INTENTION

Intention to Create Legal Relations

Generally, people make agreements without any intention that they should
be legally binding. If two or more parties make an agreement but don’t
intend it to be legally binding, then that agreement will not be regarded by
the courts as a contract. (Both mind and action need to be present to make a
contract binding).

Cases on intent to be legally binding fall into two groups- agreements

between relatives, friends or acquaintances- social and domestic agreements
and the other type is commercial agreement- usually between companies or
a company and an individual.

Where an agreement falls into the domestic and social category, the courts
will assume that the parties do not intend to create legal relations but this
presumption can be rebutted by clear evidence that they did. The reverse
applies in commercial agreements, where it is presumed that the parties do
intend such agreements to be legally binding but this can be rebutted if
there is evidence that the parties did not intend their agreements to be
legally enforceable. In both the variations, the court will take objective
approach to decide if intention was present or what was in the mind of the
parties.

In practice, it is rare for contract cases to involve problems with the

requirements of intention to create legal relations. This is largely because in
many of the situations in which the issue might be raised, particularly
domestic and social ones, there is no consideration. The courts will only
consider intention to create legal relations if offer and acceptance and
consideration have already been established. The US academic, Professor
Williston, has suggested that the separate element of intention serves no
purpose in our system and is useful only in legal systems. Contrary to that,
feminists argue that the presumption against contractual intention in
domestic agreements is in fact the law’s way of saying that the work usually
done by women is not to be regarded as important as it is something done
out of love for her family rather than an economic contribution which ought
to be paid for.

There are a few concept of intention to create legal relations. Intention to

create legal relations also means an intention to be serious about agreement
significance:

a) The contracting parties mind will be obvious to enter a serious contract

When two parties decided to enter in the environment of a contract, their

mind will understand the contents of the contracts. This is due to their
‘intention’ to be consenting mind which both of the parties have to agree. If
there is no agreement by both of the parties, it may make the contact being
a void agreement. Thus, both of the contracting parties will enable to be
serious into the contract.

b) If there is no intention to create legal relations the contract would not be

enforceable, legal and binding

Intention to create a legal relation is one of the essential elements of

contract. So, if there is no intention to create a legal relation, the contract
can be assumed as a not legal. Due to that, the contract may not being
enforceable because there is no intention to create legal relations at the
beginning which not making contracting parties to be legally binding.

c) Without intention to create legal relations, the parties cannot sue each
other

With no intention to create legal relations, it may cause the contracting

parties are not being legally binding and this circumstances may cause the
contract is enforceable. Therefore, when the contract is enforceable, the
contracting parties cannot sue each other and this will spoil their business
crisis. This will make the contracting parties hard to enquire their justice.

d) Without intention to create legal relations the contract may become a

mere promise

In addition, with no intention to create legal relations, it will make any

contract to become a mere promise. Mere promises simply like a simple
promise arise when there is no intention to create legal relations.

e) Without intention to create legal relations the contract may lack the
binding effect

Besides that, when there is no intention to create legal relations, it will make
the contract or agreement become less powerful due to whether one or both
of the parties does not have a consent mind. So, if the contract lack of
binding effect, it will cause the difficulty to the party involved in future.

Domestic and social agreements of intention to create legal relations can be

broken down into three groups which are firstly commercial or business
relations, secondly social friend’s relations and thirdly family or domestic
relations.

