- The hospital has sued to enjoin the cardiologist from working at the research institute. What is the likely outcome of the hospital's lawsuit? Select one.
Answer: The hospital will lose, because the covenant is an unreasonable restraint on trade due to its excessive geographic scope and the breadth of activity it prohibits.
The correct answer is C. Covenants not to compete are disfavored as restraints on trade and are enforced only if they are reasonable in geographic scope, duration, and the scope of prohibited activity, and are necessary to protect a legitimate business interest. A covenant that prohibits a cardiologist from practicing medicine 'in any capacity' across an entire state is almost certainly overbroad in both geographic scope and the scope of activity. Such a broad restriction violates public policy. (A) is incorrect because agreement to an unreasonable term does not make it enforceable. (B) is incorrect because even if the duration were reasonable, the covenant fails due to its unreasonable scope. (D) is plausible, but (C) is the better answer because it addresses the fundamental unenforceability of the covenant itself, which is the primary issue, rather than just interpreting its terms.
- A married couple, seeking to separate, entered into a written agreement. The agreement provided that the husband would pay the wife $200,000 if, and only if, the wife obtained a divorce within one year. The wife filed for and obtained a divorce within the specified time, but the husband refused to pay. The wife sued to enforce the agreement.
Answer: No, because the agreement is unenforceable as it creates a financial incentive to obtain a divorce, which is contrary to public policy.
The correct answer is C. Contracts that are seen as encouraging divorce are generally held to be void as against the public policy of preserving marriage. An agreement where a payment is conditioned on the procurement of a divorce creates a financial incentive for divorce and is therefore unenforceable. (A) is incorrect because performance of a void contract does not make it enforceable. (B) is incorrect because while settlement agreements made in contemplation of an already-decided divorce are favored, agreements that encourage divorce are not. (D) is incorrect because the issue is not lack of consideration but the violation of public policy.
- On February 1, a winery contracted to sell 1,000 cases of its specialty wine to a distributor, with delivery and payment due on June 1. On May 15, the state legislature passed an emergency public health law, effective immediately, banning the sale of all alcoholic beverages within the state. The winery informed the distributor that it would not be able to deliver the wine. The distributor, who had a buyer in another state where the sale was still legal, sued the winery for breach of contract.
Answer: Impossibility, because the supervening governmental order made it illegal for the winery to perform its duty to deliver the wine.
The correct answer is B. When a law is passed after the formation of a contract that makes performance of the contract illegal, the duty to perform is discharged by the doctrine of supervening impossibility (or impracticability). The government's ban on alcohol sales made it objectively impossible for the winery to legally deliver the wine. (A) is incorrect because the winery's statement was not a repudiation but a recognition of a legal discharge of its duties. (C) is incorrect because unconscionability is tested at the time of contract formation and relates to unfair bargaining processes or terms, not subsequent events. (D) is incorrect because the contract was legal when formed; the doctrine of impossibility, not illegality of formation, applies to supervening illegality.
- A small business owner needed an urgent loan of $10,000. A private lender agreed to provide the loan but required the owner to sign a promissory note for $15,000, payable in one year. The applicable state usury statute prohibits loan interest rates exceeding 25% per annum and provides that any loan in violation of the statute is void, and the lender forfeits all principal and interest. The business owner defaulted on the loan, and the lender sued for $15,000.
Answer: $0, because the usury statute renders the entire loan agreement void and unenforceable by the lender.
The correct answer is D. The loan of $10,000 with a repayment of $15,000 in one year represents a 50% interest rate, which exceeds the 25% statutory maximum. The contract is therefore usurious. The remedy for usury depends on the specific statute. In this case, the statute explicitly states that a usurious loan is void and the lender forfeits all principal and interest. Therefore, the lender is not entitled to recover any amount. (A) is incorrect because one cannot consent to an illegal contract term that violates a statute like the usury law. (B) and (C) are incorrect because they describe remedies available in other jurisdictions (reformation or forfeiture of interest only), but the controlling statute here mandates forfeiture of the entire loan.
