Concept
Intent to Be Bound
Manifestation of mutual assent and intent to be bound
Intent to Be Bound
Two parties can each have said yes and still disagree about whether anything legally binding happened. A seller who made a firm business promise may later say that he never imagined a court would enforce it, while a buyer who signed a letter of intent may find that the other side treats the letter as a mere step toward a contract not yet signed. Both disputes ask whether the parties meant their exchange to carry legal consequences. Restatement (Second) of Contracts § 21 answers in two halves: neither real nor apparent intention that a promise be legally binding is essential to the formation of a contract, but a manifestation of intention that a promise shall not affect legal relations may prevent the formation of a contract.1
The section sits on top of the objective test already studied. Assent is judged by what a party outwardly shows, so the question is never what a party privately thought about lawsuits. The first step is to separate a party's silence about legal effect, which does not matter, from an outward signal that no legal effect is intended, which does. The lesson takes the pieces in that order: the rule that intent to be bound is not required, then the situations in which a jest or disclaimer defeats a contract, and finally negotiations that contemplate a formal writing or leave terms open. It begins with the half of § 21 that most often surprises students.
Intent Is Not Required
A party does not have to intend legal consequences, or appear to intend them, for a bargain to become a contract.2 Once the objective test shows a serious promise, the promisor's opinion about whether the law will enforce it drops out. The reason is a matter of incentives. If a promisor could escape liability by saying that the thought of a lawsuit never crossed his mind, every promise would carry a free exit, and nearly any defendant could claim to have had it. Promisees who rearranged their affairs in reliance would bear the risk of a defense that only the promisor can testify to and that no one can check. So the law attaches liability to what a person deliberately promised, not to a prediction about what a court would do.
Imagine a supplier who signs a written promise to deliver 500 pallets of lumber at a stated price. When the market turns, the supplier says that he treated the promise as a handshake matter and never expected a judge to hear about it. That statement concerns his private view of legal consequences, and it changes nothing: he made a serious commercial promise, and a reasonable buyer would understand it as a commitment. The same logic reaches apparent intention. A promise made in ordinary business circumstances does not need any sign that the parties were thinking about enforcement.
The rule is not absolute, because the word "essential" in § 21 only means that intent is not a separate element the plaintiff must prove. The agreement still has to be one the parties could be taken to mean as a bargain. Everyday life contains countless agreements about social dates and meetings that nobody means to enforce, and a recipient who knows or should know that no enforceable bargain is intended has no contract.3 The next sub-section takes up that second half of § 21.
Jests and Disclaimers
The second half of § 21 gives the parties control over whether their words are legally operative: a manifestation that a promise shall not affect legal relations may prevent a contract.5 The key word is manifestation. A secret reservation is not a manifestation, and so a private joke gives the speaker no escape. In Lucy v. Zehmer, the Zehmers claimed the signed writing selling their farm was a jest, and the court enforced it anyway. Nothing before the signing told Lucy that Zehmer was not in earnest, the parties had argued over the terms for a long time, and there had been what appeared to be a good faith offer and acceptance followed by a written contract. Only after the writing was signed and Lucy had offered $5 to seal the bargain did anything suggest a joke, and the whisper to Mrs. Zehmer was not meant for Lucy to hear.6 A secret jest fails because the other party can respond only to what is communicated, and the reasonable meaning of the words was serious.
When the jest is shared or visible, the result changes. If both parties are jesting, or the recipient knows or should know that no enforceable bargain is meant, no contract results, even if a third-party observer would have thought the promises serious.7 The facts of Leonard v. Pepsico show how that works with an advertisement. The defendant advertised a Harrier jet worth about $23 million for 7 million promotional points, which could be bought for roughly $700,000, and the court held that no reasonable person would take the advertisement as seriously intended.8 The two cases differ on one fact: in Lucy the surrounding circumstances made it reasonable for the buyer to think the seller was serious, while in Leonard the absurdity of the offer told any reasonable audience that it was not.