Social and Domestic Agreements: this category includes agreements

between family members, friends or individuals who know each other but are
not in any kind of commercial relationship.
Types:
Agreement between husband and wife:
Where a husband and wife who are living together as one household make
an agreement, the courts will assume that they do not intend to be legally
bound unless there is evidence to the contrary as seen in the landmark case
of Balfour v Balfour [1919]
The Defendant was a civil servant stationed in Ceylon. While the couple were
on leave in England, Mrs. Balfour became ill and it eventually became clear
that her husband would have to return by himself. He promised to pay her a
monthly maintenance allowance. They later decided to separate and the
husband then refused to make any more payments. The Court of Appeal
decided he was not bound to pay the allowance because at the time when
the agreement was made there was no intention to create legal relations.
When this type of agreement was made between husband and wife, said
Atkin LJ, it was a family matter in which the courts really had no place to
interfere. Legal principle: where a husband and wife living together as one
household make an agreement, the courts will assume they do not intend to
be legally bound, unless there is evidence to the contrary. [Although, the
legal elements of offer & acceptance & consideration was present in this fact
yet no legal binding took place as there was no intention to create legal
relations]
The agreement in Balfour was made while the parties were still cohabiting. A
different approach applies where a couple is separated or in the process of
separation or divorce. In Merritt v Merritt [1969], Mr. Merritt had left his
wife to go and live with another woman and subsequently met his spouse to
resolve various financial arrangements. Sitting in Mr. Merritt’s car, they
decided that he would pay his wife $40 a month, out of which she was to pay
the outstanding mortgage payments on their house; he would then transfer
the house ownership to the wife when the mortgage would be paid off. Mrs.
Merritt then refused to get out of the car until her husband put the
agreement in writing. Eventually, he signed a piece of paper stating what
they agreed to. The wife duly paid off the mortgage, but the husband then
refused to transfer the ownership of the house to the wife.
Held: the CA upheld the wife’s claim. Lord Denning pointed out that the
presumption applied in Balfour v Balfour was for an agreement between
husband and wife was for an arrangement where the couple were still
cohabiting. Here the parties had separated or about to separate so in such
situations it can be safely presumed that any agreements between the
parties were intended to be legally binding.
Agreements between parent and child:
Presumed not to be intended to be binding though again the presumption
can be rebutted.
Jones v Padavatton [1969]: A mother and daughter came to an
arrangement whereby the mother agreed to maintain her daughter if she
agreed to study for the bar. The daughter commenced her studies and the
mother paid her an allowance. The arrangement was later altered and the
mother agreed to provide a house in which her daughter could reside whilst
she studied. Mother and daughter fell into dispute as to the occupancy of the
house, and the mother sought possession. It was held the daughter was
entitled to remain in possession and the mother appealed.
Issues: The daughter argued the agreement between herself and her mother
amounted to a legally binding contract and, as such, she should be entitled
to remain in occupation of the house. She claimed there had been an
intention to create legal relations and she had provided consideration for her
mother’s maintenance by studying for the bar. The mother argued there was
merely an informal family arrangement, there had been no intention to
create legal relations and she was, therefore, entitled to recover possession
of the house. Even if there was an enforceable contract, she asserted the
terms of the arrangement were too vague for the court to enforce.
Decision/Outcome: The mother’s appeal was successful and she was
awarded possession. There is a presumption that family arrangements are
based on mutual trust, family ties and affection, and that there is no
intention to create legally binding contracts capable of enforcement in the
courts. This presumption can be rebutted, but the lack of formality regarding
the agreement between mother and daughter strongly indicated there was
no such intention and the daughter had no defence to her mother’s claim for
the house.
Legal principle: agreements of a domestic nature between parents and
children are presumed not to be intended to be binding although this
presumption can be rebutted.

