MGMT 402 Exam II Review: Contract Law, Behavioral Ethics & Corporate Governance

Comprehensive vocabulary flashcards covering contract formation, defenses, consideration, Statute of Frauds, third-party rights, behavioral ethics concepts, and core corporate governance case studies.

Offer

A manifestation of willingness to enter into a bargain, made so as to justify another person in understanding that their assent to that bargain is invited and will conclude it.

Objective Intent Standard

The legal standard judging offers by how an objective, reasonable person would interpret the manifestation, rather than by subjective intent; excludes statements made in anger, jest, or undue excitement.

Advertisements (Contract Law)

Generally treated as invitations to negotiate rather than binding offers, unless they are highly specific, definitive, and leave nothing open to negotiation.

Auction With Reserve

The default auction format where the seller invites bids as offers and retains the legal right to withdraw the item at any time before the hammer falls.

Auction Without Reserve

An auction format where the seller explicitly offers the item for sale, cannot withdraw it once bidding commences, and is legally obligated to sell to the highest bidder.

Option Contract

An irrevocable offer created when an offeree gives paid consideration to the offeror to keep the offer open for a specified duration.

Rejection

An express or implied refusal of an offer by the offeree that becomes effective upon receipt and permanently terminates the offeree's power of acceptance.

Counteroffer

A rejection of the original offer coupled with a simultaneous new offer, which completely extinguishes the original offer.

Termination by Operation of Law (Offers)

The termination of an offer caused by the lapse of a specified or reasonable time, the death or incapacity of either party, the destruction of the specific subject matter, or subsequent illegality.

Mirror-Image Rule

A common law rule requiring an offeree's acceptance to match the exact terms of the offer without modification or addition; any variation operates as a counteroffer.

Mailbox Rule

A contract rule providing that acceptance is effective upon dispatch (when properly addressed and sent), whereas revocations, rejections, and counteroffers are effective only upon receipt.

Fraudulent Misrepresentation

A false statement of material fact made with scienter (intent to deceive) that induces justifiable reliance by an innocent party, resulting in injury or damages.

Duress

Unlawful force, physical threats, or wrongful economic coercion that deprives a party of their free will and forces them to enter into a contract.

Undue Influence

The unfair taking of advantage by one party in a position of trust, dominance, or confidential relationship to overpower another party's free choices.

Unconscionability

A defense against the enforcement of a contract that is so grossly one-sided and unfair that it shocks the conscience; includes procedural (bargaining power disparities) and substantive (oppressive terms) aspects.

Consideration

Something of legally sufficient value given in exchange for a promise, established through a bargained-for exchange to differentiate contracts from gratuitous promises or gifts.

Preexisting Duty Rule

A principle stating that a promise to perform an act one is already legally or contractually obligated to perform does not constitute valid consideration.

Illusory Promise

A statement where the promisor retains total freedom to perform or refrain from performing without actual legal obligation, rendering it unenforceable for lack of consideration.

Promissory Estoppel (Detrimental Reliance)

An equitable exception to the consideration requirement where a clear promise is reasonably relied upon by the promisee to their substantial detriment, making enforcement necessary to avoid injustice.

Statute of Frauds (MYLEGS)

Statutory rules requiring signed writings for contracts involving Marriage, agreements not performable within one Year, Land interests, Executor debts, sale of Goods priced at $\$500$ or more, and Suretyship.

Parol Evidence Rule

A legal rule preventing courts from admitting prior or contemporaneous oral or written statements that contradict, alter, or add to the terms of a fully integrated written agreement.

Disaffirmance

The legal power of a minor to void and cancel an entered contract anytime during minority or within a reasonable time after reaching age $18$, requiring the return of remaining property in exchange for a full refund.

Intended Beneficiary

A third party for whose direct benefit a contract was created (such as a creditor or donee beneficiary) who acquires legal rights to sue on the agreement once rights have vested.

Incidental Beneficiary

A third party who benefits indirectly from the performance of a contract without being the intended recipient, possessing no legal standing to sue or enforce the agreement.

American Rule (Successive Assignments)

The majority rule for successive assignments of the same contractual rights, establishing that the first assignee in time wins.

English Rule (Successive Assignments)

The minority rule for successive assignments of the same contractual rights, establishing that the first assignee to provide written notice to the obligor wins.

Novation

A three-party agreement that completely extinguishes the original contractual obligation by substituting a new party for an original party and releasing that original party with mutual consent.

Fundamental Attribution Error

The human tendency to attribute other people's unethical actions or mistakes to their internal character flaws while attributing one's own unethical choices or errors to external situational pressures.

Cognitive Dissonance

The psychological discomfort felt when holding conflicting beliefs or when behavior contradicts personal moral values, commonly resolved by rationalizing the unethical behavior rather than changing it.

Conflicts of Interest

Circumstances where personal interests, potential financial gain, or competing loyalties conflict with professional duties, undermining objective judgment and incentivizing corruption.

Coggins v. New England Patriots Football Club, Inc.

A legal dispute where controlling shareholder Billy Sullivan executed a freeze-out merger to eliminate minority owners solely to pay off $\$5.3\text{M}$ in personal debts, breaching fiduciary duty without a legitimate corporate purpose.

Wells Fargo Sales Culture Scandal

A corporate ethics scandal where employees created over $3.5\text{ million}$ fraudulent accounts between $2002$ and $2016$ due to perverse performance quotas ('Eight is Great') and pervasive fear of termination.

Tylenol Cyanide Crisis (1982)

A corporate ethics benchmark where Johnson & Johnson responded to $7$ Chicago deaths by pulling $31\text{ million}$ bottles ($\$100\text{M}+$ value), issuing public warnings, and introducing tamper-evident packaging.

Texas Two-Step Bankruptcy Strategy

A legal and corporate maneuvering tactic utilized by Johnson & Johnson to shift talc-related asbestos liabilities into a spinoff entity to file for bankruptcy and evade tort litigation.

Volkswagen (VW) Clean Diesel Scandal (2015)

An institutional fraud case where VW installed secret defeat devices in $11\text{M}$ diesel vehicles to fool EPA tests while emitting pollutants up to $40\text{ times}$ legal limits, resulting in over $\$30\text{B}+$ in penalties.

Theranos Blood-Testing Fraud

A criminal fraud case in which CEO Elizabeth Holmes falsely claimed the proprietary Edison machine could perform hundreds of tests on a drop of blood, while secretly utilizing third-party commercial equipment.