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a. Secret intent: A corollary of the objective theory of contracts is that a party’s secret intentions (that is, secret from the other party) are irrelevant in determining whether a contract exists, and what its terms are.

2. Other uses for objective theory: The objective theory of contracts will be used not only to determine whether the mutual assent necessary to form a contract has occurred, but also to determine the meaning of particular terms of the contract.

Example: A and B sign a complex agreement for a sale of goods by B to A. The contract makes no mention of whether B is to insure the shipment. B has always done so in past deals with A, but this time he subjectively intends not to insure the goods, because insurance prices have gone up. He says to A, however, “This deal’s just like the ones we’ve done before.” A court would probably hold that A reasonably expected B to insure the shipment as he had always done, and B will be placed under a contractual obligation to do so, despite his subjective intent to the contrary.

C. Intent to create legal relations: What happens if the parties go through all of the motions of giving mutual assent to what appears to be a contractual agreement, but subjectively neither party expects the “contract” to be enforceable in court?

1. Modern view: Under modern case law, the importance of the parties’ intention, or lack of intention, that the contract be legally enforceable, depends largely upon the context of the agreement.

2. Business agreements: Where the transaction is one which would normally be considered a “business” transaction, it will be presumed that the parties intended that the agreement be legally enforceable. Rest. 2d, § 21.

a. Contract made in jest: Thus in a business context, even if one party makes an offer in jest, and the other party reasonably believes that she is serious, and seriously accepts the offer, the contract will be binding.

Example: P offers the Ds (husband and wife) $50,000 for their farm. The Ds write out a one-line statement—“We hereby agree to sell to [P] the Ferguson Farm complete for $50,000, title satisfactory to buyer”—and they sign it. When the Ds fail to go through with the sale, P sues. The Ds defend on the ground that they were drunk when they signed the document, and were only joking, and that they thought that P was also only joking. Also, they claim that they told P, even before he left the premises, that they didn’t really intend to sell the farm.

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