©Andrew Rodgers 2016

CAPE LAW UNIT 2: PRIVATE LAW

MODULE 2: CONTRACT LAW

Topic 2: Formation of Contract pt 4- Intention to create legal relations

INTENTION TO CREATE LEGAL RELATIONS

The courts will also sometimes inquire whether, despite the fact that offer, acceptance and consideration can
be identified, the parties did really intend to create a legally binding relationship.

Lord Bingham said in:

Edmonds v Lawson [2000] 2 WLR 1091: ‘Whether the parties intended to enter into
legally binding relations is an issue to be determined objectively and not by looking into
their respective states of mind’.

Sometimes when there is later disagreement as to the parties’ intentions at the time of contracting the court
will ask what the reasonable person in the position of the parties would have been likely to intend.

Not every arrangement that is made includes an intention that if we fail to keep to the agreement the other
party should be able to sue us for breach of the agreement. The concept of intention to create legal relations is
used by the courts as a device to enable them to deny enforceability to those agreements which they consider
should not be legally binding and hence enforced.

As Lord Stowell remarked in:

Dalrymple v Dalrymple [1811] 2 Hag Con 54: “Contracts should not be the sport of an
idle hour, mere matters of pleasantry and bandinage, never intended by the parties to
have any serious effect whatever”

It would not be sensible for the courts to be filled with actions on all of the broken promises that are ever made.
Parents make promises of pocket money to their children who may expect pocket money to be paid regularly.
Husbands make promises to their wives that they never keep. Boyfriends and girlfriends make arrangements to
meet that they fail to keep.

It would fill the courts and hardly be sensible in each broken promise of this type to allow the disappointed
parties to be able to sue even if it is upsetting and morally blameworthy when they are broken. The law makes
a sensible compromise by assuming that in certain situations we would usually not intend the agreement to be
legally binding, while in others we usually would. This element is known as intention to create legal relations.

The courts have developed 2 key guidelines for determining whether or not an intention to create legal relations
exist that would make an agreement enforceable. These are in the form of rebuttable presumptions:

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1. In the case of an agreement that is of a social or domestic nature it is presumed that there is no intention
to create a legal relationship enforceable in law.

2. In the case of commercial or business arrangements it is presumed that there is an intention to create
a legal relationship and that the agreement is legally enforceable

On this basis there are no hard and fast rules other than the application of the presumption where they can
apply. The area of intention, then is very much decided on the facts in individual cases. The presumptions are
generally followed unless there are any factors that allow them to be rebutted.

1) Social and Domestic Agreements

Families make arrangements among themselves on a daily basis, about who will do what work, who will pay
what and we could also include open promises that are made whereby one member of the family will buy a
particular item for another member. It is only logical that the courts will be unwilling to intervene and enforce
such arrangements or the courts would be full of domestic dispute.

Generally, then, arrangements between family members will be left to the parties themselves to sort it out and
thus not usually be held to be legally binding. The is the obvious case generally with husband and wife

Balfour v Balfour [1919] 2 KB 571: A husband worked abroad on overseas service. His
wife had to remain behind because of illness. The husband, as a result, promised her an
allowance of £30 per month while they were apart. The husband, however, failed to pay.
At a later point the husband suggested that the two should separate; the wife later
petitioned for divorce and her claim to payment of the allowance failed. The court held
that the agreement had been reached at an amicable point in their relationship and not
in contemplation of divorce. It was a purely domestic arrangement and the court felt it
was beyond its competence to interfere in what was a purely domestic arrangement and
therefore that the agreement was not legally enforceable.

Atkin LJ said: ‘It is necessary to remember that there are agreements between parties
which do not result in contracts within the meaning of that term in our law including
arrangements between husband and wife. They are not contract because the parties did
not intend that they should be attended by legal consequences. They are not sued upon
not because the parties are reluctant to enforce their legal rights when the agreement is
broken but because the parties in the inception of the arrangement never intended that
they should be sued upon’.

However, when husband and wife are already estranged then an agreement between them may be taken as
intended to be legally binding because the couple are at arm’s length:

Merritt v Merritt [1970] 1 WLR 1211: Here, the husband had deserted his wife for
another woman. The marital home was in joint names. An agreement that the husband
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would pay the wife an income of €40 per month if she paid the outstanding mortgage
was held by the court to be intended to create legally binding obligations between them.
The court also identified that one further point in the wife’s favour was that at the time
of the arrangement she had got her husband to put in writing that he would transfer title
in the property to her on completion of the mortgage. The wife had done what she was
required to do under the agreement between them but the husband nevertheless failed
to transfer the title deeds. The wife’s action for recognition of the sole title rights was
successful.

