Chapter 2 Creating Contractual Obligations

Section 1. The Nature of Assent (Contract Theory)

Two contrasting theories of contract: Objective and Subjective

A contract is an obligation attached by the mere force of law to certain acts of the parties, usually words, which ordinarily accompany and represent a known intent.

The actual intent theory

Said that objectivists would destroy that legal certainty and stability on which todays society demands

They depicted the 'objective' standard as a necessary adjunct of a 'free enterprise' economic system

'meeting of the minds' or 'will' theory

Once a contract has been validly made, the courts attach legal consequences of which the party usually never dreamed

Induced fictional discourse which imputed to the parties intentions they plainly did not have

Objectivist theory

Tried (1) to treat virtually all the varieties of contractual arrangements in the same way and (2) as to all contracts in all their phases, to exclude, as legally irrelevant, consideration of the actual intention of the parties or either of them, as distinguished from the outward manifestation of that intention

The reasonable man

Mutual assent is ordinarily arrived at by an offer and acceptance. Under the objective theory, whether there is assent is determined by asking whether a reasonable person in the position of one party would believe that the words and conduct of the other party constituted assent. This is usually a question of fact for the trier of fact. However, if reasonable persons can reach only one reasonable conclusion, it is a question of law for the court.

Subjective intent

Brings the formation of contracts into harmony with the rules governing contract interpretation, consideration, and gap-filling

Lucy v. Zehmer

Contract formation

Mutual assent regarded but not mental assent – outward signs (reasonable meaning of words and acts), not state of mind matter

Notes

The US Court of Appeals for the 10th Circuit states "contracts are not formed by comparing mental states; they are formed by what the parties communicate."

Jesting and bluffing.

The Right Stuff.

Proving subjective intent.

If we can restrict ourselves to the 'externals' (what the party said or did) then the factual inquiry will be much simplified

Spect v. Netscape Communications Corp.

Contract formation in cyberspace

Knowing consent/assent; Duty to read exception: terms submerged

Assent and Express Limitations on the Intent to be Bound

Mutual assent

Sets the boundary between the precontractual and the contractual stages

While an agreement is still being negotiated, no liability arises between the parties

Assent is a necessary condition for contractual liability, but it is not sufficient

Courts have developed two widely accepted common law principles:

That absent an expressed intent that no contract shall exist, mutual assent between the parties, even though oral or informal, to exchange acts or promises is sufficient to create a binding contract;

That to avoid the obligation of a binding contract, at least one of the parties must express an intention not to be bound until a writing is executed

Factors to tell if a party has sufficiently expressed an intention not to be bound in the absence of a formal document:

Whether there has been an express reservation of the right not to be bound in the absence of a writing

Whether there has been partial performance of the contract

Whether all the terms of the alleged contract have been agreed upon

Whether the agreement at issue is the type of contract that is usually committed to writing.

Other forms of precontractual commitment include

Gentleman's agreement: an agreement which is not an agreement, made between two persons neither of whom is a gentleman, whereby each expects the other to be strictly bound without himself being bound at all

Letters of intent: agreements in principle; negotiating parties keep a record of, or memorialize, matters on which accord has been reached.

Typically include language that seeks to prevent the letter from signaling an intent to be bound

These documents are usually understood to be noncommittal statements preliminary to a contract.

Agreement to negotiate: parties exchange promises to conform to a specific course of conduct during negotiations, such as negotiating in good faith, exclusively with each other, or for a specific period of time

The parties do not intend to be bound if negotiations fail to reach ultimate agreement on the substantive deal

No breach occurs if the parties fail to reach agreement on the substantive deal

Only breached when one party fails to conform to the specific course of conduct agreed upon

Open term agreements

Two types:

A tribune type I contract

Created when the parties agree on all the points that require negotiation (including whether to be bound) but agree to memorialize their agreement in a more formal document

Fully binding

Preliminary in form only in the sense that the parties desire a more elaborate formalization of the agreement

Binds both sides to their ultimate contractual objective in recognition that 'despite the anticipation of further formalities' a contract has been reached

Tribune Type II contract

Binding preliminary commitment

Created when parties agree on certain major terms, but leave other terms open for further negotiation

Does not commit the parties to their ultimate contractual objective but rather to the obligation to negotiate the open issues in good faith toward a final contract

Intent in Context

Lucy v. Zehmer, above, suggests that a promisor may not be bound if the promise, whether from its content or from the circumstances of its making, is insufficiently sincere to indicate the promisor’s intent to be bound.

A good legal rule as to the enforceability of promises should make contracting available to non-lawyers who will take the pains to clarify their ideas as to what they want to contract about; yet it should not make contracting so easy that it hooks the unwary signer...

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