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Objective Theory of Contracts

You are still working for the City of Bigtown's Counsel, and it seems that your work largely involves shooting down the mayor's "creative" ideas to boost tourism. He is taken with the idea of an advertising campaign developed around auctioning Bigtown on eBay! He thinks that no one will take the auction seriously but that people will come to Bigtown to satisfy their curiosity.

As you and your boss are rolling your eyes at each other, you remember a similar situation - the Pepsi Harrier-Jet case. You offer to provide background

Wall Street Journal, August 9, 1999.
John D.R. Leonard took PepsiCo seriously when one of their "Pepsistuff" commercials made an offer of a Harrier jet, the famous high-tech "jump jet" used by the U.S. Marines. In a TV commercial that aired in 1995, Pepsi jokingly included the Harrier as one of the prizes that could be received with a "mere" 7 million Pepsi points. While that sounds like a lot of points to get from drinking Pepsi products (roughly 190 Pepsis a day for 100 years), the company also allowed customers to purchase points for 10 cents a piece.

Leonard did the math, and discovered that the cost of the 7 million points needed for the jet was a mere $700,000. He then put together a business plan, raised the $700,000 from friends and family, and submitted 15 Pepsi points, the check, and an official order form along with a demand for the Harrier jet.

PepsiCo wrote back, stating: "The Harrier jet in the Pepsi commercial is fanciful and is simply included to create a humorous and entertaining ad. We apologize for any misunderstanding or confusion that you may have experienced and are enclosing some free product coupons for your use."

The free coupons did not satisfy Leonard, who then took PepsiCo to task in court. Finally, on August 5, 1999, a federal judge for the Southern District of New York held that PepsiCo was only joking when it implied in its ad that it was giving away fighter jets. Judge Wood noted that since the jets sell for approximately $23 million each, "no objective person could reasonably have concluded that the commercial actually offered consumers a Harrier jet." Instead, this was a classic example of "a deal too good to be true."

1. What are the four elements of a valid contract?
2. Describe the objective theory of contracts. How does that theory apply to this case?
3.Why do you think the court held that there was not a valid agreement here?
4. Are advertisements generally considered offers? Why or why not?
5. How does this case differ from a reward situation, where a unilateral contract is formed upon completion of the requested act?

Solution Preview

Interesting case, indeed. Please see attachment for my response to your posting. I hope this helps and take care.

1. What are the four elements of a valid contract?

The 4 Contractual Components

There are four such elements. These are consideration, the intention to create legal relations, offer and acceptance. The concept of consideration really means that each party should derive something beneficial from the transaction, hence if I offer to give you my car as a gift, I derive no consideration. The second element, namely the intention to create legal relations may be passed over swiftly as this is usually understood to exist by virtue of the fact that the parties are in negotiations. This leaves us with the essence of the contract; offer and acceptance. (


An agreement between persons, which obliges each party to do or not to do a certain thing. Technically, a valid contract requires an offer and an acceptance of that offer, and, in common law countries, consideration. (

A explicit proposal to contract which, if accepted, completes the contract and binds both the person that made the offer and the person accepting the offer to the terms of the contract. See also "acceptance".

One of three requisites to a valid contract under common law (the other two being an offer and consideration). A contract is a legally binding agreement between two or more parties which starts with an offer from one person but which does not become a contract until the other party signifies an unequivocal willingness to accept the terms of that offer. The moment of acceptance is the moment from which a contract is said to exist, and not before. Acceptance need not always be direct and can, in certain circumstances, be implied by conduct (see acquiescence below).

The intention to create legal relations. Action or inaction which binds a person legally even though it was not intended as such. For example, action which is not intended as a direct acceptance of a contract will nevertheless stand as such as it implies recognition of the terms of the contract. For example, if I display a basket of fruit in a marketplace and you come by, inspect an apple and then bite into it, you have acquiesced to the contract of sale of that apple. Acquiescence also refers to allowing too much time to pass since you had knowledge of an event which may have allowed you to have legal recourse against another, implying that you waive your rights to that legal recourse.

Is the intention to create legal relations, offer and acceptance,. The concept of consideration really means that each party should derive something ...

Solution Summary

This solution describes the four elements of a valid contract, as well as the objective theory of contracts as it applies to the case of the City of Bigtown's Counsel. It discusses why the court held that there was not a valid agreement in this case, and whether or not advertisements are generally considered offers, including why or why not. Then, it discusses how this case differs from a reward situation where a unilateral contract is formed upon completion of the requested act. Supplemented with extra informative information on contrasts.