CHAPTER 4
Intention to Create Legal Relations
INTRODUCTION
Intention to create legal relations is one of the five
elements of formation of contract besides offer,
acceptance, consideration and capacity.
This element is not provided in the Contracts Act,
the Malaysian courts have applied common law
cases on this subject- matter.
This chapter will examine: (i) how courts determine
whether an intention to create legal relations
exist; (ii) the general rules governing intention to
create legal relations in domestic and commercial
agreements; and (iii) the letter of comfort and
memorandum of understanding.
This chapter will examine:
(i)how courts determine whether an intention to create
legal relations exist;
(ii)thegeneral rules governing intention to create legal
relations in domestic and commercial agreements; and
(iii)theletter of comfort and memorandum of
understanding.
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DETERMINATION WHETHER INTENTION TO CREATE LEGAL
RELATIONS EXISTS
The intention to create a legal relationship (ICRL) means the
intention of a party to become legally bound, with legal
consequences to sue and to be sued. The court seeks to determine
whether the parties have agreed to enter into a contract and be
bound by the agreed terms.
The court applies an objective test, i.e., the court looks at what the
parties appear to have agreed rather than what the parties say they
have agreed.
It allows the protection of reasonable expectations and avoids issues
of self-interest, dishonesty or fraud if the subjective intentions of the
parties are considered. The objective test accounts all matters
including the facts and surrounding circumstances of a case that a
reasonable man will have regard to.
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In Carlill v Carbolic Smoke Ball Co 189212 QB 484 [1893] 1 QB
256, the Court of Appeal considered the statements made in the
advertisement which showed an intention of the defendants to
enter into legally binding relationships. The advertisement stated
that the defendants had deposited a sum of money into their bank
to pay for the reward. The Court held that a reasonable man
would construe from the money deposited that there was an
intention to be bound. Bowen LJ stated:
“… the main point [of the defendants] seems to be that the
vagueness of the document shows that no contract whatever was
intended. It seems to me that in order to arrive at a right
conclusion we must read this advertisement in its plain meaning,
as the public would understand it. It was intended to be issued to
the public and to be read by the public. How would an ordinary
person reading this document construe it? Was it intended that
the £100 should, if the conditions were fulfilled, be paid? The
advertisement says that £1000 is lodged at the bank for the
purpose. Therefore, it cannot be said that the statement that
£100 would be paid was intended to be a mere puff. I think it was
intended to be understood by the public as an offer which was to
be acted upon.” at 266--268.
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An expression in writing of the arrangements
between parties can show that parties intend to be
legally bound.
In Kwong Kum Sun (5) Pte Ltd v Lian Soon Siew &
Ors ,3 the appellants [1984] 1 MLJ 150, CA
Singapore.
A company carrying on business as importers of glass sheets,
wrote to the respondents a letter offering to supply and install
glass for the respondents. The letter set out prices for the supply
and fixing of glass and the last paragraph read as follows: "We
hope that the above prices are acceptable to you and shall be
grateful if you will kindly sign and return the duplicate copy of
this letter to us for our records". The respondents on the same
day notified their confirmation and acceptance of the offer on
the letter itself. An issue arose whether the letter created a
binding contract or was merely an invitation to treat. The
Singapore Court of Appeal upheld the decision of the judge at
first instance that the letter created a binding contract.
Sinnathuray J stated:
“… the general rule relating to the creation of a binding
agreement is that "for the parties to be bound they must have
finished reaching an agreement, so that it is possible to infer an
intention on the part of both of them to be bound
immediately…. at 151.
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… The learned Judge found that the letter was "a
contractual document". He must have held that
the letter was an offer for the supply and fixing of
glass for the project which upon confirmation and
acceptance by the respondents had created a
binding agreement between the parties another
way of looking at the case was that on the
evidence we have referred to the inference must
be that it was the intention on the part of the
appellants and the respondents to be bound
immediately upon the confirmation and
acceptance of the letter by the respondents. In
our judgment, by the letter the appellants and the
respondents had finished reaching an agreement.”
