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Chapter 2



This chapter discusses the first major requirement for a valid contract: that the parties have reached “mutual assent” on the basic terms of the deal. Here are a few of the key principles covered in this chapter:

  • Mutual assent: For a contract to be formed, the parties must reach “mutual assent.” That is, they must both intend to contract, and they must agree on at least the main terms of their deal.
  • Objective theory of contracts: In determining whether the parties have reached mutual assent, what matters is not what each party subjectively intended. Instead, a party’s intentions are measured by what a reasonable person in the position of the other party would have thought the first party intended, based on the first party’s actions and statements. This principle is known as the “objective theory of contracts.”
  • Offer and acceptance: Normally, for a contract to come into existence, there must be an “offer” and an “acceptance.”
    • Offer: An “offer” is a statement or act that creates a “power of acceptance.” When a person makes an offer, she is indicating that she is willing to be immediately bound by the other person’s acceptance, without further negotiation.
    • Acceptance: An “acceptance” is a statement or act that indicates the offeree’s immediate intent to enter into the deal proposed by the offer. As long as the acceptance takes place while the offer is still outstanding, a contract is formed as soon as the acceptance occurs.
  • Duration of the power of acceptance: When you analyze facts to see whether a valid offer and acceptance occurred, one of your key jobs is to figure out whether the offer ended before the “acceptance” occurred (in which case there’s no contract). The main ways in which an offer can end are:
    • the offer is rejected by the offeree;
    • the offeree makes a counter-offer;
    • the offeror revokes the offer;
    • the offer lapses by passage of time;
    • either the offeror or the offeree dies or becomes incapacitated.

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