Intention to Create Legal Relations
4
Intention to Create Legal Relations
Contents
4.6 Is a requirement of intention necessary?
There may be situations where, despite the identification of an agreement and consideration, the courts feel that an agreement should not be enforced because the parties did not intend that it should create legal relations. The main approach is based on two presumptions:
If the agreement is a ‘domestic’ agreement the courts will presume that it is not intended to be legally binding. It will be up to the party wishing to enforce to overturn that presumption.
If the agreement is ‘commercial’ the courts will presume that it is intended to be legally binding. It will be up to the party wishing to escape from the agreement to prove that the presumption should be overturned.
There is also statutory control of the situation in relation to agreements between trade unions and employers, which are generally treated as unenforceable.
In addition to the tests of the existence of a contract dealt with in the previous chapters, the courts will also sometimes inquire whether, despite the fact that offer, acceptance and consideration can be identified, the parties did really intend to create a legally binding relationship. In line with the traditional approach that the courts regard themselves simply as ‘referees’ or ‘umpires’ giving effect to the parties’ intentions, it is only where the parties themselves have entered into an agreement which they intend to be legally binding that the courts will treat it as a contract. As with the tests of agreement and enforceability, the courts take an objective approach, looking at what the parties have said and done and the context in which they have been dealing with each other. This was confirmed by the Supreme Court in RTS Flexible Systems Ltd v Molkerei Alois Müller,1 where Lord Clarke said (emphasis added):2
Whether there is a binding contract between the parties and, if so, upon what terms depends upon what they have agreed. It depends not upon their subjective state of mind, but upon a consideration of what was communicated between them by words or conduct, and whether that leads objectively to a conclusion that they intended to create legal relations and had agreed upon all the terms which they regarded or the law requires as essential for the formation of legally binding relations.
4.2.1 IN FOCUS: HIDDEN POLICY CONSIDERATIONS?
Collins has suggested that the ‘objective’ approach may well not coincide with reality:3
In cases where the issue is litigated, it seems likely that one party intended a legal agreement and the other wanted the agreement to be merely morally binding. This contradiction removes any possibility of justifying the limits of contracts on the basis of the joint intent of the parties. We are forced to the conclusion that the courts must rely upon hidden policy considerations when determining the intentions of the parties.
We are not, however, ‘forced’ to this conclusion. In many cases, rather than the parties having different intentions, they may not, at the time of entering into their agreement, have thought about the issue at all.4 In such a situation, the courts will adopt the approach, which they also adopt in other areas where there is later disagreement as to the parties’ intentions at the time of contracting,5 of asking what the reasonable person in the position of the parties would have been likely to intend.6
Although this approach may be used as a device to bring ‘policy’ considerations into the law, it is also capable of acting as a means of coming to an ‘objective’ view in an area where the parties’ evidence as to their respective states of mind is in conflict.
4.2.2 USE OF FORMALITY?
Another way of approaching the issue of ‘intention’ would be through formal requirements. It would be possible to require, for example, that an agreement, to be legally binding, must be in writing, and have within it a clause confirming that it is intended to be legally binding. In one particular situation, relating to the enforceability of collective agreements between trade unions and employers, this is precisely what has been required.7 As has been explained in earlier chapters, however, generally the English law of contract does not require formalities. Verbal agreements are enforceable, and no particular forms of words are required. It can be argued, however, that the requirements of offer, acceptance and consideration, discussed in Chapters 2 and 3, may be regarded in themselves as indications of an intention to enter into a legally binding contract. If the parties have taken the trouble to specify their obligations in a way which makes them clear and unambiguous (as required by ‘offer and acceptance’), and the agreement has the element of mutuality required by the doctrine of consideration, this may reassure a court that legal enforceability was intended. If, for example, a transaction which would otherwise appear as a gift has consideration introduced artificially, this may well be strong evidence of an intention to make a contract. The transfer of the ownership of a valuable painting, worth £50,000, which involves the recipient giving the supplier £1 in exchange, would fall into this category. There would be no point in the recipient giving the money unless the intention is to make the transaction of transfer into a contract, and the parties into ‘seller’ and ‘buyer’. The introduction of consideration is in this case therefore evidence of an intention to create legal relations. Taking this approach to its logical conclusion, some have argued that there is no need for a separate heading of intention,8 and this point will be discussed below.9
The generally accepted view, however, is that, although this analysis has some force, there are nevertheless some agreements which may have all the other characteristics of a contract, but which are clearly not meant to be treated as legally binding. If the parties to an apparently binding commercial agreement specifically state that it is not to have legal consequences, surely the courts should pay attention to this? Certain domestic arrangements may also raise difficulties. If, for example, there is an agreement between a man and a woman that he will cook a meal for them both, in return for her providing the wine to go with it, this may involve an offer, acceptance and consideration, but no one would expect it to be regarded as legally binding. If she failed to turn up, he would not be able to sue for the cost of preparing the meal. Given, however, that no formalities are required, and that offer, acceptance and consideration can be identified, how are those agreements which are intended to be binding to be distinguished from those which are not? The evidence of the parties themselves is likely to be unreliable, so some other means of determining the issue must be found.
