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Intention to Create Legal Relation

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The parties must intend the agreement to be legally binding.

But how does the court knows?Objectively judge the situation by what was said and done.

Divides agreements into :(1) social & domestic agreements (2) business agreements

INTRODUCTION

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Agreements between family members, friends and workmates.

The law presumes that social agreements are not intended to be legally binding.

Balfour v Balfour [1919] Jones v Padavatton [1969] Lens v Devonshire Club (1914)

SOCIAL & DOMESTIC AGREEMENTS

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Balfour v Balfour [1919]

• The husband worked in Ceylon, came to England with his wife on holiday.

• He later returned to Ceylon alone, the wife remaining in England for health reasons.

• The husband promised to pay his wife £30 per month as maintenance.

• The marriage broke up. The husband failed to keep up the payments.

• The wife sued.

• Court of first instance held : Mrs.Balfour was entitled to the £30.

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Balfour v Balfour [1919]

Held

Court of Appeal - The wife could not succeed because:

(1) she had provided no consideration for the promise to pay £30; and

(2) agreements between husbands and wives are not contracts because the parties do not intend them to be legally binding.

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(1)If it can be shown that the transaction

had an opposite intention

Meritt v Meritt [1970]• The husband left his wife.

• The husband agreed to pay £40 per month maintenance, out of which the wife would pay the mortgage.

• When the mortgage was paid off, he would transfer the house from joint names to the wife's name.

• He wrote this down and signed the paper, but later refused to transfer the house.

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Meritt v Meritt [1970]

Held• When the agreement was made, the husband and

wife were no longer living together, therefore they must have intended the agreement to be binding.

• This intention was evidenced by the writing.

• The husband had to transfer the house to the wife.

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(2) If a social agreement will have serious consequences for the parties

Parker v Clarke [1960] – aunt & niece Tanner v Tanner [1975] – couple leaving

together without marriage

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Parker v Clarke [1960]• Mrs Parker was the niece of Mrs Clarke. • An agreement was made that the Parkers would sell their

house and live with the Clarkes. • They would share the bills.• Clarkes promised that they would leave the house to the

Parkers. • Mrs Clarke wrote to the Parkers giving them the details of

expenses and confirming the agreement. • The Parkers sold their house and moved in. • Mr Clarke changed his will leaving the house to the

Parkers. • Later the couples fell out and the Parkers were asked to

leave. • Parkers claimed damages for breach of contract.

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Held

The exchange of letters showed that the 2 couples were serious and the agreement was intended to be legally binding because

(1) the Parkers had sold their own home, and

(2) Mr. Clarke changed his will.

Therefore the Parkers were entitled to damages.

Parker v Clarke [1960]

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(3) Where the parties to the agreement share a household but are not related, the court will examine all the circumstances

Simpkins v Pays [1955]• The defendant, her granddaughter, and the plaintiff shared a

house.

• They all contributed 1/3 of the stake in entering a competition in the defendant's name.

• A prize of £750 was won

• but on the defendant's refusal to share the prize, the plaintiff sued for 1/3.

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Simpkins v Pays [1955]

Held• the presence of the outsider rebutted the

presumption that it was a family agreement and not intended to be binding.

• The mutual arrangement was a joint enterprise to which cash was contributed in the expectation of sharing any prize.

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Try thisJohn announced that he pay £50 to anyone who would clean the

rubbish in his garden. The following person responded :

a) His wife, Berniceb) His ex-wife, Betriciac) His mistress, Bettyd) His son, Benjamine) His nephew, Brian (whom he never met before)f) His neighbour, Beng) His gardener, Balasingam

Which of the above is/are legally bound?

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In business agreements, the

presumption is that the parties

intend to create legal relations

and make a contract.

BUSINESS/COMMERCIAL AGREEMENTS

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(1)Unless if it is expressly excluded in the contract between the parties

Rose and Frank Co v Crompton Bros Ltd [1925] Orion Insurance v Sphere Drake Insurance [1990]

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Rose and Frank Co v Crompton Bros Ltd [1925] • The defendants were paper manufacturers

• entered into an agreement with the plaintiffs whereby the plaintiffs were to act as sole agents for the sale of the defendant's paper in the US.

• The written agreement contained a clause that :

“it was not entered into as a formal or legal agreement and would not be subject to legal jurisdiction in the courts but was a record of the purpose and intention of the parties to which they honorably pledged themselves, that it would be carried through with mutual loyalty and friendly co-operation.”

• The plaintiffs placed orders for paper which were accepted by the defendants.

• Before the orders were sent, the defendants terminated the agency agreement and refused to send the paper.

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Held• the sole agency agreement was not binding owing to

the inclusion of the "honorable pledge clause".

• As to the orders which had been placed and accepted, the court finds that a contract had been created and the defendants, in failing to execute them, were in breach of contract.

Rose and Frank Co v Crompton Bros Ltd [1925]

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If the clause is ambiguous, the courts will intervene and interpret it.

Edwards v Skyways [1964] JH Milner v Percy Bilton [1966]*

JH Milner v Percy Bilton [1966] • A property developer reached an "understanding" with a

firm of solicitors to employ them in connection with a proposed development

• but neither side entered into a definite commitment. • The use of deliberately vague language was held to negative

contractual intention.

