Contracts are legally binding agreements that dictate how two or more parties should conduct themselves in a mutually beneficial manner. Parties involved in a contract can agree on multiple clauses that explain various terms and conditions. One of the most critical aspects of contract law is the theories of contracts, which defines the legal binding force of an agreement. Two of the most commonly used theories of contracts include subjective and objective theory.
Subjective Theory of Contracts
According to the subjective theory of contracts, the parties’ intent to be legally bound is the most crucial element in forming a contract. Therefore, subjective theory focuses more on the parties’ motives and subjective intentions rather than the actual words in the agreement. If both parties mutually agree to the terms and conditions, then the contract becomes legally binding.
The subjective theory of contracts is often used in cases where the parties are close associates, such as family members or friends. In such cases, the parties often have a deep level of trust between them, and their intentions are clear and therefore should be respected.
Objective Theory of Contracts
The objective theory of contracts, on the other hand, is more grounded in the actual words and actions of the parties involved in the agreement. In this theory, the contract becomes binding if a reasonable person would believe, based on the parties` words and actions, that they intended to be bound by the agreement.
The objective theory of contracts is more commonly applied in commercial agreements because parties involved do not usually have a personal relationship. Instead, their intentions are grounded in objective actions and not personal relationships.
Key Differences between Objective and Subjective Theories of Contracts
The primary difference between the two theories is the focus on the parties involved. While the subjective theory emphasizes the parties’ intent, the objective theory focuses more on the actual words and actions of the parties.
Under the subjective theory, the contract is enforceable only if the parties had a mutual understanding and intention to be legally bound. On the other hand, under the objective theory, the contract is enforceable if a reasonable person would believe, based on the parties` words and actions, that they intended to be bound by the agreement.
Conclusion
The theories of contracts provide a legal framework for determining the enforceability of a contract. While the subjective and objective theories differ in their approach to analyzing the parties’ intent and actions, they both seek to enforce agreements that are mutually beneficial to the parties involved. As a professional, it is essential to convey the correct theory of contracts in all legal documents to prevent disputes that may arise.