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Corbin on Contracts

Copyright 2007, Matthew Bender & Company, Inc., a member of the LexisNexis Group.

PART I FORMATION OF CONTRACTS

TOPIC A OFFER AND ACCEPTANCE

CHAPTER 4 INDEFINITENESS AND MISTAKE IN EXPRESSION

1-4 Corbin on Contracts § 4.12

§ 4.12 Objective and Subjective Theories

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There has been a good deal of discussion with respect to two so-called theories of contract, known as the ''objective theory'' and the ''subjective theory.'' By the first, it is argued that a valid contract is created by agreement in expression, the subjective intention of the parties being immaterial. By the second, it is argued that a contract is not created unless there is agreement in intention, properly expressed. The law of contract cannot be explained by either of these theories.

As usually understood, the ''objective theory'' is based upon a great illusion-the illusion that words, either singly or in combination, have a ''meaning'' that is independent of the persons who use them. It is crudely supposed that words have a ''true'', or ''legal,'' meaning (described as ''objective''), one that all persons of whatever race, origin, or education are bound to know, and in accordance with which the law requires them to perform and to accept performance. Words, oral or written, are merely a medium by which one person attempts to convey thoughts to another person. They are merely audible sounds or visible sights.n1 It is individual humans who have ''meanings'' which they try to convey to others by the use of words, and it is individual humans who receive ''meanings'' by reason of words used by others. As a good dictionary shows, all words have been used to convey a variety of meanings, variable with time, place and circumstance. The cheaper and more incomplete the dictionary, and the more parochial and limited the linguistic education and experience of a person, the more firmly fixed is the illusion of ''an objective meaning'' and the more positive its assertion as the truth. This must be further developed in Chapters 24-29, on ''Interpretation'' and ''Mistake''.

The cases demonstrate plainly enough that a person's expressions as understood by the other party, may bind the person even though the person's own intention and meaning were different.n2 This has led courts and writers to adopt the so-called ''objective'' theory, and to say that parties are bound by what they say and not by what they think, or even to say that they are bound in accordance with the meaning that reasonable third parties would give to their expressionsn3 without regard to the meaning given by either of the parties themselves. The actual decisions do not justify this statement.n4 Other, perhaps more frequent, statements indicate the each party is bound by what reasonable persons similarly situated as were the parties to this transaction would understand. This has the merit of incorporating the knowledge and characteristics of the actual parties to the transaction. This is to the good. However, at times, the courts can and do get closer to the actual understandings of the parties. Particularly this is appropriate where the parties had a common understanding that may differ from the understanding of hypothetical third persons even if they be equipped with the knowledge and characteristics of the party whose reasonable understanding is in question. Also, we must not confine ourselves to the question of the understanding of the addressee of words. We must also blend into the inquiry the question of what the reasonable user and the actual user of the words might mean to convey.

It is certain that the purpose of the court is in all cases the ascertainment of the ''intention of the parties'' if they had one in common. The court may be convinced that they did so, in spite of their conflicting assertions in subsequent litigation. In cases in which the court is not so convinced, it must either hold that no contract was maden5 (and determine justice on some other basis), or that one of the parties is bound in accordance with the intention and understanding of the other party. The court adopts the latter alternative if (and only if) the one party knew or had reason to know the intention and understanding of the other and the latter had no reason to know that a difference existed.n6 In determining whether a party ''knew or had reason to know,'' the court must consider all of the relevant circumstances of the transaction. Among the most important of these are the linguistic usages of other people in similar cases, usages with which each party reasonably supposed the other to be familiar. This much is necessary in order that language may serve its purpose and that business transactions may proceed with confidence. This is the process that is described as ''objective interpretation''. It is not, however, the simple one of finding ''an objective meaning'' of the words of the contract, a meaning by which the parties are bound even though neither of them held it.

In earlier times a so-called ''will theory'' of contract was generally held. Contract is made by the voluntary agreement of individuals and not by the state: a person is not bound by a contractual duty unless the person willed it so. Out of some theory like this came such terms as ''meeting of the minds'', or the equivalent phrases in Latin ''aggregatio mentium'' and ''consensus ad idem.'' When these phrases, applied with logical severity, produce a result that does not square with business mores and the prevailing ideas of justice, they must be disregarded as inapplicable and untrue. Nevertheless, they are in very common use and they have not been entirely thrown aside. The modern preference is to speak of a mutual manifestation of assent rather than of a meeting of the minds.

