Contract - Intention To Create Legal Relations

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Intent to create legal relations - introduction

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Usually pleaded when the contract is being denied. The courts will apply an objective test in order to determine if there is an intention to
create legal relations, i.e. would the ordinary reasonable man have believed there was an intention to be legally bound under the circumstances? Edmonds v Lawson [2000] QB 501:

Judges are suspicious where this is raised and prefer to uphold or strike down a contract on other grounds, i.e. uncertainty or vagueness of terms.

The case law in this area has mainly been divided into two distinct areas: (a) familial, domestic or social agreements and (b) commercial agreements.

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Edmonds v Lawson [2000] QB 501

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Court of Appeal asserted that:

[w]hether the parties intended to enter into legally binding relations is an issue to be determined objectively and not by inquiring into their respective states of mind.

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Familial, domestic or social agreements

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The general presumption that is raised automatically here is that agreements made between family members are not intended to be legally binding. This presumption is one of fact, not of law.

This presumption is rebuttable by evidence to the contrary (i.e. evidence of an express or implied intention to be bound) by the party seeking to have the contract enforced. The more distant the relationship is from the core familial relationships, the more rebuttable will be the presumption and the courts will infer an intention to be legally bound. The relationships that have featured before the courts are mainly those of husband and wife, and parent and child.

Husband and Wife
(4--06) The relationship between husband and wife is usually not a legalistic relationship. One of the
key authorities in this area is the case of Balfour v Balfour [1919] 2 KB 571

Parent and child
The general presumption that there is no intention to create legal relations equally arises (4-101
in the context of an agreement made between parent and child. This presumption may
also be rebutted by evidence to the contrary.

Uncle and Nephew

The presumption also operates in respect of other family relationships, including that of uncle and nephew, and can sometimes lead to harsh results.Mackey v Jones (1959) ILTR 177

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Balfour v Balfour [1919] 2 KB 571

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a husband
promised to pay £30 a month to his wife while he was away. He failed to honour this promise
and his wife sued for breach of contract. It was held there was no intention to create legal
relations and the presumption was not rebutted. It is noteworthy that in this particular case,
the parties were still married and on relatively good terms. It is likely that the outcome would
have been different if this agreement had been made in the context of a marital break-up.

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Courtney v Courtney (1923) 57 ILTR 42

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The High Court upheld the legal validity of a separation agreement.

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Merritt v Merritt [1970] I WLR 1211

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The husband left the family home, which was in joint names with his wife and subject to a mortgage. He left to live with another woman.

The husband and wife had discussions in his car
and he promised that he would pay her £40 a month, with which the remainder of the mortgage would be paid. The wife refused to get out of the car until the husband put the agreement into writing. The agreement was that she would pay off the mortgage and when it was complete, he would transfer the house into her name.

Under the circumstances, Lord Denning opined:

It is altogether different when the parties are not living together in amity but are separated or are about to separate. They then bargain keenly. They do not rely on honourable understandings. They want everything cut and dried. It may safely be assumed that they intend to create legal relations.

It was held that there was a presumption that there was no intention to create legal relations since it was a family relationship, but this was rebutted as the arrangement was intended to affect their legal relations and there was a breach of contract.

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The New Zealand Approach

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The Courts of New Zealand have appeared to opt for a more pragmatic approach and tend not to rely on factual presumptions in this context. Indeed, in the New Zealand Court of Appeal case of Fleming v Beevers [1994] 1 NZLR 385 it was stated that:

The English cases speak in terms of a presumption. The range of circumstances in cases such as these is likely to be so varied that in any particular case a presumption, albeit of fact, is likely to be of limited assistance. Each case will turn on its own facts and there is
no substitute for a careful examination of those facts. The subject-matter and attendant circumstances may well suggest that the parties had no intention of creating a legally enforceable obligation. The converse may equally be true.

However, given that most cases of this nature are adjudged on a case-by-case basis and per the factual circumstances as they exist at the time, it is submitted that in practical terms the presumptions operate in the same manner as if merely judging according to facts alone.

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Jones v Padavatton [1969] 1 WLR 328

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In this case, a mother and daughter entered into an agreement that if the daughter returned to England from the USA to study for the Bar, the mother would pay her a $200 allowance. The daughter accepted. The mother bought a house and the daughter lived there with her child and some tenants. The rent received from the tenants covered the daughter's expenses. A few years later the mother claimed possession of the house. The objective test was applied and the court looked at what the parties had said and written down.