Social arrangements: the presumption that an agreement is not intended

to be legally binding also applies to social relationships between people who
are not related. Then again it can be rebutted with evidence to the contrary.
Simpkins v Pays [1955]: Ms. Simpkins was a paying boarder at Ms. Pays
house, who lived with her granddaughter. Ms. Simpkins habitually entered
into newspaper competitions. Concerning one weekly Sunday newspaper
competition, the three agreed that Ms. Simpkins would fill in a weekly
coupon, with each person making three forecasts, yet submitting them in Ms.
Pays name, and divide the prize in the event of winning. A forecast made by
Ms. Pays’ granddaughter in one of the coupons submitted won a prize of
£750 under Ms. Pays name. Ms. Pays refused to distribute the prize and Ms.
Simpkins claimed for one-third of the prize under their agreement.
Issues: The question arose as to whether there was an intention to create
legal relations in the informal arrangement between the Parties so as to
constitute a legal agreement to distribute the shares.
Decision/Outcome: The Court held that, irrespective of the familial relations
and the informal context, there was mutuality in the arrangement between
the Parties, by which they agreed to the manner of the submission of the
forecast in Ms. Pays name on a weekly basis and that, if there was a success,
all three persons would share the prize money equally. Despite the domestic
context, the filling out of the coupon by Ms. Simpkins was not a voluntary
service to Ms. Pays but rather pursuant to an agreement by which each Party
had shares in the result, thus showing an intention to create legal relations.
The Court held that the mutual arrangement, no matter how informal,
constituted a legally-binding agreement to divide the shares in thirds. [Here
the decision was given against the general principle for social arrangements]
Wilson v Burnett [2007]: two claimants claimed they had reached an oral
agreement with the defendant that if any of them won the lottery then that
would be shared equally amongst them. The Defendant admitted she
discussed the idea with the other two but argued that no agreement had
been reached.
Held: the court concluded that there was no intention to create legal
relations and therefore even if an agreement is reached it was not legally
binding.
Commercial Agreements: there is a strong presumption that parties in
commercial arrangements intend to be legally bound, unless there is a very
clear contrary evidence then this presumption can be rebutted.
Leading case: Esso Petroleum Ltd v Customs and Excise
Commissioners [1976].
Esso, a petrol company, advertised a scheme by which customers would
receive one free World Cup coin for every four gallons of petrol purchased.
The World Cup coins were manufactured coins with the head of a 1970 World
Cup English footballer on one side and the word ‘Esso’ on another for a sales
promotion. Esso ran advertisements The Customs and Excise Commissioners
claimed that the coins were liable to purchase tax as goods “produced in
quantity for general sale,” under the Purchase Tax Act 1963, Sch 1, Group
25. Esso claimed that the coins were free gifts and, thus, there was no sale
with the intention to create legal relations and produce a legal effect.
Issues: The question arose as to whether, the distribution of the coins were
goods “for general sale,” and thus sold per a legal obligation by Esso to
supply the coins under a contractual relationship with customers.
Decision / Outcome: Firstly, the Court held that there was an intention to
create a legal obligation by Esso to supply the coins. The transaction took
place in a business setting, and was itself a legal offer beyond a mere ‘puff’
that rendered Esso commercial advantages, and was accepted by the
customers. Secondly, the Court held that, for a contract of sale, there must
be a transfer of the goods for monetary consideration. The Court held that,
despite the intention to create a legal obligation, there was no consideration
for the transfer of the coins as the coins were transferred under the separate
contract for sale of the petrol. Accordingly, the Court held that there was no
contract of sale by Esso.
Exceptions to the Commercial Agreements Presumption:
Honour Clause:
Rose and Frank v Crompton Bros [1925]: An American company and
English company entered into a sole agency agreement in 1913 for the sale
of paper goods in the USA. The written agreement contained a clause
stipulating that it was not a formal nor legal agreement, and an “honourable
pledge” between business partners. Subsequently, the American company
placed orders for paper which were accepted by the British company. Before
the orders were fulfilled, the British company terminated the agency
agreement and refused to send the goods, claiming that the 1913
agreement was not legally binding and that, consequently, the orders did not
create legal obligations.
Decision/Outcome: Firstly, as to the 1913 agreement, the Court gave
overriding weight to the provision in the agreement that expressly provides
that it is to be solely an “honourable pledge”, as demonstrating that the
parties did not intend the arrangement as a legally-binding contract. The
Court explained that the argument that clauses restricting the legal
enforceability of a contract apply solely when the document is otherwise
unquestionably of legal force. In this case, the document and circumstances
did not intend to create any legal interest, and the clause expressly
precluding the agreement’s legal enforceability applies. Secondly, the Court
held that the fact that the arrangement does not constitute a legal contract
does not preclude the orders and acceptances from constituting legally-
binding contracts. The lack of enforceability of an express legal arrangement
under an agency agreement does not preclude the legal transactions. The
orders constituted mutual offers and acceptances with each transaction
having ordinary legal significance.
Agreement ‘subject to contract’:
Use of these words in agreements are usually taken to mean that the parties
do not intend to be legally bound until formal contracts are exchanged.
Collective Bargaining Agreements:
Under collective bargaining, an employer negotiates pay and conditions with
the workforce as a whole (usually represented by the trade union) rather
than on an individual basis. Such agreements are binding in most countries.
Exception seen in the case of Ford Motor Co Ltd v Amalgamated Union
of Engineering and Foundry Workers [1969]: Ford Motors and trade
unions reached collective agreements concerning employment conditions,
signed by their representatives. When a union strike took place concerning
the conditions the company brought an action for an injunction pursuant to
the agreements, attesting the collective agreements to be legally binding.
The unions argued that no legally enforceable contract resulted from the
collective agreements. Decision/Outcome: As a point of law, the Court
reiterated that when agreements are reached in a commercial context, the
presumption is that the parties intended for the agreement to be legally
binding, unless an express provision declares otherwise. However, the Court
held that, even though they are concluded in a commercial environment, in
the case of collective agreements, where there is no express provision, it is
necessary to examine the context and surrounding circumstances, in order
to ascertain the intention of the parties to be legally bound. The relevant
circumstances include the wording of the agreements, their nature, the
background in which they were reached, the knowledge and opinions of
parties’ representatives, and other facts that show the parties’ intentions
that the agreements are binding in law. On the facts, the agreements did not
contain express provisions concerning their binding effect, and the Court
held that the commercial context of the agreements is outweighed by their
wording and nature, as well as the parties’ voiced opinions. Examining a
range of factors, the Court concluded that the collective agreements
primarily constituted the parties’ optimistic aspirations and did not
contemplate legal enforceability. Thus, the Parties did not have the intention
to make the collective agreements binding at law. (Not binding)