Illegality Chapter 15 Complete Test Bank

Business Law, 17e (Langvardt)

Chapter 15 Illegality

1) An agreement that violates legislative and court-made rules and creates a threat to public policy shall be denied enforcement on the ground of illegality.

2) Any contract that is deemed illegal is also a criminal violation.

3) Even if both parties consent to an agreement, if a court finds the agreement illegal then it will not enforce it.

4) A contract to commit a serious crime is a legal contract.

5) Statutes that require proof of character and skill and impose penalties for violation are considered to be revenue raising in nature.

6) An agreement can be illegal even if no statute specifically states that such an agreement is illegal.

7) Public policy never changes and courts always apply it in the same way.

8) For a noncompetition clause to be enforceable, the clause must serve a legitimate business purpose.

9) A court will enforce a noncompetition clause even if its restraints are unduly burdensome either on the public or on the party whose ability to compete would be restrained.

10) The origin of the policy against restrictions on competition in the market comes from common law.

11) A noncompetition clause is also known as a "liability waiver."

12) An exculpatory clause is a provision in a contract that purports to relieve one of the parties from tort liability.

13) An agreement to divorce one's spouse is considered to be illegal.

14) Courts will always enforce an exculpatory clause from a properly executed contract.

15) Under the doctrine of unconscionability, courts would refuse to grant the equitable remedy of specific performance for breach of contract if the contract was oppressively unfair.

16) One example of procedural unconscionability is the use of "fine print" in stating a contractual provision.

17) A contract of adhesion is one that the courts will always enforce because of the strong public policy underlying such contract.

18) The Uniform Commercial Code (UCC) allows the court to modify or limit the enforcement of a provision in a contract that is found to be unconscionable.

19) Courts will provide a remedy for the breach of illegal agreements.

20) To encourage people to cancel illegal contracts, courts will allow a person who rescinds such a contract before any illegal act has been performed to recover any consideration that he has given.

21) Which of the following is not a factor when a court considers whether an agreement is illegal for public policy reasons?

A) The importance of the public policy involved.

B) Whether both parties knew the agreement was illegal.

C) The seriousness of any wrongdoing involved.

D) If enforcement of the agreement would interfere with the public policy involved.

22) When a court says that an agreement is illegal, it most likely means that the agreement:

A) has not mentioned a time period for which the agreement is valid.

B) does not identify the parties involved in the agreement.

C) is related to buying and selling of trade secrets.

D) violates public policy.

23) Normally, an illegal contract is:

A) a quasi-contract.

B) implied-in-fact.

C) unenforceable.

D) voidable.

24) A court has held that a certain contract violates public policy. This contract will be treated the same as a(n):

A) illegal contract.

B) contract between a minor and an adult.

C) private contract.

D) adhesive contract.

25) Which of the following is not a category of illegal agreements?

A) Agreements that violate statues

B) Agreements that violate public policy developed by courts

C) Unconscionable agreements and contracts of adhesion

D) Agreements to bring more profit to one party than the other

26) Which of the following terms refers to a widely shared view about what ideas, interests, institutions, or freedoms promote public welfare?

A) Void contract

B) Public policy

C) Implied-in-fact policy

D) Express contract

27) If a statute is considered to be ________, the purpose of the legislation is to protect the public against dishonest or incompetent practitioners.

A) regulatory

B) enforceable

C) adhesive

D) ancillary

28) Todd is a licensed real estate broker in Ohio. One of Todd's largest clients, Sun Corp., contracted in writing with Todd to find a purchaser for its plant in New York and agreed to pay him a 6% commission if he was successful. Todd located a buyer who purchased the plant. Unknown to Todd, New York has a real estate broker's licensing statute which is regulatory in nature, intended to protect the public against unqualified persons. Todd violated the licensing statute by failing to obtain a New York license. If Sun refuses to pay Todd any commission and Todd brings an action against Sun, he will be entitled to recover:

A) nothing.

B) a fee based on the actual hours spent.

C) the commission agreed upon.

D) out of pocket expenses only.

29) Sam, a plumber, entered into a contract for $75,000 with Orr, Inc., to perform certain plumbing services in a building owned by Orr. After Sam had satisfactorily performed the work, Orr discovered that Sam had violated the state licensing statute by failing to obtain a plumbing license. As a result, Orr refused to pay Sam. The licensing statute was enacted merely to raise revenue for the state. An independent appraisal of Sam's work indicated that the building's fair market value increased by $70,000 as a result of Sam's work. The cost of the materials that Sam supplied was worth $35,000. If Sam sues Orr, Sam will be entitled to recover:

A) nothing.

