INDIAN CONTRACT ACT

INTENTION TO CREATE LEGAL RELATIONS

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Contents
Table of Cases.............3 Introduction..4 Family and Social Agreements..6 Cases laws related to social arrangements..7 o Balfour vs Balfour.7 o Jones v. Padavatton.8 Commercial Agreements..9 o Esso Petroleum Ltd v Commissioners of Customs & Excise.10 o Rose and Frank Co. v J.R. Crompton & Bros Ltd .12 Conclusion13 Bibiography.15 o Books o Websites

Table of Cases Balfour vs Balfour 1919] 2 KB 571 Jones v. Padavatton (1969) 2 ALL ER 616 - Electronic Version. Esso Petroleum Ltd v Commissioners of Customs and Excise [1976] 1 WLR 1. Rose and Frank Co. v J.R. Crompton & Bros Ltd [1923] 2
KB 261; [1925] AC 445

Albert v Motor Insurers Bureau [1971] 2 All ER 1345

Intention To create Legal Relations

Introduction According to Section 2 (h) of the Indian Contract Act: An agreement enforceable by law is a contract. A contract, therefore, is an agreement the object of which is to create a legal obligation, i.e., a duty enforceable by law. 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 Indian 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 not to intervene in domestic situations because the courts would then be swamped by trifling domestic disputes. We can have an 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 Relation1

Law of Contract Singapore 4(1)

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

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. 2

(Adams & Brownsword 2004:93-94)

Cases laws related to social arrangements: Balfour vs Balfour3: Facts: Mr. Balfour (D) and Mrs. Balfour (P) lived in Ceylon and visited England on a vacation. The plaintiff remained in England for medical treatment and the defendant agreed to send her a specific amount of money each month until she could return. The defendant later asked to remain separated and Mrs. Balfour sued for restitution of her conjugal rights and for alimony equal to the amount her husband had agreed to send. Mrs. Balfour obtained a decree nisi and five months later was granted an order for alimony. The lower court entered judgment in favor of the plaintiff and held that the defendants promise to send money was enforceable. The court held that Mrs. Balfours consent was sufficient consideration to render the contract enforceable and the defendant appealed. Issues: 1. Must both parties intend that an agreement be legally binding in order to be an enforceable contract? 2. Under what circumstances will a court decline to enforce an agreement between spouses? Holding and Rule: 1. Yes. Both parties must intend that an agreement be legally binding in order to be an enforceable contract.

[1919] 2 KB 571

2. The court will not enforce agreements between spouses that involve daily life. Agreements between husband and wife over matters that affect their daily lives are not subject to contractual interpretation, even when consideration is present. Spouses normally intend that the terms of their agreements can be varied as situations develop. The court held that it was presumed that the parties made the agreement as husband and wife and did not intend that it could be sued upon. The court held that as a matter of public policy it could not resolve disputes between spouses. Disposition: Judgment for plaintiff Mrs. Balfour reversed. Point Decided: Contracts related to the social aspect of marriage will not be enforced by the courts. Contracts between spouses related to business relationships can be enforced, however. Courts are willing to support negotiated divorce settlements and written statements of support. Jones v. Padavatton:4 This case Jones v. Padavatton 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

(1969) 2 ALL ER 616 - Electronic Version.

considered, rather than being dismissed as outside the realm of contracts. Facts: A mother, Mrs Violet Lalgee Jones, agreed with her daughter, Mrs Ruby Padavatton, that if she would give up her secretary job at the Indian embassy in Washington DC and do the bar here, the mother would pay maintenance (from Trinidad, East Indian descent). The mother gave monthly payments and then bought a London house (moving out of a one room flat in Acton to 181 Highbury Quadrant, Highbury) which she lived in and rented out. Then they had a quarrell while Mrs Padavatton was still completing her bar exams at Lincoln's Inn. The mother brought an action for possession of the house. The daughter argued there was a binding contract that she could stay. 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.

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 Excis.5

Esso Petroleum Ltd v Commissioners of Customs and Excise Facts: 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
5

[1976] 1 WLR 1.

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.

Judgement: 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.

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.6

Rose and Frank Co. v J.R. Crompton & Bros Ltd Facts: The defendant manufactured carbon paper in England. The plaintiff bought the defendants 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 defendants goods. The agreement said : 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 cooperation.

[1923] 2 KB 261; [1925] AC 445

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. Judgement: 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 gentlemens 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. Point decided: 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.

Conclusion: The doctrine of intention 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 Bureau7 , it was stated by the Upjohn LJThe 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 8thus: An agreement, even though it is supported by consideration, is not binding as a contract if 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. 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.
7

[1971] 2 All ER 1345

(25th Edition, Volume I, para. 123)

Bibliography Books: Avtar Singh, Law of Contract and Specific Relief (10th edition 2006) Beatson J, Anson`s Law Of Contract (28th edition Oxford, Delhi) Ewan Mckendrick, Contract Law (6th edition Palgrave Macmilan, Hampshire 2005) Michael Furmston, Cheshire, Fifoot & Furmstons Law of Contract (15th Indian edition Oxford, Delhi 2007) Jill Poole, Text Book on Contract Law (8th edition Oxford, London 2006) Mindy Chen-Wishart, Contract Law ( 5th edition Oxford, London 2007) Websites: http://www.australiancontractlaw.com/law/formationintention.html http://netk.net.au/Contract/05Intention.asp http://netk.net.au/Contract/Balfour.asp http://www.google.co.in/search?hl=en&q=intention+to+create+le gal+relationship+in+social+and+domestic&meta=&aq=f&oq= www.usyd.edu.au/lec/subjects/Merritt%20v%20Merritt. http://netk.net.au/Contract/Esso.asp http://netk.net.au/Contract/Edwards.asp