Certainty & Intention to Create Legal Relations Lecture

Certainty

Introduction

Once there is valid offer and acceptance, an agreement is formed. The next requirement for such an agreement to be enforceable as a legally binding contract is its certainty.

An agreement may not qualify as a valid and enforceable contract if it lacks certainty, as upheld in the early decision in Guthing v Lynn, (1831) 2 B7 Ad 232.  For instance, where a son sought to avoid a promissory note on the pretext of a promise made to his father to not challenge the distribution of wealth under the latter’s will, the court rejected the plea as the promise being too uncertain- White v Bluett, (1853) LJ Ex 36.

However, the extent of certainty necessary to validate an agreement depends on the facts of individual case, leaving much scope for judicial interpretation.  Thus, while a failure to describe a vital term (such as price, rent, quality, quantity, time period) is likely to render an agreement without effect, it is not always necessary to fill in every detail, for instance- even if the agreement envisages future documentation, it may nonetheless constitute a binding contract- Harvey v ADI, [2003] EWCA Civ 1757. Although an estimate or quotation is normally not regarded as having contractual effect, the result may vary - as in case of quotations against tenders culminating into a binding contract- Blackpool Aero Club v Blackpool BC, [1990] 3 All ER 25. 

Another genre of agreements causing ambiguity is one which is subject to conditions precedent. A condition precedent is an event which must occur before performance of the contract is due.  While such an agreement may not be fully effective until the conditions are fulfilled, it may nevertheless be binding upon the parties insofar as completing those conditions are concerned- Ee v Kakar, (1979) 124 SJ 327.  The problem intensifies further in the context of open contracts, specifying only the parties, property and price, under broad heads- Bigg v Boyd Gibbins, [1971] 2 All ER 183.

Despite the peculiarity arising from varying facts and circumstances of each case, the uncertainty vitiating a contract may be broadly classified into two categories: (a) vagueness, and (b) incomplete agreement, discussed below.

Vagueness

Where an agreement is too vague and abstract, such that no definite meaning can be accorded to it without altering the original terms or adding new ones, the courts will refrain from substituting its own will over the parties’ intent, and thus, not enforce the agreement-Mileform Ltd v Interserve Security Ltd, [2013] EWHC 3386.  For instance, in G Scammell & Nephew v Ouston, [1941] AC 251, it was held that an agreement to buy goods on hire-purchase, without specifying the exact kind and terms of it, was not enforceable.  Likewise, an agreement subject to satisfaction of another party has been reckoned as vague and incapable of enforcement, in Stabilad Ltd v Stephens & Carter, [1999] 2 All ER 651.  An estoppel or action by a party cannot be cited to remedy the inherent gaps in the contract, although a claim for restitution may apply- Easat Antennas Ltd v Racal Defence Electronics Ltd, [2000] All ER (D) 845.

Also, where the court is of the opinion that an agreement is no more than an agreement to agree, enforcement has been negated, for instance, in Barbudev v Eurocom Cable Management Bulgaria, [2011] EWHC 1560, and Dhanani v Crasnianski, [2011] EWHC 926. In the former case, the court, while deciding upon the enforceability of a side letter issued in relation to a merger deal, held that agreement could not be enforced if it is uncertain and vague in its entirety.  In the latter case, an agreement and a term sheet requiring the parties to do their best towards setting up a private equity fund were found to have much left to be decided in future, and thus, held to not constitute enforceable contract.

