Networked Knowledge - Law Lectures

Intention to Create Legal Relations / Parties To a Contract

Author: Dr Robert N Moles

Contract Law Homepage
A state of Injustice - table of contents
Losing Their Grip - The Case of Henry Keogh - table of contents

The Issue of "Intention"

Some writers say that a specific intention to create legal relations is not necessary, and that the absence of consideration would be sufficient to deal with this. This is much the same point as we will make in our discussion of promissory estoppel. Here one could say that if you wanted to know whether a person intended to create legal relations, you could look to see what they had done or promised to do as their part of the arrangement. However, the question of intention is something which is looked at in addition to the aspect of consideration. There are sometimes good reasons why parties would like to see their relationships as non-legal.

Partnering Agreements

This is particularly the case in the modern use of partnering agreements. These are informal, or moral agreements between parties and which are completed in addition to the normal contractual arrangements. It is intended that the parties will explicitly agree to cooperate with each other with a view to timely completion of the contract, and to assist each other to overcome any difficulties which might arise.

Business arrangements

It is understandable that the parties should wish to cloak their negotiations with immunity so that a contract will not come into existence by inadvertence. But to deprive a finalised arrangement of legal effect requires the clearest intention

Masters v Cameron

(1954) 91 CLR 353, High Court

An agreement was reached to sell a property. This agreement is made subject to the preparation of a formal contract of sale which shall be acceptable to my solicitors on the above terms and conditions. On the same day a deposit was paid to the vendor's agent. When the purchaser refused to proceed with the sale, both parties claimed the deposit.
The purchaser said there was no contract and that the money paid should be returned.
The vendor said there was a contract and the failure to proceed meant that the money was forfeited.
At trial, it was held there was a contract.
On appeal it was said there were 3 possibilities:

1. The parties have finalised their agreement and intend to be bound straight away - just want to be more precise. An assent without power to vary the terms indicates a completed contract.

2. They have agreed all the terms, but have made performance of one or more terms conditional upon the execution of a formal document.

3. The parties do not want to be bound until they have completed the formal document. Here, the parties may wish to retain the right to withdraw, if agreement cannot be reached on outstanding matters.

In the first two cases we have a binding contract. In the third case we merely have a record of the terms which are intended to form the basis of a contract to be finalised.

If subject to contract means there are terms to be agreed, or conditions to be fulfilled, then there is no contract until those things have been done. When not expressly stated to be so, then it is a matter of construction. We conclude that no contract has been formed here.

Was the payment anticipatory, to become a deposit under the contract? Was it intended to be an interim guarantee that the purchaser would enter a reasonable contract? We conclude that the payment was merely anticipatory.

Rose and Frank Co v Crompton

[1923] Court of Appeal

Plaintiff based in New York and sold carbon paper - defendant  an English manufacturer of it. After dealing with each other for a number of years they entered into a written agreement which said inter alia:

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 co-operation.

Plaintiff claimed that defendant  was in breach of the agreement and the trial judge held that it was legally binding. The Court said that for there to be legal agreements, an intention to be legally bound is essential - with business arrangements it usually follows as a matter of course that legal relations are intended. With social arrangements the reverse is the case.

There is no legal obstacle to prevent them from doing so - this means that there is no law and no issue of public policy against it. Once one reads the agreement in its ordinary meaning, then it is manifest that no action can be maintained on the basis of it.

However, once plaintiff actually ordered goods from defendant, then there would be a contract of sale in regard to that transaction. It could be argued then that this makes the agreement here rather like a tender to supply which does not have any contractual effect until an order is actually placed.

Edwards v Skyways Ltd [1964] 1 WLR 349 - Queen's Bench Division

The Company and Association reps met and agreed that payment would be made of an ex gratia amount with regard to the pension payment, and a refund of contributions. The decision was published in the newsletter. One redundant pilot was told what his payment and refund would be. He received the refund, but then the company rescinded its decision to make the ex gratia payments. When he sought to recover it, he was told that there was no obligation to pay it.