Lord Denning identified why the case was different from Balfour v Balfour: “It is
altogether different when the parties are not living in amity but are separated or about
to separate. They then bargain keenly. They do not rely on honourable understandings.
They want everything cut and dried. It may safely be presumed that they intend to create
legal relations”

Sometimes, families make arrangements that appear to be business arrangements because of their character.
In such cases the court will need to examine what the real purpose of the arrangement was and it is this purpose
that will determine whether the agreement is enforceable or not:

Jones v Padavatton [1969] 1 WLR 328: A mother provided an allowance for her daughter
under an agreement for her daughter to give up her highly paid job in New York, study
for the Bar in England and then return to practise in Trinidad where the mother lived.
When the daughter was finding it difficult to manage on the allowance, the mother then
bought a house for her to live in, part of which the daughter could let to supplement her
income. They later quarrelled about the daughter’s unsuccessful attempts to pass the
bar exams and the mother sought repossession of the house. The daughter’s argument
that the second agreement was contractual failed. The court could find no intent and
held it was too vague to be considered contractual. The daughter had no right to stay in
the house because there was no enforceable contract.

If money has changed hands then it will not matter that the arrangements is made socially. It will be held as
intended to be legally binding. Presumption overturned:

Simpkins v Pays [1955] 1 WLR 975: Three women, the claimant, the defendant and the
defendant’s granddaughter lived in the same house. They all entered a newspaper
competition in the defendant’s name but paying equal shares of the entry money. They
also did so on the clear understanding that they would share any winnings. When they
did in fact win £750 the defendant refused to share in the winnings. In defending the
action, she argued that the arrangement was not enforceable and did not give rise to a
legal relationship, since it was purely domestic. The court would not accept this
argument and the defence failed, possibly for policy reasons. she was bound by the
agreement.
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If parties put their financial security at risk in order to pursue a particular agreement, then it is generally
accepted that it must have been intended that the agreement should be legally binding.

Parker v Clarke [1960] 1 WLR 286: A young couple were persuaded by an older couple
to sell their house in order to move in with the older couple, with the promise also that
they would inherit property on the death of the old couple. When the 2 couples
eventually fell out and the young couple were asked to leave, their actions for damages
succeeded. The judge held that giving up their security was an indication that the
arrangement was one intended to be legally binding and the presumption applied to
domestic agreements was rebutted. He also said that the language of the
correspondence, the surrounding circumstance and the precise details governing the
arrangement, indicated that the parties intended to create legal relations.

The question must, of course depend on the intention of the parties, to be inferred from
the language they use and from the circumstances in which they use it.

Commerical and Business dealings

Businesses operate under an entirely different basis to private individuals. The whole purpose of the activities
in which they engage is to make a profit. Businesses in any case operate within a legal framework and therefore
are presumed that agreements are contractual unless the facts prove otherwise.

An agreement made within a business context is presumed to demonstrate an intention to be legally binding
unless evidence can show a different intent. This principle may apply even though the agreement on the face of
it appears to be gratuitous in character:

Edwards v Skyways Ltd [1969] 1 WLR 349: An attempt to avoid making an agreed ‘ex
gratia’-(done from a sense of moral obligation rather than because of any legal
obligation) payment in a redundancy failed. Although ex gratia indicates no pre-existing
liability to make the payment, the agreement to pay it once made, was binding because
of the context in which it was made. In this case, the claimant was a pilot who was made
redundant. As part of the arrangements for this, he was offered and accepted a payment
which stated to be ‘ex gratia’. The company then found out that the terms which had
been offered would be more expensive for it than it realised, and denied that there was
any legal obligation to make the payment.

The judge held that ex gratia did not mean not legally binding, but simply recognised
that, prior to the offer being made, there had been no obligation to make such a
payment. Once it had been made, however, and accepted as part of the redundancy
arrangement, it was capable of being legally binding and there was no evidence to
overturn the presumption that this should be the case. the pilot succeeded in his action.