Methods of resolving vagueness

  1. Use of business customs and trade usages: Not all agreements apparently vague are, however, rendered unenforceable.  Rather, courts, in the interest of contractual sanctity and commercial needs, tend to cure any gaps through business, customs and trade usages, wherever possible- Courtney v Fairbairn Ltd v Tolaini Bros (Hotels) Ltd, [1975] 1 All ER 453.  Thus, the likelihood of an agreement getting vitiated due to uncertainty is lesser in the business/commercial context, as parties can fill the gap through ordinary course of dealings, trade customs and usages- as was the case in British Crane Hire v Ipswich Plant Hire, [1974] 1 All ER 1059.  In this case, an agreement over the telephone was held valid, owing to the standard forms subsequently circulated of which practice the hirer was aware of.  Having said that, the same outcome may not follow where one of the parties is not accustomed to the usual business trends- Hollingworth v Southern Ferries, [1977] 2 Lloyd’s Rep 70.  In another case, the term “not less favourable” in relation to remuneration in the agreement was interpreted to mean of an equivalent value or more, and thus, was upheld as clear and certain clause- Leeds Rugby Ltd v Harris, [2005] EWHC 1591. 
  1. Reasonableness:The aspect of reasonableness is also used by courts to rectify uncertainties, as was done in Hillas & Co v Arcos Ltd, (1932) 147 LT 503.  This case concerned an agreement for sale of timber of certain fair specification, which was contended as being vague and uncertain.  The court, applying the standard of reasonableness and objective standards of quality, upheld the agreement.  More recently, the standard was applied in MRI Trading AG v Erdenet Mining Corporation LLC, [2012] EWHC 1988, to uphold a delivery contract based on a reasonable shipping schedule where it was not expressly so agreed upon.
  1. Doctrine of severability:The doctrine of severability can also come to rescue an uncertain clause, i.e., court may ignore the vague clause and effectuate the remaining agreement.  This was done in Nicolene Ltd v Simmonds, [1953] 1 QB 543, where the sale was subject to usual conditions of acceptance, although no such conditions existed.  The court, ignoring the phrase as meaningless, upheld the other parts of the contract.  Similarly, a self-contradicting arbitration clause in ERJ Lovelock v Exportles, [1968] 1 Lloyd’s Rep 163, was disregarded to validate the other provisions.
  1. The contract itself:The courts may also identify a mechanism inherent in the contract itself by which ambiguity is to be resolved. The case of Foley v Classique Coaches Ltd,[1934] 2 KB 1 is an example of this, whereby the contract had a term stating any ambiguity would be resolved by arbitration.

Incompleteness

While an agreement does not require to contain all minute details, it should nevertheless be complete insofar as the vital or essential terms are concerned- Grow With Us Ltd v Green Thumb (UK) Ltd, [2006] EWCA Civ 1201.  Thus, while period of a lease and identification of property in conveyance are important (Harvey v Pratt, [1965] 1 WLR 1025, and Bushwall Properties v Vortex Properties, [1976] 1 WLR 591), price in a sale of goods may not be that critical as it can be ascertained by standard of reasonableness.  The latter is corroborated by section 8(2) of the Sale of Goods Act of 1979, and upheld in Foley v Classique Coaches Ltd, [1934] 2 KB 1.  A contrast ruling is however found in May and Butcher Ltd v The King, [1934] 2 KB 17, where the court held that price is an essential of sale, and thus, where price is left to be agreed between the parties, there is no contract- a view given restricted play in contemporary times. While both the cases had an arbitration clause, what distinguished Foley from May and Butcher was that the arbitration clause in the former was to apply in case of “failure to agree” on a price (a certain mechanism) as against the arbitration in the latter which was to be triggered in case of dispute over “disagreement” about the price.  Having said that, this very fine line of distinction is difficult to demarcate in every case.  Similar reasoning over absence of arbitration clause was applied in King's Motors (Oxford) Ltd v Lax, [1969] 3 All ER 665.

In the context of interest payments on a loan, a clause varying the rate from time to time in accordance with mortgage conditions was held to be not completely unfettered, and thus, valid- Paragon Finance v Nash, [2001] EWCA Civ 1466. An agreement enclosing only bare essentials may be reckoned as complete if that is so intended by parties.  Accordingly, in Perry v Suffields Ltd, [1916] 2 Ch 187, an agreement to sell a house was upheld, notwithstanding that it did not address important features like payment of deposit, and completion.   Similarly, where the core terms in respect of product, price, and quantity were agreed upon in a sale of goods, incompleteness as regards port of shipment was held to be immaterial- Pagnan SpA v Feed Products, [1987] 2 Lloyd’s Rep 601.

