Intention to create legal relation PDF

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Intention to Create Legal RelationsIntroductionA contract must constitutes of elements for it to be a valid contract. Example of elements known are offer, acceptance and consideration. Apart from that, it is also important that the two parties intended to create legal relations. 1 Intention to creat...

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Intention to Create Legal Relations Introduction A contract must constitutes of elements for it to be a valid contract. Example of elements known are offer, acceptance and consideration. Apart from that, it is also important that the two parties intended to create legal relations.1 Intention to create legal relations is an idea that every contracting party must have the necessary intention to involve into a legally binding agreement.2 If two or more parties enter into an agreement without any intention to create legal relation, that agreement will not be regarded by the courts as a valid contract. The needs for intention to create legal relations is exclude cases which are not really relevant for the court to litigate. Not every agreement leads to a legally binding contract which can be enforced through the courts.3 For example, a person may have an agreement to meet his friend at a restaurant in which the meal is paid by his friend. It appears that the agreement is legally bound. However, in general the parties agreed to such agreements do not intend to be legally bound. Furthermore, the court would likely conclude that such agreement is not legally binding because parties do not have the intention to create legal relations. The common law divided agreement into two types of agreements: domestic agreements and commercial agreements. The distinction between the two types of agreements is to allow the court to determine which whether an agreement is legally binding and does both parties to the agreement intend to create legal relations.4 The difference between the two types of

1 Richard Stone and James Devenney, The Modern Law of Contract, (Routledge, 2015) 2 Ewan McKendrik, Contract Law, (10th edn, Palgrave Macmillan 2013) 3 Ibid 107 4 Ewan McKendrick, Contract Law: Text, Cases, and Materials, (6th edn, Oxford University Press 2014) 266-267

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arguments are the presumption. In domestic and social arguments, the presumption is that the parties did not intend to create legal relations. While the other hand, concerning commercial agreements, the presumption is that the parties did intend to create legal relations. Both presumptions can be rebutted by evidence of contrary intention. Rebuttable Presumption Generally, there is a presumption that for agreements entered into in a social or domestic context, the parties did not intend to create legal relations. For instance, an agreement between a husband and a wife is presumed not to be legally bound.5 Example of such a case is Balfour v Balfour.6 The defendant who worked in Ceylon, with his wife, came to England on holiday. The defendant then returned to Ceylon alone, the wife however stayed in England for health reasons. The defendant promised to pay the wife £30 per month as maintenance, but failed to pay the maintenance when their relationship broke up. The wife brought action to the court. The court held that the wife could not succeed because she had provided no consideration for the promise to pay £30. Atkin LJ in this case expressly based his refusal to enforce the agreement on the lack of intention by both parties to create legal relations. His judgement can be seen in the court desire, as the need to prevent unnecessary litigation and to keep the law out of family relationships.7 In a similar way, agreelments between parents and children are presumed not to be legally enforceable. In Jones v Padavatton,8 the same principle in Balfour

5 John Carter, The Construction of Commercial Contracts, (Bloomsbury Publishing, 2013) 6[1919] 2 KB 571 (CA) 7 Ibid (Atkin LJ) 8 [1969] 1 WLR 328 (CA)

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was used. Next, social agreements, for instance agreements between two friends are also presumed not to be legally binding. 9 Domestic or Social Agreements The presumption of a domestic or social agreements may of course be rebutted by evidence of intention. There is no finite list of methods by which the presumption may be rebutted.10 Whether or not the presumption has been rebutted ultimately depends on the facts of the case. The context in which the parties had entered into the agreement may persuade the court whether or not the presumption has been rebutted. There are few factors which may affect the court in considering whether the presumption has been rebutted. The first is the setting in which the agreement is made. The court is more ready to conclude the presumption has been rebutted, if an agreement is entered by family members in a ‘business setting’. For example in the case of Snelling v John G. Snelling Ltd & Others,11 three brothers who were directors of a family company, entered into an agreement on the running of the company. The court held that there is intention to create legal relations and the agreement is legally bound. Also similarly, where there is a breakup of marriage by a husband and a wife, the presumption does not function as in such case the parties do not rely on honourable understandings. The court will have regard to any reliance which has been placed on the agreement. The court are more ready to infer that the agreement was intended to be legally binding if one party has acted to his detrimental or putting financial security at risk on the faith of the agreement.

