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Author’s Introduction

Name- Avneesh Kumar,

3^rd year student of B.A.LL.B. (Hons),

Dr. Ram Manohar Lohiya National Law University

E-mail- akakak.kumar7@gmail.com

Mob- (0) 9548306485.

Mob- 2 (0) 9319396563

Title- “Intention To create Legal Relations in (1.) Domestic and Social Agreements (2.) Commercial Agreements”

Introduction

Apart from offer, acceptance, and consideration, the final ingredient for a contract to be entered into which is enforceable at law is that the parties must have an intention to create legal relations. Without it there is no binding contract. Under UK law, an agreement supported by consideration is not enough to create a legally binding contract; the parties must also have an intention to create legal relations. Often, the intention to create legal relations is expressly stated by the contracting parties. In other situations, the law will readily imply the intention, because of the nature of the commercial dealings between the parties. Generally it is assumed that in social and domestic type of agreements this type of intention is absent, but parties do intend to create legal relations in commercial agreements. It is assumed that this doctrine was not clearly established until 1919.

Alternatively, it can be said that the Doctrine is based upon public policy; that is to say that, as a matter of policy, the law of contract ought no to intervene in domestic situations because the courts would then be swamped by trifling domestic disputes. We can have a example of it; I promise to pay my wife ₤50 if she will type the manuscript of this chapter of the book. My wife agrees. Does this agreement create a legally enforceable contract? On the face of it there appears to be no reason why it should not. We have reached agreement and the agreement is supported by consideration. But it is likely that an English Court would conclude that we had not entered into a legally binding contract because we lacked an ‘an intention to create legal relations’, which has been held to be an essential element in any contract.

It could be said that the doctrine is based on the intention of the parties, objectively interpreted; that is to say, my wife and I did not intend that our agreement would have legal consequences. But my wife certainly expected to receive the money if she typed the manuscript, although it is unlikely that neither of us intended that she would have to go to court in order to get her money.

It was observed by the Scottish Law Commission, 1977,

“it is, in general,l right that courts should not enforce entirely social engagements, such as arrangements to play squash or to come to dinner, even though the parties themselves may intend to be legally bound thereby”.

In Singapore Contract Law, Section 4 describes the requirement of Intention to Create Legal Relation-

“In the absence of contractual intention, an agreement, even if supported by consideration, cannot be enforced. Whether the parties to an agreement intended to create legally binding relations between them is a question determined by an objective assessment of the relevant facts.

Commercial Arrangements– In the case of agreements in a commercial context, the courts will generally presume that the parties intended to be legally bound. However, the presumption can be displaced where the parties expressly declare the contrary intention. This is often done through the use of honour clauses, letters of intent, memoranda of understanding and other similar devices, although the ultimate conclusion would depend, not on the label attached to the document, but on an objective assessment of the language used and on all the attendant facts.

Social Arrangements – The parties in domestic or social arrangements are generally presumed not to intend legal consequences.”

Australian Contract law also recognize its importance, and distinguish it from consideration, it is given in following words-

“For a contract to exist the parties to an agreement must intend to create legal relations. Usually, the presence of consideration will provide evidence of this – if the promisor has specified something as the price for the promise this – in most cases – carries with it an intention that the parties be bound. Intention remains, however, an independent requirement and must be separately demonstrated and there are cases in which consideration has been present but no contract found to exist because this pre-condition has not been fulfilled. In determining if there is contractual intent and objective approach is taken.

When assessing each case the courts used to apply certain presumptions to different types of contract; thus, typically, domestic or social contracts were presumed not to have been created with an intention to create legal relations and commercial agreements were presumed to have such intention. Recently, however, the High Court in Australia has indicated that presumptions should not be used when determining intent – in each case intention must be proved without the aid of such presumptions.”

Family and Social Agreements

In domestic arrangements it is generally assumed that the parties do not intend to relate legal relations. In many domestic agreements, for example those made between husbands and wives and parents and children, there is no intention to create legal relations and no intention that the agreement should be subject to litigation. Familial relationships do not preclude the formation of a binding contract, though to create contractual relations, there must be a clear intention on either party to be bound.
While there are conflicting legal authorities on whether specific facts involving familial relations result in binding and enforceable agreements, it seems settled that in domestic agreements there is a rebuttable presumption that the parties do not have intention to create legal relations.

