Contract Law I Itclr PDF

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Assignment Questions:

1. There is a debate as to whether the element of “intention to create legal relations” is required in the formation of a valid contract. Discuss. 2. The element of “intention to create legal relations” in the formation of a valid contract: a comparative study between Malaysia and the United Kingdom. Support your answer with relevant authorities.

Contents 1.

Question 1.....................................................................................................................................3

1.1.

Introduction.............................................................................................................................3

1.2.

Consideration and Intention to Create Legal Relation.........................................................3

1.2.1.

Consideration Sufficient to Cover the Functions of the Intention Test?......................4

1.3.

“Intention to Create Legal Relations” and “Offer and Acceptance”...................................4

1.4.

The Domestic/Commercial Distinction...................................................................................5

1.5.

Importance of Intention to Create Legal Relation................................................................7

1.6.

Conclusion................................................................................................................................8

2.

Question 2.....................................................................................................................................8

2.1.

Introduction.............................................................................................................................8

2.2.

Social and domestic agreements.............................................................................................8

2.3.

Commercial Agreements.......................................................................................................11

2.4.

Conclusion..............................................................................................................................15

3.

Overall Conclusion....................................................................................................................15

References..........................................................................................................................................16

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1. Question 1 1.1. Introduction In formation of contract, there are several elements which must be met. The intention to create legal relations is a crucial doctrine in formation of contract or agreement. A contract or agreement with intentions to create relations means parties involved agreed and have the intention to go into agreement which is legally binding by law and regulations. Though this doctrine date back to landmark decision of Carlill v Carbolic Smoke Ball Company in 1893 but it was only until the case of Balfour v Balfour (1919) that it became a main concern in establishing an agreement whether the parties have the intention to be legally bound.1 Place of meeting for talk of agreement plays a part in showing the intention of the parties to create legal relation. How will this apply to parties having agreement over a drink in pub? This scenario can be illustrated in the case of Blue v Ashley (2017). In this case, Mr Blue supposed that he was employed by Mr Ashley’s company, Sports Direct Group during a set up meeting in a pub. It was said that Mr Ashley offered £15 million bonus to MR Blue if he could ensure Sport Direct’s share price moved above £8 per share. It was known that a meeting in pub to be an informal social setting. Mr Blue stated that he accepted the offer which he claimed Mr Ashley offered with intention to be bound by legal relations. The share price of Sports Direct did rise above £8 per share but Mr Ashley refused to pay which led to Mr Blue suing him to recover the sum. The Court held the parties had no intention to enter into legal relations and therefore dismissed the claim based on few issues. First the place of agreement done in pub was unlikely a place for serious negotiations of agreements which shows no intention to create legal relation. Furthermore, it was not by Mr Blue’s power that the share price rose above £8. Finally, Mr Ashley had few drinks and not in the correct state of mind which means he is not in any events to make such a promise.2 Intention to create relations is often overlooked but this doctrine as per shown in the case above can be vital in enforcement of contract or agreements. Nevertheless, there is still arguments on whether intention to create legal relation is required in formation of contract and agreements. 1.2. Consideration and Intention to Create Legal Relation The argument using consideration is often raised to abandon the intention to create legal relations requirement in formation of contract. This argument is based on sufficiency of the doctrine of consideration as a test of legal enforceability which was said rendering the intention test unnecessary. However such argument is insufficient to prove the redundancy of 1 “Intention to Create Legal Relation” (StudyMooseMarch 6, 2016) 2 Gould J, “Formation of Contract: Intention to Create Legal Relations” (Levi Solicitors LLPAugust 7, 2017)

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the requirement of intention to create legal relations as a counter argument can equally be raised stating that it is unnecessary to have doctrine of consideration as intention to create legal relations already exists for test of legal enforceability. There are some points need to be prove in this argument saying that intention test should be abandoned. Doctrine of consideration will need to prove that it is sufficient to cover the functions of the intention test or this doctrine is better than the intention test.3 1.2.1. Consideration Sufficient to Cover the Functions of the Intention Test? The principle of the intention test is having parties involved in an agreement to have intention to be bound legally to have the said agreement enforceable. It has always being an argument that consideration itself is sufficient to proof the presence of intention to create legal relation. Thus, intention of forming relations is unnecessary. However, this argument has neglected the situation whereby the agreement is not enforceable even when consideration could be found due to the parties indicated expressly or implied that they have no intention to create legal relation. Consideration may be able to a solid proof to prove the existence of the parties’ intention to be bound but not legally. In other words, consideration may be able to proof the seriousness to go into contract but not the intention to be legally bound by law and regulation. Freedom of contract is highly appreciated and plays a fundamental principle in contract law. Legally binding agreement need to be voluntarily agreed by parties involved. This mean that people should be allowed to go into contract even if the agreement is not legally bound but rely on trust, love, affection or confidence of relationships between parties. Exclusion of courts’ jurisdiction can be argued to be illegal to enable parties’ intention for agreement can avoid law and regulations. Exclusion of courts’ jurisdiction and exclusion of legal binding are different. An agreement or contract with clause of “this agreement is binding in honour only… and should not have any legal effects” can be brought to court. However, the court unlikely to uphold the agreement as there is an agreement to not be legally bound. This indicate that consideration can be accepted to prove parties are serious for agreement but it is still insufficient to replace the crucial role of intention to create legal relation tests.4 1.3. “Intention to Create Legal Relations” and “Offer and Acceptance” There is also argument that intention to create legal relations is unnecessary when offer and acceptance of an agreement or contract already constitute the intention to be legally bound and can overcome the uncertainty. In short, there will be an enforceable contract as long as there are offer and acceptance. This can be argued as offeror will give a promise when offer and the offeree will exchange a promise in return as an acceptance of the offer. This explains that the promises between the offeror and offeree can be consideration and is necessary for finding of offer and acceptance and overcome uncertainty. If such argument is proven true, consideration can be argue in the same way to be regards as unnecessary. Thus, both consideration and intention to create legal relations tests will be superfluous.