The Co says the promise and agreement had no legal effect because there was no intention to enter legal relations because ex gratia means not binding and the background knowledge of the parties understood it as such. Ex gratia may mean without admission of liability, or without there being any pre-existing legal right (may be to avoid setting an awkward precedent). Settlements are often expressed in this way. But this does not mean that such agreements are legally unenforceable.

It was understood at the meeting that if the payments were made without legal obligation on the part of the company, then it would not be taxable. So the agreement, it was argued, was intended to exclude legal sanctions. The evidence was not sufficient to establish that this was the intention of all present. Judgment for the plaintiff

See also Air Great Lakes

Esso Petroleum v Customs and Excise - free gift non contractual

[1976] House of Lords

This is somewhat like the Nestles case and their chocolate bar wrappers. Here, Esso produced World Cup Coins which they gave away free with every so many gallons of their petrol. The coins had no intrinsic value. I think that in this case, as with a number of others, it is important to remember that this is not an action in which a disappointed customer was being refused what had been bargained for, but that under the Purchase Tax Act, it had to be determined whether the coins were produced for sale. If so Esso would have to pay a large sum in tax. In reading the judgments in this case, one might be minded to think that the judges’ sympathies were not with the claims by the Revenue.

The majority view was that although Esso were very much involved in selling petrol, it does not follow that there was any legally binding contract with regard to the coins. Otherwise, it seems that no dealer could ever make a free gift to a customer. Despite the use of posters etc, I think that the facts negative any presumption with regard to contractual intention on the part of the purchaser or the dealer.

Lord Fraser did point out that Esso advertised that instead of getting just 4 gallons for a certain payment you would now get 4 gallons + a coin - presumably Esso would not have bothered advertising if they thought that it was insignificant - presumably by the customers going out of their way to get it indicates that they regard it as a part of what they had bargained for. Each customer would have a right to a coin when ordering the 4 gallons in accordance with the advertisement. The use of the words gift and free did not change that. It may be that the minimal value of the medal influenced their views.

All except Lord Fraser said there was no sale of the coins.

3, including Fraser said there was an intention to enter legal relations

2 thought there to be a collateral contract - it being the view that any contract re the coins would be additional to the contract for the petrol.

If a person has been collecting the set - maybe because it is thought that they may increase in value, is the customer not at a disadvantage if the supply of coins is discontinued? Have they not relied on the offer in just the same way as in Carlill?

Claims are often made that heads of agreement, letters of intent or letters of comfort were never intended to have contractual force

Banque Brussels Lambert SA v Australian National Industries Ltd

(1989) 21 NSW LR 502 Supreme Ct NSW

Spedley Ltd wanted to borrow $5m from a Belgian Bank. The bank wanted some additional assurance that the loan would be paid off. Spedley was partly owned, through a holding company by ANI. They wrote to the bank saying:

that they are aware of the loan, and that they have shares in the holding company. They would not reduce their holding in the holding company until the loan was paid off, and that they would give 90 days notice of any intention to reduce their holding and the bank could then ask for the loan to be repaid within 30 days. Their practice is to ensure that obligations are met as they fall due.

ANI did sell its shares without that notice, and S Ltd was not in a position to repay. The bank says it is not liable to repay based on Kleinwort Benson v Malaysia Mining [1989] 1 All ER 785 which held that a statement in a letter of comfort did not impose any legal obligation - they made no contractual promise and their repudiation of their moral responsibility was not thought to be a matter for the court.

Letters of comfort

They were first used in the 1960s in USA when people were reluctant to give guarantees, because they would have to be disclosed in accounts as contingent liabilities. The French view has been that they are enforceable, because otherwise, the idea that a commercial instrument would be meaningless would be unthinkable.

The claim in contract

Is there an intention to create legal obligations? Is the letter sufficiently promissory? Start with the assumption that in commercial transactions, legal relations are intended. The onus of proving the absence of such intention rests with those who assert it - Edwards v Skyways.