- A politician secretly agreed to vote in favor of a zoning change that would benefit a real estate developer. In exchange, the developer agreed to pay the politician $100,000 after the vote. The politician duly voted for the zoning change, but the developer refused to pay. The politician, now out of office, sued the developer for $100,000 for breach of contract.
Answer: No, because the contract is unenforceable as it is against public policy and both parties are in pari delicto.
The correct answer is A. A contract to bribe a public official is a classic example of a contract that is void as against public policy. The agreement is illegal and unenforceable from its inception. When both parties are willing participants in an illegal agreement, they are considered in pari delicto (in equal fault). In such cases, the court will not aid either party and will 'leave them where it finds them.' (B) is incorrect because while the timing might raise a past consideration issue in another context, the overriding issue here is the illegality of the subject matter. (C) and (D) are incorrect because a court will not enforce any part of a contract that is void due to illegality, regardless of performance or benefit conferred.
- A company entered into a contract with a consultant for a one-year term at a fee of $120,000, payable in monthly installments. The contract required the consultant to provide two services: (1) prepare a lawful market-analysis report, and (2) obtain confidential customer data from a competitor through illegal industrial espionage. The contract did not apportion the fee between the two services. After three months, the consultant had provided three legitimate market-analysis reports but had not engaged in any espionage. The company then terminated the contract and refused to pay anything.
Answer: $0, because the contract is unenforceable due to its illegal purpose, and the illegal part is not severable from the legal part.
The correct answer is C. If a contract has both legal and illegal purposes, a court may enforce the legal portion only if the contract is divisible. Divisibility requires that the illegal portion not be central to the agreement and that the consideration can be apportioned. Here, the consideration ($120,000 fee) is a single lump sum for both legal and illegal services and was not apportioned in the contract. Because the consideration is not apportioned, the illegal espionage provision taints the entire contract, making it unenforceable. Therefore, the consultant can recover nothing. (A) is incorrect because the contract is unenforceable. (B) is incorrect because the contract is not divisible. (D) is incorrect because recovery in quantum meruit is generally denied when the contract involves serious illegality like industrial espionage.
- A homeowner, aware that his plumber was unlicensed, hired him anyway to take advantage of a significantly lower price. The state has a public-safety statute requiring plumbers to be licensed. The plumber completed the work, but due to his negligence, a pipe burst and caused significant water damage. The homeowner sued the plumber for damages based on negligent performance of the contract.
Answer: Yes, because the public policy behind the licensing statute is to protect homeowners, who are members of the class the statute is designed to protect.
The correct answer is C. Although the contract is illegal, the parties are not considered in pari delicto (in equal fault). The licensing statute is designed to protect the public (homeowners) from incompetent plumbers. As a member of the protected class, the homeowner is generally not barred from suing for damages caused by the unlicensed plumber's breach or negligence, even if the homeowner knew the plumber was unlicensed. The policy of protecting the public outweighs the policy of not enforcing illegal contracts in this context. (A) incorrectly applies the in pari delicto rule. (B) is incorrect because assumption of the risk generally applies to known risks inherent in an activity, not to the risk of a contractor's negligence. (D) misapplies comparative fault, which relates to negligence causing the injury, not the negligence in contract formation.
- A city ordinance requires all businesses operating within city limits to obtain an annual 'business privilege license' for a fee of $200. The ordinance specifies that its sole purpose is to raise general revenue for the city. A local bakery, a sole proprietorship, inadvertently failed to renew its license for the current year. During this period, the bakery contracted with and provided $5,000 worth of pastries for a corporate event. The corporation later discovered the bakery's license had lapsed and refused to pay, claiming the contract was illegal and unenforceable.
Answer: Yes, because the licensing ordinance was intended for revenue-raising purposes rather than for the protection of public health or safety.
The correct answer is D. Courts distinguish between licensing statutes intended to protect the public and those intended merely to raise revenue. If a licensing requirement is for revenue-raising purposes, the failure to obtain the license does not render contracts made by the unlicensed party unenforceable. Here, the ordinance's stated purpose is to raise revenue, so the bakery can enforce the contract. (A) and (B) are incorrect because they fail to make this distinction; a violation of a revenue-raising ordinance does not typically void a contract. (C) is incorrect because waiver is not the correct legal basis for the bakery's recovery; the contract is enforceable on its own terms because the illegality does not go to a matter of public policy protection.
