Intention to create legal relations

INTENTION TO CREATE LEGAL RELATIONS & CONSIDERATION

2.1 INTENTION TO CREATE LEGAL RELATIONS

As we all know, intention to create legal relations is part of elements in contract. Intention to create legal relations is defined as an intention to enter a legally binding agreement or contract. Intention to create legal relations is one of the necessary elements in formation of a contract. It is because, intention to create legal relations consists of readiness of a party to accept the legal sequences of having entered into an agreement. Intention to create legal relations is a motion of every contracting party must have the necessary intention to enter into a legally binding contract.

Based on the case of studies, Mr John has an intention to create legal relations when he decided to do some window shopping at SOGO Shopping Complex last Sunday.

There are a few concept of intention to create legal relations. Intention to create legal relations also means an intention to be serious about agreement significance:

a) The contracting parties mind will be obvious to enter a serious contract

When two parties decided to enter in the environment of a contract, their mind will understand the contents of the contracts. This is due to their ‘intention' to be consenting mind which both of the parties have to agree. If there is no agreement by both of the parties, it may make the contact being a void agreement. Thus, both of the contracting parties will enable to be serious into the contract.

b) If there is no intention to create legal relations the contract would not be enforceable, legal and binding

Intention to create a legal relation is one of the essential elements of contract. So, if there is no intention to create a legal relation, the contract can be assumed as a not legal. Due to that, the contract may not being enforceable because there is no intention to create legal relations at the beginning which not making contracting parties to be legally binding.

c) Without intention to create legal relations, the parties cannot sue each other

With no intention to create legal relations, it may cause the contracting parties are not being legally binding and this circumstances may cause the contract is enforceable. Therefore, when the contract is enforceable, the contracting parties cannot sue each other and this will spoil their business crisis. This will make the contracting parties hard to enquire their justice.

d) Without intention to create legal relations the contract may become a mere promise

In addition, with no intention to create legal relations, it will make any contract to become a mere promise. Mere promises simply like a simple promise arise when there is no intention to create legal relations. Based on the case of studies, the situation of mere promises can be seen when Nathan, the Comfortable Furniture Sdn Bhd salesman have no intention to create legal relations. He did not accept cash deposit from Mr John to obey the company policy. When the mere promise occurs, the salesman still can sell the dining set to other people because they is no legal contract between Nathan and Mr john.

e) Without intention to create legal relations the contract may lack the binding effect

Besides that, when there is no intention to create legal relations, it will make the contract or agreement become less powerful due to whether one or both of the parties does not have a consent mind. So, if the contract lack of binding effect, it will cause the difficulty to the party involved in future.

Domestic and social agreements of intention to create legal relations can be broken down into three groups which are firstly commercial or business relations, secondly social friend's relations and thirdly family or domestic relations.

a) Commercial or business relations

In term of general rules of commercial or business relations, there is a presumption or intention to be legally binding. Otherwise in term of exception the presumption is rebuttable.

Case example:

Kleinwort Benson Ltd V Malaysia Mining Corporation Bhd in year 1989

The case shows the letters of comfort. In this case, the plaintiff (bank) agreed loan to MMC Metals, subsidiary of MMC. The bank asked MMC to guarantee loan. MMC said not policy to guarantee loans to subsides offered letter of comfort stating: "It is our policy to ensure that the business of MMC (Metals) is at all times in a position to meet its liabilities under the arrangements”. The bank accepted but charged higher rate of interest and the market collapsed and MMC went into liquidation. The plaintiffs tried to claim balance from MMC. First instance the court found in favour of plaintiff, relying heavily on Skyways (1964) ruling overturned on appeal and the judge said Skyways case not was about promise supported by consideration so not applicable here. Hence, ruled no intention to create legally binding agreement statement was not meant to act as guarantee, stating on current position, not future intention.

b) Social friend's relations

In term of general rules of social friend's relations, there is no presumption to be legally binding. Otherwise, in term of exception the presumption is rebuttable.

Case example: Simpkins V Pays in year 1955

The case shows mutuality. In this case .the defendant, her granddaughter and the plaintiff (paying lodger) regularly took part in newspaper competition. All contributed but entered in defendant's name. There is no set of arrangement that state payment of postage etc. When entry of the competition is successful, defendant refused to share with plaintiff. The plaintiff sued for his share. Court ruled legally binding relationship as sufficient mutuality in the arrangements between parties.

c) Family or domestic relations

In term of general rules of family or domestic relations, there is no presumption to be legally binding. Otherwise, in term of exception the presumption is rebuttable.