At the time it was important to the bank to obtain a suitable letter from ANI. There should be no room in the proper flow of commerce where statements made by businessmen after hard bargaining and to induce another to enter into a transaction would be a merely honourable engagement - without any express statement to that effect. The whole thrust of the modern law is to give effect to transactions. It is for this reason that uncertainty, a concept so much loved by lawyers, has fallen into disfavour as a tool for striking down commercial bargains.

What factors are important? Clearly the words are important. But, it is said, a finely tuned linguistic fork is inimical to justice.

The statement re 90 days notice was clearly intended to confer a benefit upon the bank. That notice with provision for demand allows for recovery. In this case, the not our intention to reduce carries the import of intention to give rise to legal relations. The third para gives assurance that ANI wished to assure that Spedley would be able to repay its loans - its promissory nature is clear. The bank has made out its case that ANI was in breach of 2 enforceable contractual promises.

We saw in Placer Development that the voluntary assumption of obligation was not a question of whether the parties had expressed an actual intention, but on the proper inference to be drawn from their actions.

Ultimately therefore, intention is one of the policy outlets of the law as to which agreements ought to be enforced as contracts, and which of them should find no legal redress.

Allan and M Hiscock Law of Contract in Australia.

Domestic and social arrangements

Australian European Finance v Sheehan (1993)

This issue raises some really important questions as to why judges draw the boundary lines in the way in which they do. This use of the public / private distinction looks from one point of view as if the judges are keeping out of people's affairs and allowing them to sort things out themselves. On the other hand it could appear that they are denying legal protection to those who might need it most. Its not surprising that the courts do not wish to get involved in the sort of agreement between people who share with regard to who is going to do the washing up, etc. On the other hand, the title of the book which was quite well known some years ago underlines the point - Scream Quietly or the Neighbours Will Hear by Erin Pizzey. Or as Tracy Chapman says - if it’s a domestic affair, then the police may not come at all, or if they do they will take their time about it. “Not interfering” or “not getting involved” can seem like the pursuit of liberty - but when its the police or the judges who are doing that, it can also seem like the denial of civil liberties.

Contract law often has to deal with difficulties between husband and wife, de facto’s, people who share. It is said that there is a presumption in law that an agreement between husband and wife is not legally enforceable, but that this is only a weak presumption. It may well be that this is an area in which we need a feminist analysis of the law - as we have suggested, it parallels an aspect of the criminal law - it is common for the police to refuse to intervene, even sometimes in the case of most serious assaults, if they feel that it has taken place in the context of so-called domestic relations. No doubt that arose from the idea mentioned by Blackstone in his Commentaries on the Laws of England that a husband was allowed to give reasonable chastisement to his wife - this included beating her with a stick, provided that it was no thicker than his thumb.

So too in property law, it was long held that the property of the wife became the property of the husband upon marriage, that women were not allowed to enter into contracts in their own right, and indeed, the Venerable Bede tells us that in medieval England, upon the husband's death, the wife passed to the next owner along with the rest of the property. But the disabilities of women are not just part of ancient history - at the beginning of the 19th C, some of those campaigning for radical reform never contemplated that women would get the vote - indeed, many thought that it would fundamentally undermine the constitution if that were to happen. [I'm thinking here of Bentham and Austin].

It is not surprising then, that in the present law, especially where domestic arrangements are concerned, it is more difficult to assert legal rights, than in other areas. Does this apply equally to all parties in the domestic arrangement? Both rich and poor are equally entitled to sleep under the bridges in Paris.

Balfour v Balfour - Domestic arrangements not contractual

[1919] UK

This involved a husband and wife - the husband was due to return to Ceylon (as it was then called - now called Sri Lanka) where he had employment, but the wife, on medical advice was to remain in England. The husband promised to pay the wife £30-00 per month until the wife was able to join him in Ceylon. Later the parties separated and were divorced. The judge in this case was Lord Atkin. I mention this in passing, because he was the judge who was very significant in Donoghue v Stevenson (1932), but who was ostracised by other judges in the House of Lords, who did not agree with him, and this caused him much pain and upset in his later years.