151.
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Conversely, in MN Guha Majumder v RE Donough [1974]
2 MLJ 114 a case involving the sale and purchase of a
house, the High Court held that there was no intention
of the parties to be bound. In this case, there was an
advertisement for the sale and a potential purchaser went
to view the house twice. Discussions took place between
the parties but no agreement was signed. The Court
stated:
“Where the parties enter into a formal document the intention to enter
into formal legal relationship is obvious. But when all that happens is a
quite casual conversation whether on the telephone or otherwise, it is
very much more difficult to infer that the parties are really
contemplating entering into any legal relationship… The law... does not
impute intention to enter into such a legal relationship as that of
vendor and purchaser where the circumstances and the conduct of the
parties negative any intention of the kind… It is true negotiations
ensued, but the evidence ... seems to indicate that the parties do not
intend to be immediately bound, or to put it into Latin, that they have
no present animus contrahendi, which is of course necessary on the part
of all parties to the formation of a contract. What passed was only a
negotiation from beginning to end.” at 117.
Continue….
In Yap Eng Thong v Faber Union Ltd [1973] 1 MLJ 191, the
communications between the parties indicated that the
parties did not intend to be legally bound. The plaintiffs
signed an agreement whereby they agreed to purchase a semi-
detached bungalow to be constructed on a piece of land. They
paid a sum of $500 as option money. It was agreed that within
six weeks of the agreement, the plaintiffs should sign an
agreement of sale with the defendants who owned the land,
failing which the defendants were entitled to re-sell the
property and forfeit the option money. No agreement of sale
was entered into and the defendants "called off" the sale to
the plaintiffs. The plaintiffs claimed damages for breach of
contract.
The issue arose as to whether there was already a legally binding
contract. The High Court held that there was no legally binding and
enforceable contract. The parties were in dispute as to what the
actual agreement for sale should contain. Furthermore, although the
six week period had expired, the defendants had sent to the
plaintiffs a form of an agreement for sale but the plaintiffs refused
to sign it.
The Court found that the plaintiffs were not prepared to sign any
agreement which did not contain the disputed items and had
persisted to demand the inclusion of those items. This state of
affairs clearly indicated that no legally binding contract had yet
come into existence.
INTENTION TO CREATE LEGAL RELATIONS IN SOCIAL AND
DOMESTIC AGREEMENTS
Social and domestic agreements, for example, agreements
between spouses, parents and children, need to be
distinguished from other agreements. The general rule
where social and domestic relationships are concerned is
that there is no intention to create legal relations.
This is based on public policy considerations to
encourage individuals to take responsibility for their
domestic and social affairs, and to reduce these issues to
be brought for the courts' determination.
The general position governing domestic relationships was
set out in Choo Tiong Hin & Ors v Choo Hock Swee(1959)
25 MLJ 67 CA Singapore where Whyatt CJ stated:
“… an agreement is not a contract in the strict sense of the word,
unless it is the common intention of the parties that it shall be
legally enforceable. Such an intention is normally inferred from the
nature of the agreement. For instance, in the case of agreements
regulating commerce for business, it is obvious that the parties
intend legal consequences to follow; per contra, in the case of
agreements relating to social engagements, it is inferred as a matter of
course that there is no common intention to create legal obligations.
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The agreements ... possess all the characteristics of a
private family arrangement depending for its efficacy upon
a sense of filial duty and paternal responsibility on the part
of the adopted sons and their adoptive father ...
Agreements of this character between adopted sons and
their adoptive father may well work satisfactorily so long
as a spirit of trust and mutual confidence prevail within the
family but if this ceases to exist, then in my opinion, the
sanctions of the Courts are no substitute.” at 68-69.