B) $35,000.

C) $70,000.

D) $75,000.

30) Roger and Erick make a bet concerning whether a certain rich citizen will die within the next year. Neither party has any economic interest in this person's fate, except for that created by the bet. This agreement is:

A) unenforceable if statutes prohibit wagering agreements.

B) unenforceable because it tends toward the commission of a crime.

C) unconscionable because it contemplates the destruction of life.

D) a valid and enforceable risk-allocation agreement.

31) Mr. Green enters into a contract with Ms. White to purchase legal ingredients that he plans to use to perfect an illegal marijuana manufacturing operation. Ms. White is aware that Mr. Green intends to use the ingredients for an illegal purpose. She refuses to pay the amount owed to Mr. Green and he sues in court. What is the court likely to do?

A) Recognize the contract but only allow 50% economic recovery for Mr. Green since his products were used to produce illegal items.

B) The court will likely not enforce Mr. Green's contract since it was part of an illegal action.

C) The court will likely enforce the agreement if Mr. Green registered the contract with the Secretary of State's office.

D) The court will enforce the agreement if Mr. Green has lived in the forum state longer than Ms. White.

32) Which of the following is most true regarding noncompetition clauses in contracts?

A) Such clauses are not used during employment contracts.

B) Such clauses will be enforced if they have a legitimate business purpose.

C) Such clauses are enforced only for protecting the environment and conserving resources.

D) Such clauses help in promoting free trade.

33) In an employment contract, the noncompetition clause might be the only part of the contract:

A) that the parties put in writing.

B) that would be valid.

C) that would be unenforceable.

D) that would be illegal.

34) Which of the following is NOT a requirement in the enforceability of a noncompetition clause?

A) The noncompetition clause must serve a legitimate business purpose.

B) The noncompetition clause must be regarding the sale of goods.

C) The restriction on competition must be reasonable in time, geographic area, and scope.

D) The noncompetition clause should not impose an undue hardship.

35) Noncompete clauses in contracts:

A) are never enforced because they violate anti-trust laws.

B) are never enforced because they are unethical.

C) are always enforced under the doctrine of "freedom of contract."

D) are enforced if found to be reasonable.

36) Helga owns an insurance business in Idaho. Her clients are all Idaho residents. She later sells her business to Carlos. As part of the deal, the contract contains a noncompete clause that prevents Helga from operating an insurance business anywhere in Idaho, Washington, or Oregon for a period of five years. Six months after this sale, Helga opens an insurance business in Oregon. If Carlos seeks to enforce the noncompete agreement against Helga, will he probably be successful?

A) Yes, because this agreement is reasonable.

B) Yes, because the clause is not imposing an undue hardship.

C) No, because this agreement is not reasonable.

D) No, because the agreement is not yet converted into a treaty.

37) Which of the following statements is true regarding noncompetition clauses in employment contracts?

A) These clauses are illegal.

B) Employments contracts with these clauses are voidable.

C) These clauses put post-employment restrictions on the employees.

D) These clauses need to be ratified by the employer.

38) Which of the following constrains the employee from divulging or using certain information gained during his employment?

A) Nonsolicitation agreement

B) Nondisclosure agreement

C) Noncompetition clause

D) Deed of trust

39) In which of the following situations is a court most likely to refuse to enforce a noncompetition clause?

A) The clause is not ratified by the employer.

B) The employment contract, which contains the clause, is an implied-in-fact contract.

C) The clause restricts employees from engaging in a "common calling."

D) The employment contract, which contains the clause, is a quasi-contract.

40) Paul is hired by Soprano as a security guard. At the time of hiring, Paul signs an agreement that relieves Soprano from workers' compensation liability. This agreement is most likely:

A) enforceable because Paul and Soprano have equal bargaining power.

B) unenforceable because it includes intentional torts.

C) enforceable so long as the terms of the agreement are conspicuously disclosed.

D) unenforceable as a violation of public policy.

41) Which of the following is also termed a "liability waiver"?

A) Exculpatory clause

B) Nondisclosure agreement

C) Confidentiality clause

D) Noncompetition clause

42) A(n) ________ clause is a provision in a contract that purports to relieve one of the parties from tort liability.

A) exculpatory

B) implied-in-fact

C) quasi

D) expressed

43) An exculpatory clause that protects a person from liability for fraud is:

A) valid but unenforceable.

B) valid if it is in writing.

C) against public policy.

D) valid if both parties agree.

44) Which of the following is true regarding an exculpatory clause?

A) It is illegal in nature.

