Valid Binding Contact – Intentions to Create Legal Relations

In this chapter, you would be covering:

Ø      The basic presumptions of intentions to create legal relations

Ø      The different application of the law with regards to the various situations

Ø      The relationship between intentions to create legal relations and considerations.

Why is this chapter important?

Q: What is a valid & binding contract?

A simple definition of a valid and binding contract was offered by Lord Wilberforce, New Zealand Shipping v A.M. Satterwaite[1] stating that an enforceable contract is found with the existence of

Ø      offer

Ø      acceptance

Ø      consideration

Intentions to Create Legal Relations

Note: All the elements needs to be present before it would be considered as a valid and binding contract. This is because all contracts are agreements but not all agreements are contracts. Consider the difference of elements below:

The key distinction between the 2 is whether is there is a consideration to the contract to enforce it and then with the intentions for the issues to be resolved in the court of law.

This further illustrated by Lord Stowell, in Darymple v Darymple[2] stating:

“[Contracts] must not be the sports of an idle hour, mere matters of pleasantry and bandinage, never intended by the parties to have any serious effect whatever.  "

Ø      The law does not hold the existence of a contract merely because of the presence of an agreement by the parties

Ø      Mutual promises made every day in domestic and social life do not invite litigation.

Therefore, the parties to an agreement must have the intention to create legal relations[3] to enforce the agreement. The word "Intention" is elusive, as Brian CJ. Has stated that "Even the devil knoweth not the mind of man."

Therefore, ITCLR works on the basis of presumptions: Presumption is where there Courts will assume the status quo without the parties proving the facts

Domestic agreements - presumption of no intention to create legal relations

Commercial agreements - presumption of an intention to create legal relations. [4]

Note: The presumption is objectively ascertained.

Domestic / Social Agreements

This is where the Presumption is that no legal relations were intended

However, you would have to note that the courts only presume an absence of intention and such presumption is rebuttable by contrary evidence. The burden to prove that there was intentions lies on the party seeking to uphold the contract

Some of the sample situations are:

1.         Agreements between husbands and wife

The presumption is that there is no Intentions to Create Legal Relations.

This could be seen in the case of Balfour v Balfour[5] where there was no evidence that the parties intended their agreement to be legally binding at the time it was made. However, there may be times that the presumptions could be rebutted to show that there was intentions to create legal relations such as in:

Merritt v Merritt[6] where

1.         The husband and wife are separated or on the verge of separation

2.         The promise – was put down in writing – which would then indicate the seriousness of the parties – and would successfully infer - intended the court's intervention - main reasons people reduce statements into writing - documentary evidence in court.

3.         The terms of the agreements are sufficiently certain to be enforced.[7]

Similar situations could be seen in Darke v Strout[8] where ITCLR was due to the formality of the letter

In the modern times, there may be certain unique situations where the Couple is living together but not married. What would be the status?

e.g. Tanner v Tanner[9]

Courts are more likely to consider that there is an intention to be legally bound by financial and property arrangements

2.         Agreements between Parent and Child

The classic example for this would be Jones v Padavatton[10], here, it was held that there are No Intentions to create legal relations as the presumption failed to be rebutted because the agreement was "one of those family arrangements which depended on the good faith of the promises which are made and are not intended to be rigid, binding agreements."[11]

This is not a universal rule as in Snelling v John G Snelling Ltd [12] where members of a family are contracting on a commercial basis, there are Intentions to create legal relations is presumed

3.         Other Domestic or Social Agreements

Other domestic and social agreements could raise the presumption, such as sharing a common household. However, in order for ITCLR to play a role, there must be  "mutuality in the arrangements of the parties." (Simpkin v Pays[13])

Failing which, as it was stated in Buckpitt v Oates[14] that an Ordinary social arrangements, the courts will require special evidence of intention to rebut the presumption that the parties did not intend to create legal relations.

Commercial Agreements – presumption of Intention to Create Legal Relations

Unless there is evidence to the contrary, the court will presume the parties intend to create legal relations in commercial agreements. (Jonathan Alexander Bunn & David Bunn v Haydon Harrisson Rees & Gillian Parker[15])

If there were declarations that the agreement is not binding in law were made, the courts would uphold the express and unambiguous intention of the parties not to create legal relations. - Rose & Frank v Crompton Bros.[16]

Whether the clause or terms of the contract is deemed to be binding in the court of law is a matter of construction. In Wilkie v London Passenger Transport Board[17] - a free travel pass issued to an employee is not a contract:

Whilst on the other hand in Gore v Van Der Lann[18], A pass issued to a pensioner was held to create a contract, apparently because of the nature of the terms attaching to its use.

In the event that the parties to the contract has the words “ex-gratia”, the case of Edwards v Skyways Ltd.[19] Stated that the use of the words 'ex - gratia' did not negate contractual intention – in Commercial transactions - presumption of an intention to create legal relations.

Letters of Comfort

Letters of comfort, as the word will describe it as, merely letters of comfort as  Kleinwort Benson Ltd. v Malaysia Mining Corp. Bhd.[20] In the is case, MMC had issued a letter of comfort that stated amongst other things that,

"it is our policy to ensure that the business of [MMC Metals] is at all times in a position to meet its liabilities to you......

Concept of a letter of comfort - known by both sides - include a document whereby one party gives comfort to another - assuming a moral responsibility, but not a legal liability, to ensure repayment of the liabilities of a subsidiary - mere statement of the company's policy was not sufficiently certain enough to be legally enforced.[21]

The subject matter having little intrinsic value

In the event that the subject matter of the contract is too little or intrinsic value; the courts may most probably find that the contract has no intentions to create legal relations. This could be seen in:

Esso Petroleum Ltd. v Customs & Excise Comrs.[22] which concerns World Cup Coins that were not 'produced for sale’ but to be given s gifts to clients. The House of Lords decided by a majority of four to one that the goods were not produced for sale and thus tax was not chargeable.

Collective Industrial Agreements

At common law - collective agreements between employer and a trade union relating to wages and other conditions were presumed not to be legally binding (Ford Motor Co Ltd v AEF[23] )

The relationship between Intention to create Legal Relationship and Consideration

The importance of ITCLR and consideration had been heightened lately with the emergence of various new statutes and laws. Professor Ewan McKendrick argues that when parties reached an agreement does not mean - a legally enforceable contract, even where the agreement is supported by consideration.

Recently, Art 2.101 Principles Of European Contract Law 2000, Sec 1 (a) and (b)

Mentioned that so long as the parties inteded to be legally bound and they reach a sufficient agreement it is enforceable without any further agreement.

On the other hand, Art 3.1 Unidroit Statement of Principles for International Commerial Contract 1994  dictates that a contract is concluded, modified or terminated by the mere agreement of the parties, without any further requirement.

These provisions seems to suggest that one does not need to prove the existence of consideration before one can enforce the agreement.