Intention to create Legal Relations

The law makes a sensible compromise by assuming that in certain situations we would
usually not intend the agreement to be legally binding, while in others we usually would.
The first covers social or domestic arrangements where it is presumed there is no
intention to be legally bound. The second concerns commercial or business agreements
where an intention to be legally bound is presumed. In either case, the facts can show
that the presumption should not apply.
The intention is very much decided on the facts in individual cases. Intention to create
legal relations is defined as an intention to enter a legally binding agreement or contract.
The intention to create legal relations is one of the necessary elements in the formation
of a contract. If there is no agreement by both of the parties, it may make the contract
void agreement.
Social and Domestic / Family Agreements
Arrangements between family members are usually left to them to sort out themselves
and are not legally binding
Vaughan v Vaughan
Issue: The wife resisted the possession proceedings on the basis that, when leaving the
house, he had told her that she could always live there. Therefore, she claimed to have
an irrevocable licence to remain in the matrimonial property during her lifetime. The
county court judge held that there could be no doubt that by an irrebuttable presumption
of law a wife’s licence to occupy the matrimonial home was irrevocable. A contract
supported by consideration was not essential. The husband appealed.

The Court of Appeal held that after the decree of divorce, the former wife could not
justify her claim unless on the basis of a contract. The statement which was made to her
when her ex-husband left meant that she was entitled to remain in occupation as a bare
licensee and this licence was revocable. Where a promise is made which is not
contractual in form and the promise has been acted upon it is not the case that the
promisee is given the right to go on enjoying the subject matter of the promise
indefinitely. Denning L.J. observed that the wife should have protected her position by
applying for maintenance payments prior to obtaining the decree of divorce and should
have also reached an agreement with the husband that he would not seek to remove
her from the matrimonial home except by an order of the court.

The courts will consider the certainty of the agreements which has been entered into by
the parties

Coward v MIB
The court found that the agreement to take a friend to work in exchange for petrol
money lacks contractual intention.

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Balfour v Balfour (1919)
A husband worked abroad without his wife who had to stay in England because of
illness and promised an income of £30 per month. When the wife later petitioned for
divorce, her claim to this income failed. It had been made at an amicable point in their
relationship, not in contemplation of divorce. It was a purely domestic arrangement
beyond the scope of the court. Where husband and wife are estranged, an agreement
between them may be taken as intended to be legally binding.
Merritt v Merritt (1970)
Here the husband had deserted his wife for another woman. An agreement that he
would pay her an income if she paid the outstanding mortgage was held by the court to
be intended to create legally binding obligations. Sometimes, of course, families make
arrangements that appear to be business arrangements because of their character. In
such cases, the court will need to examine what the real purpose of the arrangement
was.
Granatino v Radmacher (2010)
Couple divorced after nine years and the husband claimed ancillary relief against the
wife’s assets. The anti-nuptial agreement was valid. The rule that such agreements are
contrary to public policy should no longer apply. A court could give effect to an
agreement even if the result is different to that which the court would have ordered. If
freely entered into, with all information available to both parties and in the absence of
pressure, such agreements should be upheld, unless it would be unfair to do so.
Jones v Padavatton (1969)
A mother provided an allowance for her daughter under an arrangement for the
daughter to give up her highly-paid job in New York, study for the Bar in England and
then return to practice in Trinidad where the mother lived. When the daughter was
finding it difficult to manage the allowance the mother then bought a house for her to
live in, part of which the daughter could let to supplement her income. They later
quarrelled and the mother sought repossession of the house. The daughter’s argument,
that the second agreement was contractual, failed. The court could find no intent. If
money has passed hands then it will not matter that the arrangement is made socially. It
will be held as intended to be legally binding.
Simpkins v Pays (1955)
A lodger and two members of the household entered competitions in the lodger’s name
but paying equal shares of the entry money and on the understanding that they would
share any winnings. So, when the lodger won, he was bound to share the winnings. If
parties put their financial security at risk for an agreement, then it must have been
intended that the agreement should be legally binding.
Parker v Clarke (1960)
A young couple were persuaded by an older couple to sell their house in order to move
in with them, with the promise also that they would inherit property on the death of the