This case concerned a dispute between a father and his
adopted sons who worked together on the family farm. The
sons alleged that there were valid contracts between them and
their adoptive father whereby they agreed to be adopted and
to work with their adoptive father for the acquisition of wealth
to be administered by their adopted father. The Court of
Appeal held that this was a private family arrangement
involving the obligations of father and son and there was no
intention to create legal relations.
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In Choo Tiong Hiii's case above, the Court had referred to
the English case of Balfour v Balfour [1919] 2 KB 571. In
this case, the husband went to Sri Lanka to work. His wife
was sick and could not follow, so she stayed back in the
United Kingdom wherein the husband agreed to pay the wife
£30 a month. The learned judge held that there was a
contract between the husband and his wife for the husband
to maintain his wife during the temporary separation at £30 a
month. However, on appeal, it was held that there was no
intention to create legal relations, Atkin LJ emphasised that
"[t}he home is a domain to which the king's writ does not
run". The Court also noted that this was a case where the
husband and wife were "living in amity". ( good relations)
Balfour v Balfour was also referred to in the case of Jones v
Padavatton [1969] 2 All ER 616; [1969] 1 WLR 328, CA ,
which involved arrangements between a mother and her
daughter. In this case, the daughter who was satisfactorily
employed in Washington, accepted an offer from her mother
to go to the United Kingdom and read for the Bar with a view
to practising as a lawyer in Trinidad. Her mother agreed to
provide maintenance for her at the rate of £42. No terms of
the arrangement were recorded in writing and in particular,
nothing was said as to the duration of the maintenance.
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The daughter duly went to United Kingdom and
commenced her studies for the Bar. Later, following a
proposal made by the mother, a house was bought in
London for the daughter to reside with her son, with the
rents from letting other rooms to provide for
maintenance in place of the £42 maintenance a month.
The house was purchased for £6,000 and conveyed to
the mother, who provided the money for incidental
expenses and furniture. Again, there was no written
arrangement and incidental matters remained unsettled.
No money from the rents was received by the mother,
nor was she supplied with any accounts. Subsequently,
the mother claimed for possession of the house from the
daughter.
The Court of Appeal held that this was only a family
arrangement and that the parties had no intention of entering
into legal relations. Danckwerts LJ stated:
“… the present case is one of those family arrangements which
depend on the good faith of the promises which are made and are
not intended to be rigid, binding agreements. Balfour v. Balfour
was a case of husband and wife, but there is no doubt that the
same principles apply to dealings between other relations, such as
father and son and daughter and mother. This, indeed, seems to
me a compelling case…
Continue..
The mother and the daughter seem to have been on very good terms
before 1967. The mother was arranging for a career for the
daughter which she hoped would lead to success. This involved a visit
to England in conditions which could not be wholly foreseen. What
was required was an arrangement which was to be financed by the
mother and was such as would be adaptable to circumstances, as it in
fact was. The operation about the house was, in my view, not a
completely fresh arrangement, but an adaptation of the mother's
financial assistance to the daughter due to the situation which was
found to exist in England. It was not a stiff contractual operation any
more than the original arrangement.” at 620
The general rule on intention to create legal relations in
domestic and family relations has been applied to social
relationships as well.
In Heslop v Burns [1974]1 WLR 1241, CA the defendants, a
married couple, were living in an attic. The wife, who was
expecting a child, did some temporary cleaning work at the
deceased's office. The deceased visited the defendants and
expressed concern at the conditions in which they were living in.
Thereafter, he provided the defendants with a residence, first a
cottage, and subsequently two other houses. He also became
godfather to one of their daughters and paid for her education
and gave her presents. He was extremely generous to the
defendants, visited them frequently, paid the rates on the
properties they occupied, and never required any payment from
them in respect of their -occupation of the properties.
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Upon the death of the deceased, the executors claimed
possession of the premises occupied by the defendants.
The defendants contended that they were tenants at
will of the deceased. The Court of Appeal held that the
executors were entitled to possession of the
deceased's properties and that the defendants were
not tenants at will but merely licensees.