Much importance is given to the policy that private lives of the citizens should be protected from too much interference from the courts. Chen-Wishart calls this ‘Freedom from contract.’ Adams and Brownsword therefore correctly state that the ‘“sanctioning” presence of courts might inhibit social relationships.’ There are several points which could be made here – remember that when the courts talk of intention, they seldom mean the actual intention of the parties – evidence concerning the psychological disposition of the parties would not be regarded as relevant. What the judges are interested in is a reasonable inference from the actions of the parties – an objective test. Now often, what is a reasonable inference will tell you lots more about the person who is doing the inferring than it will about the state of mind of the persons who are the subject of the discussion.

Balfour v Balfour[2]

Facts – Mr Balfour was a civil engineer, and worked for the Government as the Director of Irrigation in Ceylon (now Sri Lanka). Mrs Balfour was living with him. In 1915, they both came back to England during Mr Balfour’s leave. But Mrs Balfour got rheumatic arthritis. Her doctor advised her to stay, because a jungle climate was not conducive to her health. As Mr Balfour’s boat was about to set sail, he promised her £30 a month until she came back to Ceylon. They drifted apart, and Mr Balfour wrote saying it was better that they remain apart. In March 1918, Mrs Balfour sued him to keep up with the monthly £30 payments. In July she got a decree nisi and in December she obtained an order for alimony.

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 core part being this passage.

“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.”

Then Duke LJ gave his opinion-

“In the Court below the plaintiff conceded that down to the time of her suing in the Divorce Division there was no separation, and that the period of absence was a period of absence as between husband and wife living in amity. An agreement for separation when it is established does involve mutual considerations.

That was why in Eastland v Burchell 3 QBD 432, the agreement for separation was found by the learned judge to have been of decisive consequence. But in this case there was no separation agreement at all. The parties were husband and wife, and subject to all the conditions, in point of law, involved in that relationship. It is impossible to say that where the relationship of husband and wife exists, and promises are exchanged, they must be deemed to be promises of a contractual nature. In order to establish a contract there ought to be something more than mere mutual promises having regard to the domestic relations of the parties. It is required that the obligations arising out of that relationship shall be displaced before either of the parties can found a contract upon such promises…………….”

Lord Justice Atkin took a rather different approach, 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……………….”

However, this attitude towards social agreements seems to have changed nowadays. Freeman classifies Balfour v Balfour as a ‘Victorian Marriage’ and sees the marriage of today ′less regulated′ and ′more dependent upon individual choice.′ For him ‘Marriage has become a ‘personal rather than a social institution.’ He pleads for a change in the treatment of presumptions in domestic spheres.

The presumption that the parties to domestic agreements do not intend to create legal relations can be rebutted in a number of different ways. There is no finite list of methods by which the presumption can be rebutted. There are, however, one or two restrictions on the type of evidence that can be led. In particular, the parties cannot lead evidence of their own subjective intentions but that is a general preposition of contract law and is no confined to the present context.

While or not the presumption has been rebutted ultimately depends upon the facts of the case, the cases in which the presumption has been rebutted exhibit some common features. In the first place the context in which the agreement was concluded has often been a factor in persuading the court to rebut the presumption. For example, where the relationship between the parties is approaching the point of break down the courts are more likely to conclude that there was an intention to create legal relations.

Secondly, the presumption may be rebutted where the parties have acted to their detriment in reliance upon the agreement that has been concluded between the parties. This factor does not always suffice to rebut the presumption, we can have its example from Jones v. Padavatton

Jones v. Padavatton,[3]

This case (Jones v. Padavatton [1969] 1 WLR 328), like BalfourVBalfour1919, demonstrates that domestic arrangements, however complex, are presumed not to create contracts, unless there is clear indication to the contrary. Unlike the earlier case, however, the complexity and precision of the arrangements in this one meant that the facts had at least to be considered, rather than being dismissed as “outside the realm of contracts”.

Facts- Mrs Jones offered to pay for her daughter, Mrs Padavatton, to study law if she (the daughter) left the USA and came to England. This she did. The mother then bought a house in London which the daughter lived in; her maintenance was payed from the rents of other tenants.

Eventually mother and daughter fell out, and Mrs Jones took action to reclaim possession of the house. It was ruled that although the circumstances were such that she could not have done this if the tenant had been anyone other than her daughter, there was no evidence to show that the case overruled the standard assumption that domestic arrangements are not contracts.