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It is commonplace in commercial situations to make offers of free gifts. The clear purpose of such arrangements
is to promote the business. As a result, the arrangement can still be held to indicate a legal relationship and
mean that the promise is legally binding:

Esso Petroleum co ltd v Commissioners of Customs and Excise [1976] 1 All ER 117: Esso
gave free world cup coins with every four gallons of petrol purchased at the time of the
world cup. The customs and Excise department wanted to claim purchase tax from the
transaction on the ground that they had been produced for general sale. To succeed it
needed to show that the arrangement was contractual, the purchase of the petrol being
the consideration for the free coin, and also therefore that there was an intention to
create a legal relationship. The House of Lord was actually divided on this issue. Those
dissenting held that the transaction was too trivial to have any contractual base.
However, the majority held that, since Esso was clearly trying to gain more business from
the promotion, there was an intention to be bound by the arrangement

Lord Simon of Glaisdale said: ‘In the first place, Esso and the garage proprietors put the
material out for their commercial advantage, and designed it to attract the custom of
motorist. The whole transaction took place in a setting of business relations. In the
second place, it seems to me in general undesirable to allow a commercial promoter to
claim that what he has done is a mere puff, not intended to create legal relations. The
coins may have been themselves of little intrinsic value, but all the evidence suggests that
Esso contemplated that they would be attractive to motorist and there would be a large
commercial advantage to themselves from the scheme, an advantage in which the
garage proprietors would also share’.

This principle has also been developed to cover those situations where prizes are offered in competitions. The
purpose of such events is generally to promote the body offering the prize. As a result, there is generally
presumed to be an intention to create legal relationships which is binding on the parties and be relied on by
members of the public who enter the competition:

McGowan v Radio Buxton [2001]: the claimant entered a radio competition for which
the prize had been stated to be a Renault Clico car. She was told that she had won but
was given a four-inch scale model of a Clico. The defendants argued that there was no
legally binding contract. The judge held that there was intention to create legal relations.
The claimant entered the competition as a member of the public and that looking at the
transcript of the broadcast, there was not even a hit that the car would be a toy.

However, it is possible for a similar type of agreement not to contain an intention to be legally binding, where
that is specifically stated in the agreement itself:

Jones v Vernon’s Pools Ltd [1938] 2 All ER 626: The pools company inserted a clause on
call coupons, stating that the transaction should not give rise to any legal relationship

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but be binding in honour only. The claimant alleged that he had completed and sent in
a pools coupon but that the company has then lost his winning coupon, although the
pools company claimed that they had never received it. The claimant sought payment of
the appropriate winnings and failed. The clause was sufficiently precise and clear to
prevent any legal claim.

The same type of principle applies and has operated with significant effect in the case of ‘comfort letters’
although such letters are worded so that they appear almost to amount to a guarantee that a transaction will
be largely enforceable, they do not and will not give rise to legal obligation:

Kleinwort Benson Ltd v Malaysian Mining Corporation [1989] 1 WLR 379: Kleinwort
lent £10 million to Metals ltd, which was a subsidiary company of the Malaysian mining
corporation. The parent company MMC would not guarantee the loan but instead issued
a comfort letter stating that its intention was to ensure that at all times Metal ltd had
sufficient funds available for repayment for the loan. When Metals ltd went out of
business without repaying Kleinwort, Kleinwort sued the parent company. Its action was
based on the existence of the comfort letter, but failed. The court held that if it had
actually required a guarantee of repayment then it should have insisted on one before
engaging in the transaction, rather than accepting a mere comfort letter.

A similar principle, allowing a party in a commercial relationship to deny the consequences of an apparent
contractual breach by means of a clause refuting that a legal relationship exists, has been succeeded through
the use of the honour pledge (a clause in a contract stating that the contract is not legally enforceable)

Rose and Frank Co v J R Crompton & Bros [1923] 2 KB 261: Rose and Frank, a New York
sales firm continuously sold paper for Crompton, manufacturers of tissue, as their
agents. Under the agreement, Rose and Frank had sales and distribution rights for a 3-
year period and there was an option to extend the time. A clause in the contract between
them purported to oust the jurisdiction of the courts in the event of any dispute between
the parties and to bind the parties instead by an honourable pledge. This in effect stated
that the agreement was not a formal agreement but a genuine statement of the purpose
of the agreement between them and of the intention of the parties to pursue that
purpose with mutual co-operation. Rose and frank sued on the basis of the broken
agency agreement and also for the failure to deliver the goods already ordered. The
court of appeal in a judgment which in effect extinguished the agency agreement as a
legal relationship, upheld that termination as legitimate by virtue of the honour pledge.
The House of Lords upheld the decision of the court of appeal