Legal Environment Of Business: CONTRACT FORMATION

Agreement

The mutual manifestation of assent between parties, consisting of a valid offer and a valid acceptance, required to create a binding contract.

Offer

A definite proposal made by an offeror to an offeree indicating present intent to enter a contract and creating the power of acceptance.

Serious Objective Intention

Requirement that an offeror’s intent be judged by the reasonable person standard, not by hidden or subjective intent.

Definiteness of Terms

Requirement that essential terms of a contract—such as parties, subject matter, price, quantity—be reasonably certain.

Communication of Offer

Requirement that an offer must be actually communicated to the offeree to create the power of acceptance.

Termination of Offer

Ending of an offer by revocation, rejection, counteroffer, lapse of time, destruction of subject matter, death, or supervening illegality.

Revocation

Withdrawal of an offer by the offeror, effective when received by the offeree unless the offer is irrevocable.

Irrevocable Offer

An offer that cannot be revoked due to detrimental reliance, promissory estoppel, or formation of an option contract.

Rejection

Offeree’s refusal of an offer, effective when received by the offeror, terminating the power of acceptance.

Counteroffer

Offeree’s response containing material changes to the offer’s terms, constituting a rejection and a new offer.

Mirror Image Rule

Common law rule requiring acceptance to match the terms of the offer exactly, otherwise constituting a counteroffer.

Acceptance

Offeree’s unequivocal assent to the terms of an offer, communicated in an authorized manner.

Consideration

The bargained-for exchange consisting of legal value given in return for a promise or performance.

Legal Value

Benefit to the promisor or detriment to the promisee that satisfies the requirement of consideration.

Bargained-For Exchange

Mutual inducement where each party gives something of value to the other as part of the agreement.

Adequacy of Consideration

Principle that courts do not examine the relative value exchanged unless consideration is grossly inadequate, suggesting fraud or duress.

Promissory Estoppel

Equitable doctrine enforcing a promise without consideration when reliance is foreseeable, actual, and results in detriment.

Detrimental Reliance

Action taken by a promisee in reliance on a promise, creating grounds for promissory estoppel.

Contractual Capacity

Legal ability to enter into a contract, requiring that parties understand the nature and consequences of their actions.

Minor’s Capacity

Principle that contracts involving minors are generally voidable at the minor’s option, with certain exceptions.

Intoxication (Contract Capacity)

Impairment that may render a contract voidable if the party lacked understanding at the time of contracting.

Mental Incompetence

Condition that may render a contract void (adjudicated incompetent), voidable (no capacity), or valid (lucid interval).

Lucid Interval

Period during which a mentally impaired person regains capacity, making contracts valid.

Legality

Requirement that a contract must have a lawful purpose; agreements contrary to public policy or illegal are void.

Unconscionability

Contract or clause so grossly unfair or oppressive that it shocks the conscience, making it void against public policy.

Void Contract

Agreement with no legal effect due to illegality or incapacity.

Voidable Contract

Valid contract that may be legally avoided by one or both parties.

Unenforceable Contract

Valid contract rendered unenforceable due to a legal defense such as statute of frauds or statute of limitations.

Express Contract

Agreement whose terms are explicitly stated orally or in writing.

Implied Contract

Agreement created by conduct where circumstances show intent to contract without explicit terms.

Bilateral Contract

Promise exchanged for a promise, forming the contract at the moment of mutual assent.

Unilateral Contract

Promise exchanged for performance, forming the contract only when performance is completed.

Objective Theory of Contracts

Standard assessing contractual intent based on how a reasonable person would interpret words and conduct.

Lucy v. Zehmer

Landmark case affirming the objective theory of contracts, enforcing a contract despite claimed subjective intent to “joke.”