Judgment- 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.

DANCKWERTS, L.J.

“There is no doubt that this case is a most difficult one, but I have reached a conclusion that the present case is one of those family arrangements which depend on the good faith of the promises which are made and are not intended to be rigid, binding agreements. Balfour v. Balfour n(3) was a case of husband and wife, but there is no doubt that the same principles apply to dealings between other relations, such as father and son and daughter and mother. This, indeed, seems to me a compelling case.”

SALMON, L.J.

“The parties cannot have contemplated that the daughter should go on studying for the Bar and draw the allowance until she was seventy, nor on the other hand that the mother could have discontinued the allowance if the daughter did not pass her examinations within, say, 18 months. The promise was to pay the allowance until the daughter’s studies were completed, and to my mind there was a clear implication that they were to be completed within a reasonable time. Studies are completed either by the student being called to the Bar or giving up the unequal struggle against the examiners. It may not be easy to decide, especially when there is such a paucity of evidence, what is a reasonable time. The daughter, however, was a well-educated intelligent woman capable of earning the equivalent of over £ 2,000 a year in Washington. It is true that she had a young son to look after, and may well (as the learned judge thought) have been hampered to some extent by the worry of this litigation. But, making all allowance for these factors and any other distraction, I cannot think that a reasonable time could possibly exceed five years from November 1962, the date when she began her studies.”

FENTON ATKINSON, L.J.

“At the time when the first arrangement was made, the mother and the daughter were, and always had been, to use the daughter’s own words, “very close”. I am satisfied that neither party at that time intended to enter into a legally binding contract, either then or later when the house was bought. The daughter was prepared to trust the mother to honour her promise of support, just as the mother no doubt trusted the daughter to study for the Bar with diligence, and to get through her examinations as early as she could. It follows that in my view the mother’s claim for possession succeeds, and her appeal should be allowed. There remains the counterclaim. As to that I fully endorse what SALMON, L.J., has said as to the manner in which that should be disposed of.”

But cases can be found in which it has operated to rebut the presumption.

Parker v Clark[4] (1960)

This case (Parker v Clark) demonstrates that although domestic arrangements are assumed not to create legally-binding obligations (see: BalfourVBalfour1919, JonesVPadavatton1969), in some cases this assumption may be overruled by the facts. In this case the arrangement had a significant effect on the lives of the affected parties, and some would have been significantly disadvantaged if the arrangement had not been enforced.

Mrs and Mrs C invited their niece and her husband (Mr and Mrs P) to live in their house free of rent, in return for domestic support. The Ps sold their house and moved in. Later, the Cs tried to evict the Ps, and the Ps took legal action to prevent this. The court held that in this case the severity of the situation allowed the agreement between the Ps and the Cs as a contract.

Devlin J. stated

“ I cannot believe….. that the defendant really thought the law would leave him at liberty, if he so choose, to tell the plaintiffs when they arrived that he has changed his mind, that they could their furniture away……I am satisfied that an agreement binding in law was intended by both parties”

However, the position may well have been different had the parties fallen out before the plaintiffs acted to their detriment by selling the house and moving in with the defendants. On such facts a court may well have concluded the the parties did not intend to enter into a bindind contract. This suggests that there may be a difference between executed and executory agreements.

If we talk about the relations of husband and wife, then generally it is assumed that there is no contract between them but situation may be different when they are separated. The issue was considered in

Merritt v Merritt[5],

Facts – The husband and wife were married in 1941 and had three children. In 1966, the husband became attached to another woman and left the matrimonial home to live with her. At that time, the matrimonial home, a freehold house, was in the joint names of the husband and wife, and was subject to an outstanding mortgage of some £ 180. The wife pressed the husband to make arrangements for the future, and on 25th May 1966, they met and talked the matter over in the husband’s car.The husband said that he would pay the wife £ 40 a month out of which she must make the outstanding mortgage payments on the house and he gave her the building society mortgage book. Before leaving the car the wife insisted that the husband should put down in writing a further agreement, and on a piece of paper he wrote: ‘In consideration of the fact that you will pay all charges in connection with the house… until such time as the mortgage repayment has been completed, when the mortgage has been completed I will agree to transfer the property in to your sole ownership.’ The husband signed and dated that agreement, and the wife took the piece of paper away with her. In the following months she paid off the mortgage, partly out of the husband’s monthly payment to her and partly out of her own earnings. When the mortgage was paid off the husband refused to transfer the house to the wife.

