5.3 Objective Theory of Contracts

The objective theory of contracts is a fundamental principle in contract law that focuses on the objective intent of the parties involved in a contract rather than their subjective beliefs or intentions. Using the objective theory of contracts, a contract is formed based on the outward, objective manifestations of the parties’ intentions, as perceived by a reasonable person. In other words, it’s not necessary for the parties to share the same internal, subjective understanding of the contract terms; what matters is how their words and actions would be reasonably understood by an outside observer. This standard takes into account the parties’ communications, actions, and conduct leading up to and including the time of the contract’s formation. Courts will therefore look at the objective evidence of the parties’ intent, rather than their individual, subjective beliefs or unexpressed intentions. This means that even if one party secretly harbored a different intention, the contract is based on what they objectively conveyed to the other party. The objective theory of contracts promotes clarity and predictability in contract law and provides a foundation for enforcing agreements based on the parties’ objective expressions of intent.