B) It is also termed a "release."

C) It is invalid in negligence cases.

D) It imposes strict liability on the guilty party.

45) An agreement that unreasonably tends to interfere with family relationships will be considered ________.

A) implied-in-fact

B) valid

C) exculpatory

D) illegal

46) Agreements made by unmarried people who are living together:

A) are unenforceable regardless of their nature.

B) are enforceable if they do not involve the division of property.

C) are unenforceable if one of the parties is married to someone else.

D) are considered to be against public policy.

47) Which of the following was NOT taken into account by classical law in assessing contracts?

A) Fraud

B) Duress

C) Misrepresentation

D) Fairness

48) Under the doctrine of ________, courts would refuse to grant the equitable remedy of specific performance for breach of a contract if they found the contract to be oppressively unfair.

A) unconscionability

B) mirror image

C) community-of-interest

D) contract bar

49) Which of the following is a possible outcome if a court finds that a contract or a term in a contract is unconscionable?

A) It will refuse to enforce the entire agreement.

B) It will impose punitive damages on the guilty party.

C) It will allow the injured party to recover damages.

D) It will ask for arbitration in the matter.

50) ________ is generally taken to mean the absence of meaningful choice together with terms unreasonably advantageous to one of the parties.

A) Unconscionability

B) Illegality

C) Adhesion

D) Rescission

51) Which of the following is a possible example of procedural unconscionability?

A) A clause excluding a seller's liability for consequential damages from a defective good.

B) A clause imposing a penalty for failure to deliver the goods on time.

C) A high price term in a contract.

D) A fine-print price term in a contract.

52) Courts may decline to enforce unconscionable terms or contracts. This provision is provided in:

A) Section 12 of UCC.

B) Section 208 of UCC.

C) Section 4 of UCC.

D) Section 208 of Restatement (Second) of Contracts.

53) Which of the following is an example of substantive unconscionability?

A) Terms that are stated in "fine print"

B) A disparity in bargaining power between the parties

C) High-pressure sales tactics

D) Unjustifiably harsh terms

54) Amy is hired by BigMart as a cashier. At the time of hiring, Amy is required to sign an arbitration agreement under which she agreed to settle any and all claims she might have relating to her employment by final and binding arbitration before a neutral arbitrator and in accordance with BigMart's "Dispute Resolution Rules and Procedures" which is a separate ten-page document containing complex procedural details. Under the agreement, Amy is required to pay for all arbitration-related costs, and BigMart can still sue Amy in civil court for claims arising from her employment. A court will most likely view this agreement as:

A) unenforceable since it is a quasi-contract.

B) enforceable because it is an arbitration agreement.

C) unconscionable because it is an adhesion contract that is oppressive.

D) enforceable because it is part of a valid employment agreement.

55) To determine ________ unconscionability, courts will scrutinize the contract terms themselves to determine whether they are oppressive, unreasonably one-sided, or unjustifiably harsh.

A) procedural

B) voidable

C) substantive

D) associative

56) A ________ is a contract, usually on a standardized form, offered by a party who is in a superior bargaining position on a "take-it-or-leave-it" basis.

A) quasi-contract

B) contract of adhesion

C) executory contract

D) bilateral contract

57) Toby, an Ohio real estate broker, misrepresented to Allen that he was licensed in Michigan under Michigan's statute regulating real estate brokers. Allen signed a standard form listing contract agreeing to pay Toby a 6% commission for selling Allen's home in Michigan. Toby sold Allen's home. Under the circumstances, Allen is:

A) not liable to Toby for any amount because of the rule of mirror image which needs to be fulfilled for creating a binding contract.

B) not liable to Toby for any amount because Toby violated the Michigan licensing requirements.

C) liable to Toby only for the value of services rendered under the quasi-contract theory.

D) liable to Toby for the full commission under the promissory estoppel theory.

58) Wayne and Mia are friends in Idaho, where gambling is illegal and they are aware of it. Wayne and Mia bet $1,000 on which day Paradise Creek will flood its banks. They have no financial interest in Paradise Creek. Wayne wins this bet. Mia pays Wayne the $1,000, but later that day, regrets it and sues Wayne to get her $1,000 back. The court would probably rule in favor of:

A) Mia, since gambling was illegal.

B) Mia, because a bet is considered to a form of an implied-in-fact contract.

C) Wayne, because he won the bet fair and square, so the court will enforce the wager.

D) Wayne, since the court will "leave the parties where it finds them" in cases like this.

59) In technical legal terms, a party not equally in the wrong is said to be not in ________.