Held — The written agreement of 25th May 1966, was intended to create legal relations between the parties because the presumption of fact against such an intention where arrangements were made by a husband and wife living in amity did not apply to arrangements made when they were not living in amity but were separated or about to separate, when (per Lord Denning MR at p 762 a, post) it might safely be presumed that they intended to create legal relations; the surrounding circumstances in the present case showed that the parties did so intend; accordingly, the wife was entitled to sue on the agreement, and it being sufficiently certain and there being good consideration by the wife paying off the mortgage, she was entitled to a declaration that she was the sole owner of the house and to an order that the husband joining in transferring it to her.

The same presumption apply to social arrangements.

Coward v. Motor Insurers’ Bureau[6]

In this matter Mr. Coward and Mr. Cole were work colleagues who had an arrangement regarding shared lifts to work. Cole would drive his motorbike and Coward would ride pillion in return for a weekly sum of money. Unfortunately both were killed in a road traffic accident and the wife of Mr. Coward made a claim for damages against the estate of Mr. Cole. However Cole’s insurance policy did not cover pillion passengers and as his estate had no assets or money to satisfy the judgment, Mrs. Coward pursued the Motor Insurance Bureau (MIB).

The MIB have an agreement whereby accidents and consequential claims would be satisfied by the Government in circumstances where the driver has no relevant policy of insurance. However the rules covering this situation require Mr. Coward was carried for “hire or reward”. Consequently Mrs. Coward needed to prove that there was a contract in place between Coward and Cole for the lifts to work.

There was clearly an offer of transport and this was accepted. In addition the consideration exchanged by the parties was the service of transport and the money paid by Mr. Coward. However there was a question over how formal this arrangement was so as to amount to an intention to create legal relations. Once again this matter progressed to the Court of Appeal and it was decided that notwithstanding the regular payment of money in return for the lift, it was not so formal as to create a contract. There were no terms as to how long this was to last, what would happen in default of payment or the availability of transport, or anything written down so as to at least make their intention clear.

The practice of colleagues sharing a lift to work (or “car pooling”) is an accepted and wide spread practice. Parties will usually agree that one will take their car and in return the others will make a contribution towards the petrol costs. This is usually a matter of convenience, reducing costs or even a conscious decision to reduce emissions from each separately taking a vehicle. It cannot be said however that the agreement is so formal as to form a contract for the provision of this service. The contrast is to a previous example, that of public transport. There are no tickets, conditions or terms of agreement and no business or profit making organization is involved. There can be no obligation upon people in this scenario to ensure that transport is always made available to the party that pays. What would happen when the owner of the vehicle went on holiday or there was a shift change? In these circumstances an element of common sense must come into play. Most people will make informal agreements ranging from car pooling to picking up children from school or even being the designated driver on a night out. None of these create a contract as the intention is one of informal assistance or a mutual benefit, not to create legal relations.

In Hadley v Kemp[7] (the Spandau Ballet case) that even if only one group member was credited for the as the composer of all the songs, a joint authorship could be established by showing a “significant and original contribution to the creation of the musical work”. In this case, musicians were claiming joint authorship of songs which were not written by them, but performed in a very personal way. The Court took the degree of creativity into consideration and decided that for one song Glow, the drummer had provided a “significant original contribution to the song as a whole” and dismissed the saxophonists claim that he was a joint author of the song True on the ground that, on the one hand, saxophonists in general were expected to improvise saxophone fills and, on the other hand, the saxophone solo took only 16 bars and 9% of the whole song.

Commercial Agreements

Commercial agreements differ from domestic and social agreements in that the presumption operates the other way. It is here that there is a very strong presumption that there is an intention to create legal relations. For anyone to come along after they have made an ordinary commercial contract and argue that there was no intention to create legal relations would be wasting their time. For such an argument to succeed there must be a very clear and explicit statement. One way in which this can happen is if parties who are negotiating for a contract want to make absolutely sure that their negotiations do not inadvertently become a contract. We looked at this issue earlier when we examined. In the case of commercial transactions the courts presume that the parties did intend to create legal relations and the presumption is not an easy one to displace. The strength of the presumption is such that the issue rarely arises in commercial litigation. One case in which it did arise, and which produced a division of judicial opinion, is the decision of the House of Lords in Esso Petroleum Ltd v. Commissioners of Customs and Excise, [1976] 1 WLR 1.

