Deck 13: Illegal Bargains

Question 1

American courts generally will enforce a gambling agreement if both parties are in agreement on the terms.

Answer 1

False

Question 2

Bargains are illegal if they violate a crime or tort but not if they are merely against public policy.

Answer 2

False

Question 3

An agreement for the purchase of an illegal substance will be enforced by the courts if all other elements of the contract are present.

Answer 3

False

Question 4

The law does not provide a remedy for the breach of an unenforceable agreement.

Question 5

A covenant not to compete is a type of restraint of trade that courts today will enforce under certain circumstances.

Question 6

Maximum rates of interest that are permitted under usury statutes vary from state to state.

Question 7

Where a stipulation in restraint of trade is part of the sale of a business, it may be valid if the restraint is within reasonable limitations to protect the business's goodwill.

Question 8

Specific lender usury statutes rather than the general usury statute generally apply to real estate mortgages and small consumer loans.

Question 9

The Code and the Restatement both contain definitions of what constitutes "unconscionable" conduct.

Question 10

Oswald applied for a loan from Pointe Lenders. Pointe's reasonable cost of checking Oswald's credit will be considered as part of the financing charge when determining whether Pointe's rate of interest exceeds that allowable under the usury statute.

Question 11

An exculpatory clause may excuse one party from liability for her own tortious conduct.

Question 12

An agreement to pay a public officer something extra for performing his official duty is enforceable.

Question 13

Many states impose no limit on the rate of interest that may be charged on loans to corporations.

Question 14

In some states, a lender who charges a usurious rate forfeits both the principal and interest on the loan.

Question 15

It is legal for a candidate for public office to make a bargain with a supporter to give them a certain appointment following the election in return for support.

Question 16

Sam, a student, promises to act as a guide on a fishing trip for a group of visiting dignitaries. The dignitaries agree to pay him $200 for his services. Sam guides them, but when they discover that Sam does not have a fishing license, they refuse to pay him. The agreement is an illegal one, which is not enforceable.

Question 17

A contract that requires a person to commit a tort will be enforced by the courts.

Question 18

The courts readily enforce a covenant not to compete during the period of employment.

Question 19

Bill is currently enrolled in law school. He expects to graduate and take the bar exam in order to be able to practice law. Before Bill becomes a lawyer, he promises to represent his friend, Tom, in a breach of contract action if Tom will pay him 25% of the settlement. Bill negotiates and the case settles for $50,000. Tom refuses to pay Bill. Bill then graduates and attempts to sue Tom. Bill has a legal right to enforce the agreement.

Question 20

An adhesion contract is offered on a "take-it-or-leave-it" basis.

Question 21

The legal effect of a usurious loan varies from state to state.

Question 22

The usual means of enforcing an agreement prohibiting an employee from competing in a described territory for a stated period of time is by injunction.

Question 23

Don has an employment contract with Dunkirk Ice Cream. He sells ice cream and novelty ice cream products. He has nine children and doesn't make enough money, so he decides to see if another dairy will hire him, too. "After all," he reasons, "most stores carry four or five different brands." His employment contract prohibits him from competing. If Don sells for another dairy in addition to Dunkirk, will he be in trouble under his contract?

A) No, it is unenforceable as against public policy.
B) Yes, it is likely to be enforceable during employment.
C) No, the prohibition against competing is enforceable only after he quits Dunkirk.
D) A court would have to rule on the enforceability of the covenant not to compete since courts are reluctant to enforce such covenants during a period of employment.

Question 24

Courts will never limit freedom of contract.

Question 25

B& B, Inc. pays an attorney to draft and lobby for a bill which will greatly lessen B & B's tax liability to the state and federal governments. B&B gives the attorney $20,000 in cash to pay legislators for taking the time to listen to him. This is an agreement which is a violation of public policy.

Question 26

Where parties to a failed agreement are in pari delicto , a court will provide a remedy to the injured party.

Question 27

Abner operates a small repair business and is in desperate need of a certain type of building material. He obtains the material from a large corporation, but is charged a grossly unreasonable price and is forced to buy other material he does not need. In view of the buyer's unequal bargaining power and unreasonable terms of the contract, this may be a case of:

A) in pari delicto .
B) partial illegality.
C) substantive unconscionability.
D) procedural unconscionability.

