Intention to create legal relations

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Intention to create legal relations', otherwise an "intention to be legally bound", is a doctrine used in contract law, particularly English contract law and related common law jurisdictions. [lower-alpha 1]

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The doctrine establishes whether a court should presume that parties to an agreement wish it to be enforceable at law, and it states that an agreement is legally enforceable only if the parties are deemed to have intended it to be a binding contract.

A contract is a legally binding agreement. Once an offer has been accepted, there is an agreement, but not necessarily a contract. The element that converts any agreement into a true contract is "intention to create legal relations". There must be evidence that the parties intended the agreement to be subject to the law of contract. If evidence of intent is found, the agreement gives rise to legal obligations whereby any party in breach may be sued.

In English law, there are two judicial devices to help a court to decide whether there is intent: the earlier objective test, and the later rebuttable presumption. Both tests are used together in combination.

The objective test

The reasonable man would deem that the promise of a reward was intended to be binding. Carbolic smoke ball co.jpg
The reasonable man would deem that the promise of a reward was intended to be binding.

Counterintuitively, the best way of discovering whether the parties intended to contract is not to ask them, as this "subjective test" would give the rogue an easy loophole to escape liability. (He would reply, "No! I did not intend to be bound".) Instead, just as in Carlill v Carbolic Smoke Ball Company , [1] the court applies the "objective test" and asks whether the reasonable bystander, after taking into account all the circumstances of the case, thinks that the parties intended to be bound. [lower-alpha 2] Since the advertisement (pictured) stated that the company had "deposited £1,000 in the Alliance Bank to show sincerity in the matter", the court held that any objective bystander who read this would presume an intention to contract.

The rebuttable presumption

The rebuttable presumption establishes a burden of proof; but the burden may be rebutted by evidence to the contrary. The civil standard of proof is "a balance of probabilities", while the criminal standard of proof is "beyond reasonable doubt". Here, different presumptions will apply, according to the class of agreement. For these purposes, there are four classes of agreement:

The four classes

Family agreements

Family agreements are presumed not to give rise to legal relations unless there is clear evidence to the contrary. The courts will dismiss agreements which for policy reasons should not be legally enforceable. [2]

In 1919, Lord Atkin held in Balfour v Balfour [3] (where a husband promised his wife to pay maintenance while he worked in Ceylon) that there was no "intention to be legally bound", even though the wife was relying upon the payments. The judge stated that as a general rule, agreements between spouses would not be legally enforceable:

The matter really reduces itself to an absurdity when one considers it, because if we were to hold that there was a contract in this case we should have to hold that with regard to all the more or less trivial concerns of life where a wife, at the request of her husband, makes a promise to him, that is a promise which can be enforced in law. [4]

In a more modern case, Jones v Padavatton , [5] the court applied Balfour v Balfour and declared that a mother's promise to allow her daughter an allowance plus the use of a house provided that she left the USA to study for the English Bar was not an enforceable contract.

However, if there is clear intent to be contractually bound, the presumption is rebutted. In Merritt v Merritt , [6] a separation agreement between estranged spouses was enforceable. In Beswick v Beswick [7] an uncle's agreement to sell a coal delivery business to his nephew was enforceable. Also, in Errington v Errington , [8] a father's promise to his son and daughter-in-law that they could live in (and ultimately own) a house if they paid off the balance of the mortgage, was an enforceable unilateral contract.

Social agreements

With social agreements, there is no presumption, the case being decided solely on its merits.

Although many sources consider "social and domestic agreements" to be a single class, it is better to regard "family agreements" as a class separate from "social agreements", as the latter invokes no presumption, and only the objective test applies.

In Simpkins v Pays , [9] an informal agreement between a grandmother, granddaughter and a lodger to share competition winnings was binding. Sellers J held, applying the objective test, that the facts showed a "mutuality" between the parties, adding:

If my conclusion that there was an arrangement to share any prize money is not correct, the alternative position to that of these three persons competing together as a "syndicate", as counsel for the plaintiff put it, would mean that the plaintiff, despite her propensity for having a gamble, suddenly abandoned all her interest in the competition in the Sunday Empire News . I think that that is most improbable ...

