Bargains

This class opens Module II by putting the central question of contract formation on the page: how does the law know when two people have agreed? The answer is the objective theory of contracts, and it governs the rest of the year. We work the rule through two cases that mark its boundaries, one where outward conduct binds a reluctant party and one where matching words still fail to form a contract.

Mutual assent and the objective theory

R2d § 17. A contract requires a bargain in which there is a manifestation of mutual assent and a consideration. We focus this class on the first half: the manifestation of mutual assent.

R2d § 18. Mutual assent requires that each party either make a promise or begin or render a performance. R2d § 19 adds that assent may be manifested by written or spoken words or by other conduct, and that conduct counts as a manifestation only where the party intends it or has reason to know the other party may infer assent from it.

The throughline is objective, not subjective. Courts look to outward expressions, not private thoughts. The law imputes to a person an intention corresponding to the reasonable meaning of the person’s words and acts. Historically courts spoke of a subjective “meeting of the minds,” but contract law shifted to an objective standard for clarity and predictability: parties can rely on what is said and done, not on what was secretly meant.

When matching words still fail: misunderstanding

R2d § 20. The objective theory has a limit. Where the parties attach materially different meanings to a term, and neither knows or has reason to know of the other’s meaning, there is no manifestation of mutual assent and no contract. If one party knows or has reason to know of the other’s meaning, that party is held to the other’s understanding. Misunderstanding is not the same as ambiguity; the question is whether the objective manifestations themselves diverge with no basis for choosing between them.

Cases

Lucy v. Zehmer enforces a signed memorandum to sell the Ferguson Farm for $50,000 even though Zehmer claimed he was only joking. Because Zehmer’s words and conduct would warrant a reasonable person in believing he intended a real sale, his secret jesting intent is immaterial. A party cannot escape a bargain by claiming a private joke the other side had no reason to detect.

Raffles v. Wichelhaus, the two-ships-Peerless case, sits on the other side of the line. Buyer and seller both said “ex Peerless,” but each meant a different ship sailing from Bombay. The parties said the same words yet manifested different intentions, and the court had no principled basis to prefer one ship over the other. With no common position to enforce, no contract formed. Read together, the cases define the objective theory’s reach: Lucy shows that subjective intent does not defeat an objective manifestation; Raffles shows that when the objective manifestations themselves split, there is nothing to enforce.

What you should be able to do

State and apply the objective theory under R2d §§ 17-19. Explain why a secret reservation does not defeat a manifested bargain. Apply R2d § 20 to decide whether a genuine misunderstanding leaves the parties with no contract. Next class scales this same test up from face-to-face dealing to advertising, where the audience is the public rather than a single counterparty.