Case example: Balfour v Balfour in year 1919

The husband brought wife to England from Sri Lanka. The husband had to return but wife stayed for medical reasons. He promised to pay her £30/month until his return. When he failed to pay, the wife sued the husband. Wife's action failed because there is no consideration moved from her and there is no intention to create legally binding agreement found. The court stated in husband and wife cases, burden of proof is on plaintiff to prove intention to create legally binding agreement.

2.2 CONSIDERATION

Consideration is one of the essential elements of contract. There are many definition of consideration. At first, consideration can be defined as something that is worth and have value such as an item or services. Besides that, based on the case of Currie V Misa, the classic definition of consideration can be describe that a consideration is a worth consideration which may involve right, interest, profit or benefit of one party which come from any forbearance, detriment, loss or responsibilities occurred and after being experience of the promisee. Consideration includes of executory, executed except for past. Apart from that, consideration in contract is executory when whether works has not been completed, but which needs to be completed in future. Next, consideration in contract is executed when works have been completed. Furthermore, past consideration refers to being past at a time before the making of a promise. Consideration only amounts to past consideration if it was performed before the return promise was made for example before the contract was formed. Consideration occurs as the requirements in order to enable the party to enforce a promise.

Based on the case studies, the situation of consideration can be found when Mr John who was walking around in SOGO Shopping complex get interested of the dining set in Comfortable Furniture Sdn Bhd furniture shop. Other than that, the second situation of consideration incurred when Mr John was very happy as he succeed in bargained the prices of the 6 seater dining set worth RM 1,000. Furthermore, the third situation of consideration can be viewed when Mr. John would like to pay RM 100 for the dining set deposit due to Mr John did not have enough money at that time.

2.3 RULES IN CONSIDERATION

i. Consideration can be past, executory and executed

Consideration provided for a promise must be done in relation to that promise. If something has already been completed and the promise comes after, this is a past consideration. Executory consideration consists of two promises and executed consideration consists of one promise followed by some action.

ii. Consideration must move from the promisor

Consideration must be provided by promisee in order for her or him to be able to enforce promise. Thus, party who has not provided consideration for promise cannot enforce promise and it is only the party who has “paid” for promise who can enforce it.

Case example: Tweddle V Atkinson in year 1861

John Tweddle promised William Guy that he would pay a sum of money to the child of William Guy, and likewise William Guy promised John Tweddle that he would pay a sum of money to the child of John Tweddle, upon the marriage of the two children to each other. However, William Guy failed to pay the son of John Tweddle, who then sued his executors for the amount promised. It was held that the son could not enforce the promise made to his father, as he himself had not actually given consideration for it - it was his father who had done so instead. This particular rule of consideration forms the basis of the doctrine of privity of a contract, that is, only a party to a contract is permitted to sue upon that contract's terms. Therefore consideration from the promisee was indulgent of the claim. Although consideration must move from the promisee, it does not necessarily have to move to the promisor. The promisee may provide consideration to a third party, if this is agreed at the time the parties contracted.

iii. Consideration must have economic value

Nevertheless, consideration must have some economic or material value even if negligible. Consideration cannot consist solely in sentimental or otherwise emotional value. For example following someone wishes or promising not to keep boring a person with complaints.

Case example: White V. Bluett in year 1853

A son sued his father's executors, alleging that the father had promised to pay him some money if he would cease, as the father alleged the son had done, complaining to him that he had been unfairly treated. This promise was too vague to be a "real" consideration.

This explains where a son's promise to stop complaining to his father about the distribution of the father's property was held to be incapable of amounting to consideration.

iv. Consideration cannot be the past

Consideration must be given in return for; such as in the situation of must be, to some extent, motivated by, promise or act of other party. For example, there must be fairly direct co-relation between consideration and promise or action. Something only done for reason other than promise will not be valid consideration for promise.

Case example: Roscorla V Thomas in year 1842

Roscorla and Thomas contracted to buy a horse for £30. After the sale, Thomas promised Roscorla that the horse was sound; the horse turned out to be vicious. It was held that Roscorla could not enforce the promise, as the consideration given for entering into the contract to buy the horse had been completed by the time the promise was made; in a sense, the consideration was "used up".