Stamp LJ stated:
“On the facts of this case it is, in my judgment, abundantly clear
that the parties did not enter into any arrangement, far less any
arrangement intended to create a legal relationship, as to the
terms on which the defendants should occupy the property…There
was no contract, no arrangement, no statement by the deceased.
The defendants, as I see it, were allowed to move into the
property and occupy it simply as a result of the bounty of the
deceased and without any arrangements as to the terms on which
they should do so. There was no evidence of any discussion
whatsoever taking place as to the terms of the occupation. It was
by the effect of the bounty of the deceased that the home was
provided, and it was, I think, for those reasons that the
defendants remained there.” at 1246.
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There have, however, been exceptions to the general rule
that no intention to create legal relations exists in
domestic agreements.
In Merritt v Merritt the husband and wife were
separated. The husband agreed to pay his wife and to
transfer the house to her; the wife was to pay the
instalments due on the house. These arrangements were
put into writing. The wife paid the instalments but the
husband refused to transfer the house to her. The Court of
Appeal held that in this case, there was intention to
create legal relations and the wife could take action for
breach of contract.
From this case, it appears that where a husband and his wife are not
"living in amity" (unlike in Balfour v Balfour), the presumption that
there is no intention to create legal relations does not apply. It may
be noted too that in Merritt v Merritt, their agreed arrangements
were put into writing. However, in Pearce v Merriman [1904] 1 KB
80, it was held that there was nothing to prevent a husband and a
wife from entering into a tenancy agreement with each other.
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In Pettitt v Pettitt [1969] 2 All ER 385, HL, for about nine
years, the appellant and her husband lived in a house which
she had inherited. During that time, her husband carried out
a number of improvements to the house. Subsequently, the
house was sold and the appellant acquired a new house.
After the new house had been paid for, there was a surplus
of a few hundred pounds which the husband used (apparently
with the appellant's consent) in paying for his car. The
spouses lived in the house for four years before divorcing.
The husband sought a declaration that he was beneficially interested
in the proceeds from the sale of the house on the ground that, during
those four years, he had carried out a considerable number of
improvements to the house and garden. The husband's claim failed.
In this case, the House of Lords explored the difficulties faced in
determining the legal relationship affecting husbands and wives.
Lord Hodson stated:
“That these disputes [between husband and wife over the ownership of
property] are difficult to resolve is plain enough, if only because of
the special relationship between husband and wife. They do not as a
rule enter into contracts with one another so long as they are living
together on good terms. It would be very odd if they did…
Continue….
• An illustration, perhaps an extreme one, is provided
by the case of Balfour v. Balfour [1919] 2 K.B. 571
…
• Sargant J. held that the parties who were husband and wife
had entered into a contract fixing the husband's obligation to
maintain his wife during a temporary separation at £30 a
month. Apart from the husband and wife relationship the
judge's decision could hardly have been questioned, but the
Court of Appeal used strong words in support of the
proposition that mutual provisions made in the ordinary
domestic relationship of husband and wife do not of
necessity give cause for action on a contract.
• Atkin L.J pointed out that these arrangements are not sued
upon because the parties in the inception of the arrangement
never intended that they should be sued upon. The Balfour
decision has no direct bearing on the kind of situation which
has arisen here but I think it rightly indicates that the Court
will be slow to infer legal obligations from transactions
between husband and wife in the ordinary course of their
domestic life.” at 400
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INTENTION TO CREATE LEGAL RELATIONS IN COMMERCIAL
AGREEMENTS
In contrast with domestic agreements where there is a
presumption that there is no intention to create legal relations,
in commercial agreements the general rule is that such an
intention exists. This is to facilitate trade and commerce and to
promote certainty in business transactions. However, this
presumption can be rebutted if on the facts, it has been
indicated otherwise. This can arise where an agreement expressly
provide that it is not intended to be legally binding. The onus of
proof to rebut the general presumption is on the party who
denies that there is an intention to create legal relations.