In fact, as we have noted above, English law operates on the basis of an ‘objective’ approach, based on what a reasonable person in the position of the parties would have been likely to have intended. This approach is assisted by the ‘presumptions’ as to intention, which differ according to whether the agreement is to be regarded as ‘domestic’ or ‘commercial’. These two categories of agreement must therefore be looked at separately.10
The leading case in this category is Balfour v Balfour.11
Key Case Balfour v Balfour (1919)
Facts: There was an agreement between husband and wife, resulting from her inability (due to illness) to return with him to his place of work, in Ceylon. He agreed to pay her £30 per month while they were apart. Later, the marriage broke up and the wife sued the husband for his failure to make the promised payments.
Held: The Court of Appeal held that her action must fail. Two members of the court centred their decision on the lack of any consideration supplied by the wife. Atkin LJ, however, stressed that even if there were consideration, domestic arrangements of this kind are clearly not intended by the parties to be legally binding. He used the example of the husband who agrees to provide money for his wife in return for her ‘maintenance of the household and children’.12 If this was a contract, then each would be able to sue the other for failure to fulfil the promised obligation. As regards this possibility, Lord Atkin commented:13
All I can say is that the small courts of this country would have to be multiplied one hundredfold if these arrangements were held to result in legal obligations. They are not sued upon, not because the parties are reluctant to enforce their legal rights when the agreement is broken, but because the parties, in the inception it never intended that they should be sued upon. Agreements such as these are outside the realm of contracts altogether.
The onus was on the wife to establish a contract and she had failed to do so. Mr Balfour was not contractually bound to make the payments.
Lord Atkin’s judgment is the one that has received most attention in subsequent case law, and has been taken as establishing the position that in relation to domestic agreements there is a presumption that they are not intended to be legally binding.