A) res ipsa loquitur

B) ab initio

C) pari delicto

D) ad idem

60) Joe is the owner of the restaurant "Yummy Bites." Neil is an employee of a competitor's restaurant "Mom's Kitchen." Joe pays Neil $1,000 to obtain recipes from "Mom's Kitchen." In the meantime, Joe has second thoughts and forbids Neil to obtain such recipes. Joe wants to get his money back. Identify the most accurate statement that might help Joe.

A) Joe can recover the amount because he has rescinded the contract before any illegal act has been done by Neil.

B) Joe cannot recover the amount because he has entered into an illegal contract.

C) Joe cannot recover the amount because such contracts are unenforceable and illegal.

D) Joe can recover the amount because the contract between him and Neil is a quasi-contract.

61) A contract is said to be ________—that is, the legal part can be separated from the illegal part—if the contract consists of several promises or acts by one party, each of which corresponds with an act or a promise by the other party.

A) implied-in-fact

B) voidable

C) unenforceable

D) divisible

62) If part of an agreement is legal and part is illegal, the courts will:

A) declare the entire agreement to be void.

B) ask both the parties to ratify the agreement before considering it for evaluation.

C) enforce the legal part so long as it is possible to separate the two parts.

D) impose punitive damages on both the parties.

63) Where no separate consideration is exchanged for the legal and illegal parts of an agreement, the agreement is said to be ________.

A) unconscionable

B) rescind

C) indivisible

D) adhesive

64) Which of the following will not make an agreement illegal?

A) An agreement that violates a statute.

B) An agreement that violates public policy.

C) An agreement that is unconscionable.

D) An agreement that is not timely ratified.

65) In the case in the text, Coma Corporation v. Kansas Department of Labor, why did the court find in favor of the Department?

A) Kansas has a strong and longtime public policy protecting wages and wage earners.

B) Kansas courts do not recognize employment contracts with illegal aliens.

C) Kansas law forbid the court from recognizing the validity of the contract.

D) Kansas is a pro-employer state.

66) When a legislature has specifically stated that a particular contract is void, a court need only:

A) cancel the contract.

B) interpret and apply the statute.

C) decide whether the contract is against public policy.

D) decide whether the contract is unconscionable.

67) What would happen if courts enforced agreements that involve the violation of a statute?

A) They would frustrate the purpose for which the legislature passed the statute.

B) The legislature would override such decisions.

C) It would promote obedience of the law.

D) The public would show greater respect for courts.

68) Sally agrees to sell Mary her old kitchen appliances for $3,000. Little does Sally know, Mary intends to use the appliances to cook methamphetamine. Mary paid $500 in cash and wrote a check for the remaining amount. The check bounced and Sally sued Mary to recover the remaining money. What is likely the result:

A) Sally is entitled to $2,500 because she was unaware of Mary's intention.

B) Sally is entitled to $2,500 because Mary is in possession if the appliances.

C) Sally is entitled to $2,500 because even if she knew of Mary's intention there was proper consideration.

D) Sally is entitled to nothing.

69) Whether a statute is a regulatory statute or a revenue-raising statute depends on:

A) common law.

B) the plain meaning of the language.

C) the intent of the legislature.

D) interpretation by administrative agencies.

70) Generally, statutes that require proof of character and skill and impose penalties for violation are considered to be ________ in nature.

A) remedial

B) revenue-raising

C) regulatory

D) enabling

71) The requirements of regulatory statutes indicate that they were intended:

A) to regulate competition.

B) to incentivize innovation.

C) for the protection of corporations.

D) for the protection of the public.

72) Statutes that impose a significant license fee and allow anyone who pays the fee to obtain a license are usually classified as ________.

A) regulatory

B) revenue raising

C) enabling

D) transparent

73) The fact that statutes requiring a license only requires payment of a fee indicates that the purpose of the law is to:

A) raise money.

B) protect the public.

C) protect professions.

D) incentivize entrepreneurs.

74) The policy against restraints on competition is based on the economic judgment that the public interest is best served by:

A) freedom of association.

B) freedom of contract.

C) free competition.

D) laissez-faire.

75) Courts tend to judge noncompetition clauses in ________ by a stricter standard than they judge similar clauses contained in ________.

A) ancillary agreements; employment contracts

B) employment contracts; contracts for the sale of a business

C) contracts for the sale of a business; employment contracts

D) ancillary agreements; contracts for the sale of a business

76) In the case in the text, Clark's Sale and Service, Inc. v. Smith, why did the court refuse to enforce the restrictive covenant?

A) The restrictive covenant was overly broad and indivisible.

