domestic agreements – agreements made between family members and relatives where there is no intention to create legal relations.

• • Objective test: would the words or conduct of the parties lead a reasonable person to believe, on the balance of probabilities, that legal relations were intended. 
  • Presumption: a belief (as the word is used here it is a reference to what the courts assume).
  • Social agreements: agreements made between friends or acquaintances.
  • Voluntary agreements: agreements where the parties volunteer their services, usually for no money.

Introduction

Chapter 6 introduces you to the second element that must be present in a simple contract – that is, the question of intention between the parties to create legal relations.  

The fact that you have reached an agreement with another party does not necessarily mean that a contract has been created. It is this element of intention that distinguishes a legally binding contract from other types of arrangements. Without intention, you can still have an agreement but it is an agreement that is not enforceable in a court because it is not a contract. The parties will have to rely on moral or social pressure for enforcement. 

In this chapter we begin by looking at intention generally (express and implied) and then the two main types of agreement: non-commercial, and commercial or business agreements. In the case of a non-commercial agreement there is a presumption (or a belief) that the parties do not intend to create legal relations while in the case of a commercial or business agreement there is a presumption that legal relations are intended.  

Step 2 – Intention to create legal relations

In Step 1 you were concerned with the issue of agreement. Was there an offer? Did the other party accept? Once you are satisfied that an agreement has been reached, you need to think about whether the agreement you entered into was legally enforceable. The fact you and the other party have reached an agreement does not necessarily mean that a contract has been formed.  

For an agreement to be legally enforceable as a contract, you both must intend to create legal relations. This can be express (words, writing or conduct) or implied; but if it is not present, there can be no contract. 

The question of intention is closely linked to the question of agreement which, together with consideration (see Chapter 7), will determine whether the parties have entered into a simple contract. But note that even at this stage we don’t know whether our contract that we created is valid. That can only be determined after considering the elements of capacity, consent, legality and form (these are dealt with Chapter 8, Chapter 9 and Chapter 10). 

Is it difficult to determine intention? 

The difficulty with determining intention is trying to work out what the parties really intended. As you will discover, the parties to a contract rarely make express reference to the question of intention.  

It is only when a problem arises between the parties and one party wants to enforce their ‘rights’ that intention suddenly becomes an issue. Suddenly, the party that feels aggrieved – usually because there is money at stake – will want to know what their rights are – that is, whether there is an enforceable agreement or not. 

In trying to find an answer to the question of intention, the courts (in the case of Australia, up until the Australian High Court decision in Ermogenous v Greek Orthodox Community of SA Inc [2002] HCA 8 (‘Ermogenous’) classified agreements into two categories: 

• Agreements of a business or commercial nature. Here the courts had adopted an approach involving a rebuttable presumption (a legal principle that presumes something to be true until evidence is produced by the party who wishes to disprove it proves otherwise) that unless the contrary can be clearly established, it was presumed that the parties did intend to create an enforceable contract.
• Agreements of a social or domestic nature. Here there was a rebuttable presumption that the parties did not intend legal relations. For example, if you agree to meet a friend at the movies and they don’t turn up, you might be upset but you don’t usually intend to sue them for breaching their promise to you.

Where problems arise is where the consequences for the aggrieved party are much more serious (for example, in a PNG Lottery win where a ticket holder claims they bought the winning ticket with their money and the ticket bought by the group did not win anything), because now the court has to try to determine what the parties intended when making their arrangement. Did the parties intend their agreement to have legal consequences should things go wrong? This can be quite hard to determine because the parties in these types of arrangements rarely make express reference to the requirement of intention.

How do you determine intention?  

Intention can be determined by considering the relevant context and the relationship between the parties and determining what inferences can be drawn from that. Look at what the parties have said, written or done as well as taking into ‘account the subject matter of the agreement, the status of the parties, their relationship to one another and other surrounding circumstances.

 What form can intention take? 

What is express intention? 

The parties rarely make any direct or express reference to the question of intention to contract within the contract itself. Where references are made, they are generally found only in commercial (or business) agreements and they are invariably expressed in a negative way – that is, by way of terms that expressly and clearly state that the parties don’t intend to be legally bound – for example, by including wording in the agreement such as: 

• ‘binding in honour only’ (these are also known as ‘honour clauses’). In the English case of Rose & Frank Company v JR Crompton & Bros Ltd [1925] AC 445, a commercial arrangement contained the following clause which made it clear that the parties did not intend to create legal relations and that the agreement was not meant to be legally binding:

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 . . . but it is only a definite expression and record of the purpose and intention of the parties concerned to which they each honourably pledge themselves. 

