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UEA Law School
FORMATION OF CONTRACTS II: INTENTION TO CREATE LEGAL
RELATIONS
INTRODUCTION
We have seen that, in order for there to be a binding contract, the parties must have reached an agreement, with A having made an offer which B accepted. We have also seen various rules relating to identification of agreement and the constituent elements of offer and acceptance. The first of those rules we considered was the objective principle. Remember, this is the principle that whether the parties have reached agreement is determined objectively: o Would the reasonable person believe that A intended to make an offer? o Would the reasonable person believe that B accepted that offer? It is not, however, sufficient simply to establish that the parties have reached an objective agreement, according to the various rules we have considered. It must also be established that the parties intended that agreement to be legally binding. Once again, intention here is judged objectively. I.e., the question is whether the reasonable person would believe that the parties intended their agreement to be legally binding. In a sense, it can be artificial to analyse intention to create legal relations separately from offer and acceptance. For example, remember the basic definition/description of an offer: A statement of willingness by one party to be bound to the proposed terms upon the assent to those terms of the other party.
UEA Law School Part of the analysis of whether A has made an offer is, therefore, whether the reasonable person would believe that she intended to be legally bound upon assent to those terms. Similarly, part of analysis of whether B has accepted an offer addressed to her is whether she intends to be legally bound upon giving her assent to the proposed terms. It is, nonetheless, easier to analyse offer and acceptance separately, in large part because the law has developed two presumptions which go a long way towards resolving issues of intention to create legal relations. When A and B enter into an agreement in a domestic and/or social context, there is a presumption against intention to create legal relations. When A and B enter into an agreement in a commercial context, there is a presumption in favour of intention to create legal relations. It is important to note that these presumptions are rebuttable. DOMESTIC AND SOCIAL AGREEMENTS In domestic and social agreements, the court presumes that the parties did not intend to create legal relations. This seems to be a presumption based largely upon policy, specifically, the floodgates argument. The basic idea of the floodgates argument in this context is that, if it were generally presumed that parties to a domestic and social agreement intended the agreement to be legally binding, the courts could become inundated with a flood of litigation. For example: A number of friends agree that they will go out for a meal and split the bill between them. One of the friends does not show up to the meal. The others claim that she must still pay her share. She refuses. This sort of thing probably happens numerous times every day.
UEA Law School o There was insufficient evidence to overcome the presumption against intention to create legal relations Jones v. Padavatton [1969] 1 WLR 328, CA A mother promised her daughter that she, the daughter, could live rent-free in a house purchased by the mother In return, the daughter moved from Washington to London to live in the house and study for the Bar When the mother sought possession of the house, the daughter claimed that she had a contractual entitlement to live there rent-free The majority of CA held that there was no binding contract, because the presumption against intention to create legal relations had not been rebutted [Note that Salmon LJ held that there was an intention create legal relations, but the contract required the daughter to pass the Bar within a reasonable time, which had, his Lordship held, been exceeded in this case, the daughter not having qualified 5 years after the agreement was made. The mother, therefore, was not in breach of the contract.] As noted, the presumption is a rebuttable one. Therefore, if the evidence establishes that, judged objectively, the parties did intend the agreement to be legally binding despite the social and domestic context, it will be. Evidence of such an intention can be found in a number of factors. McKendrick gives the following examples: The fact that the parties’ relationship had broken down at the time the agreement was made. The fact that the agreement, although between a husband and wife living together in amity, relates to ‘ownership…of the matrimonial home, bank accounts, savings or other assets’ ( Granatino v. Radmacher [2010] UKSC 42, at [142]. The fact that the agreement, although between family members, relates to the running of a business. The fact that one party has acted to his/her detrimental reliance upon the agreement.
