What are the Objective Theory of Contracts
Reasonable outside observer would adhere. The law of contract prohibits the enforcement of contracts that appear to be too good to be true. Business contract law serves to prevent outrageous claims from being enforced. This interpretation of the law of contracts is known as the Objective Theory of Contracts.
The Objective Theory prevents the interpretations of any law of contract from enforcing ridiculously out-sized claims in advertisements as the offer of a contract. The most famous example of this in business contract law is the Pepsi Harrier Jet case. In a 1995 TV commercial Pepsi offered a Harrier jet as a reward for its Pepsi points customer give away.
The ad said that the jet could be obtained for 7 million points. While the main method of obtaining Pepsi points was to drink Pepsi brand soda and redeem points from bottle caps, the company also allowed points to be purchased for ten cents each. John Leonard thought he saw a brilliant business opportunity.
The normal cost to obtain a Harrier jet was in excess of $23 million dollars. If Leonard bought all the points he would have needed to redeem for the jet it would cost him just $700,000. After raising money from friends and family, Leonard bought 7 million Pepsi points.
Attempting to enforce what he thought was a valid law of contract, he sent the 7 million points he had purchased, as well as 15 Points he had obtained from other means, and an order form on which he demanded that Pepsi supply him with a Harrier jet.
In response, the company wrote him a letter giving him free coupons and a letter which claimed that business contract law did not oblige the company to provide the jet because it was obviously an outlandish claim, meant to be humorous and entertaining. Leonard took Pepsi to court, claiming that the advertisement of a Harrier jet for the 7 million Pepsi points he had purchased was a valid offer.
Leonard said that when Pepsi did not reward him with the jet it had violated the law of contract. He claimed that by mailing in the points he had accepted their offer, the 7 million points were his consideration, and that the jet constituted Pepsi's consideration.
In rejecting Leonard's claim, the judge laid out the Objective Theory of Contracts succinctly. The judge ruled that business contract law had not been violated because "no objective person" could have believed in good faith that the offer was serious.
Due to the outrageous nature of the advertisement, the law of contract was determined to not have been violated. Business contract law is bound by a reasonable person test, that is, would a reasonable person examining the contract determine that the terms of the contract were realistic.
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