For a contract to exist the parties to an agreement must intend to create legal relations. Discuss the content and rationale (reason for) of that rule.

In order to make a contract, there are 4 requirements which must be satisfied in order for a contract to be complete in the eyes of the law. Capacity of parties to commit to a contract, an agreement on terms by both parties, consideration and an intention to create legal relations.
The function a contract between parties serves is to legally bind duties, uphold promises, perform exchanges and acknowledge and enforce consequences of any breach of contract. Parties that have capacity to agree to a contract must therefore intend to create legal relations, so that the agreement/s has legal force behind it. If the contract is breached legal action/remedy can thus be enforced by interpreting the words and conduct of the parties in the view of whether the agreement/s would be reasonable to any person who observed them.

To determine whether a statement is intended to be legally binding, reference is made to Atkin LJ in Rose and Frank Co v JR Crompton & Bros Ltd [1], These types of contracts include an 'honour clause' which specifically states that a contract is not formed unless parties have an intention to create legal relations. This requirement usually operates to prevent a purely domestic or social agreement from constituting a contract. “To create a contract there must be a common intention of the parties to enter into legal obligations, mutually communicated expressly or implied.” Lord Denning MR in Merritt v Merritt [2], “would reasonable people regard the agreement as intended to be binding?. This is an objective test used by the courts to determine the parties.

If the parties have a social or domestic bond a lack of intention is assumed by the courts and the burden of proof falls on the plaintiff. In this social setting courts will also examine the strength of the connection between the parties in relation to their agreement having legal consequences. For example, the promises made between a husband and wife in a setting of ‘natural love and affection’ [3] are according to Atkin LJ ‘never intended that they should be sued upon’[4]. However, determining the relationship between parties, and their settings, can be difficult as evident in Ermogenous v Greek Orthodox Community of SA Inc.[5].

Dunton v Dunton[31] presents a case where a former husband agrees to pay an allowance to his ex-spouse in exchange for her behaviour to be as described by the ex-husband. This example demonstrates a contract in a social or domestic context, an arrangement between two parties who had been married but have become estranged. The involvement of a large sum of money and the serious consequences of entering into the arrangement make it clear, in the eyes of the law, that there is intention to create legal relations.

Though in some social situations there is an intention to create a legal relationship, in the case of Merritt v Merritt [6] the husband did not go through with the agreement and was held accountable by the courts. “Once that natural love and affection has gone, as it normally has when the marriage has broken up, there is no room at all for the application of such a presumption.” (Widgery LJ.) Presumption meaning that the contract is of a social nature and not enforceable. This case demonstrated that within a social relationship a commercial contract can be formed and held enforceable.

This assumption can be rebutted provided the subject matter of the agreement was commercial in nature[7] (Roufus v Brewster[8] ) or language used in negotiations implied a business or commercial nature such as one involving a large amount of money (Wakeling v Ripley[9]). In this setting, the intention to create legal relations is assumed and therefore the burden of proof falls on the defendant. Another example of a commerical agreement in which its presumed that both parties intended the agreement to have legal consequences is Esso Petroleum Ltd v Commissioners of Customs and Excise [10], where the three lords held the parties possessed legal intent in the provision of coins upon a customer purchasing 4 gallons of petrol. [11] However, to negate this the parties can expressly state during negotiations for a commercial deal that they wish their contract to be binding in honour and not in law; meaning that the burden of proving legal relations weren’t intended on the defendant.

As has been said the court usually presumes that in a commercial context the parties involved intended to create legal relations by entering into the agreement. However, parties that defend a claim made on the foundation that he/she didn’t intend to create legal relations can express that words used in the agreement weren’t intended for the agreement to have legal consequences. These cases are known as ‘honour clauses’. In the case of Rose and Frank v JR Crompton and Bros Ltd [12] one such clause was illustrated that prevented the American Company into taking action against the English suppliers when the agreement was terminated without notice. ‘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 wither of the United States or England, but 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…that it will be carried through by each of the…parties with mutual loyalty and friendly cooperation.’[13]. In the case of Jones v Vernon's Pools Ltd a clause inserted on the back of football coupon by the plaintiff (P) was held to have the same effect as honour clasuse.