Social and hypothetical agreements follow the same line. An invitation to dinner or a hypothetical bargain struck in a classroom is understood by both sides as carrying no legal rights, so no contract forms.9 An express statement that a promise is not to have legal effect works the same way, because the parties themselves have shown which kind of promise they are making. The same agreement placed in a commercial setting, with no such signal, would be enforceable.
Preliminary Agreements
The hardest intent problems arise in negotiations. Parties agree in principle, then plan to put the deal into a formal writing, and one side backs out before signing. Everything turns on whether they meant to be bound at the point of agreement or only once the formal document was executed. Three situations capture the range. If the parties make it clear that they do not intend legal consequences until a final record is signed, no contract exists until then. If they make it clear that the planned writing is only a convenient record of an agreement already reached, the contract binds even if the record is never adopted, and a refusal to sign is a breach. The third case, where the parties have shown only that they expect a writing, is the difficult one, and the answer depends on the parties' intention, which is often a question of fact.11
Courts resolve the third case by looking at what the circumstances say about intention. The Restatement (Second) lists the extent to which express agreement has been reached on all terms, whether the contract is of a type usually put in writing, whether it needs a formal writing for its full expression, how many details it has, whether the amount is large or small, whether it is common or unusual, whether a standard form is widely used, and whether either party has begun preparing to perform.12 Courts applying New York law ask a shorter version of the question, which is a good one to carry into an exam.
The first two points restate the common law principles that, absent an expressed intent that no contract shall exist, informal mutual assent is enough, and that a party who wants to avoid that result must express an intention not to be bound until a writing is executed.13 The third and fourth points explain why the sale of a business, a complex and valuable deal with unresolved issues, is the kind of transaction where parties are normally expected to sign a formal memorandum before being bound.14 Open terms enter the analysis as evidence of intent: the more significant issues the parties leave unresolved, the less likely it is that they meant to be bound.15 The separate doctrine of indefiniteness is taught elsewhere.
Two matched situations show how the factors move the answer. Suppose two merchants agree orally on price, quantity, and delivery date, shake hands, and say their lawyers will paper the deal. Every material term is settled and the writing is only a record, so a refusal to sign can be a breach. Now suppose one party sends a letter saying neither side is bound until a formal contract is signed, and key issues, such as the price of future services, remain open. The reservation is express and the deal is incomplete, so no contract exists yet. The facts that moved the answer are the express reservation and the unsettled terms.
A third possibility sits between a binding contract and none. In Teachers Insurance & Annuity Ass'n v. Tribune Co., the court identified two kinds of binding preliminary agreement. One is complete agreement on everything the parties thought needed negotiation, preliminary only in form. The other is a commitment to a contract on agreed major terms that leaves open terms to be negotiated, which obligates the parties to negotiate those terms in good faith without committing them to the final deal.16 A good-faith negotiation duty may also be coupled with a right to walk away if talks fail, and a party who relied on promises in a letter of intent may seek reliance-based protection.17
Intent Is Not Required
A party does not have to intend legal consequences, or appear to intend them, for a bargain to become a contract.19 Restatement (Second) of Contracts § 21 says this in its first clause: neither real intention nor apparent intention that a promise be legally binding is essential to formation. The first Restatement reached the same result in its § 20, which required only that a party intend to do the acts that manifest assent, such as speaking the words or signing the paper. What a party privately believed about the legal weight of those acts was beside the point.20 Once the objective test shows a deliberate, serious promise, the promisor's opinion about whether a court would enforce it drops out of the analysis.
The reason is a matter of incentives and proof. Suppose a promisor could escape by testifying that the thought of a lawsuit never crossed his mind. Nearly every defendant could say so, and no one could check the claim, because it describes a state of mind that only the speaker can report. Every promise would then carry a free exit, and a promisee who had rearranged his affairs in reliance would bear the risk of a defense he could neither anticipate nor rebut. Attaching liability to what a person deliberately promised removes that risk, and it is the same logic that makes assent turn on outward conduct instead of private thought.21
Imagine a lumber supplier who signs a written promise to deliver 500 pallets at a stated price. When the market turns, the supplier says he regarded the promise as a handshake matter and never expected a judge to hear about it. That statement concerns his private view of legal consequences, and it changes nothing. A reasonable buyer would read a signed commercial promise as a commitment, so the supplier is bound. The same is true of a merchant who signs a standard sales form without a thought about its legal effect: the signature manifests assent, and ignorance of the legal consequences does not undo it.22
The rule has a limit, and the word "essential" in § 21 marks it. Intent to be bound is not a separate element the plaintiff must prove, but the other half of § 21 still allows the parties to defeat formation by a manifestation, one that is visible and not secret, that their promise is not to affect legal relations.23 Change the supplier's facts so that the signed paper says in plain words that it creates no legal obligation, and the answer reverses. The fact that moved the result is an outward signal against legal effect, and silence about legal effect is not such a signal. The next subsection takes up that second half of § 21.
