objective theory of contracts

The objective theory of contracts holds that a contract is formed based on the outward actions and expressions of the parties, rather than their internal, subjective intentions. A court will determine if a contract exists by asking what a "reasonable person" would understand from the parties' words and conduct. This approach promotes fairness and predictability by focusing on observable behavior to interpret an agreement. 

Key principles

• Focus on observable conduct:

  The theory judges the intent of the parties based on what they said and did, not their secret thoughts or beliefs. 

• Reasonable person standard:

  The interpretation of the contract hinges on how a reasonable person in the other party's position would have understood the words and actions. 

• Formation requirements:

  Courts look for objective evidence of an offer, acceptance, and consideration to determine if a contract was formed. 

• Prioritizes objective meaning:

  If there's a disagreement over subjective intent, the party whose understanding aligns with the objective meaning of the words and actions is considered the winner. 

Example

• If someone signs a contract believing it to be something else, but their actions and words would lead a reasonable person to believe they agreed to the contract, a court would likely enforce the contract based on the objective theory. 

What the theory replaces

• The objective theory replaced the older "subjective theory," which focused on the "meeting of the minds" of the parties. Under the subjective theory, a contract was not valid unless both parties had the exact same subjective intent.