B) The restrictive covenant did not serve a legitimate business purpose.

C) The restrictive covenant was unreasonable in time.

D) The restrictive covenant imposed an undue hardship on Smith.

77) A contract that "shocks the conscience of the court" is said to be ________.

A) illegal

B) voidable

C) exculpatory

D) unconscionable

78) In the case in the text, Walters v. YMCA, what was the court's holding?

A) The language of the exculpatory clause was void and unenforceable as against public policy.

B) Then language of the exculpatory clause was overly broad and unenforceable as against public policy.

C) The language of the exculpatory clause was appropriate under the circumstances and Walters could not recover.

D) The language of the exculpatory clause was unenforceable because parties cannot free themselves of negligence liability.

79) An exculpatory clause that is written in ________ and conspicuous print is more likely to be enforced than one written in ________ and presented in fine print.

A) ambiguous language; legalese

B) legalese; clear language

C) clear language; legalese

D) legalese; ambiguous language

80) Courts often refer to unfairness in the bargaining process as ________.

A) undue influence

B) lack of power

C) substantive unconscionability

D) procedural unconscionability

81) In Singh v. Uber Technologies Inc., the case in the text, the court concluded that:

A) because there was a large disparity in bargaining power between the parties, the agreement was unconscionable.

B) Uber took advantage of its drivers when it failed to pay overtime compensation and made the drivers pay for significant business expenses that were incurred for Uber's benefit.

C) because Uber did not provide users with an opportunity to read the full terms of the agreement prior to acceptance, the agreement was unconscionable.

D) Singh may be able to demonstrate a disparity in bargaining power but he failed to show that the agreement was substantively unconscionable.

82) If a consumer is presented with a contract of adhesion with no opportunity to negotiate terms and signs the agreement without understanding what he is signing, has he consented to the terms?

A) He has only consented to the terms that he could understand.

B) He has only consented to the terms that he could have reasonable expected in the contract.

C) He has consented to all terms of the contract.

D) He has not consented to any terms of the contract.

83) There must be separate ________ for each promise or act for a contract to be considered divisible.

A) payments

B) consideration

C) headings

D) clauses

84) 84 To encourage people to cancel illegal contracts, courts will allow a person who rescinds such a contract before any illegal act has been performed to:

A) recover any consideration that he has given.

B) be free from criminal liability.

C) be free from civil liability.

D) recover the full amount of the agreement.

85) In the case in the text, Gamboa v. Alcarado, what was the rationale for the court's decision?

A) The contract was entered into as a result of undue influence.

B) There was a large disparity in bargaining power and the terms of the agreement the defendants were relying on were in fine print.

C) The defendants knew the plaintiffs did not read and write in English and took advantage of them when it required them to sign a contract written in English.

D) Defendants in such cases cannot be allowed to use the very illegality of their agreement as a way to avoid the consequences of their actions.

86) Shoddy, the owner of Shoe Repair, was contemplating retirement. He therefore contracted to sell his business to Pauline Parker. Shoe Repair was located in Hoosierburg, Indiana, which has a population of 5,233. Apart from containing a provision entitling Parker to use the Shoe Repair name for the business, the parties' contract included a clause that prohibited Shoddy from opening any competing shoe repair shop in Hoosierburg for a period of one year from the date of the parties' contract. Two months after the date of the contract (and one and one-half months after the sale of the business to Parker had been completed), Shoddy grew tired of retirement. As shoe repair had been his life's work, he opened up a shoe repair shop in Hoosierburg. Parker sued him in an effort to obtain an injunction against his operation of the competing business, alleging a violation of the parties' contract. How is the court likely to rule? Explain your reasoning.

87) Describe the three criteria that need to be fulfilled to enforce a noncompetition clause.

88) Jan opens a sandwich shop across the street from another sandwich shop run by Amy. Amy is disturbed by this competition, and she agrees to pay Jan $5,000, in exchange for Jan's promise to quit the business and not to engage in a similar business within ten-mile radius of Amy's business. Is this contract legal and enforceable? Why or why not? If the agreement is not enforceable, how might Jan and Amy restructure it to increase its chances of being legal?

89) What is an exculpatory clause?

90) Jerry and Louise contract for Jerry to sell Louise his farm for $300,000. As part of the deal, Jerry throws in a pound of marijuana seeds, for which Louise is to pay an extra $1,000. Louise's plan is to use the seeds to grow a marijuana crop. Is the whole contract or any part of the contract enforceable? Assume that both the sale of marijuana seeds and the cultivation of a marijuana crop are illegal.