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chapter 9
Indicate whether the statement is true or false.
1. An exculpatory clause in an employment contract is usually enforceable.
a. True
b. False
2. Whether a contract with an unlicensed professional is legal and enforceable depends on the purpose of the licensing statute.
a. True
b. False
3. If there is a statute that prohibits a certain act, a contract to do it is unenforceable.
a. True
b. False
4. A covenant not to compete is enforceable only if it is reasonable in duration and geographic area.
a. True
b. False
5. Misrepresentation cannot occur by silence.
a. True
b. False
6. When both parties to a contract are mistaken about the same material fact, the contract cannot be rescinded.
a. True
b. False
7. A contract entered into under undue influence is voidable.
a. True
b. False
8. Any contract to commit a crime is unenforceable.
a. True
b. False
9. A seller’s attempt to conceal a fact that is material to a contract can give rise to an action for fraud.
a. True
b. False
10. Ordinarily, a minor can disaffirm a contract even though she has misrepresented her age.
a. True
b. False
11. A contract that is void from the outset can be enforced in some circumstances.
a. True
b. False
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12. A minor who enters into a contract for necessaries may disaffirm the contract but remains liable for the reasonable value of the goods.
a. True
b. False
13. A contract must be in writing to be enforceable if its performance is impossible within one year.
a. True
b. False
14. Under the Statute of Frauds, all contracts must be in writing to be enforceable.
a. True
b. False
15. To be enforceable, a memorandum evidencing an oral contract must include the essential terms.
a. True
b. False
16. Contracts entered into by mentally incompetent persons can be valid.
a. True
b. False
17. All contracts between adults and minors are void.
a. True
b. False
18. A contract entered into by a minor is voidable at the option of either of the contracting parties.
a. True
b. False
19. A contract in which a party assumes a primary obligation normally must be in writing to be enforceable.
a. True
b. False
20. In certain circumstances, bargains are so oppressive that the courts relieve innocent parties of part or all of their duties.
a. True
b. False
21. All collateral promises must be in writing to be enforceable.
a. True
b. False
22. A threat to exercise a legal right ordinarily constitutes duress.
a. True
b. False
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23. A covenant not to compete included in the sale of an ongoing business is unenforceable.
a. True
b. False
24. In most illegal contracts, both parties are considered to be equally at fault, and neither party can enforce it.
a. True
b. False
25. Parents are always liable for the contracts made by their minor children.
a. True
b. False
26. To be enforceable, a writing evidencing an oral contract must have been signed by the party who seeks to enforce it.
a. True
b. False
27. Because fraud actions necessarily involve wrongful conduct, courts may award punitive damages.
a. True
b. False
28. A contract entered into by an intoxicated person is never valid.
a. True
b. False
29. Reliance on a misrepresentation is justified if the misrepresentation is an obviously extravagant statement.
a. True
b. False
30. A person who enters into a contract when he or she is intoxicated can void the contract under any circumstances.
a. True
b. False
31. A statement of opinion is generally subject to a claim of fraud.
a. True
b. False
32. Misrepresentation of law ordinarily entitles a party to relief from a contract.
a. True
b. False
33. An innocent party can rescind a fraudulent contract and be restored to his or her original position.
a. True
b. False
34. A contract that exculpates one party for negligence or other wrongdoing will often be viewed as unconscionable.
a. True
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b. False
35. To be enforceable, a contract for a sale of goods priced at $500 or more should be in writing.
a. True
b. False
Indicate the answer choice that best completes the statement or answers the question.
36. On Victor’s eighteenth birthday, he decides that he no longer wants to keep a fishing boat he bought from Water Craft, Inc., when he was seventeen. His right to disaffirm the deal will depend on
a. why Victor no longer wants to keep the boat.
b. why Victor entered into the contract to buy the boat.
c. whether Victor acts within a reasonable period of time.
d. whether Water Craft has the right to disaffirm.