Two agreements were clear:

(a) that the daughter leave and study for the Bar for a fixed sum and

(b) that the mother allowed her to live in the house.

Neither agreement was in writing and there was no precise duration, therefore neither was intended to create legal relations, but was merely a family arrangement.

The presumption was not rebutted under the circumstances.

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Rogers v Smith (Unreported, Supreme Court, 16 July 1970)

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A father had given his money-lending business to his son, who was to pay himself a salary and his mother's expenses. The father died. The mother promised the son orally that the costs of supporting her would be recoverable from her estate on her death. The mother died.

The question arose as to whether or not the agreement was enforceable. It was held that the promise was not seriously intended because if the mother had reneged on
the promise, the son would still have supported her.

The Court agreed with the objective test and looked at all the surrounding circumstances. O'Dalaigh C.J. found that the presumption that there is no intention to create legal relations can be implied from the subject-matter of the agreement or expressed by the parties, even in commercial situations.

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Mackey v
Jones (1959) ILTR 177

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The plaintiff's uncle had promised his mother (the plaintiff was a 14-year-old boy at the time) that if he came to live with him and helped to look after his farm, he would convey the farm to the boy upon his death. However, the uncle left the farm to a third party.

Deale J. was of the opinion that there was no intention to create legal relations and so the presumption had not been rebutted under the circumstances.

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Hynes v Hynes (Unreported, High Court, 21 December 1984)

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An agreement between the plaintiff and the defendant (two brothers) to transfer a business owned and run by the plaintiff to the defendant was held to be enforceable.

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Leahy v Rawson (Unreported, High Court, 14 January 2003)

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Sullivan J. appeared to limit the family relationships to which the presumption applies. He held that the presumption applies only to parent and child relationships and relationships
involving spouses. It is a presumption of fact and the onus is on the claimant to rebut the presumption. In this case, the relationship between the plaintiff and her non-marital partner's
brother was deemed insufficiently close to attract the presumption.

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Business and Commercial Agreements

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In contrast to domestic and familial relationships, there is a presumption of an intention to be legally bound in respect of business and commercial agreements. This presumption can be rebutted by clear evidence that there is no such intention.



The objective test also applies in this respect. This is the case even where the negotiations between the parties are of an informal nature. - Esso Petroleum v Commissioner for Customs & Excise [1976] 1 All ER 117

Exceptions

The presumption that there is an intention to create legal relations may be displaced by a clear expression of a lack of intention. Indeed, the parties may even include a clause to that effect
within the agreement itself A clause that seeks to exclude legal liability in this manner is known as an "honour clause" and the agreement into which it is inserted is known as a "gentleman's agreement", i.e. an agreement that is binding as a matter of honour, not of law. Rose & Frank Co. v Crompton [1923] 2 KB 261

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Esso Petroleum v Commissioner for Customs & Excise [1976] 1 All ER 117

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A legally enforceable contract was held to arise from a transaction where football tokens were offered to anyone who purchased 4 gallons of the plaintiff's petrol. Lord Simon asserted that there was an intention
that this transaction was to be legally binding as " ... the whole transaction took place in a setting of business relations ... ". Moreover, the purpose of this promotional offer was commercial in that it was designed by Esso to encourage more members of the public to
purchase its petrol.

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Rose & Frank Co. v Crompton [1923] 2 KB 261

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The parties had agreed that the plaintiffs would distribute the defendant's goods (carbon paper) in the USA. This agreement contained a so-called honourable pledge clause, which stated:

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 of the United States or of England, but it is only a definite expression of the purpose and intention of the three parties concerned to which each honourably pledge themselves with the fullest confidence, based on past business with each other, that it will be carried through by each of the three parties with mutual loyalty and friendly co-operation.

The English Court of Appeal was of the opinion that the presumption of an intention to create legal relations was displaced by the honourable pledge clause as by the insertion of such a clause, the parties had clearly ruled out any intention to create a legally binding contract.

