What is the significance of the "objective theory of contracts"?

The objective theory of contracts is significant because it focuses on assessing the intentions of the parties involved in a contract based on objective facts rather than subjective interpretations or emotional motivations. This theory emphasizes that the words and actions of the parties create the understanding of their agreement. When determining whether a contract is valid and enforceable, courts look at the outward expressions—what a reasonable person in the same situation would conclude about the intent of the parties. This approach ensures that agreements are interpreted consistently, based on observable evidence, rather than on what one party may have privately felt or intended. This creates a more reliable framework for contractual relationships and disputes, ensuring fairness and clarity in business dealings.