Law of Contract - Introduction (Part 3)

The objective approach

Throughout legal studies, it is often to see reference to the “objective” or the “subjective” approach. These terms are often confusing and can be rather misleading. Unfortunately their use is so widespread that every lawyer must be aware of them.

The general rule in the law of contract is that the courts will use the objective approach to decide whether a contract has been formed. The classic authority for this principle is the case of Smith v Hughes (1871) L.R. 6 QB):

“If, whatever a man’s real intention may be, he so conducts himself that a reasonable man would believe that he was assenting to the terms proposed by the other party, and that other party upon that belief enters into a contract with him, the man thus conducting himself would be equally bound as if he had intended to agree to the other party’s terms.”

In essence the objective approach means that the courts will base their decision on how the words and conduct of the contracting parties would appear to a reasonable man. The courts will not be basing their judgment on what the contracting parties claim was in their minds at the time.

This approach is rationalised by Treitel as follows:

“This objective principle is based on the needs of commercial convenience. Considerable uncertainty would result if A, after inducing B reasonably to believe that he (A), had agreed to certain terms, could then escape liability merely by showing that he had no “real intention” to enter into that agreement.”

From which perspective is the objectivity assessed?

Professor Howarth, in a well-known article (The Meaning of Objectivity in Contract (1984) 100 LQR 265) explored the objective approach. In particular he questioned from which perspective the intention of the parties was assessed.

He considered that there were 3 options:

1. Promissor objectivity

This means that the promise (which could be the offer or the acceptance) is understood from the point of view of a reasonable person standing in the position of the promisee. (The party making the promise.)

2. Promisee objectivity

This is from the point of view of a reasonable person in the position of the promisee (the person to whom the promise is made).

3. Detached objectivity

Here the reasonable person is in the position of a third party, independent to the promisor and promisee.

Please not that there are academics that have disagreed with Professor Howarth’s classification (Vorster J. “A comment on the meaning of objectivity in contract” (1987) 103 LQR 274). The important point to note however is that there is clearly more than one way of looking “objectively” at a contract law situation (McKendrick).

Requirements for a valid contract in English law

Under English law, there are three principal requirements for a valid contract.

1. Agreement

2. Consideration

3. The Intention to Create Legal Relations.

Finding agreement - The doctrine of offer and acceptance

The normal test for ascertaining agreement is to apply the doctrine of offer and acceptance.

The doctrine of offer and acceptance has been criticised by some commentators as rigid and excessively formalistic.

The rationale for the use of this doctrine is the desire of the courts for commercial certainty.

Please note that there are cases in which the courts have simply not applied the doctrine (Percy Trentham v Archital Luxfer [1993] 1 Lloyd’s Rep25). In other instances the application of the doctrine appears to be highly artificial (Clarke v Earl of Dunraven (The Satanita) [1897] AC 59 HL). 

See further, textbooks:
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