Esso Petroleum Ltd v Commissioners of Customs and Excise[8]

In 1970 the taxpayers (‘Esso’) devised a petrol sales promotion scheme. The scheme involved the distribution of millions of coins to petrol stations which sold Esso petrol. Each of the coins bore the likeness of one of the members of the English soccer team which went to Mexico in 1970 to play in the World Cup competition. The object of the scheme was that petrol station proprietors should encourage motorists to buy Esso petrol by offering to give away a coin for every four gallons of Esso petrol which the motorist bought. The coins were of little intrinsic value but it was hoped that motorists would persist in buying Esso petrol in order to collect the full set of 30 coins. The scheme was extensively advertised by Esso in the press and on television with phrases such as: ‘Going free, at your Esso Action Station now’, and: ‘We are giving you a coin with every four gallons of Esso petrol you buy.’ Folders were also circulated by Esso to petrol stations which stated, inter alia: ‘One coin should be given to every motorist who buys four gallons of petrol – two coins for eight gallons and so on.’ 4,900 petrol stations joined the scheme. Large posters were delivered by Esso to those stations, the most prominent lettering on the posters stating: ‘The World Cup coins’, ‘One coin given with every four gallons of petrol’. The Customs and Excise Commissioners claimed that the coins were chargeable to purchase tax under s2(1) of the Purchase Tax Act 1963 on the ground that they had been ‘produced in quantity for general sale’ and therefore fell within Group 25 of Sch 1 to the 1963 Act.

Held-

Viscount Dilhorne – Esso are engaged in business, and are supplying these coins in order to promote the sale of their petrol. But it does not necessarily follow that there was any intention on their part they should enter legally binding contracts with respect to the coins. Nor is there any reason to impute to the motorist an intention to enter into a legally binding contract for the supply of a coin.

If it were found that Esso, the dealer, and the customer intended to create a contract, it would seem to preclude the possibility of any dealer ever offering a free gift, however negligible the value. A common intention to enter legal relations would be found more easily if the item were something of value to the purchaser. But here the coins were of little intrinsic value. If there were any contract relating to the coins, the consideration for it would be not the payment of money, but the entry into a contract to buy petrol.

Lord Simon of Glaisdale

In the clearly commercial context in which the offer of the coins was made, it cannot be accepted that Esso did not intend to create legal relations. It is undesirable to allow commercial operators in such situations to say that their offer was a mere puff. While the coins may have little intrinsic value, Esso clearly anticipated that they would have value to their customers, otherwise the promotion would not be worthwhile. What sort of transaction was entered? It appears to be a collateral contract, the consideration for which was entering the contract for the purchase of the petrol.

Lord Wilberforce agreed with Lord Simon of Glaisdale.

Lord Fraser of Tullybelton (dissenting)

The matter of decisive importance is the form of the promotional posters. They correlate one coin with the purchase of every four gallons of petrol. When a customer purchases four gallons of petrol they are also entitled to receive a coin. Just as if a baker offers an additional bun with each dozen purchased, the customer is actually purchasing the extra bun, and in this case, the coin.

The factors arguing against this conclusion are the use of words such as “free” and “gift”, and the intrinsically negligible value of the coins. Nevertheless, it cannot be said that once a customer purchases petrol that Esso could say that they have no right to the coin.

Lord Russell of Killowen

Considered that in this case, in view of the intrinsically minimal value of the coins, there was no intention to create legal relations. This does not give carte blanche to other to renege on “free offers” where the items are of any value.

Supposing that there was a contractual obligation for the dealer to give the customer a coin, the further question arises whether this arises out of a contract of sale for money. Ignoring words such as “gift” and “free” the posters are saying “if you buy four gallons of petrol you will be entitled to a coin”. This is not a sale of the coins for money.

The presumption in favour of legal relations in commercial transctions can be rebutted but the cases in which it has been rebutted are few. It can be rebutted by the express stipulation of the parties. We can have its example by the case of Rose and Frank Co. v J.R. Crompton & Bros Ltd [1923] 2 KB 261; [1925] AC 445

Rose and Frank Co. v J.R. Crompton & Bros Ltd [9]

Facts- The defendant manufactured carbon paper in England. The plaintiff bought the defendant’s paper and sold it in New York. After dealing with each other for a number of years they entered into a written agreement as to the plaintiff having exclusive rights to buy and sell the defendant’s goods. The agreement said inter alia:

“this agreement is not a formal or legal agreement. It will not be subject to the jurisdiction of either the British or American courts. It is a record of the intention of the parties to which they honourably pledge themselves and is to be carried out with mutual loyalty and friendly co-operation.”

