Intention to create legal relations PDF

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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 matter. The intention to create a legal relati...

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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. 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. In Carlill v Carbolic Smoke Ball Co, 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. Social and domestic agreement 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. In Balfour v Balfour, Mr Balfour, whilst working abroad in Sri Lanka, promised to send his wife regular payments of £30 per month until she was able to be with him. When they split up he stopped sending these payments. Mrs. Balfour unsuccessfully attempted to sue her husband for breach of contract. The court held that there existed a presumption that spouses did not usually intend to create legal relations when they made promises to one another. The court also noted that this was a case where the husband and wife were “living in amity”. A different decision was arrived at in the case of Merritt v Merritt. A husband leaves his wife lived with another woman. They did a written agreement whereby husband agreed to pay the wife and to transfer the house to her while the wife was to pay the instalments due on the house. The wife paid the instalment but the husband refused to pay. The Court of Appeal distinguished the case of Balfour v Balfour on the grounds that the parties were separated (not “living in amity”). Where spouses have separated it is generally considered that they do intend to be bound by their agreements. The written agreement signed was further evidence of an intention to be bound. Pettitt v Pettitt, Mrs Pettitt inherited a house in which her and her husband lived. Her husband carried out a number of improvement to the house. She sold the house and purchased another property. There was some money left from the sale which she gave to her husband to purchase a car. They lived in the new house for four years and then divorced. He claimed that he had a beneficial interest in the property

based on improvements made to new house. His claim failed. Mr Pettitt had no interest in the property. The improvements were insufficient to create an equitable interest in the property. Also, they do not as a rule enter into contracts with one another so long as they are living together on good terms before divorce. Commercial Agreement Generally, in all business or commercial agreements there is presumption that the parties have the intention to create legal binding contract. This is to facilitate trade and commerce and to promote certainty in business transaction. However, this presumption can be rebutted if on the facts, it has been indicated otherwise. The burden is on the party denying that there is intention to create legal binding contract to rebut this presumption depending on the words used by the parties and/or the circumstances in which they used them. Rose and Frank Co v JR Crompton & Bros Ltd, the court held that The honourable pledge clause stated in the agreement rebutted the presumption which normally exists in commercial agreements that the parties intend to be legally bound by their agreements. The agreement therefore had no legal affect and was not enforceable by the courts. In the case of Edwards v Skyways, the claimant was an airline pilot working for the defendant. He was to be made redundant. The defendants said that if he withdrew his contributions to the company pension fund, they would pay him the equivalent of company contributions in an ex gratia payment. The claimant agreed to this and withdrew his contributions. The company then ran into further financial difficulty and went back on their promise relating to the ex gratia payment. The court held that the agreement had been made in a business context which raised a strong presumption that the agreement is legally binding. The claimant could therefore enforce the agreement and was entitled to the money. The court will also looked at all the surrounding circumstances to determine the intention of the parties. In Esso Petroleum v Customs & Excise, Esso ran a promotion whereby any person purchasing four gallons of petrol would get a free coin from their World Cup Coins Collection. The question for the court was whether these coins were 'produced in quantity for general resale' if so they would be subject to tax. Esso argued that the coins were simply a free gift and the promotion was not intended to have legal effect and also that there was no resale. It was held that there was an intention to create legal relations. The coins were offered in a commercial context which raised a presumption that they did intend to be bound. However, the coins were not exchanged for a money consideration and therefore the coins were not for resale. Letter 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 (KB) v Malaysia Mining Corporation BHD (MMC BHD), the plaintiff bank gave a loan to a subsidiary of the defendant (MMC). MMC refused to act as guarantor but stated they it was their company policy to ensure that their subsidiaries are always in a position to meet their debts. Upon the subsidiary becoming insolvent, the bank took action against the parent co-defendant based on the letter of comfort. The court held that the comfort letter had no legal effect. The fact that MMC BHD had refused to act as

guarantor demonstrated they did not intend to be legally bound. The comfort letter was held to be merely a statement of facts of the defendant’s policy at that time. 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, 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 this case, the letter was in fact a letter of undertaking rather than a letter of conform, it was therefore binding. 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 v Tan Kim Lan @ Tan Kim Lang, the court held that the MOU which was subject to a formal contract to be executed by the parties after finalizing the terms and conditions was not binding until such time that the formal contract was executed. Hence, the parties did not intend to create a legally binding contract. In Kheam Huat Holdings Sdn Bhd v The Indian Association, Penang, 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....