In the process of making a contract, the actual and proved intent of either of the parties should not be disregarded, unless one party knowingly or negligently has misled another person. If no other person has been so misled, it should make no difference what expressions would have been chosen by other reasonable or intelligent users of language or what meaning the expressions actually used would have conveyed to such third persons. Of course, the actual intent of the one party and the actual understanding of the other are matters of factn7 that may be difficult of proof, and in the process of making this proof the expressions that would be used and the meanings that would be given by others may be decisive.n8 A more detailed consideration of this may be found in the chapter on Interpretation.

If one party has knowingly or negligently misled the other by the use of words, symbols, or non-verbal conduct, this party cannot escape responsibility by proving the meaning and intention actually intended.n9 Even in such a case, however, that meaning and intention are not wholly immaterial. They should be considered along with the other circumstances in determining the remedy that justice requires.n10 Many factors must be considered. These include the nature of the mistake, the promptness with which notice of the mistake is given, and the extent of change of position or injury. A discussion of these must in the main be left to the special chapter on the subject of Mistake.

This treatise adopts neither an objective nor subjective theory of contracts.n11 Rather it adopts the basic notion that the reasonable expectations of the parties are to be effectuated. Reasonable expectations involve a complex interplay of subjective and objective elements. To illustrate, in Cox Broadcasting Corp. v. National Collegiate Athletic Ass'n, n12 ABC and Cox intended when signing the contract for programming rights that the contract would preclude the NCAA from allowing WTBS (Turner Broadcasting's Superstation) to broadcast a ''supplemental series'' of NCAA games. Contrariwise, the NCAA intended to allow WTBS to broadcast this series. At the time the contract was signed both ABC and Cox on one side and the NCAA on the other knew the other's intention. Each side asserted that the document they were about to sign effectuated its intention. Each side vigorously resisted the other's attempt to clarify the writing. They agreed that the writing would ''speak for itself.'' Later, ABC and Cox sought to enjoin the NCAA from permitting broadcasts by WTBS of the supplemental series' games. The court used some 19th century language about ''meeting of the minds,'' but then qualified it by saying that ''courts apply an objective theory of intent whereby one party's intention is deemed to be that meaning a reasonable man in the position of the other contracting party would ascribe to the first party's manifestations of assent.''n13 With this as a premise, the court concludes that ABC and Cox had no contract right to enjoin the NCAA from dealing with WTBS because they were aware that the NCAA's interpretation of the writing differed from theirs on this point. This is an unsound approach. Here, as so often happens when negotiating parties are at loggerheads on a specific point, but want to proceed with the deal, they buried the issue. There was neither a subjective meeting of the minds nor an objective understanding that either of the two contentions was correct. There was, however, consent to the terms of a written contract. Each party had the reasonable expectation that the writing would be interpreted by an independent judicial mind. Their expectations were not met. Under the approach suggested here, the parties' subjective understandings are considered, at least to the extent that there is external evidence of it, and each of their objective understandings of the other party's position is also considered, all of which must be considered in the light of the understanding and professional background of the court, and, in a proper case, of the jurors.

Legal Topics:

For related research and practice materials, see the following legal topics:

Contracts LawContract InterpretationGeneral OverviewContracts LawFormationExecutionContracts LawContract InterpretationAmbiguities & Contra ProferentemGeneral OverviewContracts LawFormationDefinite TermsContracts LawFormationMeeting of Minds

FOOTNOTES:

(n1)Footnote 1. To the deaf-blind, like Helen Keller, they are ''touches'' instead, and they might even be ''tastes'' or ''smells.''

(n2)Footnote 2. Illustrative cases are:

U.S. - Gateway Co., Inc. v. Charlotte Theatres, Inc., 297 F.2d 483 (1st Cir.1961) , noted under § 3.21.

Cal. - Brant v. California Dairies, 4 Cal.2d 128, 48 P.2d 13 (1935) .

Ill. - Heritage Commons Partners v. Village of Summit, 935 F.2d 1489 (7th Cir.1991) .

Mass. - Mansfield v. Hodgdon, 147 Mass. 304, 17 N.E. 544 (1888) .

