Solan on Objectivity

The objective theory of contract has been dominant in legal thinking for the past century or so, despite the fact that there is always a good deal of subjectivity that sneaks into the cracks.  Back in 1913, Judge Billings Learned Hand gave the classic expression of the idea:

A contract has, strictly speaking, nothing to do with the personal, or individual, intent of the parties. A contract is an obligation attached by the mere force of law to certain acts of the parties, usually words, which ordinarily accompany and represent a known intent. If, however, it were proved by twenty bishops that either party when he used the words intended something else than the usual meaning which the law imposes on them, he would still be held, unless there were mutual mistake or something else of the sort.  [Hotchkiss v. National City Bank, 200 F. 287, 293 (S.D.N.Y. 1911), aff’d 201 F.2d 664 (2d Cir. 1912), aff’d 231 U.S. 50 (1913).]

Now Lawrence M. Solan (Brooklyn) takes up that argument head-on, in The Return of the Twenty Bishops: Toward a Subjective Theory of Contract Formation.  Solan doesn’t deny that objective manifestations are important, but argues that the law is best explained by focusing on the subjective intent of the parties.  Click on “continue reading” for the abstract.

[Frank Snyder]

ABSTRACT:

Broad theories of contract law, whether based upon the rights of the individual as an autonomous actor, the benefits to society of encouraging people to engage in bargained-for transactions, or the justice due those who have relied on the promises and representations of others, are intentional in nature. No one speaks, for example, of the freedom to be bound by something one didn’t intend. Bargains imply volition. Acts in reliance come only after an understanding that someone has made a commitment. However contract law is constructed, at the very least one would expect it to take as its point of departure the players’ actual psychological states underlying the various theories that motivate it.

Yet, for generations law students have been taught that the law governing the formation of contracts is by and large objective in nature, although it has some subjective elements. It is the appearance of intent that matters most. Many case books say so, as do texts and treatises. The Restatement incorporates a largely objective approach to contract formation as well, although its key provision dealing with the interpretation of contracts is both objective and subjective.

This article argues for an approach to contract law that is subjective in nature, although it privileges objective evidence of intent. The result of this shift in focus is much greater descriptive adequacy and greater coherence among contract doctrines. Most problematic for the objective account is that when both parties agree that a commitment has been made, the promisor is bound, and when neither believes that a promise has been made, the promisor is not bound. Objective considerations are irrelevant. By the same token, courts will enforce a promise to which both parties agreed, even if a reasonable person would not have understood it as a promise. When the additional scenarios generated by considering the promisee’s state of mind and additional situations in which it is not reasonable to infer a promise are added to the mix, the objective theory has little explanatory power as a theory. Rather, what has been considered an objective theory reflects a sensible evidentiary rule amidst a system organized around the parties’ actual intent.

The subjective account of contract formation brings the formation of contracts in harmony with the rules governing contract interpretation, consideration and gap filling. The result is a far more coherent account of contract law generally. For example, the Restatement’s most basic rule of contract interpretation states: Where the parties have attached the same meaning to a promise or agreement or a term thereof, it is interpreted in accordance with that meaning. Other rules, such as the parol evidence rule and the four corners rule, limit the inquiry, but recognize discovering the parties’ meaning as its goal. Since that meaning is measured as of the time of contract formation, it is very difficult to make sense of a system that insists that the parties’ meaning at that point in time is irrelevant to questions of formation, but the only real inquiry for questions of interpretation. It further makes more sense of the debate over form contracts and other doctrines of contract law.