In Coward v MIB , [10] the Court of Appeal held that when a motorcyclist regularly gave a friend a pillion lift in return for some remuneration in cash or in-kind, there was no contract. [lower-alpha 3] Soon after, in Connell v MIB , [11] a case with materially similar facts, Lord Denning (violating the rule that the Court of Appeal was bound by its own decisions) said, "I am not satisfied by the decision in Coward. I think that when one person regularly gives a lift to another in return for money, there is a contract, albeit informal". In a similar "lifts for friends case", Albert v MIB, [12] the House of Lords approved Denning's decision in Connell (so that Coward may be considered bad law).

Commercial agreements

Business transactions are presumed to be binding contracts. Handshake (Workshop Cologne '06).jpeg
Business transactions are presumed to be binding contracts.

Business transactions incur a strong presumption of a valid contract: these agreements where the parties deal as though they were strangers, are presumed to be binding. However, "honour clauses" in "gentlemen's agreements" will be recognised as negating intention to create legal relations, as in Jones v Vernons Pools [13] (where the clause "this agreement is binding in honour only" was effective). One must be careful not to draft a clause so as to attempt to exclude a court's jurisdiction, as the clause will be void, as in Baker v Jones. [14] If a contract has both an "honour clause" and a clause that attempts to exclude a court's jurisdiction (as in Rose & Frank v Crompton ) [15] the court may apply the blue pencil rule, which strikes out the offending part. The court will then recognise the remainder, provided it still makes sense, and remains in accord with the parties' bargain. The offending clause was:

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, but it 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.

When the words "and shall not be subject to legal jurisdiction in the Law Courts either of the United States or England," are "blue-pencilled out", the remainder becomes legally acceptable, while staying true to the intended meaning.

The party asserting an absence of legal relations must prove it; and any terms seeking to rebut the presumption must be clear and unambiguous. [16] Where in Edwards v Skyways Ltd [17] a bonus payment, described as 'ex gratia', was promised to an employee, this was found to be legally binding. He had relied upon the promise in accepting a redundancy package, and his employer could not adequately prove that they had not intended their promise to become a contractual term. [18]

Collective agreements

A collective agreement is a special type of commercial agreement, such as one negotiated through collective bargaining between management and trades unions. At common law, Ford v Amalgamated Union of Engineering and Foundry Workers , [19] the courts held that collective agreements were not binding. The Industrial Relations Act 1971, introduced by Robert Carr (employment minister in Edward Heath's cabinet), provided that collective agreements were binding, unless a contact clause in writing declared otherwise. After the demise of the Heath government, the law was reversed. [20] The law is now contained in the Trade Union and Labour Relations (Consolidation) Act 1992 s.179:

"Any collective agreement made after the commencement of this section shall be conclusively presumed not to have been intended by the parties to be a legally enforceable contract, unless the agreement:

(a) is in writing, and
(b) contains a provision which states that the parties intend that the agreement shall be a legally enforceable contract". [21]

The civil law approach

In civil law systems, the concept of intention to create legal relations [lower-alpha 4] is closely related to the "will theory" of contracts as espoused by German jurist Friedrich Carl von Savigny in his nineteenth century work System des heutigen Römischen Rechts . [22] It had been a prominent concept through the nineteenth century that contracts were based on a meeting of minds between two or more parties, and that their mutual consent to a bargain, or their intention to contract, were paramount. While it is generally true that courts wish to uphold the parties' intentions, [23] courts moved in the later half of the nineteenth century to a more objective stance for interpretation, [24] whereby the emphasis moved to the way in which the parties had manifested their consent to a bargain to the outside world. Given this change, it was still said that "intention to be legally bound" was a necessary element for a contract, but it came to reflect a policy about when to enforce agreements, as well as when not to.