37. Carl and Debra orally agree on the sale of Carl’s Electrical Supplies Company to Debra and jot down the terms on the back of one of Carl’s blank invoices, which they both sign. A written memorandum evidencing an oral contract that would otherwise be unenforceable must contain
a. all terms.
b. the essential terms.
c. the preliminary terms.
d. the qualitative terms.
38. Air Flo, Inc., and Banyan Grove Apartments enter into an oral contract in which Air Flo agrees to provide airconditioning and heating maintenance for Banyan Grove’s facilities for two years. This contract is enforceable by
a. Air Flo.
b. Banyan Grove.
c. any third party, such as a HVAC supplies provider.
d. none of the choices.
39. William obtains a loan from a bank at 4.5 percent interest. The state where he obtains the loan has a usury statute that limits interest rates to a 3.5 percent maximum. William’s contract with the bank is
a. enforceable only if William does not attempt to disaffirm it.
b. enforceable only if the bank does not attempt to disaffirm it.
c. enforceable only if both William and the bank knew of the statute when the contract was signed.
d. not enforceable.
40. Mica, a minor, signs a contract to pay National 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.
41. Abner tells a representative of Brass & Woodwind Musical Instruments, Inc., that he will pay for Claudia’s trumpet if she does not. Abner does not secure any personal benefit for this promise. This promise is enforceable as a contract
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a. under any circumstances.
b. only if Claudia agrees to it.
c. only if the value of the trumpet is more than $500.
d. only if it is in writing.
42. Felicity, a minor, obtains fruits and other foodstuff on credit from Growers’ Market. Later, Felicity disaffirms the purchase. Felicity owes Growers’ Market
a. the reasonable value of the goods.
b. the retail value of the goods.
c. the wholesale value of the goods.
d. nothing.
43. Guardian Security, Inc., and Hedge Fund Corporation enter into an oral contract under which Guardian Security agrees to provide security services for Hedge Fund’s offices for as long as Hedge Fund needs them. This contract may be enforceable by
a. none of the choices.
b. Hedge Fund only.
c. any interested third party, such as a Hedge Fund shareholder.
d. either Guardian Security or Hedge Fund.
44. Drake enters into a contract with Eve, who claims to have access to a stock-trading algorithm that will multiply an investment many times over. When the results do not match this promise, Drake learns that Eve does not have access to any unique software and files a suit against her, alleging fraud. Proof of an injury is required to
a. recover damages.
b. rescind the contract.
c. undo Eve’s influence.
d. punish the defendant.
45. Vijay enters into a contract to sell his laptop to Winnie. Winnie takes possession of the laptop as a minor and continues to use it well after reaching the age of majority. Winnie has
a. expressly ratified the contract.
b. impliedly ratified the contract.
c. disaffirmed the contract.
d. none of the choices.
46. Creighton applies to BigData Corporation for a position as a software engineer. Creighton’s resume lists training in computers or programming and background as an engineer when in fact he has neither. After Creighton is hired, BigData learns the truth. BigData can
a. not rescind the contract.
b. rescind the contract on the basis of fraud.
c. rescind the contract on the basis of mistake.
d. rescind the contract on the basis of undue influence.
47. Metro City Mall requires its tenants to sign a lease that includes a clause releasing Metro from liability in the event of monetary or physical injury no matter who is at fault. Coco’s Chocolate Creations signs a lease with the mall that contains the clause. This is
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a. a covenant not to compete.
b. an adhesion contract.
c. an exculpatory clause.
d. an illusory promise.
48. Dumont threatens physical harm to force Eddie to sell his business, Citywide Vending, Inc., to Dumont for a belowmarket price. This is
a. duress.
b. fraud.
c. none of the choices.
d. undue influence.
49. 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.
50. Intoxicated and not aware of the consequences, Umberto 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 Umberto was intoxicated enough to lack mental capacity when he agreed to it.
51. Sharon agrees to assume a debt owed by Tom’s Guitars Inc. to United Funds Bank. The agreement is not in writing. To be enforceable under the “main purpose” rule, the promise must be for the benefit of
a. any third party, such as a Tom’s customer.
b. Sharon.
c. Tom’s.
d. the bank.