Mo. - Embry v. Hargadine, McKittrick Dry Goods Co., 127 Mo.App. 383, 105 S.W. 777 (1907) . A good short introduction to the conflict between objective and subjective theories in a historical context can be found in Newman v. Schiff, 778 F.2d 460, 464-465 (8th Cir.1985) .

In Computer Network, Ltd. v. Purcell Tire & Rubber Co., 747 S.W.2d 669 (Mo.App.1988) , defendant signed a letter agreement to purchase 21 computers. He was permitted to testify that he did not intend to buy that many. Nonetheless, the court held his unexpressed intent to be irrelevant.

Ohio - Akron Milk Producers, Inc. v. Isaly Dairy Co., 109 Ohio App. 155, 164 N.E.2d 579, 10 Ohio Op.2d 381 (1959) motion over, noted in § 3.21 above.

Pa. - Delaware, L. & W. R. Co. v. Monroe County Water Power & Supply Co., 227 Pa. 639, 76 A. 425 (1910) .

Vt. - Taplin & Rowell v. Clark, 89 Vt. 226, 95 A. 491 (1915) .

A good illustration is Church v. Bobbs-Merril Co., 170 F.Supp. 32 (S.D.Ind.1959) , aff'd, 272 F.2d 212 (7th Cir.) , noted herein under § 538. A letter written by the plaintiff was understood by defendant as an offer to rescind an existing contract. The defendant assented in a letter clearly stating its understanding. The plaintiff made no objection or correction.

This section is cited (also § 538) in St. Paul Fire & Marine Ins. Co. v. Indemnity Ins. Co., 32 N.J. 17, 158 A.2d 825 (1960) . After holding that the facts did not justify the creation of a quasi-contractual duty of contribution, the court held that the facts presented a question for the jury whether the defendant insurer had promised by implication to reimburse the plaintiff insurer a part of the cost of defending a suit against the insured who held policies in both companies. The court reviews evidence as to the correspondence of the parties and as to their conduct in previous cases, and says that ''if the conduct of defendant, objectively viewed, reveals a promise to pay, defendant must meet that obligation whatever may have been its unrevealed expectation.'' This is quite correct if we assume (as the facts certainly justified) that the plaintiff in fact understood the conduct of the defendant as expressing a promise to pay. If in fact the plaintiff did not so understand it, it would be wholly immaterial whether third parties, viewing the defendant's conduct (or words) ''objectively'', would have drawn the inference that the defendant made a promise to pay. See further on this point note under § 562.

A contract was made for the sale of ''the unsold lots in Fairmount Cemetery.'' The parties differed in the meanings given to this quoted phrase. It was held that the seller could not compel payment for lots not understood to be included by the buyer, the latter's understanding being the reasonable one. Miller v. Red Lion Cemetery Ass'n, 315 Pa. 421, 174 A. 105 (1934) . It seems probable that the buyer could enforce the agreement, as he understood it, against the seller.

In Woburn Nat. Bank v. Woods, 77 N.H. 172, 175, 89 A. 491, 492 (1914) , the court said: ''A contract involves what is called a meeting of the minds of the parties. But this does not mean that they must have arrived at a common mental state touching the matter in hand. The standard by which their conduct is judged and their rights are limited is not internal, but external. In the absence of fraud or incapacity, the question is: What did the party say and do?' The making of a contract does not depend upon the state of the parties' minds; it depends on their overt acts.' ''That this is not a complete and accurate exposition, see Chapters 24 and 25 on Interpretation and especially § 543B, Pkt.Supp.

The Woburn case was followed in A. Perley Fitch Co. v. Phoenix Ins. Co., 82 N.H. 318, 133 A. 340 (1926) .

(n3)Footnote 3. In Katz v. Abrams, 549 F.Supp. 668, 672 (E.D.Pa.1982) , the court goes so far as to state: ''The subjective impressions of third persons are immaterial,'' citing § 4.13 of this treatise. It is submitted that such a statement is erroneous. The understandings of third persons are not controlling, but they can be good circumstantial evidence of what the understandings of the parties might be or reasonably should be.

(n4)Footnote 4. See the discussion of ''The Expressed Intention of the Parties'', in Chapter 24 on Interpretation. Also, the discussion by Frank, J., in Ricketts v. Pennsylvania R. Co., 153 F.2d 757, 164 A.L.R. 387 (2d Cir.1946) .

