Business Law: Contracts Lecture and Exam Review

A comprehensive vocabulary review of core business law contract principles, including formation, capacity, legality, Statute of Frauds, third-party rights, breach, discharge, and remedies.

Void Contract

A contract that has no legal effect under the law, meaning neither party has an obligation to perform and neither party can enforce it.

Implied-in-Fact Contract

A contract formed by conduct consisting of four elements: (1) Party A furnishes goods or services to Party B; (2) Party A expected to be paid; (3) Party B knew or should have known payment was expected; and (4) Party B had an opportunity to reject the goods or services and did not.

Serious Objective Intent

The requirement that an offeror must genuinely intend to be bound; offers made in anger, jest (as a joke), or undue excitement do not qualify as valid offers.

Advertisement

A public announcement that is generally treated under contract law as an invitation to make an offer, rather than a binding offer itself.

Option Contract

A contract to keep an offer open for a specified period of time; it must be supported by separate consideration to be legally enforceable.

Termination by Operation of Law

The automatic termination of an offer or contract without action by the parties, including the destruction of the subject matter or supervening illegality.

Supervening Illegality

A method of contract termination where an agreement is legal when entered into, but a subsequent change in the law renders the subject matter or performance illegal, making the contract void.

Mirror Image Rule

The principle that an offeree's acceptance must match the offer exactly; any alteration or addition is treated as a rejection and a counteroffer.

Mailbox Rule

The legal principle providing that an acceptance is effective when sent (dispatched), whereas offers, revocations, and rejections are effective only when received.

Consideration

Something of legal value given in exchange for a promise, falling into four categories: tangible payment (money), a promise to perform, actual performance of an act, or forbearance.

Forbearance

A category of valid consideration defined as voluntarily refraining from doing something that a party has a legal right to do, such as agreeing not to file a lawsuit.

Bargained-for Exchange

The requirement that consideration must involve an exchange that is newly given up; past kindnesses or past performances cannot serve as valid consideration for a new promise.

Settlement Agreement

An accord to resolve an outstanding debt, which is legally enforceable only if the underlying debt is genuinely disputed.

Promissory Estoppel

An equitable doctrine used to enforce a promise lacking formal consideration when a party shows reasonable and substantial reliance on the promise to their detriment.

Disaffirmance

The legal power of a minor to cancel or void a contract at any time while still under the age of $18$, while the adult party remains legally bound.

Ratification

The act of approving and adopting a contract entered into as a minor, which can occur only after reaching age $18$, either expressly or impliedly.

Intoxication Defense

A defense rendering a contract voidable at the intoxicated party's discretion if they were so impaired that they did not understand the transaction; if they understood what they were doing, the contract is valid.

Regulatory Licensing Statute

A law enacted to protect the public by requiring specific qualifications or certifications (such as a medical license); contracts formed in violation of this statute are void.

Exculpatory Clause

A contract provision that relieves a party from liability for injuries; it is never valid for intentional, grossly negligent, or fraudulent behavior, but valid for ordinary negligence if the business is not essential to the public interest.

Unilateral Mistake

A mistake made by only one party regarding a material fact, which generally provides no relief from the contract unless it involves a clerical error that does not constitute gross negligence.

Mutual Mistake of Fact

A shared mistake by both contracting parties where there is no meeting of the minds regarding the subject matter, entitling the parties to relief from the contract.

Mutual Mistake of Value

A shared misconception by both parties regarding the market worth or value of the subject matter, which provides no legal relief from the contract.

Fraud in the Execution (Inception)

A form of fraud occurring when an individual is deceived into signing a document without knowing what they are signing, rendering the agreement invalid.

Duress

The wrongful coercion of a party into entering an agreement through the threat of a wrongful act, such as blackmail; financial pressure or high pricing alone does not qualify.

One-Year Rule

A Statute of Frauds provision requiring that if a contract cannot possibly be performed within $1$ year from the date of formation based on its express terms, it must be in writing to be enforceable.

Promise to Answer for the Debt of Another

A collateral promise to pay a third party's obligation, which must be in writing under the Statute of Frauds unless the main purpose of making the promise is to benefit the promisor.

Parol Evidence Rule

A rule prohibiting outside (extrinsic) evidence from adding to or altering a final, complete written contract, with exceptions for showing the contract is void or voidable, or for clarifying ambiguous terms.

Privity of Contract

The legal relationship between the direct parties who entered into a contract, which generally restricts enforcement rights to those signing parties.

Assignment

The transfer of contractual rights to a third party (assignee); the assignee must notify the obligor, and until notified, paying the original assignor carries no liability.

American (New York) Rule

A rule governing successive assignments stating that the first assignee in point of time holds the valid legal right to the assignment.

English Rule

A rule governing successive assignments stating that the first assignee to give notice to the obligor receives the legal right to enforce the assignment.

Delegation

The transfer of contractual duties or responsibilities to a third party; the original delegating party cannot avoid liability and remains liable if the delegatee fails to perform.

Intended Creditor Beneficiary

A designated third party intended to benefit from a contract in satisfaction of a debt, who possesses the legal right to sue either or both of the original contracting parties upon breach.

Covenant

An unconditional, absolute promise to perform a contractual obligation.

Condition Precedent

A contractual provision requiring a specific triggering event to occur before a party's duty to perform becomes active.

Condition Subsequent

A contractual provision where the occurrence of a specified triggering event terminates or excuses an existing duty to perform.

Substantial Performance

A minor breach where the core performance is rendered but slightly deviates from the contract, entitling the performer to payment minus the cost difference to correct the deviation.

Anticipatory Breach

A repudiation occurring before performance is officially due, wherein a party unequivocally announces they will not perform, allowing the non-breaching party to take immediate legal action.

Force Majeure Clause

A contractual provision that excuses or delays performance when specific, listed extraordinary events occur, such as severe weather, labor strikes, or the overthrow of a government.

Compensatory Damages

Monetary damages designed to compensate for the loss of the bargain and place the non-breaching party in the position they would have occupied had the contract been fully performed.

Consequential Damages

Foreseeable, special monetary damages arising from circumstances outside the contract that are necessary to make the non-breaching party whole.

Liquidated Damages

An agreed-upon monetary amount specified in advance in the contract, enforceable only if damages are speculative and the specified sum is reasonable rather than a penalty.

Nominal Damages

A minimal monetary award granted to establish legal liability when a wrong occurred but no substantial financial loss was suffered.

Rescission and Restitution

An equitable remedy in which the contract is undone (rescission) and both parties return the collateral, goods, or consideration previously received (restitution).

Specific Performance

An equitable remedy ordering a breaching party to complete their contractual duty, which is never available for personal service contracts.