52. On Monday, Merlin buys a tablet for $500 from a Pads & Pods store. On Tuesday, he returns to the store and buys a GPS device for $200. On Wednesday, he downloads $100 worth of tunes from singsong.com. To be enforceable as a contract, a writing is required for the purchase of
a. the tunes, the GPS device, and the tablet.
b. the GPS device and the tablet only.
c. the tablet only.
d. the tunes only.
53. Hal’s True Hardware Stores and Ideal Tools, Inc., sign a written contract for a sale of goods. To be enforceable, this written contract must include
a. a correct title, such as “Purchase Order” or “Sales Invoice.”
b. a date, such as “October 2014” or “10/2014.”
c. a quantity term, such as “50 hammers” or “100 boxes of assorted nails.”
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d. the parties’ contact information.
54. The chief executive officers of Chemico, Inc., and Petro Products Corporation orally agree that Chemico will sell a refinery and the land on which it is situated to Petro. Under the Statute of Frauds, this deal is enforceable by
a. Chemico.
b. Petro.
c. any interested third party, such as a shareholder.
d. none of the choices.
55. Morris threatens physical harm to force Barb to contract to pay him for protecting her store Barb’s Baubles against vandalism and destruction. Barb may
a. rescind the contract or refuse to comply with its terms.
b. do nothing once she has agreed to pay.
c. recover from her insurer for the cost.
d. recover from the local police for their failure to protect her store.
56. Phoebe enters into a contract with Everest for a guided tour of Whitewater Canyon. Everest represents that he is an experienced, knowledgeable guide, when in reality he has never been in the canyon. Phoebe is most likely a victim of
a. undue influence.
b. fraud.
c. mistake.
d. nothing.
57. Shannon signs a contract with Tevin, an unlicensed contractor, to build a deck and gazebo at the rear of her house. This contract is enforceable by
a. Shannon.
b. any third party who is not aware that Tevin is not licensed.
c. Tevin.
d. no one.
58. Sofia signs a covenant not to compete with her employer, Topmost Sales Corporation. A court decides that the covenant is overly restrictive. The court will likely
a. enforce it as written so as not to undercut the freedom of contract.
b. enforce it but evaluate its effects over time.
c. reform its terms to prevent any undue burden.
d. refuse to enforce it unless Topmost pays additional consideration.
59. Edward and First Star Company enter into an oral contract under which Edward agrees to provide delivery service for First Star for nine months. This contract is enforceable by
a. none of the choices.
b. either Edward or First Star.
c. any interested third party, such as a First Star customer.
d. First Star only.
60. Grant and Hester enter into a contract for a sale of Hester’s Pastoral Valley Orchard. This contract
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a. is prohibited.
b. is enforceable whether or not it is in writing.
c. must be in writing to be enforceable.
d. must be oral and in writing to be enforceable.
61. Rosalind, a seventeen-year-old, signs a contract to sell her car to Street Fleet Used Cars. The next day, Rosalind tells Street Fleet that she’s decided not to sell the car. Rosalind is liable to Street Fleet for
a. the cost of a car of comparable value.
b. the value of her performance under the contract.
c. the amount of its profit on the deal.
d. nothing.
62. Nyoko signs a covenant not to compete with her employer, Midstates Distribution, Inc. The covenant will be enforced if it
a. does not require either party to obtain a business license.
b. is reasonable with respect to geographic area and duration.
c. relieves Midstates from liability for any injury to Nyoko due to simple negligence.
d. none of the choices.
63. Gene, an accountant, convinces his client Hazel to sign a contract to invest her savings in 2Gether, a nonexistent social-networking Web site. There is clear and convincing evidence that Hazel did not act out of her free will. This is
a. duress.
b. fraud.
c. mistake.
d. undue influence.
64. U-Can-Own-It Corporation sells appliances to less educated consumers, including Viv, on installment plans. U-CanOwn-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.
65. In Simone’s selling a 300-acre farm to Rural Investments, Inc., she tells the buyer that the land “will be worth twice as much by next year.” This is
a. adhesion.
b. fraud.
c. a mistake.
d. an opinion.