There are two points to be noted here. First, the notion of the ‘domestic’ agreement should probably be taken as relating more to the subject matter than to the relationship between the parties. If, for example, a woman agrees to sell her car to her brother for £1,500, there seems little reason to deny this agreement the status of a contract, and it should be presumed to be binding unless there is evidence to the contrary. A recent decision of the High Court, however, has cast some doubt on this. It suggests that there may be situations which fall into a sort of ‘halfway house’ between domestic and commercial, and that in this case the burden of overturning the presumption may be affected. In Sadler v Reynolds,14 the alleged contract was between a journalist and a businessman. The journalist wanted to ghost-write the autobiography of the businessman, who had had a ‘rags to riches’ life, involving more than one spell in prison. The two had become friendly, meeting socially, and the journalist alleged that there had been an oral contract for him to write the autobiography. The judge suggested that the agreement fell ‘somewhere between an obviously commercial transaction and a social exchange’.15 The onus was on the journalist to prove that there was an intention to create legal relations, ‘albeit that the onus [was] a less heavy one than that which would be required to establish such an intent in the context of a purely social relationship’. The judge clearly viewed the nature of the relationship as more significant than the nature of the agreement, since at first sight an agreement to write a book would appear to be ‘commercial’, so that the burden of proving that it was not binding should have fallen on the businessman. The judge held, however, that it was up to the journalist to prove that it was binding. It follows that, as the cases seem to suggest, social arrangements between friends who are not related, or household agreements between a couple living together, but not married, should come into the category of ‘domestic’, and therefore be presumed not to be binding. An example of an agreement between friends is Coward v Motor Insurers’ Bureau,16 where an agreement between workmates to share the cost of transport to work was held not be legally binding.17
The second point to note is that, since the rule is simply based on a presumption, it will always be possible for that presumption to be rebutted (as indeed was the case in Sadler v Reynolds). In Merritt v Merritt,18 for example, an arrangement between husband and wife similar to that agreed in Balfour v Balfour, but here made in the context of the break-up of the marriage, was held to be legally binding. Lord Denning distinguished Balfour v Balfour in the following terms:19
The parties there [that is, in Balfour v Balfour] were living together in amity. In such cases, their domestic arrangements are ordinarily not intended to create legal relations. 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 context in which the agreement was made was such, therefore, that although it prima facie concerned a domestic matter, the support of a wife by her husband, the presumption that it was not intended to be binding was rebutted.
What will be the position in relation to agreements other than between spouses? The same principles apply, as is shown by the following case, which involved an agreement that is of relevance to the large number of people involved in national lottery ‘syndicates’.
Key Case Simpkins v Pays (1955)20
Facts: Three women, the plaintiff, the defendant and the defendant’s granddaughter lived in the same house. They regularly entered a newspaper ‘fashion’ competition, which required the listing of eight items in order of merit. Each of the three women made a listing, and the three entries were submitted on one form. There was no fixed arrangement as to who paid the entry fee or the postage, but the form was submitted in the defendant’s name. When one of the lines won £750, which was paid to the defendant, the plaintiff sued to recover a third share of this.
Held: The judge held that there was, on the evidence, an agreement to ‘go shares’ if one of the lines won,21 and that this was intended to be legally binding.
The judge’s reasons for coming to this conclusion are not very clear, but seem to relate to the fact that there was a ‘mutuality in the arrangement between the parties’. Having heard the evidence of the parties, he felt that their agreement went beyond the ‘sort of rough and ready statement’ made in family associations which would not be intended to be binding.22 There was a clear understanding as to what would happen in the event of a win, and this agreement was meant to be enforceable.
For Thought
If you are invited to take part in a lottery syndicate, should you insist that there is a written agreement as to how the prize is to be divided in the event of a win?
Simpkins v Pays needs to be contrasted with a more recent decision on similar facts. In Wilson v Burnett23 three young women who worked together had attended a bingo session, at which one of them, Tania, had won a national prize of over £100,000. Her companions alleged that they had agreed, when deciding to have a night out at the bingo hall, that they would share any prize of over £10. The trial judge held against them. They appealed, on the basis that the judge’s decision was not properly reasoned. The Court of Appeal, however, noted that the evidence for the agreement was not conclusive, and in particular was undermined by the fact that when Tania had won the local prize of £153 and they were waiting to hear the national result, her companions and others repeatedly asked if she was ‘going to share’. In effect, the court confirmed the judge’s view that ‘chat or talk’ about sharing winnings had not ‘crossed that line which exists between talk and “meaning business”, or an intention to create a legal relationship’. This suggests that those who intend to share competition prizes would be well advised to make their agreement formal, since the presumption that social agreements are not intended to be legally binding will not necessarily be overturned as easily as it was in Simpkins v Pays.
All the surrounding circumstances need to be considered, as was stressed by Devlin J in Parker v Clark.24 Here a young couple (the plaintiffs) agreed to live with older relatives (the defendants) and help look after them. In exchange, the plaintiffs were promised that the defendants’ house and contents would be left to them. The arrangement did not work out, and the plaintiffs, having moved out, sued for damages. Devlin J noted that:25