• An ‘honour clause’ was effective in the English case of Jones v Vernon’s Pools Ltd [1938] 2 All ER 626 (a case involving a lost lottery ticket) preventing any legal action being taken against Vernon’s Pools: 

It is a basic condition of the sending-in and acceptance of this coupon that it is intended and agreed that the conduct of pools . . . shall not be attended by or give rise to any legal relationships, rights, duties or consequences whatsoever or be legally enforceable or the subject of litigation, but all such arrangements, agreements and transactions are binding in honour only. 

or

• ‘This agreement is subject to contract’ or subject to the preparation of a formal contract of sale which shall be acceptable to my solicitor’. In both examples there may be an agreement but until a formal contract is made, the parties are not bound. The key word is ‘subject’ and it tells a court that there is still more to be done, as in, a formal contract has to be made.  

Parties to a contract may be content to be bound immediately and exclusively by the terms on which they had agreed. However, they may also decide to add some additional or further terms at a later date. A legally binding contract can still exist even though there is an intention to expand on it to substitute other terms if and when the need arises. 

Can the parties exclude the jurisdiction of the courts? 

The parties to an agreement can expressly declare that they don’t intend to create legal relations. What they cannot do is make a binding contract and expressly exclude the jurisdiction of the courts as this is contrary to public policy – for example, by using wording such as: 

In respect of any matter arising out of this agreement or any breach thereof the parties hereby acknowledge that the jurisdiction of the court is to be excluded. 

What is the intention of the parties using a ‘letter of comfort’? 

In order to secure a loan, a bank or lending institution will try to seek a guarantee from a parent company and, if possible, from the subsidiary company to which the loan is made. This is the only way the lender can be certain that assets of the group will be available to meet the obligations of the borrower should there be a default on the loan. Where the loan is supported by a contract of guarantee, there is no problem with intention. The liability of the guarantor arises on default of the subsidiary. 

But it often happens that a parent company will refuse to give a guarantee – for example, because it does not want a contingent liability to show up on its balance sheet, or it might just not want to be a guarantor. In such a case, a compromise is a letter of comfort.  

A letter of comfort may take the form of an undertaking to maintain its financial commitment in the subsidiary, or it may be one where the parent company agrees to use its influence to ensure the subsidiary meets its obligations, or it may be nothing more than an acknowledgment by the parent company that a subsidiary has entered into a contract. 

In this type of commercial transaction, it is always going to be assumed that the parties intended legal relations, unless it can be rebutted by a clear statement to the contrary. However, whether a statement is seen as promissory or a statement of intention is a matter of construction and taking into account the parties’ acts and conduct, including statements they made and documents they signed or dealt with, whether there is a clear indication of what they intended. 

Do government ‘contracts’ always result in contractual relations? 

While governments and government departments enter into contracts on a daily basis, there are some types of government dealings that simply don’t result in the creation of contractual relations. These usually involve some aspect of the government’s political or administrative activities, and here the courts are more reluctant to infer an intention to create legal relations. 

Where government schemes or handouts are concerned, the better view is that there is no intention to create legal relations.  

What is the presumption in business advertisements? 

Where advertisements are concerned, it is presumed that they are not intended to create legal relations. As usual, each case should be looked at on its facts to see whether intention is present. A good example where the courts found that the advertisements did create legal relations was Carlilll v Carbolic Smoke Ball Company in Chapter 5. The £1,000 deposited at the bank clearly evidenced an intention to pay anyone who performed the conditions of the offer and who claimed the money. 

Expressions such as ‘one per customer’ or ‘rain check’ by an advertiser in a newspaper advertisement or brochure are intended to make clear to the world at large that if the advertiser runs out of a product it will get more in at the advertised price for the customer. In other words, there is an intention on the part of the advertiser to be bound by the wording in the advertisement. This is where there is an offer, rather than there being an invitation to treat.  

Do non-commercial agreements lack serious intention? 

At common law it was possible to identify three types of agreements as generally lacking serious intention on the part of the parties to create legal obligations: 

• Social agreements made between friends or acquaintances – for example, in relation to competitions and lotteries.
• Family or domestic agreements made between family members and relatives, not just spouses, but note that also brings into play customary law; and
• Voluntary agreements, where the parties may volunteer their services without any consideration.

In these types of agreements, the parties don’t intend to create legal relations, even though the ‘agreements’ contained promises made by the parties, preferring instead to rely on family or friendship ties of mutual trust and affection. The test is objective, based on the reasonable person with the onus on the plaintiff to produce sufficient evidence to convince a court, on the balance of probabilities, that a contract was intended. 

In Australia, after Ermogenous, determining the question of intention is by way of consideration of the relevant context and the relationship between the parties, and determining what inferences can be drawn from that. However, whichever approach the court chooses to use is probably going to be the same under either approach. 

Are legal relations intended between social and domestic partners?