66. Fletcher signs a contract to buy a new electric guitar and amplifier just before reaching the age of majority. After reaching the age of majority, Fletcher does not take possession or make payments. With respect to the contract, most courts would hold that this is
a. disaffirmance.
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b. emancipation.
c. ratification.
d. rescission.
67. Country Trucking Company contracts with Baldwin to transport crated goods to a certain destination for $5,000. Country delivers the crates, but Baldwin does not pay. Country learns that the crates contained stolen goods. Country can
a. do nothing with respect to the contract.
b. recover $5,000 from Baldwin.
c. recover the goods but not the $5,000 from Baldwin.
d. recover the goods and the $5,000 from Baldwin.
68. Ranchland Properties and Prairie State Investments sign a written contract for a sale of land. In some states, to be enforceable, this contract must include
a. a correct title, such as “Land Transfer” or “Real Estate Agreement.”
b. a declaration of the contract’s purpose.
c. a statement of the source of financing.
d. a description of the land.
69. Neil, a minor, attempts to return to its former owner, a set of skis that he recently bought, used, and wrecked, in a state in which a duty of restitution is imposed. Neil
a. can return the skis “as is” and avoid further liability.
b. is not required to return the skis due to his or her minority.
c. must return the skis and pay for the damage.
d. cannot return the skis unless they can be fully restored.
70. Through fraudulent means, Finlay induces Ethel to sign a contract to invest with him the profits from her business. When Ethel learns the truth, she may
a. only enforce the contract.
b. only recover what she invested with Finlay.
c. enforce the contract or recover what she invested with Finlay.
d. do nothing.
71. Health Source, Inc., offers to buy Medico Equipment & Supplies Corporation. On June 1, Medico gives Health Source copies of Medico’s financial statements for the previous year. The statements show an inventory of $10 million. On June 15, Medico discovers that the previous year’s inventory is overstated by $500,000, but does not inform Health Source. On July 1, Health Source, relying on the financial statements, buys Medico. On July 10, Health Source discovers the inventory overstatement. Can Health Source succeed in a suit against Medico? On what basis?
72. eBuy, Inc., hires Ferris to develop and implement a marketing strategy for eBuy’s new online auction site. Ferris signs a contract that includes a clause prohibiting him from competing with eBuy during and after the employment. Before the strategy is implemented, Ferris resigns from eBuy’s employ to market his own auction site to compete with eBuy. In eBuy’s suit against Ferris, what is the most important factor the court should consider in determining whether Ferris should be allowed to compete with eBuy?
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71. Yes, Health Source can succeed in a suit against Medico. The basis for the suit could be fraud because Medico had a duty to disclose that the inventory was overstated as soon as Medico learned of that fact.
The elements of an action for fraud are (1) the misrepresentation of a material fact, (2) the intent to deceive, and (3) the innocent party’s justifiable reliance on the misrepresentation. Ordinarily, no party to a contract has a duty to come forward and disclose facts. Each party is responsible for the use of common sense and normal business sense in negotiating a contract. An action for fraud can be based on a failure to disclose material facts when there is a certain relationship between the parties such as between partners in a partnership or when a party could not reasonably discover a fact known to the other party. An action may also be maintained if, as here, a party that misstates a material fact later learns of the misstatement but does not disclose it to the other party. This is misrepresentation by conduct. Here, by providing financial statements, Medico made certain representations. Those representations were false, however, as Medico learned. Medico’s knowledge of the overstated inventory and failure to disclose this to Health Source indicated intent to deceive. Health Source’s reliance on Medico’s statements was reasonable and justifiable.
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72. In determining whether Ferris may compete with eBuy, the court should consider, most importantly, whether the covenant not to compete is necessary to protect eBuy’s legitimate business interests. A covenant not to compete can violate the public policy to promote competition in the economy. If it does, 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. The restriction in a covenant not to compete should be reasonable 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 or reform the covenant. Whether a party resigns under an employment contract does not affect the enforceability of a covenant not to compete.
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