Question 28

Claudia sells her highly successful hair salon to Carl. In the sales contract, Claudia agrees never to open a hair salon in the state. Which of the following best describes this contract clause?

A) Void as an illegal violation of a statute.
B) Valid as a reasonable restraint on trade.
C) Unenforceable as a violation of public policy.
D) Binding as fair protection.

Question 29

Permissible lender's expenses, which would not be considered in determining the rate of interest under usury statutes, include all but which of the following?

A) Cost of title examination.
B) Reasonable cost of drawing up the necessary documents.
C) A charge to the borrower of $500 to investigate the borrower's credit, when it actually cost the lender $75.
D) All of these charges would be considered in determining the rate of interest under usury statutes.

Question 30

Which of the following is NOT true with regard to an exculpatory clause?

A) An exculpatory clause excuses one party from liability for her own tortious conduct.
B) Where one party has a superior bargaining position that has enabled him to impose an exculpatory clause upon the other, the courts are inclined to nullify the provision.
C) An exculpatory clause may be unenforceable for unconscionability.
D) Exculpatory clauses are almost always against public policy.

Question 31

An agreement to refrain from a particular trade, profession, or business is enforceable if two requirements are met: that the purpose of the restraint is to protect a property interest of the promisee and the restraint is no more extensive than is reasonably necessary to protect that interest.

Question 32

A contract of adhesion:

A) is automatically unenforceable.
B) consists largely of boilerplate provisions, such as a standard-form insurance policy.
C) is a contract that exhibits either procedural or substantive unconscionability.
D) is a contract containing multiple exculpatory clauses.

Question 33

A(n) __________ is a measure designed to protect the public from unqualified practitioners.

A) exculpatory clause
B) revenue license
C) regulatory license
D) usury statute

Question 34

An agreement in connection with the sale of a business that prohibits the seller from engaging in the same or similar business for a period of twenty-five years would be unreasonable and unenforceable.

Question 35

Some states require the lender to forfeit two or three times the amount of usurious interest charged.

Question 36

Before granting an injunction enjoining a former employee from competing in a described territory, the courts insist that the employer demonstrate that the restriction is __________ to protect the employer's legitimate interest.

A) exculpatory
B) unconscionable
C) necessary
D) usurious

Question 37

Edward, an engineer, is working on a new design for some highly technical equipment which Martus, Inc. hopes to market within the next five years. The employment agreement between Edward and Martus states that Edward will not go to work for another company in the same business for a period of two years after termination of his employment with Martus, Inc. This agreement is void and unenforceable because, although Martus is a very specialized company, it would make it difficult for Edward to find other employment.

Question 38

Andria, an attorney, has a personal injury case which is set for trial next week. She needs a good doctor to testify on behalf of her client, so she contacts Dr. Wood who agrees to testify on behalf of Andria's client at the trial. In return for Dr. Wood's testimony, Andria agrees to pay Dr. Wood $10,000 if they win the case, and $5,000 if they lose. Dr. Wood agrees. The agreement between Andria and Dr. Wood is unenforceable.

Question 39

Divided Parcel (DP) includes the following on its mailing receipts: "We are not responsible for any damages to packages whether or not through the intentional or reckless fault or negligence of our employees. Send packages at your own risk." Mary reads this clause but sends her watch back to the manufacturer to be repaired anyway. The watch is destroyed when the DP driver uses the package for a ball and tosses it to his buddy. Mary is:

A) out of luck because the clause was communicated to her.
B) out of luck because she should have insured the package.
C) likely to collect from DP since exculpatory clauses always violate public policy.
D) likely to collect from DP because it attempted to excuse intentional and reckless behavior.

Question 40

Nell gives Big Al $50 in return for Al's promise to defame Sara. Nell hopes to ruin Sara's chances at a promotion. Nell finds out that Al did not hold up his end of the agreement. Which of the following statements is true?

A) Nell can get the money back from Al through litigation.
B) Nell can get the money back and force Al to do as he promised.
C) Legally, Nell can neither get the money back nor force Al to do as he promised.
D) Nell can force Al to act through an appeal to the courts, but Al gets to keep the $50.

Question 41

Which of the following would always be considered to be contrary to public policy?

A) A contract which contains a covenant not to compete.
B) A contract offered on a take-it-or-leave-it basis.
C) An agreement to pay someone to make false statements about a competitor's product.
D) An agreement which contains an exculpatory clause.

