Rose and Frank Co v JR Crompton and Bros Ltd,  AC 445.
Intention to create legal relations in the formation of contracts.
An American company and English company entered into a sole agency agreement in 1913 for the sale of paper goods in the USA. The written agreement contained a clause stipulating that it was not a formal nor legal agreement, and an “honourable pledge” between business partners. Subsequently, the American company placed orders for paper which were accepted by the British company. Before the orders were fulfilled, the British company terminated the agency agreement and refused to send the goods, claiming that the 1913 agreement was not legally binding and that, consequently, the orders did not create legal obligations.
The questions arose as to (1) whether the sole agency agreement of 1913 constituted a legally binding contract, and (2) whether the orders constituted enforceable contracts of sale.
Firstly, as to the 1913 agreement, the Court gave overriding weight to the provision in the agreement that expressly provides that it is to be solely an “honourable pledge”, as demonstrating that the parties did not intend the arrangement as a legally-binding contract. The Court explained that the argument that clauses restricting the legal enforceability of a contract apply solely when the document is otherwise unquestionably of legal force. In this case, the document and circumstances did not intend to create any legal interest, and the clause expressly precluding the agreement’s legal enforceability applies. Secondly, the Court held that the fact that the arrangement does not constitute a legal contract does not preclude the orders and acceptances from constituting legally-binding contracts. The lack of enforceability of an express legal arrangement under an agency agreement does not preclude the legal transactions. The orders constituted mutual offers and acceptances with each transaction having ordinary legal significance.