Methods of resolving incompleteness

  1. Determination by contracting party: Where the clause provides for resolution of an incomplete provision, such as valuation, by one of the contracting parties, the contract may be valid, as was upheld in relation to the seller’s duty to specify place of delivery in a FOT contract, in Bulk Trading Co v Zenziper Grains and Feedstuffs, [2001] 1 Lloyd’s Rep 357. 
  1. Determination by third party or mechanism: Similar to the above, determination by a third party or an identified methodology outside of the agreement can remedy uncertainty, such as deciding upon the price by valuers to be nominated by each party has been upheld to be a complete and certain clause, in Sudbrook Trading Estate v Eggleton, [1983] 1 AC 444. This case however must be distinguished from Gillatt v Sky Television, [2001] 1 All ER 461, where valuation of shares to be determined by an independent chartered accountant was held to be essential and integral to the agreement, and thus, the clause stood vitiated due to uncertainty.

Certainty must be tested only against the essential and vital terms of the agreement, i.e., clauses integral to it.  Vagueness or incompleteness relating to ancillary matters can be ignored while ascertaining the enforceability as a contract.

Conclusion

Owing to the fact specific interpretations, consequences of alleged uncertain clauses may be highly unpredictable under English contract law. Having said that, courts have moved much ahead of the restrictive approach exhibited in May and Butcher, to accord validity to party intentions as much possible.  The tension nonetheless still prevails, as courts would not wish to devise a contract for the parties on one hand, while also being reluctant to deny a valid one on minor discrepancies, on the other hand (KC Sutton, ‘The Uncertainty of Certainty of Contract’ (1981) 5(1) Ontago Law Review 11). 

Further, with advent of complex commercial products like pre-emption rights and options (i.e., an agreement by which one party gets the right to buy at a price to be agreed, if the other wishes to sell in future, has been upheld to be valid agreement, in Pritchard v Briggs, [1980] Ch 339), the determination of contractual certainty has become all the more debatable.

Certainty of agreement is the first step.  Only if an agreement is certain as regards its essential features, then the next check of contractual intent (intention to create legal relations) arises- Baird Textile Holdings v Marks & Spencer, [2002] 1 All ER 737.

Intention to Create Legal Relations

Introduction and Origin

Intention to create legal relations, or animus contrahendi, can be explained as the agreed intention to be legally bound by a contract between the parties.  While intention to create legal relations is acknowledged as a central contractual element, its requirement as a necessary constituent or characteristic of a valid contract is much debated. One school advocating the objective theory of contract law lead by Williston and Tuck argues that so long as consideration is found to exist, what the parties contemplated as regards the legal enforceability of the agreement is not relevant. On the other hand, the subjective theory enunciates that the intention to create a contractual legal relation is a prerequisite for a complete contract to arise, as argued by Treitel, Anson and Cheshire- “In order that an offer may be made binding byacceptance, it must be made in contemplation of legal consequences. A mere statement in the course of conversation will not make a binding promise, though it be acted upon by the party to whom it was made”- WR Anson & EW Huffcut, Principles of the English law of contract (Clarendon Press series 1879) 47.

The advent of the intention of parties can be traced back to the seventeenth century legal thinkers like Pufendorf and Simpson, who emphasised on the principle that “expressions not intended to be binding do not constitute a promise” and that courts must distinguish a genuine promise from a mere puff- WB Simpson, ‘Innovation in Nineteenth Century Contract Law’ (1975) 91Law Quarterly Review247, 264.  This was later supported by Savigny’s Will Theory laying down the premise that the “law of contract protects the wills of the contracting parties”- D Kennedy, 'From the Will Theory to the Principle of Private Autonomy: Lon Fuller's "Consideration and Form"' (2000) 100 Columbia Law Review 94, 115.

As a corollary, a statement so vague, not seriously meant, or one of opinion does not make a contract.  For instance, in Weeks v Tybald, (1605) Noy 11, where the defendant published an advert agreeing to pay certain sum of money to a suitor for his daughter’s marriage, the court declined to effectuate such general words.  Likewise, Lord Stowell commented that contracts ought not be “sports of an idle hour, mere matters of pleasantry and badinage” not intended to have legal repercussions- Dalrymple v Dalrymple, (1811) 2 Hag Con 54, 105. Also, the description of a product as being fool proof was held to have no contractual consequences in Lambert v Lewis,[1982] AC 225.  On a similar note, oral statements made in the course of negotiations do not assume the status of contract, if not so intended- Heilbut, Symons & Co v Buckleton, [1913] AC 30, reiterated in IBA v EMI Electronics, (1980) 14 Build LR 1.  Thus, in the English law of contemporary times, intention to create legal relations, or animus contrahendi, stands, parallel to consideration, as a necessary condition to a valid contract. 