9 Mindy Chen-Wishart, Contract Law, (OUP Oxford, 2012) 93-95 10 Hugh Collins, Standard Contract Terms in Europe: A Basis for and a Challenge to European Contract Law, (Kluwer Law International 2008) 11 [1973] 1 QB 87

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Such example is shown In the case of Parker & Another v Clark & Another.12 The defendants suggested the claimants, who were their friends, to live with them. The claimants were reluctant to accept the defendant’s proposal as that would have required the claimants to sell their own house. The defendants stated that the problem can be resolved by the defendants leaving to the claimants a share of their house in their will. The claimants accepted the offer, sold their house and moved in with the defendants. However, the parties began to disagree over some matters and eventually the defendants asked the claimants to leave. The claimants brought action for breach of contract by the defendants. The court held that there is intention to create legal relations by both parties and that agreements of this kind, and especially a proposal to leave property in a will, can be the subject of a binding contract. It seems the fact that the parties have acted in upon the agreement has been determining fact of the cases. Another case of such example is Simpkin v Pays,13 the defendant, her granddaughter, and the plaintiff, a paying lodger shared a house. They entered into a weekly competition run by a newspaper paying equal shares of the entry money. They had agreed that if any of them won they would share the prize money between them. One of their entries won and the winning coupon was filled in by the plaintiff but was in defendant’s name only. The defendant received £750 in prize money and refused to share it with the other two. The plaintiff brought the action to claim one third of the prize money. The court held that the presence of the plaintiff, which is an outsider of the family rebutted the presumption that the agreement was a family agreement and not intended to be legally binding.

12 [1960] 1 WLR 286 13 [1955] 1 WLR 975

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Thirdly, the certainty of the agreement which has been entered by both parties will be considered by the court in determining whether the presumption has been rebutted.14 In Jones v Padavatton,15 in 1962, the plaintiff promised a monthly allowance to her daughter if she would resign her job in America and come to England and study to become a barrister. Later the agreement was varied. It was agreed that the plaintiff would stop the allowance, and would purchase a house, in which the defendant could occupy a room, and received rents from other tenants. Both parties quarrelled and the plaintiff claimed the possession of the house although the daughter had not even passed half of her exams. The uncertainty of the agreement was also a factor which led the court to hold that there was no intention to create legal relations. The defendant had been in London for six years and had yet to complete her barrister exam. The plaintiff’s agreement of support could not be treated by the defendant as lasting indefinitely. The defendant was entitled to possession of the house. Commercial agreements Generally, the presumption is that the parties in commercial agreements are intended to create legal relationships and the presumption is a heavy one. However in term of exception the presumption is rebuttable.16 The presumption in commercial agreements can be seen operated in the case Esso Petroleum v Commissioners of Customs and Excise.17 Esso came up with a sales promotion scheme for its petrol in conjunction with the 1970 football World Cup by which any person would get a free coin from their World Cup Coins Collection if they buy four gallons of petrol. The question was whether Esso were liable to pay a purchase tax because the coins had 14 Paul Davies, JC Smith's the Law of Contract, (Oxford University Press, 2016) 15 Jones (n 6) 16 Janet Anne O'Sullivan and Jonathan Hilliard, The Law of Contract, (Oxford University Press, 2014) 17 [1976] 1 WLR 1, HL

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been ‘produced in quantity for general sale’. If so the coins would be subject to tax and Esso would be liable to pay a purchase tax. Esso argued that the coins were just a simple free gift and the promotion was not intended to have legal effect. The House of Lords, by a 3:2 majority, held that the parties intended to create legal relations, and so Esso was liable to pay purchase tax. The coins were offered in a business setting which gave rise the presumption that they intended to be legally bound. The presumption in commercial agreements may be rebutted by inclusion of an express term in the agreement which clearly states that both parties do not intend to create legal relations. Under the case of Rose & Frank Co v JR Crompton & Bros Ltd,18 both parties entered in to an agreement on the production and sale of carbonised tissue paper. In the contract, an honourable clause which stated the agreement was not a formal or legal agreement and shall not be subject to the jurisdiction of the courts. The defendants breaches the contract and the claimants brought an action for breach. The court held that both parties agree that the agreement signed will not be legally bounded under the law. Therefore, when one of the parties has broken the agreement, another party will not have the power to sue the party who breach the contract. Also another circumstances in which the presumption is rebutted is when a certain parties make vague exaggerated statements. Such statements are essentially statements of opinion or "mere puff" and are not intended to form the basis of a legally binding contract. 19 The contract will not to be legally bound if the court held that the statement made was not seriously meant. Example of case law is Lambert v Lewis.20 Furthermore, a collective agreement

18 [1925] AC 445, HL 19 Sir William Reynell Anson, Anson's Law of Contract, (OUP Oxford 2010) 70-73 20 [1982] AC 225

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between trade unions and an employer was held there was no intention to create legal relations in Ford Motor Co. Ltd v Amalgamated Union of Engineering and Foundry Workers.21 A collective agreement is always presumed as not intended to be legally binding by both parties and works as a matter of public policy unless the parties expressly said that it was intended to be binding. 22 Is the requirement of intention to create legal relations necessary? There has been many opinions that proving an intention to create legal relations as a separate requirement of a legal contract is not necessary because the requirement of consideration provided by both parties is already a way of proving intention to create legal relations by the parties. There has been a long-lasting debate on the issue and the calls for abandoning the doctrine of intention to create legal relations is not surprising.23 The strongest raised argument for abandoning the doctrine of intention to create legal relations as separate requirement for the formation of an legally binding contract is that there already exists the doctrine of consideration as a test of legal enforceability hence the proving of intention to create legal relations is unnecessary.24 While the doctrine of consideration and the doctrine of intention to create legal relations is different, there has been overlap between the two doctrines in the regards that it is sometimes not clear whether the court’s decision is based on the absence of consideration or intention to create legal relations by the parties. 25 Also, the existence of the separate requirement of intention to create legal relations has resulted a fundamental point being overlooked by the court, which is that the common law at 21 [1969] 2 QB 303 22 (n 1) 110-111 23 Thiruvallore Arwind, Contract Law, (Oxford University Press 2017) 24 Samuel Williston, Williston on Contracts, (3rd edn, Rochester 1957) 25 Dena Valente, Enforcing Promises: Consideration and Intention in the Law of Contract, (October 2010) 45-46