Jests and Disclaimers
The first half of § 21 takes the promisor's private opinion about legal consequences out of the analysis. The second half gives the parties a way to control whether their words operate at all: a manifestation of intention that a promise shall not affect legal relations may prevent the formation of a contract.25 The operative word is manifestation. Contract law protects the reasonable expectations of the person who receives a promise, and a party who plainly signals that no commitment is intended has given the other side nothing reasonable to rely on. A secret reservation is different, because it creates no signal for the other side to read and yet leaves that side exposed to an apparently serious deal. The sections that follow keep these two situations apart: the private jest that the law ignores, and the visible or shared signal that the law respects.
In Lucy v. Zehmer the defendants argued that the signed writing selling their farm was only a joke. The court enforced the writing. Before the signing, Zehmer had never indicated by word or act that he was not in earnest; the parties had argued over the terms for a long time, and the sequence looked like a good faith offer and a good faith acceptance followed by a signed writing. Lucy then offered $5 to seal the bargain, and only after that did anything suggest a joke. The Zehmers' own testimony was that Zehmer whispered the joke to his wife so that Lucy would not hear it.26 The reasoning follows from what the other party can know. Lucy could respond only to what was communicated to him, and the reasonable meaning of the words and acts was serious, so the court treated the undisclosed intention as immaterial.27 A jest that only the speaker knows about has the same legal effect as no jest at all, and it would be unfair to let a promisor keep an escape route that he hid from the one person who needed to see it.
The result changes when the jest is shared, or when the recipient knows or should know that no bargain is meant. If both parties are jesting, or for other reasons do not mean their words to have legal effect, no contract results, even if a third-party observer would have taken the promises seriously.28 The same is true of social arrangements and classroom hypotheticals, which both sides understand as carrying no enforceable rights. The question is always what the person receiving the communication should reasonably have understood. Leonard v. Pepsico shows the principle with an advertisement. The defendant advertised a Harrier jet worth about $23 million for 7 million promotional points, which could be purchased for about $700,000, and the court held that no reasonable person would read the advertisement as seriously intended.29 The two cases differ on one fact. In Lucy the surrounding dealings gave the buyer good reason to think the seller was serious, while in Leonard the absurdity of the offer told any reasonable audience otherwise.
Size alone is not what makes a promise a joke. A court has found a binding offer in a musician's public promise of $1 million for the return of a stolen laptop, because a reasonable person would have understood the promise as meant, even though the amount was large.30 A large reward is plausible when the thing recovered is valuable, whereas a $23 million jet for a few hundred thousand dollars of points is not.
An express disclaimer is the clearest manifestation under § 21, because the parties themselves have said which kind of promise is on the table. Employee handbooks supply the common example. In Ferrera v. A. C. Nielsen, the employer's handbook stated on its first page that it was not a contract but a summary of company policies and benefits. The Colorado court affirmed summary judgment against a discharged employee who claimed the handbook limited the employer's right to fire her, and the casebook account of the case draws attention to the court's concern with how conspicuous the disclaimer was.31 That concern follows from the rule's own logic. A disclaimer prevents formation because it reaches the other party and tells that party not to expect a commitment, so a disclaimer that a reasonable reader would not have seen gives a weaker basis for saying the other side was warned.