Development - Journey of Case Law

While hints of the intention to create legal relations as a contractual requisite can be found in the 1893 Court of Appeal decision in Carlill v Carbolic Smoke Ball Company, [1893] 1 QB 256, the case of Balfour v Balfour, [1919] 2 KB 571, provided for it as a separate formative constituent of contract.  The case involved an alleged contractual breach bythe husband in respect of his promise to provide a certain monthly payment to his wife while he worked overseas. The court, while ruling that such promise was not enforceable, held that such agreement between husband and wife “do not result in contracts even though there may be what as between other parties would constitute consideration for the agreement…they are not contracts because the parties did not intend that they should be attended by legal consequences”- Balfour v Balfour, 578-9.  Although widely criticised, this decision still stands as a good law in the English jurisprudence, and has also founded the presumption that domestic agreements do not create enforceable obligations.

Test of Reasonableness

While the question of intention to create legal relations is one of fact, the court does not look into the minds of the parties. Instead, it assesses the circumstances to ascertain if a reasonable person would regard the agreement as having legal consequences.  In other words, while the promisor may not anticipate that the promise would give rise to any legal obligation, he may nonetheless be bound by it if a reasonable person would consider that there was an intention to be so bound. 

Thus, the test is an objective one, regardless of the subjective belief or opinion of any of the parties, as upheld in the recent case of RTS Flexible Systems Ltd v Molkerei Alois Müller, [2010] UKSC 14.  This position can be inferred from the case of J Evans & Son (Portsmouth) Ltd v Andrea Merzario Ltd, [1976] 1 WLR 1078, where the court worked closely on the objective test to prevent the promisor from relying upon his subjective intention not known to the customer of not to enter into a contractual relationship.  Also, in Smith v Hughes, (1871) LR 6 QB 597,it was decided that the intention is to be determined from the perspective of a reasonable man, regardless of what the actual intentions could be.  Lord Donaldson, in Summit Investment v BSC, [1987] 1 Lloyd’s Rep 230, described parties actual/subjective intentions as “happily irrelevant”.  Likewise, in the recent case of Pennyfeathers Ltd v Pennyfeathers Property Co Ltd, [2013] EWHC 3530 (Ch), the court ruled that, as a reasonable observer would not have so concluded, the parties did not have the subjective intention to form a binding buy-out contract, thereby upholding the test of reasonableness.

The question is whether the parties reasonably believed themselves to be entering into a contract, as against them foreseeing a legal action in the event of breach, as elucidated in Albert v Motor Insurer’s Bureau, [1972] AC 301. Thus, an agreement to give effect to pre-existing rights (with no intention to create any new contract) was held to not create legal relations- The Happy Day, [2002] EWCA Civ 1068.  Accordingly, where the promise is vague and uncertain, the intention may be negated considering that the parties would not have believed/contemplated to be bound by such vague statements, as witnessed in Dickinson v Abel, [1969] 1 All ER 484.  For instance, a promise made by a property developer to a firm of solicitors in respect of a proposed development was held to not be a contract in the absence of definite commitments- JH Milner v Percy Bilton, [1966] 1 WLR 1582; and a promise by a husband to deserted wife allowing her to stay at matrimonial home for a not specified period or terms was held to have no contractual effect- Vaughan v Vaughan, [1953] 1 QB 762.  On a similar note, a promise induced merely by emotions cannot reasonably conclude a contractual intention, as evidenced in Licenses Insurance Corporation v Lawson, (1896) 12 TLR 501.  

The burden of proof as regards establishing the contractual intention depends much upon the nature of the agreement, i.e., implied or express.  While the courts must be able to affirmatively and confidently conclude of legal relations in the former, the burden is on the other party to assert that no legal effect was intended from the express stipulations, in case of the latter- New Hampshire Insurance v MGN, The Times (28 July 1995).  Having said that, the onus of proof is governed by presumptions in certain specific categories of contracts, discussed in detail below.

The test of reasonableness applies only where the facts trigger no presumption of contractual intent.

