The Objective Test

The Objective Test

The definitions of promise and agreement in the last section share a feature: each rests on a manifestation, meaning words or conduct that another person can perceive. That feature raises a practical question. Suppose a seller signs a writing to sell a farm and later says he was only joking, or that he never really meant to be bound. Does the contract exist because of what he showed, or does it fail because of what he privately thought? The law's answer is the objective test of assent, and this section teaches how it works and where it gives way.

The Rule and Its Reason

Contract law judges assent by outward expression, not by undisclosed state of mind. A party's words and acts are interpreted by what a reasonable person would take them to mean in the whole context of the transaction, and not by what the speaker actually meant or what the listener actually understood.¹ The reasonable person here is a construct, a community standard applied by the trier of fact, which is often a jury. Courts sometimes still say that a contract requires a "meeting of the minds," but that phrase is figurative. The parties' minds are deemed to have met if their objective manifestations lead to that conclusion.² Judge Learned Hand stated the idea vividly in Hotchkiss v. National City Bank: even proof from twenty bishops that a party intended something other than the usual meaning of his words would not save him, absent a mutual mistake or something like it.³

The rule has two practical reasons behind it. The first is proof. A court deciding a dispute years later cannot inspect what either party silently intended, but it can hear evidence of what was said, signed, and done. The second is incentive. A party whose deal has turned sour has every reason to testify that he privately meant something different, and if that testimony could undo a contract, every assurance would be unreliable to the person who relied on it. The rule also carries a measure of fairness, because the speaker controls his own words and conduct and knows others will read them in their ordinary meaning. History points the same way. When the rules of evidence changed in the nineteenth century to let parties testify on their own behalf, courts retreated quickly to an objective approach, in part because self-serving accounts of private intent were so easy to offer.⁴

Lucy v. Zehmer

The leading illustration is Lucy v. Zehmer, a Virginia decision in which a farm owner claimed that his signed agreement to sell his land had been a joke.⁵ Lucy and Zehmer had argued and discussed the terms for a long time, and a written contract for the Ferguson farm at $50,000 was signed by Zehmer and, after he asked her to, by his wife. The court found that nothing said or done before the signing indicated that Zehmer was not in earnest. Lucy then offered Zehmer $5 to seal the bargain, and only after that, even on the Zehmers' own account, did anything suggest a joke. The Zehmers testified that Mr. Zehmer had whispered to his wife that it was a joke, so that Lucy would not hear.⁶

The court reasoned that the law imputes to a person an intention corresponding to the reasonable meaning of his words and acts, and that a person judged by that standard to have manifested an intention to agree cannot rely on his real but unexpressed state of mind.⁷ Lucy, for his part, had treated the writing as a serious commitment. The next day he arranged with his brother to put up half the price, engaged a lawyer to examine title, and told Zehmer in writing that he was ready to close.⁸ The result was the same whether the Zehmers' acceptance was serious or was made in secret jest: either way there was a binding contract.⁹ The opinion also took up equity's discretion over specific performance, and it found no fraud, no sharp practice, and a price Zehmer himself admitted was good, so nothing there changed the outcome.¹⁰

The facts that carried the case are worth separating from the ones that did not. What mattered was that the signals pointed one way: a long negotiation, a signed writing, a request for a second signature, and no hint of a joke that Lucy could perceive. Compare a variation. Suppose Zehmer had winked at Lucy and said "we both know this is nonsense" as he signed. The words on the paper would be the same, but a reasonable person in Lucy's position would no longer read them as a commitment, and the result would change.

Where the Test Yields

The label "objective" can be overstated. It does not mean that subjective intent is irrelevant in every case, and the limits are where exam questions are written. The first limit is built into the standard itself. Manifestations are viewed from the standpoint of a reasonable person in the position of the other party, and that person is charged with what he actually knows or should know, including special knowledge about the speaker or the circumstances.¹¹ A buyer who actually knows the seller is jesting cannot claim a reasonable person would have been fooled. The acts that manifest assent must also be done intentionally or negligently, so conduct that is not a voluntary act of the party does not count against him.¹²

The second limit concerns a shared understanding. If both parties were jesting or otherwise did not mean their words to have legal effect, no contract results, even if a third-party observer would have thought them serious. The same is true if the person receiving the proposal knows or should know it is not meant to be legally enforceable.¹³ The reason is that contract law protects reasonable expectations, and when neither side actually expected a bargain there is nothing to protect. A shared meaning works the same way for terms: if both parties attach the same unusual meaning to a word, that meaning governs, even though a reasonable outsider would read the word differently.¹⁴

The third limit arises when the parties attach different meanings and neither knows of the other's. Under the interpretation rules of the Restatement (Second) of Contracts, one party's meaning prevails only if the other knew, or had reason to know, what the first meant while the first had no knowledge or reason to know of a different meaning. Otherwise neither party is bound by the other's meaning, even though the result may be a failure of mutual assent.¹⁵ The classic example is Raffles v. Wichelhaus. A buyer and a seller agreed on 125 bales of cotton to arrive on the ship Peerless from Bombay. Two ships bore that name, one sailing in October and one in December, and each party meant a different one. Neither had reason to know of the other's meaning, and the court found no contract.¹⁶ Lucy and Raffles differ in a single fact. Zehmer's private reservation was hidden and unreasonable to attribute to him, so the reasonable reading governed. In Raffles each side's meaning was reasonable and the words fit both, so no reasonable reading could choose between them.

Step 2 does most of the work in ordinary disputes, which is why a party's later protest that he never really meant it rarely succeeds. Steps 3 through 5 are narrow, and each depends on what the other side knew or shared, not merely on what the speaker privately felt.