Two matched situations show which fact carries the answer. Suppose a landowner signs a written memo stating that it is for discussion only and is not a binding commitment. The memo is an outward signal against legal effect, so no contract forms, even if every price term is filled in. Now suppose a seller signs an otherwise identical sale agreement, privately regards the whole thing as a joke, and acts in a serious way until he changes his mind later. The seller's reservation was never communicated, so he is bound. The terms are the same in both situations. What differs is whether the reservation was visible to the other side.
Preliminary Agreements
Negotiations over a significant deal often end in a handshake and a plan: the lawyers will now prepare a formal document. If one side then refuses to sign, the question is whether a contract already existed at the handshake or would have come into being only at signing. That question is one of manifested intention. It sits beside the rule from the previous subsection, which keeps a party's private beliefs about legal effect out of the analysis, and it asks what the parties' outward words and conduct showed about when they meant to be committed.
Three situations mark out the range. If the parties make clear that they do not intend legal consequences until a final record is executed, no contract exists until it is. If they make clear that the planned writing is only a convenient memorial of a deal already made, the contract binds even if the writing is never adopted, and a refusal to sign is a breach. The third situation is the hard one: the parties have shown only that they expect a writing to follow, and nothing more about its role. Courts reach different results on such facts, but the results are reconcilable because the parties' intention governs, and that intention is often a question of fact for the trier of fact.33 The Restatement (Second) and the UCC both take this position: signing a formal document is something the parties may plan without that plan preventing a contract from forming, unless the circumstances show that their earlier exchange was only preliminary negotiation.34
The law places the burden of speaking on the party who wants out. Informal mutual assent to exchange promises is enough to bind, and a party who does not want that result must express an intention not to be bound until a writing is executed.35 The reason is that such a reservation costs a careful negotiator one sentence, while the other side, having heard no reservation, may reasonably begin to plan and spend on the assumption that the deal is done. A related rule in Restatement (Second) § 26 points the same way from the other direction: a statement of willingness to deal is not an offer if the listener knows or has reason to know that the speaker does not intend to conclude a bargain without a further manifestation of assent.36
Because the answer depends on the whole picture, courts look for objective signals. The Restatement (Second) lists the extent to which the parties have expressly agreed on all terms, whether this kind of contract is usually put in writing, whether it needs a formal writing for its full expression, how many details it has, whether the amount is large or small, whether it is common or unusual, whether a standard form is widely used, and whether either party has started preparing to perform. An agreement reached by correspondence also tends to show an intention to be bound when agreement is reached.37 Courts applying New York law use a shorter version, which makes a workable exam routine.
The first two inquiries come from the common law principles stated above, and the second two explain why the sale of a business is the kind of transaction where parties ordinarily expect to sign a formal memorandum before being bound.38 Open terms enter the analysis as evidence of intent, not as a separate bar: the more significant issues the parties leave unresolved, the less likely it is that they meant to be bound.39 The same reasoning explains why the parties to large corporate acquisitions typically understand that nothing is enforceable until signed final documents are exchanged.40
Two contrasting situations show how the factors move the result. Suppose a wholesaler and a retailer settle price, quantity, and delivery by an exchange of letters for a routine sale, and the wholesaler's last letter says a formal order form will follow. Every term is settled, the deal is common, and agreement came by correspondence, so the form is likely a record only, and a refusal to sign it is a breach. Now suppose two companies negotiate the purchase of one company's business. They leave several issues open, including the pay for a transition period, and one side's letter says the deal is subject to a formal agreement. The reservation is express, the transaction is large and complex, and the open items are real, so no contract has yet formed. A court has reached this kind of result when the signing party had reserved the right not to be bound before a definitive agreement was executed.41 The facts that changed the answer are the express reservation and the unsettled terms, not the presence of a planned writing, which both situations share.
Binding force is not all or nothing. In Teachers Insurance & Annuity Ass'n v. Tribune Co. the court distinguished a preliminary agreement that is complete on everything the parties thought needed negotiation, which is preliminary only in form and can be enforced as a contract, from one that commits the parties to agreed major terms while leaving other terms open. The second kind does not bind them to the final deal, only to negotiate the open terms in good faith.42 A duty to negotiate in good faith can also coexist with a right to end the talks if they fail.43