Legal Definitions - objective theory of contract

The objective theory of contract is a foundational principle in contract law that dictates how courts determine whether a contract has been formed and what its terms are. This theory states that the existence and meaning of a contract are judged not by the secret, subjective intentions or thoughts of the parties involved, but by their outward actions, words, and conduct. In simpler terms, what matters is how a reasonable person would interpret the parties' communications and behavior, rather than what they might have privately intended or believed.

This approach prioritizes observable evidence of agreement, such as spoken words, written documents, or actions, over unexpressed mental states. It ensures predictability and fairness in commercial dealings by preventing parties from later claiming they didn't "really" intend to agree, despite their outward manifestations.

Here are some examples illustrating the objective theory of contract:

• Example 1: Verbal Agreement with Hidden Reservations

  Imagine a scenario where Alex offers to sell his antique watch to Ben for $500. Ben replies, "That's a deal! I'll pick it up tomorrow," and they shake hands. Secretly, Ben was hoping to negotiate the price down to $400 but felt pressured and decided to accept the offer as stated. Under the objective theory of contract, a binding contract exists for $500. Ben's outward statement ("That's a deal!") and handshake objectively signal acceptance of Alex's offer. His unexpressed private thought about wanting a lower price is irrelevant because it was not communicated and did not affect his observable conduct. A reasonable person observing this interaction would conclude that an agreement was reached at the stated price.

• Example 2: Actions Indicating Acceptance

  Consider a landscaping company that sends a detailed proposal to a homeowner for a garden renovation, including specific designs, materials, and costs. The homeowner never explicitly signs the proposal but allows the landscaping company to begin work on their property, provides access to the garden, and makes an initial payment as outlined in the proposal. Secretly, the homeowner believed they were still "just exploring options" and hadn't fully committed to the entire project. Despite the homeowner's private belief, their actions—allowing work to commence, providing access, and making a payment—objectively demonstrate acceptance of the proposal's terms. A reasonable observer would conclude that the homeowner agreed to the contract by their conduct, regardless of their uncommunicated subjective intent.

• Example 3: Standard Commercial Practices

  A software development firm sends an email to a freelance coder, stating, "We need you to develop Module B for Project X, per our standard consulting rates, to be completed by end of next month. Please confirm." The coder replies, "Confirmed." Later, the coder claims they didn't "really" intend to commit to the deadline because they had other projects, but they just sent a quick "Confirmed" without thinking. Under the objective theory of contract, a binding contract exists. The firm's email constituted a clear offer with specific terms (Module B, Project X, standard rates, deadline), and the coder's "Confirmed" was an objective acceptance. The coder's private, unexpressed reservations about the deadline are not considered because their outward communication objectively indicated agreement to the terms presented. A reasonable person would interpret "Confirmed" as an acceptance of the entire offer.