In Rose and Frank Co v JR Crompton & Bros Ltd [1925] AC
445, HL, " a sale and purchase agreement contained an
"Honourable Pledge Clause". It stated that the agreement was
not formal and legal and was not subject to the jurisdiction of
the court as follows: "This arrangement is not entered into, nor
is this memorandum written, as a formal or legal agreement,
and shall not be subject to legal jurisdiction in the Law Courts
either of the United States or England
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but is only a definite expression and record of the purpose and
intention of the three parties concerned, to which they each
honourably pledge themselves, with the fullest confidence -
based on past business with each other - that it will be carried
through by each of the three parties with mutual loyalty and
friendly co-operation". The House of Lords held that the
terms of the agreement showed that the parties had no
intention to be bound. It was a contract of honour only and
was unenforceable at law.
In Jones v Vernon's Pools Ltd [1938] 2 All ER 626 , the
plaintiff alleged that he had filled in and sent to the
defendants a coupon in respect of a pool on football matches
organised by the defendants. The defendants alleged that they
had never received that particular coupon.
Atkinson J held that the plaintiff was not entitled to maintain the
action. One of the conditions of the football pool was that: "It is a basic
condition of the sending in and acceptance of this coupon that it is
intended and agreed that the conduct of the pools and everything done
in connection therewith and all arrangements relating thereto ... shall
not be attended by or give rise to any legal relationship, rights, duties
or consequences whatsoever or be legally enforceable or the subject of
litigation, but all such arrangements, agreements and transactions
are binding in honour only". At 629-630.
The Court followed Rose & Frank Co's case and held that there is
nothing unlawful or against the law in having a gentlemen's
agreement, and the law will recognise to the full an agreement of
this kind as unenforceable at law.
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The burden of proving that an agreement does not have legal effect
is on the party who denies that there is such an intention. In
Edwards v Skyways Ltd [1964] 1 WLR 349, an employee was
made redundant on the employer's agreement to pay him an "ex-
gratia" (as a favour) payment. The employer later refused to pay and
argued that ex-gratia payments involved no element of contract and
depended on the goodness of the employer. Megaw J gave judgment
for the employee and held that the agreement was a commercial
contract. The general rule that an intention exists applies and for
the presumption to be inapplicable, the burden was on the employer
to rebut it. The onus to rebut the presumption is heavy and in this
case, the word "ex-gratia" alone does not rebut the presumption.
In Home Insurance Co Ltd & St Paul Fire and Marine Insurance Co v
Administratia Asigurarilor De Stat [1983] 2 Lloyd's Rep 674, it
was held that clear words are required to show the intentions of
the parties. In this case, the plaintiff insurers entered into three
reinsurance contracts with the defendant reinsurers. The contract
provided, inter alia, that: "This treaty shall be interpreted as an
honourable engagement rather than as a legal obligation". This clause
was part of an arbitration clause providing that disputes "shall be
referred to two arbitrators". The issue arose whether the parties had
any contractual intention when they entered into the contract.
The Court held that on the true construction of the agreement, it
was the common intention of the parties that there should be an
enforceable
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The Court held that on the true construction of the
agreement, it was the common intention of the parties
that there should be an enforceable agreement and
the defendants' contention that it had no legal
effect failed.
The Court distinguished this case from Rose and
Frank Co's case where the relevant clause clearly and
unequivocally stated that "This arrangement is not
entered into ... as a formal or legal agreement" and
moreover, it was not part of any arbitration clause.
Parker J stated:
"It would be surprising if insurers who desire to protect themselves
by reinsurance were content to do so by way of an arrangement
whereby if reinsurers decided that the cost of complying with
their apparent obligations did not appeal to them, insurers
were left with no recourse other than to state that reinsurers
were dishonourable. Since the matter is one of construction
and since construction involves ascertaining the common
intention of the parties, it would in my judgment require clear
words to produce the conclusion that there was any such
common intention.” at 676.