With the author's theory here stated, Mr. Glanville L. Williams appears to agree. In his article on ''Mistake as to Party in the Law of Contract,'' 23 Can.Bar.Rev. 271, 380 (1945), he says at p. 387, speaking of the well-known case of Boulton v. Jones, 2 H. & N. 564 (1857): ''The law of contract has a 'subjective' as well as an 'objective' side, and although the 'objective' theory has now become fashionable, it is submitted that it is erroneous to regard it as a complete statement of the law.''

(n5)Footnote 5. In Fairway Center Corp. v. U.I.P. Corp., 502 F.2d 1135 (8th Cir.1974) , the board of one party approved a proposed agreement. The board of the second party made amendments. The amendments were signed on behalf of the second party accompanied by a letter explaining its lack of assent to a material term of the amendment. There was no contract. This could have been analyzed as the making of a series of counter-offers. The court reached its conclusion by a broader look at the lack of a mutual manifestation of intent to the same terms.

In Swanson v. Holmquist, 13 Wash.App. 939, 539 P.2d 104 (1975) , a written contract of sale of a house to be built was entered into. Each party thought the other would pay any excess of mortgage discount over two percent. After construction started the builder raised the price substantially. The court held the builder could do this because the parties had not reached agreement on the mortgage discount and therefore there was no contract.

(n6)Footnote 6. In Dorchester Exploration, Inc. v. Sunflower Elec. Coop., Inc., 504 F.Supp. 926 (D.Kan.1980) , the court believed that the parties had the same intention as to the meaning of a price escalation clause. Alternatively, it thought one party was aware of an ambiguity of the clause and the meaning attached to it by the other party during negotiations. Thus the other party's meaning prevailed.

Similarly, in the law of agency, ''secret limitations on authority generally have no effect on the rights of third persons dealing with the agent.'' DeBoer Constr., Inc. v. Reliance Ins. Co., 540 F.2d 486, 494 n. 5 (10th Cir.1976) , cert. denied, 429 U.S. 1041, 97 S.Ct. 741, 50 L.Ed.2d 753 (1977) .

(n7)Footnote 7. Frey v. Friendly Motors, Inc., 129 Ga.App. 636, 200 S.E.2d 467 (1973) , is one of many cases so holding. The parties vigorously disagreed as to what was said.

Many other cases are discussed in Chapter 24.

(n8)Footnote 8. In United States v. Delegal, 678 F.2d 47 (7th Cir.1982) , a plea bargain had been accepted by the district court and the case set for sentencing. Some correspondence between the United States attorney and the defendant's counsel indicated that there might be some question about whether the plea bargain dealt with the question of the coordination of the oncoming federal sentencing and a Florida state sentence. After a hearing, the district court vacated the guilty plea. After a trial before another judge, the defendant was convicted of one more count than that to which he had earlier pleaded guilty. Held, it was an abuse of discretion to vacate the guilty plea. The agreement should be treated as a contract and whether viewed objectively or by the actual understandings of the parties, there was an agreement as to the terms of the bargain.

(n9)Footnote 9.

U.S. - General Warehousemen & Employees Union v. J.C. Penney Co., 484 F.Supp. 130 (W.D.Pa.1980) . At the expiration of a collective bargaining agreement the parties agreed that ''the terms and conditions of employment'' would be continued during the hiatus between contracts. While the quoted phrase has a ''legal'' meaning that would include all the terms and conditions of a contract, including terms with respect to the arbitration of grievances, the court rightly wanted to know how the parties reasonably understood the agreement. Was it an extension of the entire contract? The court concluded that inasmuch as the union maintained that it had a right to strike, despite a no-strike clause in the expired contract, it did not regard the entire contract as extended. The court concludes that the arbitration clause was not one of the ''terms and conditions'' reasonably understood to be carried forward.

Colo. -This section is cited in Rasmussen v. Freehling, 159 Colo. 414, 412 P.2d 217 (1966) , holding that plaintiffs in a personal injury case were entitled to a trial of their claim that a release signed by them had been obtained by fraud. How imprudent and negligent were they in failing to read what they signed? This is a factual question.