UEA Law School The Parties’ Relationship Has Broken Down Merritt v. Merritt [1970] 1 WLR 1211 H and W entered into an agreement that, if W paid off the mortgage, H would transfer the former matrimonial house into her sole name The court held that, as the parties were separated at the time of the agreement, there was an intention to create legal relations It seems obvious that, in cases of this nature, the parties are less likely to intend their agreement to be based upon the amicable nature or their relationship and are, thus, more likely to intend to the agreement to be binding in law. This ground is most commonly applicable to romantic relationships, especially marital relationships, but the same reasoning can be applied to any formerly amicable relationship which has deteriorated at the time the agreement is made. Agreements between Parties in an Amicable Relationship, but Relating to Ownership of a Common Home, Bank Accounts, Savings, or other Jointly-owned Assets The main examples of this category relate to agreements between spouses, but, again, the principle can surely extend more widely than this. If we stick to the spousal example, the basic idea is that, when an agreement relates to such important matters as the matrimonial home, joint bank accounts, joint savings, and other jointly-owned assets, the parties are more likely to intend their agreements to be legally binding. Essentially, the idea is that the law presumes that spouses will rely upon trust and affection to regulate many agreements between them when they are in an amicable relationship, but this presumption is less strong, and can be rebutted more easily, when the agreement relates to the most significant matters. It seems that this reflects, in part, the changing nature of society, in which divorce is far more common, reflecting the fact that even happily married couples nowadays are far more aware of the need to protect their legal positions should the marriage fail and are, thus, more likely to intend such agreements, which relate to the major marital assets, to be legally binding.
UEA Law School Detrimental Reliance The fact that one party has acted to her detrimental reliance upon the agreement is evidence relevant to potential rebuttal of the presumption against intention to create legal relations. Parker v. Clark [1960] 1 WLR 286 A couple sold their home on the basis of an agreement with their friends that they could live with the second couple, and that the woman would inherit a share in the house upon the death of second couple, if the first couple contributed to the running of the household The judge held that the agreement was legally binding Again, it can be seen that detrimental reliance is clearly a relevant factor: A reasonable person is more likely to believe that the parties intend their agreement to be legally binding if one party is acting to her detriment in relying upon an agreement. However, it can also clearly be seen that (i) detrimental reliance is not necessarily sufficient ( Jones v. Padavatton ), and (ii) the fact that the agreement related to ownership (albeit ownership of a share upon inheritance) of a house in which the parties lived can be relevant to the determination in the case (the more important the subject-matter of the agreement, the more likely the presumption against intention to create legal relations is rebutted). Commercial Agreements In a commercial setting, there is a very strong presumption in favour of an intention create legal relations. Esso Petroleum Ltd. v. Commissioners of Customs & Excise [1976] 1 WLR 1 Esso entered into a promotion by which it would give a collectible World Cup coin to every person who purchased 4 gallons of petrol from one of its filling stations The issue in the case was whether Esso was liable to tax on the coins, which was determined by whether the coins were sold This led HL to discussion of whether Esso entered into contracts to sell the coins By a majority, HL held that Esso was not liable to tax, as the coins were not ‘sold’, because they were not given for money consideration However, the majority held that the coins were contractually transferred
UEA Law School o The money paid for the petrol was not part of the consideration for the coins o Rather, the consideration for the coins was entry into the contract to purchase petrol, creating a collateral contract for the transfer of the coins o This was a contract, and not a mere gift by Esso, in part because HL held that there was a presumption to create legal relations o Even though the coins had little to no commercial value, the commercial setting ensured that there was a presumption of intention to create legal relations, which was not rebutted As with the presumption against intention to create legal relations in social and domestic situations, the presumption here can be rebutted. If the evidence establishes that, judged objectively, the parties did not intend their agreement to be legally binding, it will not be. However, the presumption is a very strong one. Express stipulation that an agreement is not to be legally binding (e.g., “honour” clauses, “gentleman’s agreements”) can rebut the presumption Rose and Frank Co. v. JR Crompton Ltd. [1925] AC 445, HL Two companies entered into an agreement under which one company, A Co. agreed that the other, B Co., could be the sole agent in the USA for sale there of certain products manufactured by A Co. The agreement was for rolling three-year periods (i.e., to be automatically renewed after each three-year period), but terminable upon giving six months’ notice The agreement also contained a detailed “honour clause”^2 HL held that the agreement was not binding, as the clause clearly established that the parties did not intend to create legal relations [Note that, before the termination of the agreement between the parties, various orders had been placed by B. Co. and these orders had been accepted by A Co. HL held that these orders (^2) ‘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. This is hereinafter referred to as the “honourable pledge” clause.’