In the next two cases, the court looked at all the
surrounding circumstances to determine the intention
of the parties.
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In Esso Petroleum v Commissioners of Customs and
Excise [1976] 1 W[R 1; [197611 All ER 117, HL, Esso
devised a petrol sales promotion scheme:
for every four gallons of petrol which a motorist
bought, he would be given a coin bearing the likeness
of one of the English soccer team members who played
in the World Cup competition in Mexico in 1970. The
question, for the purposes of taxation, was whether
Esso was selling petrol alone or the coins along with the
petrol.
The House of Lords, by a majority, held that although
Esso were engaged in business and had hoped to
promote the sale of their petrol, it did not necessarily
follow that there was any intention on their part that
their dealers should enter into any legally binding
contracts with regard to the coins. Furthermore, the
coins were of little intrinsic value. The facts in this
case negatived any contractual intention on the part of
the customer and on the part of the dealer as to the
coin and were sufficient to rebut any presumption to
the contrary.
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In Ford Motor Co Ltd v Amalgamated Union of
Engineering and Foundry Workers [196912 All ER 481, a
company and various trade unions representing its
employee members made agreements for regulating the
procedure for the relationship between the company and
the unions on the conditions of employment for employees.
The issue was whether these agreements were legal
contracts enforceable at law.
Geoffrey Lane J having looked at all the surrounding
circumstances held that although the agreements were
concerned with commercial relationships, the wording of the
agreements, their nature and the background upon which they
were reached showed that the parties did not intend that they
are binding contracts at law but that they should remain in the
realm of undertakings binding in honour. The agreements were
composed largely of optimistic aspirations and would have
presented grave practical problems of enforcement.
LETTERS OF COMFORT
There are instances where documents such as letters of
comfort have been issued in the course of business relations.
The issue arises whether such documents have legal effect.
In Kleinwort Benson Ltd v Malaysia Mining Corp Bhd (MMC)
29 [1988] 1 All ER 714; [19891 1 All ER 785, CA, the plaintiff
bank (Kleinwort Benson) gave a loan of £10 million to a subsidiary
of the defendant (MMC). The defendant gave the plaintiff two
letters of comfort which states: "It is our policy to ensure that our
subsidiary is in a solvent position". Upon the borrower/ subsidiary
becoming insolvent, the bank took action against the parent co-
defendant based on the letter of comfort. The trial judge held
that there was intention to create legal relations as it was a
commercial agreement and there was nothing to rebut the
presumption.
However, the Court of Appeal considered the purpose of the letter
of comfort and held that there was no such intention. The letter
was held to be merely a statement of fact of the defendant's policy
at that time, and did not give any future commitment or assurance
that the policy would continue. It also showed that the defendant
did not want to give a guarantee, and thus it had only given the
plaintiff a letter of comfort.
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The effect of a letter of comfort was also considered in
a Malaysian case.
In North South Properties Sdn Bhd v David Teh Teik
Lim & Anor 30 [20051 2 CU 510, CA, the Court of
Appeal held that a letter of comfort is generally a
statement of moral responsibility and is not
intended to have any legally binding effect.
However, whether a letter of comfort is capable of
giving rise to a legally binding undertaking will depend
on the intention of the parties and the circumstances
under which it is given.
On the facts of the present case, the letter was in fact a letter
of undertaking and not merely a letter of comfort; it was
therefore binding. The letter was worded as follows: "We, the
undersigned being the Directors of the Company hereby give
you our joint and several undertaking that the sum of
$217,002.50 referred to paragraph 2 (two) of the said letter
dated 7 May 1991 shall be paid to you on or before the 29th
day of October
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MEMORANDUM OF UNDERSTANDING
A document similar to a letter of comfort is the
memorandum of understanding, commonly called an "MOU".
