A. Mutual assent: For a contract to be formed, the parties must reach an agreement to which they “mutually assent.” This mutual assent is almost invariably reached through what are called “the offer” and “the acceptance” (see infra, p. 9).
1. Not subjective agreement: However, this requirement of “mutual assent” does not mean that the parties must have subjectively (i.e., in their minds) been in agreement. Rather, it means that each party must act in such a way as to lead the other to reasonably believe that an agreement has been reached. The doctrine that only the parties’ acts, and not their subjective thoughts, are relevant in determining whether there has been mutual assent, stems from the objective theory of contracts, discussed below.
2. Agreement required only as to major terms: The requirement of mutual assent does not mean that the parties must agree (even by the objective standard) on all the terms of the contract. Instead, they must agree on the “major” or “essential” terms. If they disagree on minor terms, or if they have simply not provided for such minor terms, the court may conclude that one party’s understanding controls, or may supply the missing terms. But the parties must, despite the minor gaps or minor disagreements, intend to have a contract. For a more full discussion of missing or misunderstood terms, see infra, p. 66 and p. 153.
B. Objective theory of contracts: Because neither contracting parties nor courts are mind-readers, it is important that the existence and terms of contracts be determined from the manifestations made by each of the parties, rather than by each party’s subjective intention. Thus a party’s intentions are to be gauged objectively, rather than subjectively.
1. Test for intent: The objective measure of a party’s intention is, in most circumstances, what a reasonable person in the position of the other party would conclude that his objective manifestations of intent meant. C&P, p. 26.
Example: A says to B, “I’ll sell you my house for $1,000.” B says, “OK, you’ve got a deal.” A’s house is in fact worth considerably more than $1,000, and A refuses to consummate the deal. B sues. If B can demonstrate that A‘s tone of voice or A‘s known lack of business acumen led B to the reasonable conclusion that A‘s offer was serious, the court will treat A as having intendeed to contract. This will be so even though A proves definitively that he intended a joke (e.g., by producing X to testify that A told X right after the offer that he intended a joke).
If, on the other hand, a person in B‘s position would reasonably have understood that A was joking (e.g., if B should have recognized the bantering tone in A‘s voice, or should have known that A‘s house was worth so much more than $1,000 that the offer could only have been made in jest), the court will treat A as not having intended to contract, and no contract will be found to have been formed.
Similarly, if A can prove that B knew A was joking (e.g., A produces a witness who says that B told him, “I knew A was joking, but I’m going to try to force the sale anyway”), there is no mutual assent, even though it would not have been unreasonable for B to think A was serious. This is because B is charged with both knowledge that he actually had about A‘s intent, and the knowledge that he should reasonably have had. If B either knew, or should have known, that A was joking, there is no mutual assent and no contract. C&P, p. 27.