- A homeowner hired a general contractor to build an addition to his house. The general contractor, who was properly licensed, hired an electrician to do the wiring. The homeowner was unaware that the electrician's license had been suspended for failure to meet continuing education requirements. The state's licensing statute for electricians is for public safety. The addition was completed, but the homeowner discovered the electrician's status and refused to pay the general contractor the portion of the contract price allocated to the electrical work.
Answer: Yes, because the homeowner's contract was with the general contractor, who was properly licensed, not with the unlicensed electrician.
The correct answer is A. The homeowner's contract is with the general contractor. As long as the general contractor is licensed, the contract between the homeowner and the general contractor is valid. The illegality arises from the contract between the general contractor and the unlicensed subcontractor. While the subcontractor cannot recover from the general contractor, the homeowner generally cannot use the subcontractor's lack of a license as a defense to payment owed to the licensed general contractor under the prime contract. (B) is incorrect because the quality of the work is not the determining factor. (C) is incorrect because the illegality in the subcontract does not typically void the prime contract. (D) states a plausible policy reason, but the general rule allows the licensed general contractor to recover from the owner.
- A plaintiff in a complex commercial lawsuit was concerned that his expert witness, an economist, would not be a compelling witness on the stand. He made a secret agreement with the economist, promising her a $50,000 bonus, in addition to her standard hourly fee, but only if the plaintiff won the case. The economist then provided testimony that was highly favorable to the plaintiff. The plaintiff won the case but refused to pay the bonus. The economist sued the plaintiff for breach of the bonus agreement.
Answer: No, because the agreement is unenforceable as it provides a witness with a financial stake in the outcome of the litigation, which violates public policy.
The correct answer is A. An agreement to pay a witness a fee that is contingent on the outcome of the case is void as against public policy. Such an agreement creates a powerful incentive for the witness to testify untruthfully and undermines the integrity of the judicial process. (B) is true that the failure to disclose would be a problem, but the fundamental issue is the substance of the agreement itself, which makes it unenforceable regardless of disclosure. (C) is incorrect because performance does not validate a contract that is void as against public policy. (D) is incorrect because while experts can be compensated for their time, a contingent fee arrangement of this type is prohibited.
- A freight company's standard bill of lading contains a clause stating that in the event of loss or damage to cargo, the company's liability is limited to $500 per shipment unless the customer declares a higher value and pays an additional fee. A customer shipped a package containing a rare painting worth $50,000 but did not declare a higher value or pay the extra fee. The package was destroyed due to the gross negligence of the freight company's driver. The customer sued for the full value of the painting.
Answer: The customer will recover $50,000, because while a limitation of liability clause is permissible for ordinary negligence, it is unenforceable against claims of gross negligence.
The correct answer is B. While courts often uphold limitation of liability clauses, especially in contracts with common carriers where the shipper has the option to pay for more coverage, there is a strong public policy exception. Such clauses are generally held to be unenforceable to the extent they attempt to limit liability for a party's gross negligence or willful misconduct. Because the loss was due to gross negligence, the court is likely to void the limitation clause and allow recovery of the full, actual damages. (A) is too broad; carriers can limit liability for ordinary negligence if properly structured. (C) and (D) state the general rule for enforcing such clauses but fail to account for the crucial public policy exception for conduct more egregious than ordinary negligence.
- A person borrowed $5,000 from a friend, signing a promissory note for repayment in one year with legal interest. The borrower truthfully told the friend he needed the money for a down payment on a car. However, the borrower changed his mind and used the entire $5,000 to place a single, illegal wager with a bookie. The borrower lost the bet and, having no other funds, defaulted on the loan when it came due. The friend sued the borrower to enforce the promissory note.
Answer: The friend will win, because the loan agreement itself was legal and was independent of the borrower's subsequent illegal act.