Case example: ReMcardle in year 1951

This case is the archetypal example of a past benefit being unacceptable as consideration in a contract. The occupants of a house carried out certain improvements during their tenancy, and were offered payment in recompense by the owner. However, the owner died before doing so, and his representatives refused to honour the promise. The courts supported the owner's representatives, because the tenants had not provided good consideration. Note that in this case the tenants' work was carried out at their own behest, and not at the request of the owner. Had the owner explicitly requested the tenants to do the work, and then offered payment, the court may have been able to use the doctrine of Implicit Assumpsit to incorporate the past work into the agreement, and thereby deem it consideration.

Case example: Lampleigh V Braithwait in year 1615

This case introduced the doctrine of Implicit Assumpsit, which states that although it is a strong principle of English law that a past benefit cannot be invoked as consideration to support a future contract, this principle may not be operative when the past benefit accrued at the beneficiary's request, and with an understanding given that the benefit would be reward in the future. Braithwaite was convicted of an unlawful killing. In desperation he asked Lampleigh to petition the King for a pardon. This was successful, and Braithwaite offered Lampleigh £100. However, when Lampleigh tried to claim, Braithwaite refused. His defense claimed Lampleigh had offered no consideration, so the agreement was not binding. The court ruled that in cases of this sort, where a past benefit was at the request of the beneficiary and where reward was expected, the past consideration could be `assumed' into the agreement.

Case example: Eastwood V Kenyon in year 1840

Mr. Eastwood brought up Sarah, the daughter of one of his friends, who died leaving Sarah sole heiress to his fortune. Mr. Eastwood had few resources and had to borrow a large sum of money to educate Sarah. When Sarah came of age, she promised to reimburse the amount. After her marriage, her husband made the same promise to Mr. Eastwood.

v. Consideration need not to be adequate but must be sufficient

In order to ensure the consideration to be sufficient, the consideration should have some value to the other party. It is because, the courts will not concern on the market price topic because they believe it will interfere the liberty of a contract.

Case example: Chappell V Nestle in year 1960

This case demonstrates that the consideration in a contract may be very close to non-existent at yet still be sufficient to uphold the agreement. Nestle offered a record to customers who sent a certain number of chocolate bar wrappers. Although the wrappers were simply thrown away, it was sufficient consideration to support the agreement. The case concerned whether Nestle should pay Chappell royalties on records given away in return for chocolate bar wrappers (plus money for postage and packing).

vi. Payment of a lesser sum is not in satisfaction of full sum

Consideration rules involves if a promise to accept less than the full amount of a debt, so it is not enforceable. In other words part payment of a debt does not generally extinguish the whole debt even if the other party agrees to this.

Case example: Pinnels case

This case probably the earliest to establish the principle that if one person owes money to another, then an agreement to take a lesser sum to settle the debt, if if well-attested, is not a binding obligation. The reason it is not rests on the fact that there is no new consideration to support the new agreement. Cole owed Pinnel £8 10s, but at Pinnel's request paid £5 2s 6d one month before the full sum was due. Cole claimed that there was an agreement that the part-payment would discharge the full debt. The court found in favour of Pinnel, because part-payment of an original debt did not make for fresh consideration. Therefore the agreement was not a contract. Although influential, this case was actually decided on a technicality. If Cole had extracted from Pinnel an agreement that the early payment was in return for accepting part payment, then Cole would have won the case. It could be argued, and indeed has been argued, that part-payment of a debt may be more acceptable to a creditor than the ability to recover the full amount in damages; common sense would suggest that it's better to have £100 now, than £200 after a year in litigation. However, in the House of Lords supported the principle of Pinnel's case, and subsequent judgements have tended to follow this ruling.