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the early stage do not recognised the intention to create legal relations by the parties. 26

Thereupon, the common law looked more onto the fact that the parties have entered their

agreement through the form of bargain which includes offer, acceptance and consideration provides an extremely empirical test of the intention. And this furthermore declare that the proof of intention to create legal relations is not necessary.27 Some believe that intention is tangled with consideration, its existence as an independent element is unnecessary. It has been suggested that to abandon the doctrine of intention to create legal relations requirement in common law jurisdictions where consideration is required for an enforceable contract, but to keep the intention requirement in jurisdictions where consideration is not required.28 In case of common law countries, where consideration is one of essentials of a valid contract, the requirement of proving ‘intention to create legal relations’ should not be pressed upon. The consideration in itself can be taken as a proof strong enough to indicate the presence of intention of forming a legally binding contract.29 Some criticises of the way in which it has been used to deny legal effect to agreements made in a family settings. However, the arguments for abandon is not very convincing. It is not entirely sure whether the doctrine of consideration is sufficient and relevant enough to replace the functions of the doctrine of intention, and also whether it works better than the doctrine of intention. 30 In conclusion, although the requirement of intention plays a much limited role, it is not entirely correct to conclude that the requirement of intention to create legal relations is 26 Zhixiong Liao, Intention to Create Legal Relations and the Reform of Contract Law: A Conservative Approach in the Modern Global Era, (2013) 27 Bob Alexander Hepple, Intention to Create Legal Relations, (1970) Cambridge Law Journal Vol. 28, No. 1 28 Bhawna Gulati, Intention to Create Legal Relations: A Contractual Necessity or an Illusory Concept, (2011) 29 Randy E. Barnett, Contracts: Cases and Doctrine, (6th edn, Wolters Kluwer Law & Business 2017). 30 Neil Andrews, Contract Law, (Cambridge University Press, 2015)

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unnecessary. The doctrine of intention to create legal relations still plays a part in the formation of a legal contract and it is especially important in the area of social agreements, where its effect can be shown in excluding several agreements from becoming enforceable by the court which on the basis that the parties did not intended to create legal relations. Therefore it can be assumed that the requirement of intention to create legal relations is accepted.

Bibliography Table of Cases Balfour v Balfour [1919] 2 KB 571 (CA) Esso Petroleum v Commissioners of Customs and Excise [1976] 1 WLR 1 (HL)

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Ford Motor Co. Ltd v Amalgamated Union of Engineering and Foundry Workers [1969] 2 QB 303 Jones v Padavatton [1969] 1 WLR 328 (CA) Lambert v Lewis [1982] AC 225 Parker & Another v Clark & Another [1960] 1 WLR 286 Rose & Frank Co v JR Crompton & Bros Ltd [1925] AC 445 (HL) Simpkin v Pays [1955] 1 WLR 975 Snelling v John G. Snelling Ltd & Others [1973] 1 QB 87

Secondary Sources Anson WA, Anson's Law of Contract, (OUP Oxford 2010) 70-73 Arwind TT, Contract Law, (Oxford University Press 2017) Barnett RE, Contracts: Cases and Doctrine, (6th edn, Wolters Kluwer Law & Business 2017) Carter J, The Construction of Commercial Contracts, (Bloomsbury Publishing, 2013) 10

Chen-Wishart M, Contract Law, (OUP Oxford, 2012) 93-95 Collins H, Standard Contract Terms in Europe: A Basis for and a Challenge to European Contract Law, (Kluwer Law International 2008) Davies P, JC Smith's the Law of Contract, (Oxford University Press, 2016) Gulati B, Intention to Create Legal Relations: A Contractual Necessity or an Illusory Concept, (2011) Hepple BA, Intention to Create Legal Relations, (1970) Cambridge Law Journal Vol. 28, No. 1 Liao Z, Intention to Create Legal Relations and the Reform of Contract Law: A Conservative Approach in the Modern Global Era, (2013) McKendrik E, Contract Law, (10th edn, Palgrave Macmillan 2013) -- Contract Law: Text, Cases, and Materials, (6th edn, Oxford University Press 2014) 266-267 O'Sullivan JA and Hilliard J, The Law of Contract, (Oxford University Press, 2014) 51 Stone R and Devenney J, The Modern Law of Contract, (Routledge, 2015) Valente D, Enforcing Promises: Consideration and Intention in the Law of Contract, (October 2010) 45-46 Williston S, Williston on Contracts, (3rd edn, Rochester 1957)

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