It has been held that in order to determine the existence of
an intention to create legal relations, the courts looks at the
language, the substance and terms in the document and
clauses such as the applicable law and jurisdiction clauses.
It is not only a question of how and what the document is
titled.
In Lim Hong Liang & Anor v Tan Kim Lan @ Tan Kim Lang &
Anor [1997] 5 MLJ 157 the parties entered into an MOU as
individual shareholders in relation to the control over some
companies. The opening paragraphs of the MOU stated that "...
this memorandum of understanding hereby sets out the
parties' understanding or some of the preliminary matters to
be dealt with prior to the parties “ finalisation of the terms
and conditions of the formal agreements relating to the
transactions hereby contemplated.”
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The defendants contended that the MOU was not a legally
binding document and thus there were no enforceable rights
which could be claimed by the plaintiffs.
The High Court concluded that the parties intended the
MOU to be subject to a formal contract to be executed by
both parties after the finalisation of the terms and
conditions.
Until such time, the MOU remained an agreement to
negotiate. This was further supported by the necessity of
getting approvals from some relevant authorities that
appeared in some clauses of the MOU.
Taking into consideration the totality of the terms and
conditions set out in the MOU, the Court held that the
parties did not intend to create a legally binding contract.
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Haidar J stated: “I agree that in construing whether a
document has legal effect or not, the label attached to
the document say, 'memorandum of understanding', is not
the criteria for construing such a document ... the court
will have to determine from its language and any other
admissible evidence its true nature and purport… In
considering the MOU, it is appropriate for me to examine
the opening paragraphs of the MOU so as to 'ascertain
what common should be ascribed to the parties from the
terms of the documents and the surrounding
circumstances' (per Ralph Gibson LJ in Kleinwort Benson
Ltd v Malaysia Mining Corp Bhd [1989] 1 All ER 785 at
p 789). F
From the above [the opening paragraphs of the MOU], it seems
to me that the parties intended the MOU to be subject to a
formal contract to be executed by both parties after the
finalisation of the terms and conditions. Until such time, the
MOU is not intended to be legally binding on the parties.” at 162
….
Taking into consideration the totality of the terms and
conditions set out in the MOU, I am of the opinion that the
parties did not intend to create a legally binding contract in
view of the various approvals that needed to be obtained and
the various uncertainties and the process of negotiations that
needed to be carried out.” at 164
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In Kheam Huat Holdings Sdn Bhd v The Indian
Association, Penang [1997] 5 MLJ 157, the defendant
was a non-profit organisation incorporated as a
company limited by guarantee. The defendant put out
advertisements calling for proposals from parties
interested in building its clubhouse. After a shortlisting
process, the plaintiff's proposal was selected. The
defendant through its management committee
members executed an MOU with the plaintiff who paid
a deposit of RM30,000. Thereafter, there were
exchanges of draft agreements between the parties'
solicitors but subsequently, the defendant passed a
resolution that the MOU was not binding upon them.
The High Court held that the MOU was not binding. In this case,
although the committee members were of the view that the
MOU was a binding agreement, they had no power to bind the
defendant under the defendant's Memorandum and Articles of
Association.
Contiue…
• Further, the divesting of the defendant's property required the
High Court's consent which had not been obtained.
• The MOU also provided that a final agreement could only be
concluded on the advice of the parties' respective lawyers
which indicated that it was only a qualified document.
• Finally, the Court held that the words of the MOU were too
uncertain to be enforced, and fell far short of a formal
agreement with essential terms required of a binding
agreement.
• In relation to words in documents which are too uncertain, it
should be noted that s 30 of the Contracts Act provides that
"[a]greements, the meaning of which is not certain, or capable
of being made certain, are void". In Illustration (a), an
agreement to sell "a hundred tons of oil" (which does not show
what kind of oil is intended) is thus void for uncertainty. In
Illustration (b), an agreement to sell "one hundred tons of oil of
a specified description" is not uncertain and does not make the
agreement void.
End