The correct answer is A. The loan agreement was for a legal purpose (a loan of money) and was not conditioned on any illegal activity. The borrower's independent, subsequent decision to use the money for an illegal purpose does not retroactively invalidate the loan contract. The illegal act is too remote from the subject matter of the contract between the friend and the borrower. The friend, as the lender, can enforce the promissory note. (B) is incorrect because the friend's knowledge is irrelevant here since the contract itself was not for an illegal purpose. (C) and (D) are incorrect because they wrongly connect the borrower's unilateral illegal act to the validity of the separate and legal loan agreement.
- A corporation's bylaws require that all contracts over $10,000 be approved by the board of directors. The corporation's CEO, without board approval, signed a $20,000 contract with a vendor for office supplies. The vendor delivered the supplies, and the corporation used them. When the vendor submitted its invoice, the corporation's board discovered the lack of approval and refused to pay, arguing that the CEO's action violated the bylaws, making the contract an illegal and unenforceable act.
Answer: The vendor, because the corporation ratified the contract by accepting and using the office supplies.
The correct answer is B. This question tests the distinction between an 'illegal' contract (one that violates public policy) and one that is merely unauthorized. An act that violates a corporate bylaw is not 'illegal' in the sense that it violates public policy. It is an internal governance issue. When the corporation accepted and used the supplies, it received the benefit of the contract and is deemed to have ratified the CEO's unauthorized action. Therefore, it is estopped from denying the contract's validity. (A) is also a strong argument, as a CEO typically has apparent authority for such transactions, but ratification is a more definitive reason for enforcement once the goods are used. (C) is incorrect because ultra vires refers to acts beyond a corporation's legal powers, not violations of internal rules, and the doctrine is rarely successful against third parties. The contract is not 'illegal' in the public policy sense. (D) is incorrect because the corporation's ratification makes the vendor's knowledge irrelevant.
- Which of the following is your client's best defense against the worker's claim for unpaid wages? Select one.
Answer: The employment contract is unenforceable because it is illegal to hire an unauthorized worker, and a court should not enforce such an agreement.
The correct answer is A. An employment contract with an unauthorized worker may be deemed illegal and against public policy as reflected in federal immigration laws. As a result, courts may refuse to enforce the executory portions of the contract. The employer's best, though not necessarily winning, argument is that the contract is illegal and therefore unenforceable by either party. (Note: Many jurisdictions, for policy reasons, would still allow the worker to recover for work already performed). However, among the choices given, illegality is the most direct contractual defense. (B) is not a recognized legal defense. (C) is incorrect; the potential for fines does not create an automatic right of offset against wages earned. (D) is incorrect; a person's immigration status does not, by itself, bar them from accessing the courts to sue for wages owed.
- The owner of a specialty food market, famous for its unique brand and customer loyalty, sold the business to a buyer. The sale agreement included a covenant that the seller would not 'engage in any retail food business' within a 50-mile radius for a period of ten years. One year later, the seller opened a small, high-end cheese shop 40 miles away. The buyer sued to enforce the covenant.
Answer: Yes, because covenants not to compete related to the sale of a business, including its goodwill, are generally enforced more broadly than those in employment contracts.
The correct answer is A. Courts grant more latitude to covenants not to compete arising from the sale of a business than to those in employment contracts. This is because the buyer has a legitimate interest in protecting the goodwill of the business they have purchased. A 50-mile, 10-year restriction could be considered reasonable in the context of protecting the value of a unique business with a strong reputation. While such terms might be unreasonable for an employee, they are often upheld for the seller of a business. (B) is a correct statement of the facts but doesn't address the legal standard of reasonableness. (C) and (D) raise valid points about reasonableness, but given the context of a sale of business goodwill, courts are much more likely to find these terms reasonable to protect the buyer's bargain. Therefore, (A) provides the best legal reasoning for why the covenant would likely be enforced.
- A U.S. company contracted with a foreign manufacturer for a shipment of electronic components. After the contract was signed, the U.S. government issued an executive order imposing a trade embargo on all goods from the manufacturer's country, making it illegal for the U.S. company to import the components. The U.S. company informed the manufacturer that it could not accept delivery or make payment. The manufacturer, which had already produced the custom components, sued the U.S. company for breach of contract in a U.S. court.