Presumption 1 - Domestic Agreements 

Such presumption against contractual intention in domestic agreements emanates as a matter of public policy, i.e., marital and household arrangements ought to be customarily kept outside the realm of contracts and judicial enforcement, regardless of the presence of any consideration.  Accordingly, an agreement to nurse a child or to gift a flat by a mother to daughter is held to be not constituting a contract- Ellis v Chief Adjudication Officer, [1998] 1 FLR 184.  It was on the same basis that an arrangement between husband and wife in respect of a dress allowance was held to be unenforceable in Cohen v Cohen, (1929) 42 CLR 91, much on the same lines as Balfour v Balfour (from which the presumption can be originally traced).

The presumption has been held to be relevant and applicable in a plethora of subsequent cases, for example, in the context of an agreement between a mother and daughter in Jones v Padavatton, [1969] 1 WLR 328.  In this case, the mother promised to maintain the daughter if the latter left her job, which maintenance was later altered to provide for rent free accommodation in the former’s house.  When the mother subsequently claimed possession of the house, the daughter resisted it on the ground of contractual promise by her mother. The court, ruling in favour of the mother, held that the agreement was purely a domestic arrangement which triggers the presumption that the parties never intended to create stiff contractual relation or be bound by it.

Rebuttal of the presumption

  1. Lack of cohabitation:The presumption above has a limited scope and can be rebutted.  For instance, an agreement where the husband and wife have separated was held to be enforceable in Merritt v Merritt, [1970] 1 WLR 1211.  Similarly, in Popiw v Popiw, [1959] VR 197, where a wife (who had left her husband) agreed to return, relying on his promise of putting the matrimonial home under their joint ownership, the court ordered the enforcement of the husband’s promise.  These cases may be used to decipher that while cohabitation, whether as married couple or otherwise, is a strong indicator for the presumption to apply, absence of it is conversely a ground of rebuttal.  More recently, the court opined in Frank Kofi Otuo v Jonathan David Morley, Watch Tower Bible and Tract Society of Britain, [2016] EWHC 46 (QB), that simply because the context of personal relations is religious, intention cannot be negated.
  1. Commercial attributes:Similarly, where the context of the agreement being entered upon has commercial attributes, the court may consider the presumption to have been rebutted- Snelling v John G Snelling, [1973] 1 QB 87. Thus, agreements not relating to household maintenance, but for commercial partnership, family business, or employment purpose are not presumed unenforceable, only because the parties are married or cohabit, as envisaged in Nunn v Dalrymple, The Times (3 August 1989). Examples may be agreement between a husband and wife relating to sharing of bank accounts, ownership of property, tenancy, or use of assets- Granatino v Radmacher, [2010] UKSC 42.  Likewise, as between parents and children, an agreement by which a house is bought for the children on the condition that they will pay certain sum of money every week to pay off the purchase price, was held to be a contractual license in Hardwick v Johnson, [1978] 1 WLR 328.  Also, regardless of cohabitation, an independent agreement to share certain prize between persons staying in the same house is legally binding.
  2. One party has acted upon the promise to a detriment: Further, the presumption may be rebutted where one party has acted upon a promise to its detriment relying upon such agreement.  In Parker v Clark, [1960] 1 WLR 286, where a couple were induced to sell their house and move in with their elderly relatives on the promise of a share in certain joint property, the court rejected the presumption of non-enforceability of the promise. Similarly, where a man promises a woman (with whom he cohabits) to make available to her the house for their children, based on which she vacates her rented flat, the court infused contractual effect to such promise- Tanner v Tanner, [1975] 1 WLR 1346. On that note, a promise of vesting interest in property so as to procure contribution from the other party towards improving such property was held enforceable in Eves v Eves, [1975] 1 WLR 1338.  This is in contrast to Pettitt v Pettitt, [1970] AC 777, where the husband, after divorce, claimed an equitable interest in the house for which he had expensed on its repairs and decoration while still being in marriage.
  1. Executed agreements: A difference in the applicability of the presumption may also lie in the context of executed and executory contracts, as purely executory agreements are generally not enforced- White v Blackmore,[1972] 2 QB 651.  Thus, courts may apply the presumption more strongly in domestic cases when none of the parties has performed its side of the bargain, affirmed in the case of Merritt v Merritt, and Rob Purton Richwood Interiors v Kilker Projects Limited, [2015] EWHC 2624.

There is, however, no exhaustive list of circumstances or cases for the presumption to apply or be rebutted, much of which depends on judicial determination on a case-to-case basis.