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old couple. When the two couples eventually fell out and the young couple were asked
to leave, their action for damages succeeded. Giving up their security was an indication
that the arrangement was intended to be legally binding.
Commercial and Business Arrangements
An arrangement made within a business context is presumed to be intended to be
legally binding unless evidence can show a different intent.
1. Edwards v Skyways Ltd (1969)
An attempt to avoid making an agreed ex gratia payment in a redundancy failed.
Although ex gratia indicates no pre-existing liability to make the payment, the
agreement to pay it, once made, was binding.
2. Esso Petroleum Co. Ltd v Commissioners of Customs and Excise (1976)
Esso gave the World Cup coins with every four gallons of petrol purchased. Customs
and Excise wanted to claim purchase tax from the transaction. Since Esso was clearly
trying to gain more business from the promotion there was held to be intention to be
bound by the arrangement. The principle has also been developed to cover situations
where prizes are offered in competitions. The purpose of such events is generally to
promote the body offering the prize so there is intention to create a legal relationship,
which is binding and can be relied on by members of the public who enter the
competition.
3. McGowan v Radio Buxton (2001)
The claimant entered a radio competition for which the prize had been stated to be a
Renault Clio car. She was told that she had won the competition but was given a
four-inch scale model of a Clio. The defendants argued that there was no legally binding
contract. The judge held that there had been intention to create legal relations. The
claimant entered the competition as a member of the public and that ‘looking at the
transcript of the broadcast, there was not even a hint that the car would be a toy’.
However, it is possible for the agreement to contain no intention to be legally binding
where that is specifically stated in the agreement itself.
4. Jones v Vernons’ Pools Ltd (1938)
The pools company inserted a clause on all coupons saying that ‘the transaction should
not give rise to any legal relationship… but be binding in honour only’. When a punter
claimed that the company had lost his winning coupon and sought payment, his claim
failed. The clause prevented any legal claim. The same type of principle applies with
so-called comfort letters. Although such letters are worded so that they appear almost to
amount to a guarantee, they do not and will not give rise to legal obligations.
5. Kleinwort Benson Ltd v Malaysian Mining Corporation (1989)
Kleinwort lent £10 million to Metals Ltd, a subsidiary of MMC. The parent company
would not guarantee this loan but issued a comfort letter stating their intention to ensure
Metals had sufficient funds for repayment. When Metals went out of business without
repaying Kleinwort the latter’s action based on the comfort letter failed. If they had

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wanted a guarantee they should have insisted on one. Sometimes judges will find that
parts of an agreement are intended to be legally binding, and other parts are not.
6. Julian v Furby (1982)
An experienced plasterer helped his daughter and son-in-law to alter and furnish their
house. When the couple split up he sued the son-in-law for the price of the materials he
had bought and also for his labour. The court agreed that there should be payment for
the materials but not for the man’s labour, which was felt to be no more than any father
would do for his daughter.
Importance of Intention to Create Legal Relations
In practice, it is rare for contract cases to involve problems with the requirement of
intention to create legal relations. This is largely because, in many of the situations in
which the issue might be raised, particularly domestic and social ones, there is no
consideration. The courts will only consider intent to create legal relations if offer and
acceptance have already been established.
The US academic Professor Williston has suggested that in fact the common law does
not demand any positive intention to create a legal obligation as an element of contract.
In his view, the separate elements of intention serves no purpose in our system and is
only useful in legal systems, which do not have the test of consideration to help them to
determine the boundaries of a contract. He suggests that mere social arrangements will
be enforced as contracts if the other requirements – offer & acceptance and
consideration, for example – are present, and the issue of intention to be legally bound
adds nothing to the decision of the court. But the case of Balfour v Balfour is an
example of offer, acceptance and consideration existing but there still is no contract
seems to show that there was no intention for the document to be legally binding.

Law cases, reports and other references the examiners would expect you to use Social
transactions: Balfour v Balfour, Merritt v Merritt, Jones v Padavatton, Radmacher v
Granatino. Commercial transactions: Esso v Commrs Customs & Excise, Frank v JR
Compton. Preston v Methodist Conference.Blue v Ashley,
Frank v JR Compton.
Firstly, as to the 1913 agreement, the Court gave overriding weight to the provision in
the agreement that expressly provides that it is to be solely an “honourable pledge”, as
demonstrating that the parties did not intend the arrangement as a legally-binding
contract. The Court explained that the argument that clauses restricting the legal
enforceability of a contract apply solely when the document is otherwise unquestionably
of legal force. In this case, the document and circumstances did not intend to create any
legal interest, and the clause expressly precluding the agreement’s legal enforceability
applies. Secondly, the Court held that the fact that the arrangement does not constitute
a legal contract does not preclude the orders and acceptances from constituting
legally-binding contracts. The lack of enforceability of an express legal arrangement