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Cadbury v Kerry Co-op & Dairy Disposal Co. Ltd [1982] ILRM 77

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Dairy Disposal Co. the owner of a number of creameries, which supplied milk for Cadbury's chocolate factories. Cadbury's was due to expand its Irish operations and in contemplation of this, Dairy Disposal agreed to ensure an adequate supply of milk to facilitate this expansion. However, Dairy Disposal Co. subsequently sold a number of its creameries to Kerry Co-op, but made an agreement with Kerry Co-op, as a condition of sale, that It would continue to supply Cadbury's in accordance with its demand, subject to price and quantity.

Despite the fact that Cadbury's was not involved directly in this agreement, it sought to enforce it against Kerry Co-op. Barrington J. held that the relevant clause was not binding because it was, at best, a commitment that Kerry Co-op and Cadbury's would enter into negotiations into the future.

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Letters of Comfort

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Letters of comfort are similar to the honourable pledge clause in that they are promises made by people which they hope to keep, but by which they do not wish to be legally bound. They are useful in commercial business practice in terms of reassunng the recipient without giving rise to contractual liability.

Letters of Comfort are normally given by companies, governments and State agencies to give assurances: if the subsidiary body runs into trouble, the Letter of Comfort means the sender is liable for the contents of the assurance. It is important to note, however that the fact that a document is labelled as a comfort letter will not of itself mean that it has no contractual effect - the test will be to inquire into the intention of the parties.

The question as to whether or not a document constitutes a letter. of comfort or not will essentially depend on its wording.

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Kleinwort Benson v Malaysia Mining Corporation [1989]
I All ER 785

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The plaintiff bank agreed to lend money to a subsidiary of the defendant
company. During negotiations, the defendants sent the plaintiffs a letter of comfort asserting that

"It is our policy to ensure that [the subsidiary] is at all times in a position to meet its liability to you under the [arrangements]".

The court considered the words"it is" to be a statement of current intent and contracts are a statement of future intent. (eg: Pollock.
"contracts are projection of exchange into the future".) it is "our policy to ensure that the business of our subsidiary is at all times in a position to meet Its liabilities to you under the above arrangements."

This undertaking had been given following a refusal by the defendants
to provide a formal guarantee on behalf of the subsidiary. Despite this assurance, the Court of Appeal concluded that this statement was not intended to be legally binding, instead It was merely stating the policy of the company .

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Letters of Intent

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A letter of intent is generally used to indicate the intention of the issuer to enter into
contractual arrangements, in due course, with the person to whom it is issued. If it is worded as such, it will not be considered to be legally binding. Generally, it is used when a person or a company seeks to induce another to undertake work or to incur expenditure while denying or limiting liability to that other, indicating that a formal contract will follow at a later date. In such cases, the courts have strived to discover a concluded contract where work has already been carried out.

A letter of intent may also expressly state that it is not intended to be legally binding and the courts will generally give effect to that expressed intent.

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Lottery Syndicates

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Lotteries and gambling arrangements will frequently be held to have contractual effect. The relevant authority here is Simpkins v Pays [1955].

Clark recognises the fact that there is a presumption of an intention to create legal relations in such structured pooling arrangements as there may be substantial winnings. Each case must be judged on its own facts.

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Simpkins v Pays [1955] 3 ALLER 10

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Readers of a Sunday newspaper were invited to take part in a fashion competition, paying a small fee on each occasion. The defendant owned the house, which she shared with her granddaughter and a lodger. All three parties entered into the competition on a regular basis. On one occasion, the defendant's granddaughter won £750. The plaintiff sought some of the fee. The defendant contended that there was no intention to create legal relations. The court found that, given the risks and profits involved in such situations, there was intention to create legal relations.

Clark recognises the fact that there is a presumption of an intention to create legal relations in such structured pooling arrangements as there may be substantial winnings. Each case must be judged on its own facts.

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Religious Arrangements

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The general approach that the courts have adopted in relation to religious arrangements is that they are not intended to be legally binding.

While there appears to be no leading Irish authority on this issue, the Ontario High Court decision of Zevevic v Russian Orthodox Christ the Saviour Cathedral [Unreported, Ontario High Court, 10 August 1988] is instructive. In this case a priest and his church were sued for failing to perform a funeral service. The priest claimed that it was traditional that a funeral would result in payment to him or to the church.

The High Court of Ontario held that there was no intention to create legal relations.

