Intention to Create Legal Relations: When is there a contractual intention?

Clearly, it is not practical to provide judicial oversight of every agreement entered into between people – social circumstances are many and numerous and it would be unrealistic for the state, through the judiciary, to be called on to resolve disputes based on purely social arrangements and defaults.

In the 19th Century the courts tended to approach the issue from the subjective standpoint – what was in the minds of the parties – the so called consensus ad idem or meeting of the minds – and give effect to that intention if it was clearly what both parties intended.

This gave way to a more objective or empirical approach to infer intention based on the actions of the parties – what they said, what they did. In social or purely domestic situations there is a presumption that the parties did not intend legal consequences or legal relations – a presumption which may be rebutted by clear evidence to the contrary. (Infra)

There is also a rule de minimis non curat lex – the law does not concern itself with trifles which may prevent legal effect being given to agreements.

 

2.1 The reasonable man test

The key is to ask would a reasonable person, given the relationship between the parties and the nature of the agreement, say that there was/was not an intention to enter into a legally binding transaction.

2.2 Two presumptions

There are two presumptions, which may be controverted by evidence to the contrary.

In the context of domestic or social arrangements there is a presumption that the parties did not intend legal relations. The opposite applies in the case of commercial transactions.

2.3 Case law

2.3.1 Social and domestic transactions

Balfour v Balfour [1919] 2 KB 571
The Court of Appeal held that there was no enforceable agreement as there was not enough evidence to suggest that they were intending to be legally bound by the promise. The presumption that there is no intention to create legal relations was not rebutted.
Mr Balfour worked in Ceylon. Mrs Balfour was unable to rejoin him because of her medical condition. Mr Balfour promised her £30 a month until she was able to return to Ceylon. They drifted apart. Mrs Balfour sued to maintain the £30 a month.

The Court of Appeal unanimously held that there was no enforceable agreement, although the depth of their reasoning differed.

Warrington LJ delivered his opinion first:

“

“The matter really reduces itself to an absurdity when one considers it, because if we were to hold that there was a contract in this case we should have to hold that with regard to all the more or less trivial concerns of life where a wife, at the request of her husband, makes a promise to him, that is a promise which can be enforced in law. All I can say is that there is no such contract here. These two people never intended to make a bargain which could be enforced in law. The husband expressed his intention to make this payment, and he promised to make it, and was bound in honour to continue it so long as he was in a position to do so. The wife on the other hand, so far as I can see, made no bargain at all. That is in my opinion sufficient to dispose of the case”

Lord Justice Atkin approached the case in a different way: , emphasising that there was no “intention to effect legal relations”. That was so because it was a domestic agreement between husband and wife, and it meant the onus of proof was on the plaintiff, Mrs Balfour. She did not rebut the presumption.