Presumption 2 - Social Agreements

Similar to domestic and household agreements, the presumption against the intention to create contractual consequences applies to social agreements too. An example in this regard is demonstrated in Lens v Devonshire Club, The Times (4 December 1914), where it was held that a winner of certain golf tournament was not entitled to legal remedies to recover the prize.  Although reiterated in White v Blackmore, [1972] 2 QB 651, the position has however evolved since then to recognise a legal relationship between the competitor and the organiser, as more recently ruled in O’Brien v MGN Ltd, [2002] CLC 33.

Other illustrations may be an agreement of hospitality- Wyatt v Kreglinger & Fernau, [1933] 1 KB 793; a car pool between friends or neighbours, even if one party bore the costs of the other’s vehicle- Coward v MIB, [1963] 1 QB 259; an agreement for musical performances by friends- Hadley v Kemp, [1999] EMLR 589; sharing of house - Monmouth BC v Marlog, The Times (4 May 1994); and provision of rent free accommodation to close friends- Heslop v Burns, [1974] 1 WLR 1241.

Rebuttal of the presumption

Similar to domestic agreements, the presumption in social agreements is rebuttable too, as was done in Simpkins v Pays, [1955] 1 WLR 975.  In this case, the parties (a grandmother, a granddaughter, and a lodger) lived in the same house. They participated in certain competition via newspaper every week, and shared the fee and postage between themselves, on the promise to share the prize money.  Later, when one party (grandmother) refused to share the prize on the ground that they never intended any legally binding relation, the court reckoned the presumption to have been successfully rebutted (given that an outsider- lodger was also involved in the agreement) so as to rule that a valid contract existed.

Presumption 3 - Commercial Agreements

Much in contrast to domestic and social agreements, the presumption in commercial agreements lies in favour of contractual construct, i.e., the courts presume that parties intended to create legal relations in a commercial arrangement. 

A leading case on this is Esso Petroleum Ltd v Commissioners of Customs and Excise, [1976] 1 WLR 1. Esso had implemented a sales promotion scheme under which it offered to give certain coins to every purchaser of four gallons of petrol.  When a tax was sought to be levied on the coins, the court went on to consider whether the coins were been supplied by Esso by way of a legal obligation or as a gift, and concluded that there was an intention to create legal relation.  In ruling so, the court reasoned (Lord Simon)-

I am … not prepared to accept that the promotion material put out by Esso was not envisaged by them as creating legal relations between the garage proprietors who adopted it and the motorists who yielded to its blandishments. In the first place, Esso and the garage proprietors put the material out for their commercial advantage, and designed it to attract the custom of motorists. The whole transaction took place in a setting of business relations. In the second place, it seems to me in general undesirable to allow a commercial promoter to claim that what he has done is a mere puff, not intended to create legal relations. The coins may have been themselves of little intrinsic value; but all the evidence suggests that Esso contemplated that they would be attractive to motorists and that there would be a large commercial advantage to themselves from the scheme, an advantage in which the garage proprietors also would share”- Esso Petroleum, 5-6.

Prior to Esso, the presumption was evident in Edwards v Skyways, [1969] 1 WLR 349, where an agreement to pay an ex-gratia payment was upheld as binding and legally enforceable. Also, in McGowan v Radio Buxton, (2001), where a claimant of a prize in a radio competition alleged breach of contract, the court found the intention to create legal consequences, and thus, awarded her damages. More recently, the presumption was upheld in the context of construction contract in Malcolm Charles Contracts Ltd v Crispin, [2014] EWHC 3898.

Needless to state, the presumption in commercial agreements is much stronger, and thus, instances of its rebuttal are few.  Accordingly, courts have confirmed contractual intent even where the agreement was stated to have been fixed in good faith (as in The Mercedes Envoy, [1995] 2 Lloyd’s Rep 559), or executed as an honourable engagement (as in Home and Overseas Ins Co v Mentor Ins Co (UK), [1989] 1 Lloyd’s Rep 473).  More so, in cases of agreements where one party has acted upon it, notwithstanding that such agreement may contain a disclaimer or a “without prejudice” clause to avoid such contractual intent- Tomlin v Standard Teles & Cables Ltd, [1969] 1 WLR 1378.