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Educational Arrangements

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In the case of Edmonds v Lawson [2000] QB 501, the Court of Appeal held that the relationship between pupil and chambers at the English Bar was intended to be legally binding. It was held that there was no reason why a binding contract could not be made for the provision of education and training.

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Agreements with the Government

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The State may not claim immunity from liability in contract because it inherited it from the Crown, as this was never part of the Irish Prerogative.

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Collective Agreements

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The question arises as to whether or not an agreement between an employer and a trade union is binding on individual members. By nature, such agreements are widely drafted, the result being that the terms are less certain and sometimes even ambiguous. Thus, in practical terms these agreements may not be upheld due to a failure to satisfy the requirement of certainty of terms.

There is line of Irish case law that provides authority for the view that, at common law, an agreement made between a trade union and an employer is in fact enforceable before the ordinary courts.

In Ford, the court stated that agreements are "merely undertakings binding in honour" . c/f the case of Ardmore Studios v Lynch [1965] IR 1

Clark acknowled~~s that"·· ·
Ford is clearly not good law in Ireland if it is held to be authority for the proposttlon that all
collective agreements are unenforceable. "6

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Ford v A. E. U W [1969] 1 WLR 339

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It was held that a collective agreement made between trade unions and employers or employers' organisations was unenforceable in the courts.

However, in accordance with the facts of the case, it seems that this particular agreement was not intended to be legally binding.

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Ardmore Studios v Lynch [1965] IR 1

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The plaintiffs owned a film studio and made an agreement with a trade union that electricians would be drawn only from a seniority list of union electricians. When the plaintiffs employed electricians who were not on the list, the defendants sought to picket their premises.

The plaintiffs sought an interlocutory injunction to restrain the defendants from picketing their premises.

However, Budd J granted
the relief sought by the plaintiffs. He refused to decide whether or not the agreement was binding.

McLoughlin J. in the trial court stated obiter that the agreement was not binding
due to uncertainty of terms.

Thus, it seems that if the terms had been clear, unequivocal and unambiguous, the agreement may have been given legal effect

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O'Rourke v Talbot [1984] ILRM 587

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The onus is on the person who asserts no legal effect is intended.

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Goulding Chemicals Ltd v Bolger [1977] IR 21

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Collective agreements are valid if incorporated into individual contracts of employment and
are binding if the collective agreement manifests itself into the individual contract.

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Industrial Relations Act 1946

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This Act provides for a method of enforcing the terms of certain collective agreements. Under s 32 of the Act, agreements relating to wages and conditions of employment (which were defined as an employment agreement) could be registered and enforced by the Labour Court. Indeed, if the agreement was in any way uncertain, the registrar would refuse to register it.

The agreement could be altered or cancelled altogether with the consent of all parttes to the employment agreement. In 1986, around 60 of these agreements were registered with the Labour Court, but their terms were not strictly observed. The Report of the Commission of Inquiry on Industrial Relations suggested that these provisions were not useful and changes were recommended. It is important to note the fact that the Report of the Commission of lnquirJ~ on Industrial Relations discovered that both sides of the industry were generally against the legal enforcement of collective agreements. Furthermore, this report advised against makmg collective agreements legally enforceable by statute.

Further reading: C~arke, The Enforceability of Agreements to Negotiate and Lock-Out Ag:eements, Bar Revtew, Vol 5, Issue 6 (April2000) 323.

A summary of the main points of the article may be expressed as fol~ows: The 1917 Irish case of Guardian of Kells Union indicated that such agreements. to negotiate were binding. In the English case of Hi/las v Arcos (1932) Com Cas, Lord Wnght stat~d that agreements to negotiate are binding unless essential elements are left to be detenruned. Later cases rejected this and stated that such agreements were a co~tract to contract and thus unenforceable. This was fmally confirmed by the House
of.Lords m Walfo~d v.Miles [1992] 2 AC 128. There has been much criticism of Walford v Miles (L.ord Steyn m hts Law Quarterly Review, among others). In the 1998 case of UK News Ltd v Mirror Group Pic T?omas ~· recognised these criticisms but stated that he was bound by pr~cedent.

Clarke recognises a slight change in approach by the Irish courts. In Bula v Tara
M_mes [1~87] I~ 95, while th~ court referred to the Cadbury Ireland and other such cases it satd constderatwn must be giVen to the observations of Lord Wright in Hi/las v Arcos.