See also

Relevant cases

Notes

  1. As in the New Zealand case of Welch v Jess .
  2. In Carlill, the contract was unilateral, with only one promise, so that only the company was bound.
  3. The court had so decided presumably to prevent a finding of the bike being used "for hire or reward", beyond the scope of the "social, domestic and pleasure" policy.
  4. In Latin: animus contrahendi or obligandi

Related Research Articles

Meeting of the minds is a phrase in contract law used to describe the intentions of the parties forming the contract. In particular, it refers to the situation where there is a common understanding in the formation of the contract. Formation of a contract is initiated with a proposal or offer. This condition or element is considered a requirement to the formation of a contract in some jurisdictions.

Consideration is an English common law concept within the law of contract, and is a necessity for simple contracts. The concept of consideration has been adopted by other common law jurisdictions, including the US.

Estoppel in English law

Estoppel in English law is a doctrine that may be used in certain situations to prevent a person from relying upon certain rights, or upon a set of facts which is different from an earlier set of facts.

Offer and acceptance Two components of agreement

Offer and acceptance are generally recognised as essential requirements for the formation of a contract, and analysis of their operation is a traditional approach in contract law. The offer and acceptance formula, developed in the 19th century, identifies a moment of formation when the parties are of one mind. This classical approach to contract formation has been modified by developments in the law of estoppel, misleading conduct, misrepresentation, unjust enrichment, and power of acceptance.

<i>Balfour v Balfour</i> 1919 English contract law case

Balfour v Balfour [1919] 2 KB 571 is a leading English contract law case. It held that there is a rebuttable presumption against an intention to create a legally enforceable agreement when the agreement is domestic in nature.

Australian contract law

The law of contract in Australia is similar to other Anglo-American common law jurisdictions.

<i>Rose & Frank Co v JR Crompton & Bros Ltd</i>

Rose & Frank Co v JR Crompton & Bros Ltd [1924] UKHL 2 is a leading decision on English contract law, regarding the intention to create legal relations in commercial arrangements. In the Court of Appeal, Atkin LJ delivered an important dissenting judgment which was upheld by the House of Lords.

<i>Jones v Padavatton</i>

Jones v Padavatton [1968] EWCA Civ 4 is a leading English decision on contract law. The decision demonstrates how domestic agreements, such as in between a mother and daughter, are presumed not to be legally binding unless there is clear intention.

When creating a contract, a negotiator is not only doing so to reach an agreement between two or more parties, but to create an agreement that is durable; whereby parties of the contract are legally bound and committed to its promises. A legally binding contract is defined as an exchange of promises or an agreement between parties that the law will enforce, and there is an underlying presumption for commercial agreements that parties intend to be legally bound.

English contract law Law of contracts in England and Wales

English contract law is the body of law that regulates legally binding agreements in England and Wales. With its roots in the lex mercatoria and the activism of the judiciary during the industrial revolution, it shares a heritage with countries across the Commonwealth, from membership in the European Union, continuing membership in Unidroit, and to a lesser extent the United States. Any agreement that is enforceable in court is a contract. A contract is a voluntary obligation, contrasting to the duty to not violate others rights in tort or unjust enrichment. English law places a high value on ensuring people have truly consented to the deals that bind them in court, so long as they comply with statutory and human rights.

Agreement in English law

In English contract law, an agreement establishes the first stage in the existence of a contract. The three main elements of contractual formation are whether there is (1) offer and acceptance (agreement) (2) consideration (3) an intention to be legally bound.

Contract Legally binding document establishing rights and duties between parties

A contract is a legally enforceable agreement that creates, defines, and governs mutual rights and obligations among its parties. A contract typically involves the transfer of goods, services, money, or a promise to transfer any of those at a future date. In the event of a breach of contract, the injured party may seek judicial remedies such as damages or rescission. Contract law, the field of the law of obligations concerned with contracts, is based on the principle that agreements must be honoured.

