Elements of a valid contract
- Offer and acceptance – A mutual consent is only possible in contract when there is an offer and acceptance. One party gives a proposal and another party accepts the offer.
- Legality – All contracts must be made on legal activities and they should not be based on illegal grounds. The subject matter of the contract must be legal depending on the laws and regulations of that region.
- Consideration – Consideration is the benefit or loss that one party gets after implementation of a contract (Dranias, 2008, p. 310). The benefit or loss could be monetary or other tangible benefits depending on the nature of contract.
- Competency – For a contract to be valid, the parties to a contract are supposed to be above eighteen years. Any person above eighteen years has the capacity to understand details of the contract and is competent to enter into a contract.
Objective theory of contracts
Objective theory of contracts is a doctrine in contract, which states that an agreement becomes a contract based on external acts and not based on purported agreements. The theory differentiates a contract and an agreement by the external legal acts of a party (Eisenberg, 1994, p. 1127). This means that a mere advertisement may not be a contract unless there are external acts performed by the person offering the contract. The theory applies to the case between Pepsi Company and a Seattle man (John Leonard) where Pepsi Company included Harrier Jet in one of its TV commercials as a prize after getting seven million Pepsi points. Interestingly, there was conspicuous absence of further external acts from the company that showed commitment to the offer and to Pepsi it was a mere joke.
Why the court held that the agreement was not valid
The court held that there was not a valid contract based on objective theory of contracts because Pepsi was only joking at the time of advertisement and did not intend to give Harrier away as a prize. Concerning the agreement, there were no external acts performed by Pepsi and the actual intention of the company was not to offer Harrier as one of the prizes. The agreement was not valid because the price of Harrier was very high compared to the price incurred to gather the points. The court held an objective test to see whether a reasonable person could take the advertisement seriously (Emanuel, 2006, p.6).
Whether advertisement are generally considered as offers
Advertisements are not generally considered as offers but they are referred to as invitation to treat because there are no promises made. According to Hartman and Desjardins, offers are made to specific people and not to the world and advertisements are made to the whole world and not to identifiable individuals (2011, p. 367). For an advertisement to be considered an offer, it must contain specific words of commitment and binding terms.
How this case differs from a reward situation
A reward situation is different from the case in hand here because a contract is formed after someone responds and completes the requested act. On the other hand, in a reward situation, there is an agreement that exists between the parties to pay for a service. The Pepsi case differs from a reward situation because there was no agreement between the parties concerning the prize. John Leonard did not notify Pepsi Company that he had accepted the offer.
Dranias, N, C. (2008). Consideration as contract: a secular natural law of contracts. Texas Review of Law & Politics, 12(2), 310.
Eisenberg, M. (1994). Expression Rules in Contract Law and Problems of Offer and Acceptance. California Law Review, 82(5), 1127.
Emanuel, S. (2006). Contracts. Aspen: New York.
Hartman, L., & Desjardins, J. (2011), Business Ethics: Decision Integrity & Social Responsibility. McGraw Hill: London.