Rebuttal of the presumption

  1. Collective agreement between trade union and employer: An exception to the presumption, however, is a collective agreement between a trade union and an employer, which is presumed not to be legally enforceable, as upheld in Ford Motor Co v Amalgamated Union of Engineering and Foundry Workers, [1969] 2 QB 303, and reiterated in Kaur v MG Rover, [2005] IRLR 40. 
  1. Honour clause:Another exception is an honour clause, which has been upheld to have the effect of preventing a contract from coming into existence, in Rose and Frank Co v JR Crompton and Bros Ltd, [1925] AC 445.  In this case, the agreement contained a provision stating- “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 ..., 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”. Similarly, honour clause prevented a legal claim in Jones v Vernons’ Pools Ltd, (1938) 2 All ER 626.
  1. Pre-contractual promise, comfort letter or letter of intent: On a similar note, contractual intent may be negated in the commercial context where the promise is made at a pre-contractual stage, or the agreement is captured in a letter of intent or a comfort letter, as was the case in Kleinwort Benson Ltd v Malaysian Mining Corporation, [1989] 1 WLR 379.  Having said that, such rebuttal is not absolute, as a letter of intent may be held to constitute a collateral contract where the parties have acted upon it over a long period or expensed considerable monies on it, as ruled in Turriff Construction Ltd v Regalia Knitting Mills, (1971) 22 EG 169, and reiterated in Wilson Smithett & Cape Sugar Ltd v Bangladesh Sugar and Food Industries Ltd, [1986] 1 Lloyd’s Rep 378.   Lastly, in the absence of formal written agreement or record where it is normally and reasonably expected, the intent may be negated, as in relation to agreement with State authorities or understandings in company board meetings- Meates v Westpac Corp, The Times (5 July 1990).

Intention versus Consideration

The principle of consideration will be explored in depth in the next chapter. It is important to note that scholars have always been at loggerheads in relation to the necessity of intention versus consideration, as constituents of a valid contract.  While Hepple and Hedley argue that intention is a misleading concept for which there is no place, over and above the prerequisites of offer, acceptance and consideration (BA Hepple, ‘Intention to Create Legal Relations’ (1970) 28 Cambridge Law Journal 122; and S Hedley, ‘Keeping Contract in its Place - Balfour v Balfour and the Enforceability of Informal Agreements’ (1985) 5 Oxford Journal of Legal. Studies 391), it is advocated by others that consideration by itself is indicative of such intention, more particularly, in the common law countries (B Gulati, ‘Intention to Create Legal Relations: A Contractual Necessity or an Illusory Concept’ (2011) 2 Beijing Law Review127). 

Having said that, English law provides otherwise.  It is clear from the court decisions (discussed above) that contractual intent and consideration are two distinct aspects, i.e., aside to consideration, an agreement must be backed by the additional element of intention to create legal relation/effect legal consequences, so as to constitute a valid enforceable contract.  Thus, a move to "go back" to the orthodox English position is advocated by some contemporary commentators (Z Liao, ‘Intention to Create Legal Relations and the Reform of Contract Law: A Conservative Approach in the Modern Global Era’ (2013) 4(2) Beijing Law Review 82), and which continues to be the prevailing legal position of today. 

Intention to create legal relations and consideration are distinct (and therefore to be separately tested) constituents of a valid contract under English law.  The two elements may however coincide or overlap in the practical context- White v Bluett, (1853) 23 LJ Ex 36.

Conclusion

Intention to create legal relations, as distinguished from consideration, is a well-established norm under English contractual law.  While the two elements are doctrinally distinct, their separate enforcement (due to a potential overlap) is not always easy from a practical standpoint, more so, as intention itself may not be equivocally be identified in certain cases- firstly, because such intention relates to the parties’ state of mind at the time of entering upon the agreement (and not any future performance or subsequent conduct); secondly, legal sanctions may not always play in the minds of parties even when making a serious promise; and thirdly, the uncertainty of evidences that the court may accept as part of the objective test of reasonableness (G Klass, ‘Intent to Contract’ (2009) 95 Virginia Law Review 1437).  Thus, despite being a core component of contract in English law, intention to create contractual relation remains a much vexed issue, more so in the context of cross-border dealings and e-commerce mainly due to variances with the legal position in other countries like the United States and India, amongst others.


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