” The defence to this action on the alleged contract is that the defendant, the husband, entered into no contract with his wife, and for the determination of that it is necessary to remember that there are agreements between parties which do not result in contracts within the meaning of that term in our law. The ordinary example is where two parties agree to take a walk together, or where there is an offer and an acceptance of hospitality . Nobody would suggest in ordinary circumstances that those agreements result in what we know as a contract, and one of the most usual forms of agreement which does not constitute a contract appears to me to be the arrangements which are made between husband and wife. It is quite common, and it is the natural and inevitable result of the relationship of husband and wife, that the two spouses should make arrangements between themselves – agreements such as are in dispute in this action – agreements for allowances, by which the husband agrees that he will pay to his wife a certain sum of money, per week, or per month, or per year, to cover either her own expenses or the necessary expenses of the household and of the children of the marriage, and in which the wife promises either expressly or impliedly to apply the allowance for the purpose for which it is given. To my mind those agreements, or many of them, do not result in contracts at all, and they do not result in contracts even though there may be what as between other parties would constitute consideration for the agreement. The consideration , as we know, may consist either in some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other. That is a well-known definition, and it constantly happens, I think, that such arrangements made between husband and wife are arrangements in which there are mutual promises, or in which there is consideration in form within the definition that I have mentioned. Nevertheless they are not contracts, and they are not contracts because the parties did not intend that they should be attended by legal consequences. To my mind it would be of the worst possible example to hold that agreements such as this resulted in legal obligations which could be enforced in the Courts. It would mean this, that when the husband makes his wife a promise to give her an allowance of 30s. or 2l. a week, whatever he can afford to give her, for the maintenance of the household and children, and she promises so to apply it, not only could she sue him for his failure in any week to supply the allowance, but he could sue her for non-performance of the obligation, express or implied, which she had undertaken upon her part. All I can say is that the small Courts of this country would have to be multiplied one hundredfold if these arrangements were held to result in legal obligations. They are not sued upon, not because the parties are reluctant to enforce their legal rights when the agreement is broken, but because the parties, in the inception of the arrangement, never intended that they should be sued upon. Agreements such as these are outside the realm of contracts altogether. The common law does not regulate the form of agreements between spouses. Their promises are not sealed with seals and sealing wax . The consideration that really obtains for them is that natural love and affection which counts for so little in these cold Courts. The terms may be repudiated, varied or renewed as performance proceeds or as disagreements develop, and the principles of the common law as to exoneration and discharge and accord and satisfaction are such as find no place in the domestic code. The parties themselves are advocates, judges, Courts, sheriff’s officer and reporter. In respect of these promises each house is a domain into which the King’s writ does not seek to run, and to which his officers do not seek to be admitted. The only question in this case is whether or not this promise was of such a class or not. For the reasons given by my brethren it appears to me to be plainly established that the promise here was not intended by either party to be attended by legal consequences. I think the onus was upon the plaintiff, and the plaintiff has not established any contract. The parties were living together, the wife intending to return. The suggestion is that the husband bound himself to pay 30l. a month under all circumstances, and she bound herself to be satisfied with that sum under all circumstances, and, although she was in ill-health and alone in this country, that out of that sum she undertook to defray the whole of the medical expenses that might fall upon her, whatever might be the development of her illness, and in whatever expenses it might involve her. To my mind neither party contemplated such a result. I think that the parol evidence upon which the case turns does not establish a contract. I think that the letters do not evidence such a contract, or amplify the oral evidence which was given by the wife, which is not in dispute. For these reasons I think the judgment of the Court below was wrong and that this appeal should be allowed.

See also: Merritt v Merritt [1970] 2 All ER 760; [1970] 1 WLR 1211. Here the court distinguished the case from Balfour v Balfour on the fact that Mr and Mrs Merritt, although still married, were estranged at the time the agreement was made and therefore any agreement between them was made with the intention to create legal relations.

Jones v Padavattan [1969] 1 WLR 328
Domestic agreements, such as in between a mother and daughter, are presumed not to be legally binding unless there is clear intention.

Jones offered to pay her daughter, Padavatton, to go to law school if she would return from the US to live in England. The daughter returned and lived in a house purchased by Jones. She also received maintenance from the rent Padavatton collected from tenants. Jones attempted to back out of the agreement and repossess the house. The Court held that there was no binding contract. Although there would have been a contract if it was not the domestic parties related, there was insufficient evidence to rebut the presumption against domestic arrangements.

Pettit v Pettit [1970] AC 777

Agreements between husband and wife may well give rise to legal consequences.

Eves v Eves [1975] 1 WLR 1338

Hardwick v Johnson [1978] 1 WLR 683

See: Tanner v Tanner [1975] 3 All ER 776
Where unmarried couples live together the courts are more likely to consider that agreements relating to property, separation and formal arrangements would be enforceable. The same principle may well hold true, where there is certainty and a clear objectoively determined intention, between a parent and an adult child.

Where domestic parties are clearly in business together, the presumption will likely be that they are intending legal consequences unless there is clear evidence to the contrary.
Snelling v Snelling [1973] QB 87

A licence for the occupation of land.

Meritt v Meritt [1970] 1 WLR 1211
Merritt and his wife jointly owned a house. Merritt left to live with another woman. They made a signed agreement that Merritt would pay his wife a monthly sum, and eventually transfer the house to her, if Mrs M kept up the monthly mortgage payments. When the mortgage was paid Mr M refused to transfer the house. In this case, the nature of the dealings, and the fact that the Merritts were separated when they signed the contract, allowed the court to assume that this was more than a domestic arrangement.

Transactions often regarded as legally binding when a husband and wife separate.

 

The presumption may be rebutted where there is evidence to the contrary. Intention may be inferred where mutuality arises.

Simpkins v Pays [1955] 1 WLR 975
A lodger and two members of a family entered into a weekly newspaper prize competition. They contributed to the entry fee but the coupon was, in fact, only submitted in the name of one of the three, a family member. They ‘syndicate’ won £750. The two family members renagued on their promise to share. The lodger sued and won – it was held that there was an an agreement and a clear intention to create legal relations.