Following a series of disputes the plaintiff claimed that the defendant was in breach of the agreement and the trial judge held that it was legally binding. The defendant appealed.

Held- The Court held that there was no legal contract. The clause had the effect of negating any other objective evidence of intention to create legal relations. Justice Vaisey, writing for the Court, reasoned that it was a gentlemen’s agreement, “which is not an agreement entered into between two persons, neither of whom is a gentleman, with each expecting the other to be strictly bound, while he himself has no intention of being bound at all.”

HELD Bankes LJ

An intention to be legally bound is essential. With business arrangements it usually follows as a matter of course that legal relations are intended. With social arrangements the reverse is the case. It is most improbable that firms engaged in international business arrangements, which are intended to take place over a period of years, should not have intended legal consequences. But there is no legal obstacle to prevent them from doing so. There is no law or issue of public policy against it. Once one reads the agreement in its ordinary meaning, then it is manifest that no action can be maintained on the basis of it.

HELD Scrutton LJ

If the parties clearly express themselves so as to avoid legal relations, then no reason in public policy why they should not do so.

HELD Atkin LJ

The normal presumption may be offset by implication and if that is so then it may surely be offset expressly. I have never seen a clause whereby business people would enter into a written agreement which was not intended to be legally binding – but it is not necessarily absurd to do so. I do not agree with the judge that the clause should be rejected on the basis of repugnancy. It is a dominant and operative clause.

An important distinction must be drawn here. On the one hand, it is contrary to public policy for parties to a legally binding contract to attempt to oust the jurisdiction of the court. On the other hand, it is not contrary to public policy for parties to an agreement to insert into their agreement a clause the effect of which is to prevent their agreement from amounting to a contract in law. In every case the court must consider, as a matter of construction, whether or not the effect of the words used is to rebut the presumption that the parties intended to create legal relation. To make the concept more clear we can have example of a another case Edwards v. Skyways Ltd. This case (Edwards v Skyways Ltd [1964] 1 WLR 349) demonstrates that if a party in a commercial agreement wishes to claim that part of the agreement is not intended to be legally binding, it has the evidential burden of proof. The assumption will always be that commercial dealings (including employer-employee) will be intended to create legal relations.

Edwards v Skyways Ltd[10]

Facts- The Secretary of the Board of Skyways was empowered in discussions with the British Air Line Pilots Association to agree to payments to redundant aircrew members of an ex gratia amount with regard to pension and superannuation. The Company and Association reps met and agreed that payment would be made of an ex gratia amount with regard to the pension payment, and a refund of contributions. The decision was published in the newsletter. One redundant pilot was told what his payment and refund would be. He received the refund, but then the company rescinded its decision to make the ex gratia payments. When he sought to recover it, he was told that there was no obligation to pay it.

HELD Megaw LJ

The company admits that a promise was made and that it intended to carry it out. The plaintiff acted on the belief that it would be fulfilled. The Co says the promise and agreement had no legal effect because there was no intention to enter legal relations. Rose and Frank and Balfour recognise that an agreement may not give rise to legal rights because this was not intended – in the social relations of that case. Even regarding business affairs, the parties can show that it was their intention to make the agreement binding in honour only and the courts will respect that intention.

In this case the matter is business relations. There was a meeting of minds, an intention to agree. I am not sure how the “objective” test of intention works between a company and a trade association where there were 5 or 6 people on either side. However, the company says, ex gratia means not binding and the background knowledge understood it as such. Ex gratia may mean without admission of liability, or without there being any pre-existing legal right (may be to avoid setting an awkward precedent). Settlements are often expressed in this way. But this does not mean that such agreements are legally unenforceable.

It was understood at the meeting that if the payments were made as a result of a legally enforceable agreement, they would be taxable. But if made without legal obligation on the part of the company, then it would not be taxable. So the agreement, it was argued, intended to exclude legal sanctions. The evidence does not show that this factor was an important element in the minds of all those at the meeting. Thus the argument was not sufficient to establish that this was the intention of all present.

