse to enforce it unless Super pays additional consideration.
ANSWER: C
PAGE:
NAT: AACSB Reflective
273
TYPE:
=
AICPA Legal
B19. National Insurance Company violates a state statute when selling an
insurance policy to Opal. The policy may be enforced by
a.
b.
c.
d.
National Insurance only.
National Insurance or Opal.
no one.
Opal only.
ANSWER: D
PAGE:
NAT: AACSB Reflective
281
TYPE:
=
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
Quiks clients, to whom Odell will aggressively market Payrolls
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
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CHAPTER 13: CAPACITY AND LEGALITY
145
B20. Through fraudulent means, Fred induces Gail to sign a contract to in vest with him the profits from High Styles, her clothing store. When
Gail learns the truth, she may
a.
b.
c.
d.
do nothing with respect to the contract.
enforce the contract or recover the payment.
only enforce the contract.
only recover the payment.
ANSWER: B
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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 bartenders license, and Bekins re fuses 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 under lying 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 pro tection of the welfare of
society. The only requirement is that the person be age eighteen,
146
TEST BANK AUNIT THREE: CONTRACTS AND E-CONTRACTS
but this is also the requirement for any person to be able to pur chase 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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Modeling
B1.
=
AICPA Decision
Inventory Control Corporation (ICC) hires Jim, a minor, to create
customized software for ICCs 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 ICCs 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. Jims 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 res titution. Also, there is
no significance to Jims agreeing to work for Kwik, ICCs competitor.
PAGES:
265266
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Modeling
A2.
N
AICPA Decision
Baby Products, Inc., hires Cole to develop and implement an ecommerce strategy for marketing Babys 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 Babys employ and opens a
business to compete with Baby. In Babys 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 Babys 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
CHAPTER 13: CAPACITY AND LEGALITY
147
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:
273277
TYPE:
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Modeling
B2.
=
AICPA Decision
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 Airways
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 airlines
negligence. Generally, an exculpatory clauselike the clause in this
problem, attempting to absolve a party of negligence or some other
wrongis 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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Modeling
=
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