Contract | Formation
Legal Relations: Intention
Study Note | DegreeDownload bitsoflaw.org
bits of law
The courts will only treat an agreement as legally binding if the parties intended it to be legally enforceable. This can be difficult to establish as the parties in dispute cannot be relied upon on this issue. Therefore the courts have established rebuttable presumptions to determine when intention to create legal relations can be found.
Domestic agreements are those made between family or friends. In domestic agreements there is a general presumption that the parties did not intend to create legal relations.
Balfour v Balfour  2 KB 571
The plaintiff sued her husband, the defendant, for money owed to her under an alleged verbal maintenance agreement.
Was a verbal agreement between spouses legally enforceable?
The agreement was not enforceable as there was intention to be legally bound.
Atkin LJ: .
. [spousal agreements] are not contracts, and they are not contracts because the parties did not intend that they should be attended by legal consequences... Agreements such as these are outside the realm of contracts altogether. The common law does not regulate the form of agreements between spouses... The consideration that really obtains for them is that natural love and affection which counts for so little in these cold Courts....
Policy reasons for the presumption also exist, as Atkin LJ noted:
.. the small courts of this country would have to be multiplied one hundredfold if these arrangements were held to result in legal obligations....
However, the presumption is rebuttable.
Merritt v Merritt  1 WLR 1211
The defendant agreed to pay the plaintiff, his ex-wife, £40 per month if she paid the mortgage owing on their family home. The plaintiff agreed provided that the defendant signed a document stating that, in consideration of her paying the debt, the house would be transferred into her sole ownership.
Was there a legally binding agreement between the parties?
It was a formal agreement which the parties clearly intended to be legally binding.
.. It is altogether different when the parties are not living in amity but are separated, or about to separate. They then bargain keenly. They do not rely on honourable understandings. They want everything cut and dried. It may safely be presumed that they intend to create legal relations....
The onus for rebutting the presumption is not heavy and factors such as whether the parties are dealing with one another at arms' length or in circumstances involving large sums of money are taken into account.
Simpkins v Pays  1 WLR 975
The defendant, her granddaughter and the plaintiff, her lodger, all lived together and entered a weekly newspaper competition. The entry coupon was sent in the defendant's name each week but there was no fixed arrangement as to who paid the entry fee and postage cost. They agreed that any winnings would be shared between all three parties. The defendant received £250 in prize money but refused to share it. The plaintiff sued for one third of the winnings.
Was the agreement legally enforceable?
There was an enforceable agreement as there was a clear understanding of what would happen if the entry won and the plaintiff was entitled to a third of the winnings.
Sellers J found that there was:
..a mutuality in the arrangement between the parties....
Agreements which are not deemed to be domestic are commercial. In these situations, the general presumption is that the parties intended the agreement to be legally binding.
It is more difficult to rebut the presumption in commercial arrangements compared to domestic arrangements.
Edwards v Skyways  1 WLR 349
The plaintiff, a pilot, was made redundant by the defendant. The plaintiff was offered and accepted an ex-gratia payment as part of his redundancy arrangements. The defendant refused to pay.
Did the term ex-gratia imply that the defendant did not intend to be legally bound?
There was a presumption that the parties intended it to be legally binding and the words ex-gratia merely meant that the defendant did not admit any pre-existing liability to make the payment. The defendant had not rebutted the presumption.
Esso Petroleum Ltd v Commissioners of Customs & Excise  1 WLR 1
The defendants, Esso, ran a promotion involving World Cup coins, advertised by posters stating:
We are giving you a coin with every four gallons of Esso petrol you buy. The plaintiffs claimed that the coins were subject to purchase tax because the coins had
been produced in quantity for general sale. The plaintiffs were claiming that the defendant was liable to pay £200 000. The defendant argued that the coins were a free gift and the promotion was not intended to have legal effect and therefore there was no tax liability.
Was there an intention to create legal relations?
The majority of the House of Lords found that the deal was a commercial transaction and therefore that was an intention to create legal relations. The majority found that the posters were an offer of a unilateral contract and the required acceptance and consideration were met on the purchase of four gallons of petrol.
Lord Simon of Glaisdale (majority):
.. Esso and the garage owners put the material out for their commercial advantage, and designed it to attract the custom of motorists. The whole transaction took place in a setting of business relations... The coins may have been themselves of little intrinsic value; but all the evidence suggests that Esso contemplated that they would be attractive to motorists and that there would be a large commercial advantage to themselves from the scheme, an advantage in which the garage proprietors would share....
Lord Russell (dissenting) argued that the World Cup coins, despite having a commercial element, were more of a gift than a sale:
.. benevolence is not a necessary feature of a gift, which may well be motivated by self interest.... It seems the minimal value of the coins were important in his reasoning.
Viscount Dilhorne (dissenting):
.. True it is that Esso are engaged in business. True it is that they hope to promote the sale of their petrol, but it does not seem to me necessarily to follow or to be inferred that there was any intention on their part that their dealers should enter into legally binding contracts with regard to the coins; or any intention on the part of the dealers to enter into any such contract or any intention on the part of the purchaser of four gallons of petrol to do so....
Parties to a commercial transaction may expressly rebut the presumption that there is an intention to be bound.
Rose & Frank Co v Crompton Bros  2 KB 261
The plaintiff supplied the defendant with tissues used for carbonising paper. There was a written arrangement that the plaintiff would be the sole supplier. However, the agreement also contained an
honourable pledge clause which stated:
This arrangement is not entered into, nor is this memorandum written, as a formal legal agreement and shall not be subject to legal jurisdiction in the Law Courts... but is only a definite expression and record of the purpose and intention of the... parties to which they each honourably pledge themselves....
Could the clause rebut the presumption to create legal relations?
The clause was capable of expressly rebutting the presumption.
.. To create a contract there must be a common intention of the parties to enter into legal obligations, mutually communicated expressly or impliedly. Such an intention ordinarily will be inferred when parties enter into an agreement which in other respects conforms to the rules of law as to the formation of contracts. It may be negatived impliedly by the nature of the agreed promise or promises, as in the case of offer and acceptance of hospitality, or of some agreements made in the course of family life between members of a family as in Balfour v Balfour . If the intention may be negatived impliedly it may be negatived expressly. In this document, construed as a whole, I find myself driven to the conclusion that the clause in question expresses in clear terms the mutual intention of the parties not to enter into legal obligations in respect to the matters upon which they are recording their agreement. I have never seen such a clause before, but I see nothing necessarily absurd in business men seeking to regulate their business relations by mutual promises which fall short of legal obligations, and rest on obligations of either honour or self-interest, or perhaps both....