There are a number of circumstances in which one party in an agreement can prove that there was an absence in intention during the formation of the contract. If this absence of intention is proven by either party then there is no enforceable agreement or binding contract. One circumstance for a contract to be not binding is through an 'Ex Gratia' payment, this is when a payment is made out voluntarily to another party to reimburse some kind of loss.[14] In 2008 undisclosed payments were given to the families of four domestic soldiers Shiels, Williams, Satatas and Hayward by the Commonwealth to ease their trauma which originated because the soldiers commited suicide as they suffered from harassment and neglect on duty. The Commonwealth government claimed that these payments were ‘Ex gratia’ and therefore meant that they accepted no liability for the causes of the soldiers suicide.[15]

In the case of Edwards v skyways Ltd a British airline company promised to make an "ex gratia" payment to its redundant airline pilots. The payment was described as "approximating to the company's contributions for each member of the pension and superannuation fund". [16] Having made this promise, Skyways then decided not to make a payment to the pilots and argued that the promise should be regarded as merely a honour clause. [17] Honour clause is defined above. Despite the use of the term ‘ex gratia payment’, Megaw J held that the parties have had an intention to create legal relations hence, honours clause couldn’t operate. [18] He also indicated that the term ‘ex gratia payment’ does not point out that a promise for such a payment is not enforceable by law. The term is simply used to diminish any pre existing liability on the part of the party agreeing to pay. [19] However, in British Steel Corp. v. Cleveland Bridge & Engineering a ‘letter of intent’ was signed. Although the work was substantially done, the anticipated contract never materialised as the parties were unable to agree on terms. Here the court found that the parties did initially intend to create legal relations with one another. Therefore the British Steel Corp (BSC) won judgement and Cleveland Bridge & Engineering co. was ordered to recompense BSC for the work done. [20]

Promotional puffs and ‘free gifts’ are used in the business sector to promote products. To determine whether advertisements were intended to be enforceable contracts, the issue of the intention of the parties is relevant. Language used to offer the promotional puff or claim may cause those that act in response to the advertisement to expect there to be no legal consequences. However, to determine if intention exists, the courts not only review the words in the promotion but also the entire context of the advertisement. [21] Intention of parties in Carlill v Carbolic Smoke Ball Company [22] was an example of one such issue.

In summary; even if a contract is supported by capacity, offer and acceptance, and consideration, the promise may still not be contractual. For a promise to be binding, it is necessary that the promise has been made with the intention that the promisor should be legally bound. [23] In commercial agreements it is assumed that the parties intend to create legal relations, whereas in social/domestic agreements it is assumed that intention to create legal relations is absent. [24] In commercial agreements the presumption can be rebutted if there is evidence that the parties didn’t intend for the agreement to be legal. Intention in commercial situations may also be rebutted on the grounds of ‘mere puffs’, ‘honourable pledges’, ‘ambiguous language’ or where only some of the terms are binding. The rationale behind these guidelines, determining whether or not intention to create legal relations in present, lies in the words of Lord Stowell; contracts “must not be the sports of an idle hour, mere matters of pleasantry and bandinage, never intended by the parties to have any serious effect whatever.” [25]

While traditionally there has been a presumption that intention is assumed in commercial cases, and not assumed in domestic cases, courts in modern times are more willing to determine whether or not intention is present solely by looking at the facts of the case. The traditional approach is found in Balfour v Balfour [26] and the modern approach is found in Fleming v Beevers. [27] The law does not deny family members the ability to form a contractual relation. It does, however, raise a rebuttable presumption that arrangements between families are not intended to be legally bound. It is possible for a promisee to rebut this presumption, if they are able to prove a contractual intention in the circumstance. [28] It is important to note that in both commercial and domestic cases the inference will be objectively ascertained. The court will be concerned with the outward and visible manifestation of an intention to create, or not to create, a contract.

Subject to Contract anticipates a formal contract at a later date. In this type of contract a problem is created when one party withdraws between initial agreement and formal contract. In England, 'subject to contract' means no contract.[29] In Canada & Australia, we have a number of interpretations:
1. Condition precedent to the formation of a contract.
2. Condition precedent to the performance of some/all obligations of contract
3. Nothing depends on the written document. Contract is binding as of their initial agreement. Writing it down is just a formality.

For a contract to exist the parties to an agreement must intend to create legal relations. Though legal type negotiations can be held they do not become a contract until the intent to create legal relations is satisfied. This becomes evident with the use of ‘subject to contract clauses’ placing further steps in creating legal relations. In the Australian case of Masters v Cameron [30] an offer was made to purchase a property subject to the preparation of a formal contract of sale in a form which was to be acceptable to solicitors. Dixon CJ, McTiernan and Kitto JJ, held that though there was an agreement the subject to contract clause meant that the matter remained in negotiation until a formal contract is settled and the formal contracts are exchanged. This view is supported further by Santa Fe Land Co.Ltd v Forestal Land etc. Ltd [31] and Winn v. Bull [32] which reinforce the subject to contract clause, means legal relations is only created with the formal contract.

Further investigation of intent is with membership of voluntary associations and whether, when a person joins an unincorporated association or club they intend to create legal relations. In the case of Cameron v Hogan [33] the High Court in 1934 ruled that being a member of the Australian Labor Party did not create an intent to create legal relations and that the court therefore had no jurisdiction. However in 1993 the New South Wales Supreme Court held in the case of Baldwin v Everingham [34] that the complexity of political parties had changed since the Cameron v Hogan case and they had jurisdiction and held that the parties had intended to create legal relations. The test created in Cameron v Hogan that when there are employment, property or reputation matters involved then the intent to create legal relations is established. This problem is resolved when clubs or associations become incorporated under state legislation.