Judgment for the plaintiff.

Exceptionally, the presumption may be rebutted notwithstanding the absence of an express stipulation to this effect by the parties. An example is a collective agreement between a trade union and an employer (or an employer’s association) which presumed not to be legally enforceable as between the parties to the agreement. This was held to be the case at common law in Ford Motor Co Ltd v. Amalgamated Union of Engineering and Foundry Workers [1969] 2 QB 303. Statute has now intervened in order to strengthen the common law position. Thus section 179(1) of the Trade Union and Labour Relations (Consolidation) Act 1992 states that:

A collective agreement shall be conclusively presumed not to have been intended by the parties to be a legally enforceable contract unless the agreement—

(a) is in writing, and

(b) contains a provision which (however expressed) states that the parties intend that the agreement shall be a legally enforceable contract.

Sec. (2) further provides- A collective agreement which does satisfy those conditions shall be conclusively presumed to have been intended by the parties to be a legally enforceable contract.

Rather than seek to rebut the presumption that the parties intended to create legal relations, a defendant may take the point that the parties did not intend to contract or otherwise lacked contractual intent. What is difference, if any, between the submission that the parties did not intend to create legal relations? The answer would appear to be that the former submission is much wider in scope, in that it can encompass issues such as whether the parties have in fact reached agreement. The latter submission, by contrast, accepts that the parties have reached agreement and is restricted to the issue of whether the agreement was intended to create legal obligations.

While it is possible to separate out these two issues in theory, it may not be so easy to do this in practice. The issues may overlap. This is particularly in the case whether the agreement between the parties is expressed in vague or uncertain terms. In such a case a defendant may argue that there is no contract on two grounds (i)the agreement is two vague or uncertain to amount to a contract; and (ii) the parties did not intend to create legal relations. The two grounds are interrelated in that the vagueness or uncertainty of the agreement may suggest both that the parties did not reach sufficient agreement on essential matters, and that they lacked an intention to create legal relations.

It may, however, be important to distinguish between the two issues in relation to the location of the burden of proof. First, it is for the claimant to prove that a contract has been concluded. But, secondly, once the existence of an otherwise enforceable contract has been established and the defendant wishes to take the point that the agreement apparently concluded by the parties was not intended to give rise to legal obligations, the onus of proof switches to the defendant to prove that that parties did not intend to create legal relations, at least in the case where the agreement is made in commercial context. The relationship between these two issues was considered in more detail by Mance LJ in Baird Textile Holdings Ltd –v– Marks & Spencer PLC [2001] EWCA Civ 274

Baird Textile Holdings Ltd v. Marks & Spencer plc [11]

Facts-Baird Textile Holdings Ltd had supplied clothes to Marks & Spencer plc. for thirty years. All of a sudden, M&S said they were cancelling their order. Baird sued M&S on the grounds that they should have been given reasonable notice. The problem was, there was no express contract under which such a term could be said to have arisen. Baird argued that a contract should be implied through their course of dealings. The judge found there was no such contract, and Baird appealed to the Court of Appeal.

Mance LJ.- Both requirements are normally judged objectively. Absence of the former may involve or be explained by the latter. But this is not always so. A sufficiently certain agreement may be reached, but there may be either expressly (i.e. by express agreement) or impliedly (e.g. in some family situations) no intention to create legal relations.

An intention to create legal relations is normally presumed in the case of an express or apparent agreement satisfying the first requirement……It is otherwise, when the case is that an implied contract falls to be inferred from parties’ conduct…….It is then for the party asserting such a contract to show the necessity for implying it……if the parties would or might have acted as they did without any such contract, there is no necessity to imply any contract. It is merely putting the same point another way to say that no intention to make any such contract will then be inferred.

And, ultimately, Sir Andrew Morritt V-C (with whom Judge LJ and Mance LJ) concurred, found that a contract could not be implied.

There is another very important case in this context: Masters v Cameron [12]
In Masters v Cameron the High Court outlined three situations that commonly arise when one party alleges a binding contract has come into existence in advance of execution of formal documentation.

The parties have finalized the terms of their bargain and intend to be bound immediately to perform those terms, but at the same time propose to have the terms restated in a form which will be fuller or more precise but not different in effect;

The parties have completely agreed on all the terms of their bargain and intend no departure from those terms but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document; or

The intention of the parties is not to make a concluding bargain at all, unless and until they execute a formal contract.