3 Xiong LZ, “Intention to Create Legal Relations and the Reform of ...” (June 2013)

4 Xiong LZ, “Intention to Create Legal Relations and the Reform of ...” (June 2013)

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In a more appropriate view, offer and acceptance alone is said to be not enough for a contract to be enforceable by law and regulations. It was argued that offer and acceptance must be focus on phenomenon of consensus ad idem, thus need to be aided by other doctrines. An offer can only be view as a willingness of offeror to oblige to the terms of the offer but with a doubt of the willingness or existence of intention to be legally bound. Contract are constructed by three stages start with the first stage of offer and acceptance that form an agreement. The second stage is about the consideration supporting the contract which bind the contract but unnecessarily will be regulated by law and regulation. The third and last stage is the existence of intention to create legal relations which will decide the agreement to be legally binding or not which will conclude the formation of contact. Thus, it can be seen that through offer and acceptance it can only proof the existence of intention to be bound but not the intention to be legally bound. In this sense, offer and acceptance are already doing the function and role of consideration which may show the unnecessary of doctrine of consideration instead of intention to create legal relations. In formation of contract, offeror and offeree must show their seriousness to be bound by the contract but not legal obligations. A serious intention to be bound cannot be used to proof the existence of intention to create legal relations.5 1.4. The Domestic/Commercial Distinction Another serious argument is whether intention to create legal relations derived from the distinction between domestic and commercial agreements. It is known that domestic contract is not enforceable while commercial agreements are prima facie enforceable. Arguments are put forward in view of presumptions based on the distinction of domestic and commercial agreements are no longer reasonable and justifiable. Courts in most common law jurisdiction still treat them differently regardless of the attacks on the distinction between domestic and commercial agreements. Domestic agreements are non-commercial agreements which can be differentiate in few type of relations. Social friend’s relations There is no presumption too be legally binding in such contract involving social friends. This can be illustrated in the case of Simpkins v Pays (1955) whereby the plaintiff and her granddaughter, the defendant, took part in newspaper competition regularly. Both of them contributed but entered competition using the defendant’s name only and there is no arrangement of payment of postage. The defendant refused to share with the plaintiff when they successfully entered the competition which leads to plaintiff suing for her share. Court held their relationship is legally binding so there is sufficient mutuality to do arrangements between the parties.6 5 Xiong LZ, “Intention to Create Legal Relations and the Reform of ...” (June 2013)