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under an agency agreement does not preclude the legal transactions. The orders
constituted mutual offers and acceptances with each transaction having ordinary legal
significance.
Borderline:
1. Preston v Methodist Conference.
Facts
Ms Preston had been ordained as a minister in 2003. In 2006 she was appointed
Superintendent Minister for a five-year term. Her relationship with the Church was
governed by the Church's constitution, contained in the Deed of Union. She received a
stipend, and accommodation, and was entitled to holiday pay, sick pay and membership
of a pension scheme. She received an annual appraisal and could be subject to
disciplinary proceedings.
In 2009 she resigned and brought an unfair dismissal claim.
The Decision: The Supreme Court.
The Supreme Court found that recent decisions meant that the spiritual character of the
ministry did not give rise to a presumption against contractual intentions, but the
spiritual nature was still relevant. The correct approach was to examine the rules and
practices of the particular Church, together with any special arrangements made with
the particular minister.
In this particular case, when considering the Church's constitution and the standing
orders of its governing body, the court found that the ministry was a vocation, with
candidates submitting themselves to the discipline of the Church for life.
The disciplinary scheme under the Deed of Union, which determined the manner in
which a minister could be suspended or removed from ministerial duties, was the same
for all members of the Church whether they were ministers or ordinary lay members. A
minister could not unilaterally resign, even on notice, as his or her relationship with the
Church could only be terminated by the decision of the conference, its Stationing
Committee or a disciplinary committee.
Therefore, unless a special arrangement had been made with Ms Preston, her rights
and duties arose entirely from her status in the constitution of the Church and not from
any contract. She was, therefore, not an employee.
2. Blue v Ashley,
Mr Justice Leggatt concluded that the conversation in the bar was conducted under the
influence of a lot of alcohol and was jovial in nature. Even though it was likely that Mr
Ashley said, or Mr Blue inferred that he could have £15 million if he could get the share
price of Sports Direct to £8, when Mr Blue agreed, everyone present laughed. Even
though 13 months later, the share price did reach £8, no reasonable person in the
Horse & Groom that fateful night of 24 January 2013 would have thought that this was a
serious offer.
Justice Leggattt:

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“The fact that Mr Blue has since convinced himself that the offer was a serious one, and
that a legally binding agreement was made, shows only that the human capacity for
wishful thinking knows no bounds”.
4. Kleinwort Benson Ltd v Malaysian Mining Corporation, [1989]
in the absence of an expressly stated intention to create legal relations in respect of the
payment, the Court must determine whether the statement within its context was
intended and understood by the parties, as a binding legal promise as to future conduct.

5. Merritt v Merritt [1970]

When parties are in the process of separating or are separated, the presumption of
there being no intention to create legal relations does not apply. The arrangement was
sufficiently certain to be enforceable, and the paying of the mortgage was ample
consideration
6. Balfour v Balfour

The general presumption is that there is no intention to create legal relations in social
and domestic agreements.
In commercial agreements, the presumption is that there is an intention to create legal
relations between the parties.
7. Jones v Padavatton
For the rebuttal, mere subjective evidence will not suffice objective evidence is also
needed.
8. Snelling v John G Snelling
Brothers running a family company enter into an agreement in regard to the running of
the company and it was held that there were intentions to create legal relations
9. Esso Petroleum Ltd v Commissioners of Customs and Excise [1976]
The transaction took place in a business setting and was itself a legal offer beyond a
mere ‘puff’ that rendered Esso commercial advantages
The presumption can be rebutted using an express term of the contract which clearly
states that the parties do not have the intention to create legal relations.
There are however instances where the presumption has been rebutted but the courts
are convinced to conclude that the parties do not have an intention to create legal
relations. The presumption can be rebutted using an express term of the contract which
clearly states that the parties do not have the intention to create legal relations.
However, the parties must make their intentions clear. Thus, agreements for the sale of
land are ‘subject to contract’ and on the ground, there is no intention to create legal
relations. At common law, connectively entering into a contract between trade unions
and an employer, will not give rise to legal relations
10. Ford Motors.

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This means that there must be an honour clause present which expressly states that
there is no intention to create legal relations.
From the above discussion, it can be concluded well-grounded that the doctrine of
intention to create legal relations is a very important element for the formation of the
contract and for it to be legally enforceable in the courts. The presumptions are
important in a sense because they reduce the workload of the courts, and only those
cases come before the courts which are of significant importance leading to some
important development.
11. Scammell v Cicker [2005]
“Where parties intend to create a contractual obligation, the court will try and give it
legal effect. The Court will only hold that the contract, or some part of it, is void for
uncertainty if it is legally or practically impossible to give to the agreement (or that part
of it) any sensible content”
12. Durham Tees Valley Airport v bmibaby [2010]
If the terms of a contract are too vague this may be grounds for saying that the parties
did not intend to form a legally binding agreement. Even if the intention is found, the
contract can still fail if the terms are too uncertain. The Courts are reluctant to try to
decide what the parties wanted to include in any agreement but will try to do so unless
the terms make it so difficult as to render the task impossible.
Commercial agreements
Bear Stearns Bank plc v Forum Global Equity Ltd

Whether contract concluded for sale of distressed debt notes – Intention to create legal
relations – String contracts – Measure of damages

The claimants (BS) claimed to have concluded a contract in a telephone conversation

on 14 July 2005 with the defendants (F) that BS would acquire from F some distressed
debt by way of notes issued by companies in the Parmalat group. Held, that a contract
for the sale of the notes had been concluded – there had not been mere agreement to
agree, there was sufficient certainty and the parties did have the intention to make a
legally binding contract. The judge found no convincing evidence of usage or custom in
the relevant market prescribing trade on LMA terms, such as to impliedly incorporate
them into an oral agreement.