Answer: The company, because its performance was excused under the doctrine of supervening impracticability due to the government embargo.
The correct answer is C. When a government action makes a party's performance illegal after the contract is formed, that party's duty to perform is discharged under the doctrine of impossibility or, as modernly termed, impracticability. The U.S. company's performance (importing the goods and paying) became illegal due to the embargo, a supervening event not of its own making. This excuses the company's non-performance. (A) is incorrect because an embargo is precisely the kind of event that triggers the impracticability defense. (B) is incorrect because even if foreign law applied, a U.S. court will not compel a party to perform an act that is illegal under U.S. law. (D) is incorrect because the contract was valid when made; its performance was subsequently excused, it did not become void retroactively.
- Your client has sued for the unpaid rent. Which of the following is the tenant's strongest defense against the landlord's claim for rent? Select one.
Answer: The lease is void because the illegal purpose involves a crime of moral turpitude, making the landlord's mere knowledge sufficient to bar enforcement.
The correct answer is B. While mere knowledge of a party's illegal purpose is often insufficient to render a contract unenforceable, an exception exists if the illegal purpose involves grave moral turpitude. Trafficking in counterfeit goods is a serious crime that would likely be considered to involve moral turpitude. In such cases, a court may refuse to enforce the contract against the user even if the other party did not actively participate in the illegal scheme. (A) is a weaker argument because mere knowledge of a less serious illegal purpose (e.g., a poker game) might not be enough. (B) correctly identifies the critical element: the seriousness of the crime. (C) is incorrect; the Statute of Frauds relates to whether a contract needs to be in writing, not to the effect of an illegal purpose. (D) is incorrect because commercial impracticability applies to unforeseen events that make performance extremely difficult, not to the inherent risks of an illegal enterprise.
- An architect, licensed only in State A, entered into a written contract to design a commercial building located in State B for a developer. State B has a statute requiring all persons practicing architecture within the state to be licensed by the State B architectural board. The stated purpose of the statute is to protect the public from unsafe building designs. The architect completed the designs, which fully complied with State B's building code. The developer, having learned the architect was not licensed in State B, paid the first two installments but refused to make the final $50,000 payment.
Answer: No, because the contract is unenforceable by the architect as it violates the public policy underlying State B's licensing statute.
The correct answer is C. When a contract is made in violation of a licensing statute designed to protect the public, the contract is generally unenforceable by the unlicensed party. Here, the architectural licensing statute is explicitly for public protection. Therefore, the architect cannot enforce the contract to recover the unpaid fee. (A) is incorrect because unjust enrichment and quasi-contract theories are generally not available when a contract is unenforceable due to the violation of a public protection licensing statute, as this would undermine the statute's purpose. (B) is incorrect because a license in another state is irrelevant; the architect must be licensed in the jurisdiction where the services are performed. (D) is incorrect for the same reason as (A); courts typically do not permit recovery in quasi-contract in these situations because it would circumvent the public policy of the licensing requirement.
- A supplier sold a large quantity of fertilizer to a buyer. The fertilizer is a common agricultural product but is also a primary component in certain types of explosives. The buyer's stated purpose was agricultural, but the supplier was later served with a subpoena indicating the buyer was under investigation for domestic terrorism. Fearing liability, the supplier refused to make the final delivery under the contract. The buyer, who has not been charged with any crime, sued the supplier for breach of contract.
Answer: The supplier, because continuing performance after learning of the probable illegal purpose would be against public policy.
The correct answer is A. A party can be excused from performing a contract if they discover that the other party intends to use the subject matter of the contract for a seriously illegal purpose. While mere suspicion is not enough, a subpoena related to a terrorism investigation provides a strong, objective basis for the supplier to believe the fertilizer would be used for a purpose involving grave moral turpitude. Continuing to supply the product under these circumstances would violate public policy, giving the supplier a valid defense. (B) is less precise than (A); the core issue is public policy against facilitating crime, not just a breach of good faith. (C) is incorrect because a subpoena is more than 'mere suspicion.' (D) is incorrect because the public policy defense exists alongside the UCC's rules on performance.