Lord Atkin said that commonly, parties to a marriage will make arrangements for personal or household expenses. But they do not amount to contracts, even though there may be present what would amount to consideration if it had occurred between different parties. They are not contracts because the parties do not intend that legal consequences should follow. To my mind, it would be the worst possible example to hold that agreements of this sort should be enforceable in the courts. The small courts of this country would have to be multiplied one-hundredfold if legal obligations were to result. Agreements such as these are outside the realm of contracts altogether. The consideration here is really the natural love and affection which counts for so little in these cold courts.

There are several points which could be made here - remember that when the courts talk of intention, they seldom mean the actual intention of the parties - evidence concerning the psychological disposition of the parties would not be regarded as relevant. What the judges are interested in is a reasonable inference from the actions of the parties - an objective test. Now often, what is a reasonable inference will tell you lots more about the person who is doing the inferring than it will about the state of mind of the persons who are the subject of the discussion.

It seems to me that this is just the very situation where Mrs Balfour might have had every intention of establishing an enforceable agreement with her husband. The matter under discussion here was much more important to her than was the matter in Shadwell v Shadwell - a gift from an uncle to a nephew which was held to be enforceable. How can we account for the differences in the court's attitude in these 2 cases? Could one not have pointed to any reliance aspect of this arrangement? Some say that the courts may wish to avoid unpleasant battles between members of a family who have fallen out - but they do deal with just these disputes in so many other cases. And isn't potential unpleasantness and hostility between people just the reason why the courts should intervene - to resolve the matter in an orderly way rather than leave the parties without any satisfactory way to resolve their differences?

Cohen v Cohen - Dress allowance - no intention (1929) CLR

The parties were married and separated some time later, after which an action was commenced with respect to money which plaintiff claimed was due to her. She said that before they were married, defendant had promised to pay £100-00 per annum as a dress allowance. The payments were only made for a limited period therefore £278-00 was outstanding for 1921-1923 the balance of the period.

The judge thought that there would be a problem in determining what the consideration would be. If the intended marriage, it might well be that the promise to marry was already existent therefore it would fail as an existing obligation. But this would only be relevant if it were thought that this arrangement was one which was intended to give rise to legal obligations. The judge thought that there was no such intention in this case. However, we should bear in mind that although the plaintiff was not successful on this point, her action was successful on other grounds. We should also consider that if plaintiff had bought dresses which she could not afford, in reliance upon her husband's undertaking, would the decision on this point have been different? Would the case be decided differently today?

Promise of accommodation to encourage emigration - contractual

Todd v Nicol [1957] Sup Ct SA

Defendant wrote to the Plaintiff’s (sister and niece of her deceased husband) to say how happy she would be if they would come to live with her in Australia. "I must have company at my age - it is not good to live alone. The house is big enough, I will do all I can to make it comfortable for you, and we could change it around when you arrive. If you do come, and sell your things, keep your cutlery and linen as we might be short of those things. I will help with emigration and jobs”.

When she heard that they would be coming, the defendant  wrote to say that she had that morning visited her solicitor to add a codicil to her will to the effect that if anything were to happen to her, when I sign it the house is yours for life Margaret without expense, also you Gracie (unless you marry) and then in the following letter she said that she was doing her darndest to think things out for their protection - just in case. Obviously the in case she had in mind was her pre-deceasing the others - not the breakdown of the relationship as in fact happened. So, is there a contract enforceable in law, or just a social arrangement?

The judge explicitly acknowledged that the parties had probably not given any conscious thought to the question of legal sanctions. He then gave a good statement of consideration in terms of benefit and detriment.

He pointed out that business arrangements are presumed to be legally enforceable - however, in this sort of situation we have either an honourable pledge - without legal enforceability, or else we have:

1 the grant of an interest in land GRANT
2 a licence to occupy which is enforceable CONTRACT
3 an equity - in favour of the licensees ESTOPPEL

Here, there the parties made no explicit reference to intention, so the court has to determine how best to deal with things. There is the expense - selling of plaintiff's things, no provision for discharge of the arrangement - the testamentary adjunct as the judge called it. Now this could all have been based on goodwill, but I incline to think that the arrangement was intended to be binding during the defendant’s lifetime. Otherwise the Plaintiffs would have been subject to the whim of the defendant in such an important aspect of their lives. The intention of the parties was to enter into a legally binding arrangement.