Question 42

If a court finds a contract unconscionable:

A) the court may refuse to enforce only the unconscionable part.
B) it must, in all states, be found both substantively and procedurally unconscionable to be unenforceable.
C) the court must refuse to enforce the contract.
D) the contract must fall strictly within the Code's or the Restatement's definition of "unconscionable" to be unenforceable.

Question 43

Archie bets his friend Jerry $100 that the Packers will win the next Super Bowl. This is an:

A) unconscionable contract and therefore illegal.
B) illegal wagering agreement.
C) agreement to obstruct justice and therefore illegal.
D) illegal restraint of trade.

Question 44

An agreement to refrain from a particular trade, profession, or business is enforceable if:

A) the purpose of the restraint is to protect a property interest of the promisee.
B) the agreement is for no longer than two years.
C) the restraint is no more extensive than is reasonably necessary to protect the promisee's property interest.
D) Two answers are correct but not all three.

Question 45

The Uniform Commercial Code provides that a court may scrutinize every contract for the sale of goods to determine whether, in its commercial setting, purpose, and effect, the contract is:

A) exculpatory.
B) unconscionable.
C) usurious.
D) complete.

Question 46

Which of the following would generally be considered to be a revenue-raising licensing law?

A) A statute requiring that doctors be licensed.
B) A statute requiring that salespeople be licensed, but not establishing any educational or training requirements.
C) A statute requiring public school teachers to be licensed.
D) A statute that requires insurance agents to pass a test before selling insurance in a state.

Question 47

Alatan owns a building supply store in Russ County. His trade extends throughout River City, the largest city in Russ County, but not beyond the county limits. He sells his store to Hilary and, as part of the transaction, agrees not to engage in the same business anywhere in River City for a period of two years. In this case:

A) the geographic restraint is reasonable.
B) this agreement is unreasonable.
C) the agreement unduly interferes with the interest of the public.
D) the time limit is reasonable, but the geographic restraint is not.

Question 48

Rorzex, Inc. entered into a contract with Denzil under the terms of which Denzil would receive $20,000 if he stole trade secrets from the leading competitor of Rorzex. Denzil performed his end of the agreement by delivering the trade secrets. Rorzex now refuses to pay Denzil for his services. Denzil:

A) may recover based upon the express contract of the parties.
B) may recover based upon a quasi-contractual theory in order to prevent the unjust enrichment of Rorzex.
C) will be unable to recover, because this is an illegal contract.
D) will be able to recover based upon promissory estoppel, because he has detrimentally relied upon the promises made by Rorzex.

Question 49

Identify five exceptions to the general rule that illegal contracts are unenforceable.

Question 50

Al, an accountant, has a tax service and accounting business in Redwood City. He decides to move to Center City, which is 150 miles away and sells his accounting practice to Able and Baker, a CPA firm. In the sale contract, he agrees that he will refrain from practicing accounting anywhere within a 60-mile radius of Redwood City for a period of two years. However, on weekends he returns to his house in Redwood City, and when clients call him, he meets with them in his home. In this case:

A) Al is in violation of the sale agreement, which contained restrictions that would probably be held to be valid.
B) the agreement is invalid, because it is an illegal restraint on trade.
C) the agreement is illegal, because it is a violation of public policy.
D) the two-year provision is likely to be held invalid, because it is too long a period of time.

Question 51

The sole nursing home in the county offers a long-term care agreement. The contract is prepared on a standard form and offers terms on a take-it-or-leave-it basis. Such a contract is called:

A) exculpatory.
B) a usurious contract.
C) an illegal restraint of trade.
D) an adhesion contract.

Question 52

Rose is working hard on Arlin's mayoral campaign. She thinks that just a few more votes could win the election, so she promises to pay her friend Violet $50 if she will register and vote for Arlin. Violet does so, but Arlin loses the election, and Rose now refuses to pay. Rose's agreement to pay Violet:

A) is enforceable.
B) is unenforceable and opposed to public policy.
C) is an agreement to obstruct the administration of justice.
D) is an unconscionable contract covered by the UCC.

Question 53

A __________ is a law establishing a maximum rate of permissible interest for which a lender and borrower of money may contract.

A) wager
B) usury statute
C) Sunday statute
D) blue sky law.