<i>Merritt v Merritt</i>

Merritt v Merritt [1970] EWCA Civ 6 is an English contract law case, on the matter of creating legal relations. While under the principles laid out in Balfour v Balfour, domestic agreements between spouses are rarely legally enforceable, this principle was rebutted where two spouses who formed an agreement over their matrimonial home were not on good terms.

Privity is a doctrine in English contract law that covers the relationship between parties to a contract and other parties or agents. At its most basic level, the rule is that a contract can neither give rights to, nor impose obligations on, anyone who is not a party to the original agreement, i.e. a "third party". Historically, third parties could enforce the terms of a contract, as evidenced in Provender v Wood, but the law changed in a series of cases in the 19th and early 20th centuries, the most well known of which are Tweddle v Atkinson in 1861 and Dunlop Pneumatic Tyre v Selfridge and Co Ltd in 1915.

Incorporation of terms in English law is the inclusion of terms in contracts formed under English law in such a way that the courts recognise them as valid. For a term to be considered incorporated it must fulfil three requirements. Firstly, notice of the terms should be given before or during the agreement of the contract. Secondly, the terms must be found in a document intended to be contractual. Thirdly, "reasonable steps" must be taken by the party who forms the term to bring it to the attention of the other party. The rules on incorporating terms in English law are almost all at a common law level.

Capacity in English law

Capacity in English law refers to the ability of a contracting party to enter into legally binding relations. If a party does not have the capacity to do so, then subsequent contracts may be invalid; however, in the interests of certainty, there is a prima facie presumption that both parties hold the capacity to contract. Those who contract without a full knowledge of the relevant subject matter, or those who are illiterate or unfamiliar with the English language, will not often be released from their bargains.

A letter of comfort, sometimes called a "letter of intent", is a communication from a party to a contract to the other party that indicates an initial willingness to enter into a contractual obligation absent the elements of a legally enforceable contract. The objective is to create a morally binding but not legally binding assurance.

<i>Welch v Jess</i>

Welch v Jess [1976] NZ recent Law 185 is a reported precedent case in New Zealand on intention to create legal relations in the law of contract.

Simpkins v Pays [1955] 1 WLR 975 is a precedent case on intention to create legal relations in the English law of contract.

References

  1. Carlill v Carbolic Smoke Ball Company [1893] 1 QB 256
  2. Koffman, Macdonald, p. 98
  3. Balfour v Balfour [1919] 2 KB 571
  4. per Warrington LJ, [1919] 2 KB 571, pp. 574-575
  5. Jones v Padavatton [1969] 1 WLR 328
  6. Merritt v Merritt [1970] 2 All ER 760, [1970] 1 WLR 1211
  7. Beswick v Beswick [1967] AC 58
  8. Errington v Errington [1952]
  9. Simpkins v Pays [1955] 1 WLR 975
  10. Coward v M.I.B. [1962] 1 All ER 531 CA
  11. Connell v M.I.B. [1969] 3 All ER 572 CA
  12. Albert v M.I.B. [1971] 2 All ER 1345
  13. Jones v Vernons Pools [1938] 2 All ER 626
  14. Baker v Jones [1954] 1 WLR 1005
  15. Rose & Frank v Crompton [1925] AC 445
  16. Furmston, Cheshire, Simpson, Fifoot, p. 150
  17. Edwards v Skyways Ltd [1964] 1 WLR 349
  18. Furmston, Cheshire, Simpson, Fifoot, p. 151
  19. Ford v A.U.E.F. [1969] 2 QB 303
  20. Simon Honeyball (2014). Honeyball and Bowers' Textbook on Employment Law. Oxford University Press. p. 7. ISBN   978-0-19-968562-2.
  21. Trade Union and Labour Relations (Consolidation) Act 1992 s.179
  22. Savigny, System des heutigen Römischen Rechts (1840) online, in German
  23. BCCI v Ali and HIH v Chase Manhattan Bank
  24. e.g. Smith v Hughes [1871] LR 6 QB 597

Bibliography