Requirement of intention to create legal relations

Apart from offer, acceptance and consideration an assertion has always been made that for there to be a valid contract, it is also essential that parts have an intention to create binding legal relations. Provide a critical analysis of this proposition with clear elaboration from decide cases.

Contract is an agreement between two or more parties intended to have legal consequences or an agreement supported by consideration. From the Law of Contract Act S.2 Subsection 1 (h) define contract as an agreement enforceable by law is a contract.

The requirement of intention to create legal relations in contract law is aimed at sifting out cases which are not really appropriate for court action. Not every agreement leads to a binding contract which can be enforced through the courts. For example you may have an agreement to meet a friend at a pub. You may have a moral duty to honour that agreement but not a legal duty to do so. This is because in general the parties to such agreements do not intend to be legally bound and the law seeks to mirror the party's wishes. In order to determine which agreements are legally binding and subject to an intention to create legal relations or not, the law draws a distinction between domestic agreements and agreements made in a commercial context.

Domestic Agreement:

In the domestic agreement the presumption can be easily rebutted if parties who are in a familial relationship are contracting in a business context.

Parties intended involved in a domestic relationship, will generally not have intended legal consequences to follow their arrangement thus a contract will not be enforceable for instance in Balfour v Balfour [1] a husband worked overseas and agreed to send maintenance payments to his wife. At the time of the agreement the couples were happily married. The relationship later soured and the husband stopped making the payments. The wife sought to enforce the agreement. The court held that the agreement was a purely social and domestic agreement and therefore it was presumed that the parties did not intend to be legally bound.

Where parties are divorced, separated, or in the process of separating, the negotiation do not take place in the context of natural love and affection therefore there is no room left for the application of such a presumption and the court will generally find that the requisite contract intent existed, or if a husband and wife enter into an agreement in circumstances in which they are no longer living in harmony. Similarly, if the words used in the contract indicate a legal intention, the presumption that may otherwise have arisen may be rebutted for instance in Merrit v Merrit [2] a husband left his wife and went to live with another woman. There was £180 left owing on the house which was jointly owned by the couple. The husband signed an agreement whereby he would pay the wife £40 per month to enable her to meet the mortgage payments and if she paid all the charges in connection with the mortgage until it was paid off he would transfer his share of the house to her. When the mortgage was fully paid she brought an action for a declaration that the house belonged to her. The court held that the agreement was binding. The Court of Appeal distinguished the case of Balfour v Balfour on the grounds that the parties were separated. 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.

Parties in other familial relationships are considered the same as married or de facto couples, and it is presumed that they do not intend to cerate legal relationships as the agreement is made in this context are based on natural love and affection. The bond of natural love and affection is likely to weaken according to the remoteness of the tie and will subsequently be easier to rebut fore instant in Jones v Padavatton [3] a mother promised to pay her daughter $200 per month if she gave up her job in the US and went to London to study for the bar. The daughter was reluctant to do so at first as she had a well paid job with the Indian embassy in Washington and was quite happy and settled, however, the mother persuaded her that it would be in her interest to do so. The mother's idea was that the daughter could then join her in Trinidad as a lawyer. This initial agreement wasn't working out as the daughter believed the $200 was US dollars whereas the mother meant Trinidad dollars which was about less than half what she was expecting. This meant the daughter could only afford to rent one room for her and her son to live in. The Mother then agreed to purchase a house for the daughter to live in. She purchased a large house so that the daughter could rent out other rooms and use the income as her maintenance. The daughter then married and did not complete her studies. The mother sought possession of the house. The question for the court was whether there existed a legally binding agreement between the mother and daughter or whether the agreement was merely a family agreement not intended to be binding.

The court held that the agreement was purely a domestic agreement which raises a presumption that the parties do not intend to be legally bound by the agreement. There was no evidence to rebut this presumption.

Commercial Agreement:

In the Commercial agreement is where an agreement is made in the commercial context, the law raises a presumption that the parties do not intend to be legally bound by the agreement.

Parties negotiate and agree in a business setting, it is assumed that the parties intended the agreement to have legal consequences for instance in Esso Petroleum Co Ltd v Customs & Excise [4] 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 and Esso would be liable to pay £200,000. 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. The court 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.

Government activities in policy initiatives, the government activity relates to a policy initiative a court may be less likely to find that the parties intended to enter contractual relations for instance in Administration of Papua New Guinea v Leahy the department of Agriculture, at the request Leahy, provided assistance to help Leahy eliminate an infestation of cattle tick on his property, an activity which was consistent with government policy. After the exercise, the Department was sued by Leahy who claimed damages for breach of contract on the basis that the departmental officers did not perform their activities skillfully. The court held that the agreement between the parties was not contractual in nature. The conduct of the parties constituted an administrative arrangement by which the Administration in pursuance of its agricultural policy gave assistance to an owner to prevent that stock contracting a disease which was prevalent in the territory. The work done was analogous to a social service which generally does not have as its basis a legal relationship of a contractual nature.

In voluntarily association, rules or constitutions of voluntarily association do not constitute a binding legal contract between parties ‘unless there was some clear positive indication that the members contemplated the creation of legal relations inter se, the rules adopted for their governance would not be treated as amounting to an enforceable contract for instance in Cameron v Hogan

In conclusion, it can be seen that intention to create legal relations therefore seeks to keep agreements between family and friends outside the court jurisdiction