See: Wilson v Burnett [2007] EWCA 1170 where the Court of Appeal found no intention to create legal relations.

Lord Justice May: On 20 January 2005 at a bingo hall in Plymouth, a ticket or book purchased and held by Tania Burnett (the defendant) won not only a local prize of £153 but a huge national bingo prize of £101,211. Tania was there that night playing bingo with two friends with whom she worked, and they were Stacy Wilson and Abigail Stacey. They claimed in County Court proceedings tried at Exeter on 13 December 2006 that the three girls had made a binding oral agreement, enforceable in law, that they would share any winnings equally. So Stacy and Abigail each claimed £33,736 from Tania as their contractual share of the national prize.

“The issue in this case was, in the end, a narrow one: that is, whether there had or had not been a sufficiently certain binding agreement at the girls’ place of work on an earlier occasion. There were intrinsic problems with an agreement such as this, both of definition and on the question of whether a necessarily casual conversation could be elevated into an agreement binding and enforceable in law. The reality, I think, is that the claimants’ bare bones account of what they say was agreed at their place of work, taken alone, scarcely stands as an agreement binding and enforceable in law. Having considered the judge’s judgment as a whole, it was in my view a sufficiently adequate judgment, in which the judge made a critical finding of fact unfavourable to the claimants. This finding was open to him on the limited oral evidence, which was truly capable of bearing directly on the subject. I do not consider that the rest of the evidence bore directly on this critical finding, and I think that insofar as it was capable of supporting one side or the other, some of it went one way and some perhaps another. I am not persuaded that justice requires that there should be a new trial, and for these reasons I would dismiss the appeal. ”

 

Peck v Lateu [1973] 117 SJ 185
Pact regarding winnings made by two ladies covered ‘bonus’ prize.

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2.3.2 Commercial transactions

In commercial transactions there is a presumption that the parties do intend to create legal relations. This presumption may also be rebutted by clear evidence to the contrary.

Binding in honour only

Jones v Vernons Pools [1938] 2 All ER 626
No legal relations where football pools coupon stated the agreement was to be binding in honour only.

Rose & Frank v J R Crompton Bros [1925] AC 445
Rose and Frank Co was the sole US distributor of JR Crompton’s carbon paper products. In 1913, the parties signed a new document which included this clause:

“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 n 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 with the fullest confidence, based upon past business with each other, that it will be carried through by each of the three parties with mutual loyalty and friendly co-operation.”

The relationship between the two parties broke down as JR Crompton refused to supply some of the orders of the plaintiff. Rose & Frank Co sued on enforcement of the agreement.

See the dissenting judgment of Atkin LJ which was upheld in the House of Lords

No legal relations in circumstances where the contract stated ‘This agreement is not entered into as a formal or legal agreement’.

The possibility of an implied contract after a course of dealings between two businesses?

Baird Textile Holdings Ltd v Marks & Spencer plc [2001] EWCA Civ 274 is a case on the possibility of an implied contract after a course of dealings between two businesses.

Presumption rebutted

Edwards v Skyways Ltd [1964] 1 WLR 349
‘Golden handshake’ argued by employer to be ex gratia and not legally binding. Employer failed to rebut presumption.

Evans v Merzario Ltd [1976] 1 WLR 1078

Burrows v Brent LBC [1996] 1 WLR 1448 (HL)
An agreement not to enforce a council tenancy was not intended to have contractual force, so the tenant became a ‘tolerated trespasser’:

Burden of proof: The burden of proof in commercial transaction where the presumption is that the parties to intend legal relations is on the party contending that the agreement is not legally binding.

Esso Petroleum v Commisioners for Customs and Excise [1976] 1 WLR 1

Agreement to negotiate

Walford v Miles [1991] 28 EG 81 CA

Agreements to negotiate are not normally binding: However, an agreement ‘locking out’ negotiations with a third party is not necessarily void, if there is consideration and a realistic time limit.

Comfort letters

Comfort letters have tended to be construed as agreements to continue to negotiate or a statements as to future intention and have not be held to be contractually enforceable.

Kleinwort Benson Ltd v Malaysia Mining Corp Bhd [1989] 1 All ER 785
The comfort letter lacked contractual force in this case – but it is a matter of construing the document in each case.

Wikipedia note on Comfort Letters

Subject to contract

Agreements which are stated to be ‘subject to contract’ are not legally enforceable. There is an express negation of an intention to be bound.

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