Question 54

In considering a covenant not to compete in an employment contract, the court in the case of Payroll Advance, Inc. v. Yates said in its opinion:

A) in order to obtain an injunction it is necessary for the employer to show that actual damage has occurred.
B) covenants not to compete are presumptively valid, and they are enforceable to the extent they are reasonable.
C) the question of reasonableness of a restraint requires consideration of such circumstances as the subject matter of the contract, the purpose to be served, the situation of the parties, the extent of the restraint, and the specialization of the business.
D) a non-compete agreement over 2 years in length is never reasonable.

Question 55

Mel has a neighborhood grocery store that he would like to sell. Casey is interested in purchasing the business, but he is concerned because he knows that Mel has built up a lot of goodwill over the years, and he wonders whether Mel might not just open another store down the block and take all of the business from the old store with him. Casey asks for and receives from Mel a clause in the sale agreement that Mel will not open another grocery store within a 150-mile radius of the old store for a period of at least ten years.
a. What is this agreement called?
b. Is the negotiated clause a valid one? Explain why or why not.
c. What guidelines would a court ordinarily use in determining whether to enforce such a clause?

Question 56

Which statement is true about the limit on the rate of interest that a lender may charge?

A) Interest rates are strictly regulated on loans to corporations and other businesses.
B) More than half of the states have no interest rate limits on credit card transactions.
C) Interest rates on installment loans may not exceed the interest rate cap of other types of loans.
D) Expenses such as document preparation, inspections and title inspection must be considered in determining the rate of interest allowable under the usury statutes.

Question 57

Under which of the following circumstances would a court be unlikely to enforce the illegal contract?

A) Where the aggrieved party was unaware of the illegality.
B) Where a party withdraws from an illegal agreement prior to performance.
C) Where the agreement is with an unlicensed attorney.
D) Where one of the parties is less at fault than the other.

Question 58

Carl and Ron both work in road construction. They know that two major jobs are going to be up for public bids, and agree between themselves that Carl will bid on one job and Ron will bid on the other, so that they both have work for the summer. When the bids are opened, Carl realizes that Ron has bid on both jobs. Ron is awarded both contracts. If Carl now wants to sue Ron for breach of contract:

A) Carl would probably win on the basis of promissory estoppel since he has detrimentally relied upon Ron's representation that he would not bid.
B) since Carl is less at fault than Ron, the court will likely award Carl damages.
C) the agreement will not be enforced by the courts because it violates public policy.
D) the agreement will not be enforced by the courts because it obstructs the administration of justice.

Question 59

Philip has been in training for several months and now plans to run in the school-sponsored, 10-mile, fun-run mini-marathon. He completes and signs an entry blank which contains the statement, "I hereby agree to hold the sponsors harmless for any injury sustained as a result of participation in this event no matter how such injury may be caused."
a. What is the legal term for this clause in the agreement?
b. Is the clause valid and legally enforceable? Explain its legal effect.

Question 60

Opal wanted to purchase a smartphone and found one she liked at Live Talk Mobile. Several important contractual terms were buried in the written agreement and some of the meaning of the contract was obscured by legal jargon. The contract involved:

A) procedural unconscionability.
B) substantive unconscionability.
C) adhesion.
D) exculpatory clauses.

Question 61

Who usually enters into employment contracts and what provision is commonly included regarding possible restraint of trade? Explain the purpose of such provisions.

Question 62

Courts usually will require evidence for a transaction to be usurious. What factors will the courts require as evidence of usury?

Question 63

a. Explain the meaning of "public policy" in the context that an agreement is void because it violates public policy.
b. List the most common forms of agreements that violate public policy.

Question 64

State and local governments require licenses for certain businesses and professional activities.
a. Explain the difference between a regulatory licensing statute and a licensing statute enacted to raise revenue.
b. Explain the significance in contract law between a regulatory license and a revenue raising license.
c. Give an example of each type of licensing statute.

Question 65

What is the legal effect of an agreement that is criminal, tortious, or otherwise contrary to public policy, and why does it have that effect?

Question 66

Delbert won a $500 bet with Samuel on the outcome of the World Series, but Samuel refuses to pay. Discuss what recourse Delbert has. If Delbert had instead bought a ticket from a state-operated lottery, would his recourse be different?

Question 67

Distinguish between procedural and substantive unconscionability.