In the first two cases there is a binding contract. In the first there is a contract binding the parties immediately to perform the agreed terms whether the contemplated formal document comes into existence or not, and to join (if they have so agreed) in settling and executing the formal document.

In the second case, there is a contract binding the parties to join in bringing the formal contract into existence and then to carry it into execution.

There is no binding contract in the third case. The terms of the agreement are not intended to have, and therefore do not have, any binding effect of their own.

While Masters v Cameron outlines only three situations, a counter situation has been identified “in which the parties were content to be bound immediately and exclusively by the terms in which they had agreed upon whilst expecting to make a further contract in substitution for the first contract, containing, by consent, additional terms.” That is, all the terms of the proposed transaction may not be finally agreed between the parties and accordingly changes might be made in the terms proposed and new terms could be introduced. In such a case, there is a contract between the parties.

Conclusion

The doctrine of intention to create legal relations to create legal relations has not lacked its critics. Some, such as Professor Freeman, are critical of the way in which it has been used to deny legal effect to agreements made in a family context. Others points out that the doctrine rests on a fiction in that the parties to the alleged agreements frequently have no discernible intention one way or the other. . But it is assumed that it is a necessary part of contract. In the case of Albert v Motor Insurers’’ Bureau , it was stated by the Upjohn LJ-

“The hazards of everyday life, such as temporary indisposition, the incidence od holidays, the possibility of a change of shift or different hours of overtime, or incompatibility arising, make it most unlikely that either contemplated that the one was legally bound to carry and the other to be carried to work.”

It is stated in ” Chitty on Contracts ” (25th Edition, Volume I, para. 123) thus:

” An agreement, even though it is supported by consideration, is not binding as a contract if is was made without any intention of creating legal relations. Of course, in the case of ordinary commercial transactions, it is not normally necessary to prove that the parties in fact intended to create legal relations. ” (emphasis supplied)

In our Indian law the intention to create legal relations is not given as an essential ingredient of contract law, but even the apex court of India has expressed its reservation about the need of this separate requirement of “intention to contract” under the contract act. Going by the criticism which is already there in the West, the court found that it was a necessity of those systems where consideration was not a requisite of enforceability. Thus it is still an open question whether the requirement of “intention to contract” is applicable under the Indian Contract Act in the way in which it has been developed in England.

But earlier to this, a limited recognition of the applicability of this principle in India could be inferred from the decision of the Supreme Court in Banwari Lal v. Sukhdarshan Dayal,[13]. In an auction sale of plots of plot, a loudspeaker was spelling out the terms, etc., of the sale, one of the statements being that a plot of certain dimensions would be reserved for Dharamshala (public inn). Subsequently that plot was also sold for private purposes. The purchasers sought to restrain this. Chandrachud J (afterwards CJ) said:

“Microphones…….. have no yet acquired notoriety as carriers of binding representations. Promises held out our loudspeakers are often claptraps of politics. In the instant case, the announcement was, it at all, a puffing up for sale.”

In a subsequent case on the subject, the Supreme Court noted the general proposition that in addition to the existence of an agreement and the presence of consideration there is the third contractual element in the form of intention of the parties to create legal relations.

Ultimately we should assume that the intention to create legal relation is a essential requirement of contract. At the first instance it may have some similarities with consideration but there may be so many cases when both these elements are different. As like, it two friends decided to go to a restaurant, and one of them promises to pay for the drink and the other for the food then we can not say that there is no consideration but still there is no intention to create legal relations, and if anyone of them sue the other for breach of contract then the action should fail.

Bibliography

Beatson J, Anson`s Law Of Contract (28^th ednOxford, Delhi)

Ewan Mckendrick, Contract Law (6^th edn Palgrave Macmilan, Hampshire 2005)

Michael Furmston, Cheshire, Fifoot & Furmston’s Law of Contract (15^th Indian edn Oxford, Delhi 2007)

Jill Poole, Text Book on Contract Law (8^th edn Oxford, London 2006)

Mindy Chen-Wishart, Contract Law ( 5^th edn Oxford, London 2007)

Avtar Singh, Law of Contract and Specific Relief (9^th edn EBC, Lucknow 2006)

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http://www.australiancontractlaw.com/law/formation-intention.html

http://netk.net.au/Contract/05Intention.asp

http://netk.net.au/Contract/Balfour.asp