6 All Answers ltd, 'Intention to Create Legal Relations' (Lawteacher.net, September 2019)

accessed 4 September 2019

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Family or Domestic relations There is also no presumption of legal binding in agreement between family members be it brother and sister, children and parents or husband and wife. This can be seen in a landmark case of Balfour v Balfour (1919). This case is about a husband brought his wife from Sri Lanka to England. The husband then need to return but his wife was advised and required to stay due to medical reasons. A £30 per month allowance was promised by the husband to the wife until his return. As time passed, the couple decided to get separated and the husband stopped paying the allowance which led the wife to sue the husband. The court held that there is no intention to create legal relation as it was a family matter and in husband and wife cases, plaintiff carries the burden to prove the intention to create legal relation.7 Other non-commercial agreements which courts often treat them by referring to domestic agreements can also be between church and priest, illustrated in the case of Ermogenous v Greek Orthodox Community of SA Inc (2002); or agreement between employer and labour union as in the case of Ford Motor Co Ltd v Amalgamated union of Engineering and Foundry Worker (1969). Parent and child As discussed above, there is no legal binding between family members which is the same in the case between parent and child. This can be seen in the case of Jones v Padavatton (1968) whereby the plaintiff who is the daughter worked in USA. The defendant, her mother offered to pay for her expenses if she was to return to England and finish her Bar Program. They agreed and the defendant bought her a house so the plaintiff can rent out rooms to cover her expenses. The plaintiff and defendant had a quarrelled and the defendant brought an action to possession of the house while the plaintiff was still doing her Bar Program. The plaintiff argued on the ground that there was binding contract between the plaintiff and defendant. The court held that there was no binding contract as it was domestic parties related. Commerical or Business relations On the other hand, Commerical agreements exist the intention to enter into legal relations. The case of Kleinwort Benson Ltd v Malaysia Mining Corporation Bhd (1989) showed how important is the intention to create legal relations. In this case, the plaintiff which is the bank agreed to loan to MMC Metals which is subsidiary of MMC. MMC was asked by the bank to guarantee the loan but MMC stated it is not policy to guarantee loans to subsidiaries. MMC offered letter of comfort stating that it is their policy to ensure the business of MMC Metal is to be at position to meet its liabilities at all times under the arrangements, which the bank accepted but charged higher rate of interest. MMC went into liquidation as the market collapsed. The plaintiff which is the bank, then claim balance from MMC. In the first place, the court favours the plaintiff by relying on Skyways (1964). The ruling was overturned on appeal as the judge held that Skyways case was on different issue which is not applicable in this case. Hence the decision of the court to held that this case was ruled no intention to 7 All Answers ltd, 'Intention to Create Legal Relations' (Lawteacher.net, September 2019)

accessed 4 September 2019

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create legal relation as statement was merely stating the company position and not meant to be the guarantor.8 As discussed above, it can be seen the importance of distinguishing the relations of parties and how intention to create legal relations are judged by the relations of the parties involved. 1.5. Importance of Intention to Create Legal Relation There are a few reasons why it is important to have intention to create legal relations. The contracting parties mind will be obvious to enter a serious contract The intention to create legal relations is crucial when parties involved decided to enter into a valid contract as this will ensures that both parties are willing to be bound by the terms of the agreements. Only with same intention, both parties can agree to the agreement or contract. The contract will be deemed as invalid if there is no agreement by both parties.9 Contract or agreement to be enforceable, legal and binding A contract or agreement can only be enforceable, legal and binding if can be proven the intention to create a legal relation. If it consist only intention to go into contract or agreement, it is not enforceable and legal binding as it may not be necessary to have the intention to create legal relations.10 Parties cannot sue each other It is vital to have intention to create legal relations as without this doctrine, parties are unable to sue each other when a dispute arises. Only with intention to create legal relations, a contract or agreement can be bound legally by law and regulation. In other words, a contract or agreement without intention to create legal relations will lost their rights to enquire justice shall a dispute happen as both parties did not agree to bind it by law and regulations.11 Without intention to create legal relations the contract may become a mere promise A contract or agreement without intention to create legal relations simply means it is only simply a mere promise. This means that any party in the contract or agreement can choose to uphold the promise or break it without any fear of consequences as it is only a promise, not bound legally which will cost legal consequences.12 8 All Answers ltd, 'Intention to Create Legal Relations' (Lawteacher.net, September 2019)

accessed 4 September 2019 9 All Answers ltd, 'Intention to Create Legal Relations' (Lawteacher.net, September 2019)

accessed 4 September 2019 10 “Intention to Create Legal Relation” (StudyMooseMarch 6, 2016) 11 “Intention to Create Legal Relation” (StudyMooseMarch 6, 2016) 12 All Answers ltd, 'Intention to Create Legal Relations' (Lawteacher.net, September 2019)

accessed 4 September 2019

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1.6. Conclusion As discussed above, we can see that intention to create legal relations is crucial to proof the legality of a contract or agreement. For instance, domestic family related relations are crucial to proof the intention to create legal intentions as shown by the case Balfour v Balfour (1919)13. We can learn from this case how to distinguish an agreement or contract in domestic relations to enable the agreements to be recognized as legal and can be regulated. We can also see how crucial the role of intention to create legal relations in commercial relations. Blue v Ashley (2017) and Kleinwort Benson Ltd v Malaysia Mining Corporation Bhd (1989) case showed us that intention to create legal relations can affect the decision of dispute. With the said above, it can be concluded that the doctrine of intention to create legal relations are required in formation of a valid contract.

2. Question 2 2.1. Introduction Intention to create legal relation (ICLR) 14is part of elements in formation of contract. Besides ICLR, the other elements to form a contract include offer, acceptance, consideration and capacity. Although ICLR is not mentioned in the Contracts Act, there seems to be no doubt that in order to form a valid contract, both parties must have the intention to enter into such a relationship. ICLR can be seen in several types of agreements such as social and domestic agreements and commercial agreements. 2.2. Social and domestic agreements Social and domestic agreement, for example is agreements between spouses, parents, and children. 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 court’s determination15. For example, agreements such as family agreement need to be distinguished from other agreements. In term of general rules of social and domestic agreements, there is no presumption to be legally bindi...