Case example: Foakes v Beer in year 1884

The appellant, John Weston Foakes, owed the respondent, Julia Beer, a sum of £2,090 19s after a court judgment. Beer agreed that she would not take any action against Foakes for the amount owed if he would sign an agreement promising to pay an initial sum of £500 and pay £150 twice yearly until the whole amount was paid back. Foakes was in financial difficulty, and so Beer waived any interest on the amount owed. Foakes made the payments as agreed without any interest. Beer sues Foakes for the interest. At trial, the court found in favour of Foakes, but was reversed by the Court of Appeal. The House of Lords upheld the ruling of the Court of Appeal in favour of Beer. The reasoning behind their judgment was that though the agreement did not contemplate the interest owed, it could still be implied given an enforceable agreement. However, the promise to pay a debt was deemed not to be sufficient consideration as there was no additional benefit moving from Foakes to Beer that was not already owed to her.

vii. Other case related to consideration

Case example: Haigh V Brooks in year 1839

The problem presented by this case is not a new one. Over a century ago, in England, Brooks obtained a certain document from Haigh believing that it was a guarantee, and promised to pay a certain sum of money in consideration of Haigh's giving it up. The guarantee proved to be unenforceable. Haigh sued Brooks for the money promised. The court said that the plaintiffs were induced by the defendant's promise to part with something which they might have kept, and the defendant obtained what he desired by means of that promise. Both being free and able to judge for themselves, how can the defendant be justified in breaking this promise, by discovering afterwards that the thing in consideration of which he gave it did not possess that value which he supposed to belong to it? It cannot be ascertained that that value was what he most regarded.

Case example: Ward V Byham in year 1956

A mother was under a statutory duty to look after her child. The ex-husband promised to pay her £1 a week if she ensured that the child was well looked after and happy. It was held that notwithstanding the statutory duty imposed on the mother, she could enforce the promise since the act of keeping the baby 'happy' provided additional consideration.

Case example: Glasbrook Bros Ltd v Glamorgan CC in year 1925

In this case, a colliery requested police protection during a strike, in the form of a body of officers quartered on the premises. The police only had the resources to make visiting patrols, but offered to place constables at the site for a financial contribution. After the strike the police presented the Colliery with a bill for services rendered, which the colliery refused to pay.

It was held that although performing a statutory duty could not be sufficient consideration to support an agreement, the action of the police was beyond statutory requirements, and payment could be claimed.

Case example: Stilk V Myrick in year 1809

In this case, a seaman, agreed with Myrick to sail his boat to the Baltic Sea and back for £5 per month. During the voyage, two men deserted. Myrick promised he would increase Stilk's wages if Stilk agreed to honour his contract in light of the desertions. Stilk agreed and on return to port, Myrick refused to pay him the extra wages. It was held that Myrick's fresh promise was not enforceable as the consideration Stilk had provided for it, the performance of a duty he already owed to Myrick under contract, was not good consideration for Myrick's promise to increase his wages.

Case example: Hartley V Ponsonby in year 1857

In this case, the captains offered extra money if the crew carried on working; in both cases the captains refused to pay at the end of the voyage; in both cases the sailors sued for the additional wages. The difference is that in this case there were substantial desertions: only five were left of the original complement of 36. In Stilk two deserted out of eleven. The sailors won their case in Hartley, where they had failed in Stilk. Why? In both cases the sailors had a contractual obligation to work the ship back to port, so in neither case was there any fresh consideration. The difference can be accounted for like this. In Stilk the change in the sailors' conditions was not dire: the crew should have been able to cope with two desertions. There being no fresh consideration, the captain's agreement to increase wages was not binding.

In Hartley, there were so many desertions that the contracted parties were no longer working in the same circumstances as when the contract was formed. Hence there were entitled to consider it discharged. This makes the captain's offer of increased wages, and acceptance by the sailors, an entirely new contract. Before the fresh promise was made, circumstances had arisen which would have entitled the promisee to refuse to carry out his obligations under his contract.

Case example: Shadwell V Shadwell in year 1860

In this case, Shadwell was under a contractual duty with a third party to marry. Shadwell's uncle promised to pay him £150 per year after he was married. It was held that Shadwell marrying was good consideration, notwithstanding that he was obliged by a contract with a third party to marry in any event.

Case example: Pau On v Lau Yiu Long

Pao On agreed to sell shares to Fu Chip (controlled by Long) in consideration for certain shares. To protect the share value, Pao On and Fu Chip agreed that Pao On would retain 60% of the acquired shares until April 1974. However, in April 1973, Pao On refused to proceed with the contract unless Long agreed to indemnify him against the value of the retained shares falling below a set level. Long agreed, but only to ensure public confidence in the company. The sale proceeded a Pao On sought to enforce the indemnity.



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