TABLE OF CONTENTS
Introduction
Importance of Intention to Create Legal Relationship
Tests for Determining Intention to Create Legal Relationship
Instances Where Intention Plays a Crucial Role
Conclusion

Introduction

Contracts are the backbone of commercial transactions and legal relationships. They define the rights, obligations, and expectations of parties entering into agreements. However, not all agreements amount to contracts, as there are several essential elements that must be met for an agreement to be legally binding.

One such critical element is the intention to create legal relationship between the parties involved. This post delves into the profound importance of intention in contract formation, examining its role in various contexts, and how it shapes the enforceability of agreements.

Importance of Intention to Create Legal Relationship

The presence of an intention to create a legal relationship is fundamental to the formation of a contract. Without this intention, agreements remain mere promises and lack enforceability.

This concept is integral to contract law as it underscores the seriousness and legal consequences of entering into a contract. One significant legal precedent that illustrates this importance is the case of Balfour v. Balfour (1919).

In Balfour v. Balfour, the court emphasized that not all agreements between parties result in contracts because their meanings may not conform to legal standards. This observation is particularly relevant in cases involving personal or domestic agreements, such as those between spouses or family members. In such scenarios, the absence of an intention to bear legal consequences often precludes the formation of a binding contract.

Tests for Determining Intention to Create Legal Relationship

To ascertain the existence of an intention to create a legal relationship, courts employ specific tests:

Objective Test

The objective test focuses on how a reasonable person, in the position of the parties involved, would interpret the circumstances and the intentions of the parties. It aims to evaluate whether a reasonable person would believe that the parties intended to create a legally binding contract. This test is crucial as it ensures that the perspective of a reasonable person prevails over the subjective intent of the parties.

Rebuttable Presumption

In some cases, such as family or social agreements, the court may presume the intention to create a legal relationship. However, this presumption is not absolute and can be rebutted by providing evidence of facts and circumstances indicating a contrary intention. This approach acknowledges the complexities of personal relationships and allows flexibility in assessing contractual intent.

Simpkins v. Pays (1955)

The case of Simpkins v. Pays illustrates the application of the test of objectivity. In this case, a mother, her daughter, and a paying guest participated in crossword puzzles, with the mother’s name being used for the entry.

The expenses were shared among them without any formal obligations. When they won a prize, a dispute arose about sharing the winnings. The court determined that a reasonable person in these circumstances would have believed there was an intention to share the prize. Consequently, the court upheld the existence of a binding agreement based on this objective interpretation.

Carlill v. Carbolic Smoke Ball Company (1893)

The famous case of Carlill v. Carbolic Smoke Ball Company further highlights the test of objectivity. In this case, the defendant company had advertised that they would pay £100 to anyone who contracted influenza after using their product as directed. Mrs. Carlill used the product as instructed but still fell ill.

When she sought the reward, the company refused to pay. The court held that the objective test applied, and a reasonable person reading the advertisement would have believed that there was an intention to create a contract. Mrs. Carlill was entitled to the reward as she had performed the conditions specified in the offer.

Instances Where Intention Plays a Crucial Role

Family or Social Agreements

1. Agreement between Husband and Wife

Agreements between spouses often exemplify the challenge of determining the intention to create a legal relationship. In cases like Balfour v. Balfour, husband-wife agreements are generally considered non-contractual.

The absence of formal, legally binding terms often signals a lack of intent to create a legally enforceable contract. However, there are exceptions to this general rule.

In McGregor v. McGregor (1888), a husband and wife withdrew their complaints under an agreement where the husband promised to pay her an allowance, and she refrained from pledging his credit. In this case, the court deemed the agreement binding because it demonstrated the parties’ intention to create a legal relationship.

2. Agreement between Parent and Child

Agreements between parents and their children typically fall into the category of family and social contracts. These agreements are often presumed not to form binding contracts due to their familial nature and reliance on trust and good faith. However, exceptions exist when the facts and circumstances indicate a contrary intention.

In Jones v. Padavatton (1969), a mother promised her daughter financial support if she pursued legal education in England and returned to Trinidad as a barrister. When conflicts arose, the court held that this was a family arrangement grounded in good faith, without the intention to create a contractual relationship. The absence of a binding contract was attributed to the lack of clear contractual terms and the familial nature of the arrangement.

In contrast, Parker v. Clark (1969) demonstrated that, in specific instances, an intention to create a legal relationship can override the familial context. In this case, an elderly couple invited their niece and her husband to live with them.

The couple expressed their intention to bequeath their home to the niece, and they sold their house to support this intention. When disputes arose, the court upheld that the parties’ actions indicated a clear intention to create a legal relationship, resulting in a binding agreement.

Commercial Agreements

In contrast to family and social agreements, commercial agreements typically presume the intention to create a legal relationship. The business context generally implies that parties intend their agreements to be legally binding. However, this presumption is not absolute and can be rebutted in certain circumstances.

Esso Petroleum v. Commissioners of Customs and Excise (1976)

Esso Petroleum v. Commissioners of Customs and Excise exemplifies the presumption of intention in commercial agreements. In this case, Esso Petroleum launched a promotional campaign offering a free coin from a world cup collection on the purchase of four gallons of petrol.

The question at hand was whether there were enough coins produced for resale and whether this would attract tax liability. The court ruled that the coins were offered in a commercial context, indicating an intention to create a contractual relationship. However, it was noted that no consideration was involved in this particular agreement.

Exception: Comfort Letter

Despite the presumption of intention in commercial agreements, there is an exception known as the “comfort letter.” This exception is exemplified in the case of Kleinwort Benson Ltd. v. Malaysia Mining Corporation (1989).

In Kleinwort Benson Ltd. v. Malaysia Mining Corporation, a subsidiary of Malaysia Mining Corporation sought a loan from Kleinwort Benson Ltd. The parent company, Malaysia Mining Corporation, refused to be a guarantor but provided a comfort letter stating that it would ensure its subsidiaries were financially secure.

When the subsidiary faced financial difficulties and the bank sought to recover the loan based on the comfort letter, the court held that the letter had no legal effect. The court emphasized that Malaysia Mining Corporation did not intend to be legally bound by the comfort letter, illustrating that the presumption of intention can be rebutted by clear evidence to the contrary.

Conclusion

In conclusion, the intention to create a legal relationship is a fundamental aspect of contract formation. It ensures that parties understand the gravity of their commitments and the legal consequences of entering into agreements.

While the absence of a formal written contract may suggest a lack of intent in some cases, the objective test of interpretation allows courts to evaluate the intention based on the circumstances and actions of the parties involved.

The distinction between family and social agreements and commercial agreements lies in the presumption of intent. In family and social contexts, agreements are often grounded in trust and good faith, making the intention to create a legal relationship less evident. However, exceptions exist when parties’ actions and intentions indicate otherwise.

In commercial agreements, the presumption is generally in favor of an intention to create legal relations, but this can be rebutted by evidence to the contrary, such as comfort letters.

Overall, the role of intention in contract law underscores the dynamic nature of agreements and the need to balance the presumption of intent with the unique circumstances of each case.