Mich. - Banque de Depots v. Nat. Bank of Detroit, 491 F.2d 753 (6th Cir.1974) . Dunkel was trying to arrange a foreign loan, and as a customer of Detroit, asked it to serve as bailee to hold the shares of stock he was putting up as security, and to use its international telex facilities to help him set up the deal. Detroit then telexed Depots: ''We confirm we hold in our collateral file'' 267,000 shares, and that one James Dondich was authorized to pledge these shares for a loan. Depots replied questioning whether the shares were free of restrictions. Detroit said they were free. Depots asked for a ''key tested'' message to that effect (a message which in the banking world is treated as the equivalent of a signed writing). Detroit provided it. When Dunkel defaulted, Detroit refused to turn over the shares to Depots, claiming the 267,000 shares as collateral for its own loan to Dunkel. Depots sued, winning below. Held, affirmed. The court thought Detroit knew Depots was asking for certification that it had good collateral and quoted this section of Corbin to show that Detroit's own contrary intention was ineffective. Echols v. Nimmo, 586 F.Supp. 467 (W.D.Mich.1984) .

N.Y. - Grimpel v. Hochman, 74 Misc.2d 39, 343 N.Y.S.2d 507 (1972) . A contract for painting and paperhanging called for ''the best workmanship by union skilled craftsmen.'' The owner was a perfectionist and had in mind a subjective standard of personal satisfaction. The owner did not prevail.

Vt. - Bachli v. Holt, 124 Vt. 159, 200 A.2d 263 (1964) . At request, the plaintiff subcontractor submitted a bid to the defendant general contractor. Plaintiff commenced work and received progress payments from the defendant. Final payments were not made and the defendant told plaintiff to look to the owner for payment. The defendant had expressed to third parties that the subcontractor was working directly for the owner, but had never expressed this to the subcontractor. The defendant was liable despite his apparent belief he had no contract with plaintiff.

(n10)Footnote 10. The complex interplay between the parol evidence rule and the determination of whether assent has been expressed is demonstrated by Ely Constr. Co. v. S & S Corp., 184 Neb. 59, 165 N.W.2d 562 (1969) . The defendant was bidding on a government subcontract. Government specifications called for steel windows or equivalent. Defendant submitted a bid explicitly based on aluminum and plaintiff was well aware of this. The written contract incorporated the government specifications. Plaintiff, the general contractor, sought unsuccessfully to get the government contracting officer to accept aluminum instead of steel. Plaintiff then demanded that defendant install steel windows. The majority of the court thought that the intent of the parties to use less expensive aluminum could be shown by parol evidence. The dissenter thought that the parol evidence rule barred evidence of the negotiating history of the contract.

(n11)Footnote 11. This point is noted in Kabil Developments Corp. v. Mignot, 279 Or. 151, 566 P.2d 505 (1977) . Kabil's agent was allowed to testify he felt he had reached an agreement with Mignot for helicopter services. Mignot appealed claiming that admission of evidence of a subjective state of mind was reversible error. The court affirmed, holding that this evidence of the agent's subjective understanding was evidence of an objective mutual manifestation of assent and the jury had properly been instructed as to the limited function of this evidence.

Transpacific Leasing, Inc. v. Klineline Sand & Gravel Co., 272 Or. 133, 535 P.2d 1360 (1975) suggests a subjective basis for its result, a wrong reason for an otherwise defensible holding. Under one version of the facts, Klineline's president, Fuhrman, signed an offered lease as guarantor. He also wrote an accompanying letter stating that his liability was limited to $60,000. These were delivered to an intermediary, who was the agent of neither party. The lease was delivered to Transpacific, the lessor, but the letter was not delivered until later. The court correctly notes that Fuhrman's sending the lease document together with the letter constituted a counter-offer. The undelivered counter-offer showed, said the court, a lack of ''meeting of the minds'' and therefore, if these were the facts, no contract was made with Fuhrman. A better explanation is that the intermediary's delivery of only part of Fuhrman's response to the offer was a negligent error in transmission. See § 4.11 above. If the intermediary deliberately withheld the letter, the conduct was akin to forgery.

(n12)Footnote 12. 250 Ga. 391, 297 S.E.2d 733 (1982) .

(n13)Footnote 13. 297 S.E.2d at 737 .