Unless if it is expressly excluded in the contract …

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There are situations where it would appear at first sight that

the parties had entered into a commercial agreement, but,

nevertheless, a contract is not created.

(1) Mere puffs

(2) Letter of Comfort

(3) Letter of Intent

(4) Collective Agreements

(5) Free Gifts

Commercial Contracts that have no ITCLR

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For the purposes of attractingcustomers, salesmen may make vague exaggerated claims in adverts.

• Such statements are statements of opinion or "mere puff" and are not intended to form the basis of a binding contract.

• But a more specific pledges such as, "If you can find the same holiday at a lower price in a different brochure, we will refund you the difference", are likely to be binding.

• A statement will not be binding if the court considers that it was not seriously meant.

Weeks v Tybald (1605) Heilbut, Symons & Co v Buckleton (1913)

(1) Mere puffs

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Heilbut, Symons & Co v Buckleton (1913)

• Heilbut was a rubber merchants who were underwriting shares of what they claimed was a rubber company.

• Buckleton called up a manager at Heilbut to inquire about the shares.

• In response to the questions, the manager stated that they were "bringing out a rubber company".

• Based on this statement, Buckleton purchased a large amount of shares.

• The shares turned out not to be for a rubber company at all, the shares did very poorly.

• Buckleton sued for breach of warranty.

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• Heilbut made misrepresentation but was not done fraudulently.

• statement was made in answer to an inquiry for information.

• The court nevertheless, allowed the plaintiff’s claim for breach of warranty in the statement

Heilbut, Symons & Co v Buckleton (1913)

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This is a document supplied by a 3rd party to a creditor,

indicating a concern to ensure that a debtor meets his

obligations to the creditor.

Depending on the terms, such letters may be either

binding contracts or informal and uncertain assurances

resting entirely upon business goodwill.

Kleinwort Benson v Malaysia Mining Corp [1989]

(2) Letter of Comfort

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Kleinwort Benson v Malaysia Mining Corp [1989]

• The Bank (plaintiff) agreed to lend money to the Defendant’s subsidiary based on the latter’s letter of comfort that states that :

“it was the company's policy to ensure that the business of its subsidiary is at all times in a position to meet its liabilities.”

• The subsidiary went into liquidation and the plaintiffs claimed payment from the defendants.

Held• The LC were statements of the company's present policy, and not

contractual promises as to future conduct.

• They were not intended to create legal relations, and gave rise to no more than a moral responsibility on the part of the defendants to meet the subsidiary's debt.

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This is a device by which one person indicates to another that he is

likely to place a contract with him, but is not yet ready to be bound.

But if the language of the letter does not negative contractual

intention, the courts can hold the parties to be bound by the

document especially if the parties has acted in reliance of it.

Turriff Construction v Regalia Knitting Mills (1971)

(3) Letter of Intent

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Turriff Construction v Regalia Knitting Mills (1971) • Regalia met Turriff and subsequently wrote a letter to the latter

which states :“As agreed at our meeting on 2nd June 1969.. It is the

intention of Regalia to award a contract to Turriff to build a factory…phase 1 to be on a fix price basis… the commencing date to be 1st August and the terms of payment be negotiated. All this to be subject to agreement on an acceptable contract”

• Turriff prepared a detail design and negotiated with Regalia’s architect over the terms of the contract.

• They discussed about “indemnity” for Turriff before the contract could be signed.

• Turriff applied for an interim payment of £3,500 for the design work.

• The project was cancelled. Regalia denied payment.

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Held• There is yet to be any contract since it is still in the

negotiation process.

• The letter is no more than the expression in writing of a party’s present intention to enter into a contract at a future date. Save in exceptional circumstances it can have no binding effect.

• However, Turriff was allowed to claim for cost incurred for work done after 2nd June

Turriff Construction v Regalia Knitting Mills (1971)

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Agreement between a trade union and an employer regulating

rates of pay and conditions of work.

Section 179 of the Trade Union and Labour Relations

(Consolidation) Act 1992 states that such agreements are not

intended to be legally enforceable unless they are written

and expressly affirm that they are to be binding.

(4) Collective Agreements

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Esso Petroleum Co. Ltd v Customs and Excise Commissioners (1976)

• Esso instruct its operator to give one World Cup coin to consumer who purchase 4 gallons of gas. It was advertised as “free”

Free Gifts

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Held : Court of First Instance• The motorist had a straightforward contract for

the coins as part of the undisputed contract for the purchase of petrol.

Conclusion• The coin is part of the contract of sale• Esso lost – have to pay tax

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Held : Court of Appeal

• The motorist had no contract for the coins, the coins being a gift.

• According to this interpretation, the promise to deliver the coins was not binding on Esso.

Conclusion

• The coin is a gift

• Esso won – no need to pay tax

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Held : House of Lords• There were 2 contracts in this transaction :

– one a straightforward contract for the purchase of the petrol, and – "collateral contract" (coins for petrol)

• under the definition of a "contract of sale goods" in the Sale of Goods Act 1893, this was not a contract of sale since the consideration for the coins under the contract was not money.

Conclusion• The coin in not part of the contract of sale, under the SOGA

definition• Esso won – no need to pay tax

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The End