However, the sting in the tail of this case was that whilst the plaintiff's won on the question of intention - so as to create a contract [THE FORMATION ASPECT]- the judge then found that their behaviour was so unreasonable, that he found them in breach of contract.[the other side won on the EXCUSES ASPECT]

Promise of financial support contractual - but not indefinite

Jones v Padavatton [1969] Court of Appeal UK

The mother lived in London and her daughter lived in the USA. The mother (P) said that if daughter (D) went to London to take her Bar exams mum would pay her a monthly allowance. Defendant in fact went to England and mum paid tuition fees plus the monthly allowance. Mum then bought a large house for defendant to live in with rooms to be let to tenants. Defendant collected the rents but did not pass them on to mum. Defendant remarried in 1965, and in 1967 mum sought possession of the house. Defendant counterclaimed for £1655-00 which she had spent on the house.

One judge (Danckwerts) says little more than that this was one of those family arrangements not really intended to be binding, and that the Balfour principle could apply also to other family relationships. Another judge (Salmon) started by pointing to many of the standard things which it would be useful to remind ourselves of: - that if there is a contract then who has the onus of proof - here, the judge said that the onus would be on defendant to establish that. He also pointed out that the existence of a contract is a matter of intention - what, he asks, would ordinary people have intended by communicating with each other in this way? He took the standard line of saying that we apply an objective test - but we should perhaps take the opportunity to pause and ask ourselves whether the references to intention / ordinary / objective, give us any clear criteria regarding what is involved?

The judge also points to the presumption against intending legal relations in domestic arrangements - the presumption here being contrary to that of business arrangements. He says that if the daughter had gone to London, then surely the mother would not have been able to simply withdraw the allowance - the daughter would have had a contractual right to it? But, we might add, what claim would the mother have if the daughter just packed in her studies? Probably none - like the uncle in Shadwell if the nephew did not marry. These situations might look like a contract with obligations on one side only. Such a contract, he thought, would only run for a reasonable time to allow the daughter to completer her studies (say 5 years) - that would take her up to 1967. She cannot then be expected to gain anything further under the contract in 1968.

The remaining judge (Fenton Atkinson) asked what consideration there could be from the daughter? Giving up her job and accommodation might be sufficient. Then what evidence is there with regard to intention? When the daughter said, when she wouldn't let her mum into the house, that a normal mother doesn't sue her daughter in court that could be taken as a clear indication that legal remedies were not intended to attach to the arrangement. But, we should ask, is it right to view the evidence in this way? We should presumably be looking to evidence of their intentions at the time they were entering into the arrangement - not what they might have thought about it later. On this basis, most legal arrangements could be avoided. Also, shouldn't we be looking for objective intent rather than actual intent?

Riches v Hogben (1986) Qd R 315

A son agreed to emigrate, having been assured that the mother would buy a home and put it in the son's name. She bought the home but put it in her own name. After a time the son moved out under pressure from his mother, but brought an action to have the house put in his name.

HELD - The son relied upon the existence of a contract with his mother. The court found was no problem with intention to create legal relations. However the mother invoked the Statute of Frauds and there was no sufficient act of part performance to overcome this.

An alternative ground relied upon by the son was the doctrine of proprietary estoppel. The mother had made a promise to purchase the son a property. In reliance on this promise the son went to the expense and inconvenience of emigrating to Australia. The mother should be estopped from breaking her promise. The son succeeded on this ground.

