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Chapter 12
LEGALITY
Practice Test
1. At a fraternity party, George mentions that he is going to learn to hang glide during spring break.
Vicki, a casual friend, overhears him, and the next day she purchases a $100,000 life insurance
policy on George’s life. George has a happy week of hang gliding, but on the way home he is bitten
by a parrot and dies of a rare tropical illness. Vicki files a claim for $100,000, but the insurance
company refuses to pay.
(a) Vicki will win $100,000 but only if she mentioned animal bites to the insurance agent.
(b) Vicki will win $100,000 regardless of whether she mentioned animal bites to the insurance agent.
(c) Vicki will win $50,000.
(d) Vicki will win nothing.
(d). Vicki will win nothing. She has no insurable interest in George's life, and her policy is an
unenforceable wagering contract.
3. James Wagner agreed to build a house for Nancy Graham. Wagner was not licensed as a contractor
and Graham knew it. When the house was finished, Graham refused to pay the final $23,000, and
Wagner sued. Who will prevail?
Graham wins. Statutes that require contractors to be licensed are designed to protect the public. As a
result they are strictly enforced. Regardless of what Graham knew, Wagner cannot collect on this
illegally earned debt. Wagner v. Graham, 296 S.C.1, 370 S.E.2d 95, 1988 S.C. LEXIS 94 (S.C. Ct.
App. 1988).
5. McElroy owned 104 acres worth about $230,000. He got into financial difficulties and approached
Grisham, asking to borrow $100,000. Grisham refused, but ultimately the two reached this
agreement: McElroy would sell Grisham his property for $80,000, and the contract would include a
clause allowing McElroy to repurchase the land within two years for $120,000. McElroy later
claimed the contract was void. Is he right?
McElroy is right. The contract is usurious. By purchasing the property for only $80,000, but
guaranteeing McElroy the right to repurchase quickly for $120,000, Grisham is charging $40,000
interest on an $80,000 loan. He would have been better to stay within the bounds of the usury laws:
the court ruled that McElroy was entitled to receive double the interest he paid. McElroy v. Grisham,
306 Ark. 4, 810 S.W.2d 933, 1991 Ark. LEXIS 324 (1991).
7. Guyan Machinery, a West Virginia manufacturing corporation, hired Albert Voorhees as a salesman
and required him to sign a contract stating that if he left Guyan he would not work for a competing
corporation anywhere within 250 miles of West Virginia for a two-year period. Later, Voorhees left
Guyan and began working at Polydeck Corp., another West Virginia manufacturer. The only product
Polydeck made was urethane screens, which comprised half of 1 percent of Guyan’s business. Is
Guyan entitled to enforce its noncompete clause?
No. The noncompete clause is unenforceable here because the two companies are not really in
competition and Guyan therefore has no confidential information or customer lists to protect.
Voorhees v. Guyan Machinery Co., 191 W. Va. 450, 446 S.E.2d 672, 1994 W.Va. LEXIS 27 (1994).
9. 810 Associates owned a 42-story skyscraper in midtown Manhattan. The building had a central
station fire alarm system, which was monitored by Holmes Protection. A fire broke out and Holmes
received the signal. But Holmes’s inexperienced dispatcher misunderstood the signal and failed to
summon the fire department for about nine minutes, permitting tremendous damage. 810 sued
Holmes, which defended based on an exculpatory clause that relieved Holmes of any liability caused
in any way. Holmes’s dispatcher was negligent. Does it matter how negligent he was?
Yes, it matters. Because the exculpatory clause was negotiated and was reasonable, the New York
Court of Appeals held that it was valid as to ordinary negligence. However, the clause was held
invalid as to gross negligence. The court remanded the case to determine whether the dispatcher was
grossly negligent. Sommuer v. Federal Signal Corp. 79 N.Y.2d 540, 593 N.E.2d 1365, 1992 N.Y.
LEXIS 1305 (1992).
11. The purchaser of a business insisted on putting this clause in the sales contract: The seller would not
compete, for five years, “anywhere in the United States, the continent of North America, or anywhere
else on earth.” What danger does that contract represent to the purchaser?
The danger is that because the noncompete clause is overly broad, a court will not enforce it. In the
majority of states a court will modify the agreement so that it is more reasonable. In a minority of
states, the court will strike the noncompete altogether, leaving the seller free to compete directly with
the buyer. That is precisely what happened in CAE Vanguard, Inc. v. Neuman, 246 Neb. 334, 518
N.W.2d 652, 1994 Neb. LEXIS 156 (1994).