The established principle dictates that a contract’s existence and its terms are determined by what a reasonable person in the position of one party would conclude, based on the external manifestations of intent of the other party. This focus shifts away from a party’s private, subjective intentions or understandings. For example, if a business owner publicly offers to sell a car for a specified price, and a potential buyer expresses clear acceptance, a binding agreement may be formed even if the seller secretly did not intend to sell at that price. The courts will consider the outward expressions and actions to determine if a contract was formed.
This approach to contract law promotes predictability and fairness in commercial transactions. It allows parties to rely on the communicated intentions of others, fostering trust and stability within the business environment. Historically, the move towards this tenet emerged as a response to the inherent difficulties in proving subjective intent. By focusing on observable conduct, the legal process is streamlined, and the risk of fraudulent claims based on hidden motives is reduced. This also ensures equal treatment under the law, as all parties are judged according to the same standard of reasonableness.