The remedies here are very flexible. The remedy could have been of damages together with an order that the son be permitted to stay in the home, or that the house be made over, or a charge be allowed over the house. In view of the nature of the promise, an order was made that the son get the house and the mother be entitled to stay in the granny flat. See also

Woodword v Johnston [1992] 2 Qd R 214

Roufos v Brewster [1971] 2 SASR 218

Dealings with government

It used to be the case that actions could not be brought against the government (Crown). It is clear now that the government can enter into contacts for goods and services just like anyone else. It is important to realise that government departments complete a huge range of contracts - so much so that they often have special arrangements with suppliers to provide them with goods and services on preferential terms.

However, where some aspect of the government’s political or administrative activities are involved, some different considerations apply. The government has public responsibilities as well as private rights. Should its discretion to do the right thing be fettered by prior promises to the same extent as with private individuals? The cases indicate that the courts may be more reluctant to infer an intention to create legal relations here. Even if there was some evidence of an intention to be bound by the promise, it may not go to the extent of meaning that it was to be subject to the adjudication of the court. The status of the parties and the nature of the relationship have to be taken into account. Promises to pay a subsidy or to keep schools within the electorate - made during an election campaign were not enforceable. Supposing someone had re-arranged their business affairs on the basis of a promise that taxes would not be increased - would this be enforceable?

See - Australian Woollen Mills Pty Ltd v Commonwealth

Admin of Papua New Guinea v Leahy (1961) 105 CLR 6

After a request from the plaintiff, the Commonwealth Dept of Agriculture took over spraying to eradicate ticks. Plaintiff was to pay for the labour required and to muster the cattle. The Dept’s officers failed to carry out the spraying carefully enough and more serious infections occurred. Plaintiff sued for damages for breach of contract. It was held that the arrangements were administrative and not contractual. Same where the public authority is carrying out a statutory duty and charges a fee to cover the cost of the service, it is unlikely that the arrangement will be seen as contractual.

Voluntary Associations

The normal view has been taken that members of organisations may well be involved in consensual arrangements, but this does not mean that they are contractual. The courts are more willing to exercise their powers where property rights or a person’s ability to earn their livelihood are involved.

Cameron v Hogan (1934) 51 CLR (HH 215)

The plaintiff - previously Premier of Victoria, was excluded from the Labour Party which he claimed was in breach of its rules and prevented from retaining the job as Premier. The court took the view that normally, rules of a political organisation to regulate its affairs, has not been understood to impose contractual duties on officers or members. This is seen as a domestic matter. In adopting the rules the members should not be thought to be creating enforceable contractual rights. There has to be a clear indication of the intention to create legal relations. It may well be the case that the courts will intervene on other grounds such as those to protect natural justice.

The other question which may arise with a voluntary association is that of the proper person to sue. The association has no legal personality.

McKinnon v Grogan [1974] 1 NSWLR 295 (HH 216)

The North Sydney Rugby club. Problems arose dealing with the election of the general committee of the Club. It was suggested here that Cameron v Hogan had probably not had a great influence and that it was out of touch with the changing times. It has meant that the courts have not involved themselves in an area of great importance, and it might be that if the High Court had a chance to look at it they might do things differently. To liken the great political parties, or major sporting institutions with a group of friends meeting for a chat is out of touch with the times. The real issue in Cameron is one of judicial policy. In Buckley v Tutty the court was able to put Cameron to one side because they could see that they were dealing with a man’s right to carry on his trade and the doctrine of restraint of trade is not limited to contractual situations. Why can’t people have the same guidance in sporting and political organisations as they have elsewhere? Otherwise the organisations will be given over to deceit, and the arrogant disregard of rights which will destroy trust between members.

Despite Cameron, the courts often deal with disputes between members and social clubs such as the RSL. If people join and subscribe to the constitution and bye laws, they should be taken to be bound by them. Limitations on these rights can be worked out in the cases.

In this case, there are no problems with procedure, but matters of great importance.

Voluntary organisations can incorporate under State and Territory legislation. Associations Incorporations Act 1983 (NSW) S11(2) provides: rules of an incorporated association bind the association and members of it to the same extent as if the rules had been signed and sealed by each member and contained covenants on the part of each member to observe them.

Trade Unions - depends on the Commonwealth or State legislation under which they are registered.

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