A ‘letter of comfort’ is usually sent to a company’s lender to act to ease the mind of the lender and try to reassure it that its credit is being spent credibly. It can state, but not necessarily guarantee, things like: it will meet financial obligations in certain ways or it will warn the creditor of any plans to sell a subsidiary which all alerts the lender to the financial situation. [35] In Banque Brussels Lambert SA v Australian National Industries Ltd (1989), [36] Australian National Industries (ANI) assured the bank Banque Brussels Lambert (BBL) that prior to selling its subsidiary ‘Spedley’ it would provide ninety days notice to it. However, ANI never kept this promise and sold Spedley which then went bankrupt, as a result of the financial uncertainty BBL tried to enforce the letter of comfort as contract. Irrespective of ANI arguing that it never had intention to create legal relations, Rogers CJ looked at the language of the letter and concluded judgment to Banque Brussels Lambert. This was based on clear promissory statements in the letter declaring them consistent with intention to create legal relations in. [37]

In relation to Domestic agreement the intention to create legal relations is not presumed. An example case in which this is evident is Balfour V Balfour [38] Lord Justices considered that the agreement is unenforceable on the basis that there was lack of intention to create legal relations as the agreement is between husband and wife. On contrary it can be rebutted if husband and wife are in the process of divorce. Illustrated in case of Popiw V Popiw [39] where the court decided that due to the facts of the case the husband and wife situation referred to in Balfour does not exist in this case. The intention to create legal relationship is rather evident as the husband visited a solicitor in order to give effect to the promise.

It can be argued that Domestic arrangements and business arrangements clash when it comes to finding the necessary legal intent existed. This was the case in Wakeling V Ripley [40] in which the defendant a wealthy old men invited his sister and her husband whom lived in the UK to move and permanently live in Australia to care for him till death. He promised in exchange of consideration he would provide them income and his property upon his death. A dispute arose and so the couple sued the old men due to breach of contract and the court held that the present agreement was more than just a family agreement. The agreement between the brother and sister was of serious nature. Therefore despite the parties being related it may be necessary to view the seriousness of the arrangements.

  1. [1923] 2 KB 261.
  2. [1970] 1 WLR 1211 at 1213.
  3. [1919] 2 KB 571.
  4. Ibid.
  5. (2002) 187 ALR 92.
  6. [1970] 1 WLR 1211 at 1213.
  7. [5.70] Wilmott L, Contract Law. 2001 Oxford University Press. Australia.
  8. [1971] 2 SASR 218.
  9. (1951) 51 SR (NSW) 183.
  10. (1976) 1 All ER 117.
  11. Willmott, L. 2001. Contract Law. Oxford University Press. Australia.
  12. (1925) AC 445.
  13. Ibid.
  14. Dr. Peter E Nygh &Peter Butt, Butterworths Concise Australian Legal Dictionary (3rd edition 2004).
  15. Slater & Gordon Lawyers, ‘EX GRATIA CLAIMS RESOLVED OVER ARMY DEATHS’ (Press Release, 28 October 2008.
  16. Carter, JW, Penden, E and Tolhurst, GJ, Cases and Materials on Contract Law in Australia (5th Edition 2007)
  17. (1964) 1 WLR 349
  18. [(1964) 1 WLR 349
  19. Lindy Willmott, Sharon Christensen, Des Butler and Dill Dixon Contract Law, (3rd Edition 2009)
  20. Lindy Willmott, Sharon Christensen, Des Butler and Dill Dixon Contract Law, (3rd Edition 2009)
  21. Carter, JW, Penden, E and Tolhurst, GJ, Cases and Materials on Contract Law in Australia (5th Edition 2007)
  22. (1893) 1 QB 256.
  23. Salzedo, S. Brunner, P. Ottley, M. 2004. Briefcase on Contract Law. Routledge-Cavendish. United Kingdom.
  24. Willmott, L. 2001. Contract Law. Oxford University Press. Australia.
  25. Dalrymple v Dalrymple (1811) 2 Hag Con 54 at 105.
  26. [1919] 2 KB 571.
  27. [1994] 1 NZLR 385 CA.
  28. Bigwood, R. 2003. Exploitative contracts. Oxford University Press. Australia.
  29. [1992] 2 WLR 174.
  30. (1954) 91 CLR 353.
  31. (1910) 26 TLR 534.
  32. (1877) 7 Ch D 2924.
  33. (1954) 51 CLR 358.
  34. [1993] 1 QdR 10.
  35. Australian National University, Intention to Create Legal Relations, [online lecture], 6 march 1998

  36. (1989) 21 NSWLR 502.
  37. A.N.U, above n 35.
  38. [1919] 2 KB 571
  39. [1959] VR 197
  40. [1951] 51 SR183