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When Are Contracts Legally Binding? Promise Theory vs. Objective Theory of Contract

Professor Randy Barnett explains two of the main competing theories of contracts - contracts as promise and the objective theory of contracts. The promise theory posits that a contract is binding because the parties have agreed to be bound by it. But what if one party didn’t realize what they were promising or acted in bad faith - should they be released from the contract? The objective theory of contract says that in such a case the contract is binding anyway, and the contract should be enforceable according to a reasonable, ordinary understanding of the terms used rather than according to what someone thought they were promising. https://youtube.com/watch?v=vw57wLhOjW0

Transcript

So contract as promise built a theory of contract around one of the principles of contract, which is the will principle or the idea that parties should be held responsible because they have bound themselves. They have committed themselves to be bound in the form of having made a promise. Now, most of the time, what we say is consistent with how we really think. So there really is no conflict between a promise theory and the objective theory of contract. But what happens when there's a difference? What happens when we say one thing, but we really mean another, or we didn't really realize what we were talking about when we said those things, and what happens when that happens and you can prove it? Does that party get out of the contract because they didn't really mean it, that they may have seemed like they did, but they honestly didn't? On a purely promissory basis, they didn't really make the promise. It looked like they did, but they actually didn't. So if the morality of contract is based on the morality of keeping one's promise and they didn't really make a promise, they should get out. But contract law doesn't work that way, and it has really never worked that way. Instead, what contract law requires is an objective manifestation of assent. That's what contract law requires. Now, here's the trick. There actually is a subjective twist to modern contract law. And that is if both parties shared a subjective understanding of a particular word in the contract, let's say, that was not the reasonable meaning of the word. It was their own private meaning, but they both shared it. Then that subjective agreement would be the contract, not the objective meaning of the terms. But if they didn't both mean the same thing: one party had one subjective understanding and another party had another subjective understanding, the party whose subjective understanding corresponds to the reasonable meaning is the one that would win. And the party whose subjective understanding differed from the objective meaning would lose. So the objective meaning is going to take priority over subjective assent when the two parties disagree about subjective intent or subjective assent. The objective theory of contract holds that to find that there has been assent to a contract by a contracting party, you don't actually examine his subjective mental state or her subjective mental state to see if they really meant to do this. What you examine is their outward behavior. What did they express? What was the reasonable meaning of the words they used when they say "I consent" or "I promise". It doesn't matter whether they secretly did or did not. What matters is what they said and what a reasonable person would think they meant when they said that. That's the objective theory of contract.

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