Contract Theory and One Harrier Jet

Contract Theory and One Harrier Jet

    John Leonard’s pursuit of the Harrier jet was a classic example of how to distinguish between a valid and invalid contract. Leonard should have kept in mind the four elements of a valid contract. The first requires a meeting of the minds, which means that both parties understand the terms of the contract and agree to the basics of the deal. This is where Leonard’s idea of a contract breaks down; he had no such meeting of the minds with Pepsico. He saw a commercial and took it seriously; he did verify this offer through the official catalog. The next element is consideration; that is, something of value exchanged between the parties, or services to be performed. Leonard met the requirements on his end as he paid the necessary Pepsi Points and the $700,000 shortfall. However, PepsiCo had no obligation to accept it because they did not list a price for the jet in their official Pepsi Stuff catalog. The next requirement was an agreement by both parties to enter into a contract. While Leonard obviously agreed to the contract, Pepsico had not, evidenced by the catalog itself, which did not include the jet. The final element is that the parties are legally able to sign a contract and of sound mind to do so. While one might question Leonard’s judgment for taking a silly commercial seriously, both he and PepsiCo were legally able to enter into a contract.

    The objective theory of contracts assumes that both parties have good intentions going into the contract and that the contract must be viewed objectively as opposed to viewing it from the point of view of one of the parties. After viewing the contract objectively, the Court found that there was no such contract between Leonard and Pepsico for purchase of the jet:

    A basic rule of contracts holds that whether an offer has been made depends on the objective reasonableness of the alleged offeree’s belief that the advertisement or solicitation was intended as an offer.

The Court held that there was no agreement because a reasonable person should have seen that the advertisement was made in jest and was not intended to be taken seriously.  The absence of the jet from the official catalog should have made that clear.

    Advertisements are generally not construed as offers. In Wood’s decision, he states that advertisements are assumed not to be offers; in fact, “Such advertisements are understood to be mere requests to consider and examine and negotiate…” it also states that the language must be clear. This was not the case in the Pepsi Stuff advertisement; there was no clear language stating definitively that the Harrier Jet was for sale; nor did such an offer appear in the official catalog.

    In a reward situation, both parties have an agreement that when a certain act is performed, compensation will be provided. For example, PepsiCo did have a contract for a mountain bike. If a consumer presented PepsiCo with 3000 points (or 15 points and the monetary difference), he or she would receive a mountain bike that had been designed exclusively for Pepsi. This was a reward situation because it was stated in the catalog that such a bike was available for 3000 points. The difference here is that no such offer was made for the jet. The catalog did not contain the jet or the number of points required to purchase the jet. If it had been listed in the catalog for 7 million points, then PepsiCo would have been obligated to sell it to Leonard. Instead, Leonard completed the requirements he perceived to be necessary without first checking that this performance would entail the reward (the jet).