Lecture 4: Contractual Intention

1. Introduction --- two rebuttable presumptions to intention

2. Domestic Agreement
A. Presumption against intention (General Rule)
B. Rebutting the intention (Exception)
I. Express Terms
II. Subject-matter of the agreement
III. Certainty
IV. Relationship of parties
V. Subsequent Conduct
VI. Consequence and Reliance
3. Social Agreement
A. Presumption against intention (General Rule)
B. Rebutting the intention (Exception --- reasonable man)
4. Commercial Agreement
A. Presumption in favor of intention (General Rule)
B. Rebuttal of presumption (Exception)
I. Expressed negation of Intention
II. Subject to contract
C. Presumption not easily rebutted (conditions of general rule)
I. Clear language indicated
II. Formal contractual document
III. Essential terms settled
5. Letter of comfort
Lecture 4: Contractual Intention

1. Introduction of intention1

 Area of contract doctrine is dominated by 2 rebuttable presumptions to intention

 Domestic/social agreement: an assumption that not intended to be contractual binding
 Commercial agreement: an assumption that intend to be contractual binding
 Presumption can be displaced by evidence indicating that reasonable people in the
position of the parties would have possessed a contrary intention

2. Domestic Agreement
A. Presumption against intention
 Among the most common types of agreement are those made among family
members who undertake to do things for each other (e.g. chores and pocket $)
 General Rule: Agreement between close family members are “generally” not
legally binding unless clear intention to the contrary is shown.

 Compensation for repayment of expenses in raising children

Sun Er Jo v Lo Ching [1996]
Fact: P (a 90yrs mother of 5 adult children), after falling out with her children concerning
financial transaction, commenced proceedings against them for breach of trust. One
of her claims was for repayment of expenses in raising her children.
Held: A lack of intention to create legal relations between family members “generally”.

 Unrealistic to a contract b/w spouses on provision of money for domestic expenses

*** Balfour v Balfour2 [1919]
Fact: A husband worked overseas and agreed to send maintenance payments to his wife. At
the time of the agreement the couple were married. The relationship later soured and
the husband stopped making the payments. The wife sought to enforce the agreement.
Held: Parties never intended to make a bargain which could be enforced in law because it
is unrealistic to suggest an agreement between spouses to provide money for

1
There is overlapping area between the requirement of contractual intention and certainty of terms. A lack of
contractual intention can explain/indicate apparently uncertain essential terms (and vice versa)
2
Other justifications: a) no consideration for a husband’s promise to pay, just a gratuitous undertaking; b) on
empirical facts that the parties do not in practice sue each other because this agreement is never intended to sue
upon; c) overwhelm court if domestic affair actionable & value of common law to respect sanctity of private
married life
 domestic expenses in married life

B. Rebuttal on Presumption (Exceptions)

 Exception: Presumption against contractual intention can be rebutted if the
parties actually intended to establish
 The onus of rebutting presumption is on the party seeking to establish
contractual relationship (Balfour case)

I. Express Terms / Formal contractual document (with obligation)

 An express stipulation that the agreement to be legally binding b/w parties
 Embodiment of parties’ agreement in formal contractual document or the
agreement of consequences of a legal character for breach is functionally
equivalent to express stipulation of contractual intention

 Legal obligation included in a document implied intention of legal consequence

*** Snelling v John G Snelling Ltd [1973]
Facts: An agreement among three brothers concerning the finances of their family-owned
company was embodied in formal written document.
Held: Although an agreement not expressly state intention to be legally bound, the court
held that the party would have not been so troublesome to stipulate forfeiture of
loans (or debt of honor) unless intended legal consequence from the agreement

 Lack of formal document should not be taken to preclude contractual intention

Jones v Padavatton [1969]
Facts: See below in III. Certainty of Terms
Judges: “lack of formality in expressing the arrangement is not necessarily an indication
not to intend a contract”

II. Subject-matter of the agreement

 Presumption will be rebutted if the subject matter is not of essentially
domestic character (Balfour -- wife’s living expense is domestic)
 Where subject matter transaction of commercial character or where
substantial property or large sums of money is involved, a court will be
 strongly incline to rebut the presumption

Fong Huen v Anthony Wong [1975]

Held An agreement between P and his son-in law by which P delivered his daughter’s title
deeds into the daughter’s possession in exchange for promissory note from the son-
in-law was held to be legally enforceable.
Similar case (a) Yang Foo-Oi v Wai Wai Chen [2016]: an agreement to effect inter vivos (a
(enforceable transfer made during lifetime) distribution of billions of dollars’ worth assets
contracts in (b) Ho Lai King v Kwok Fung Ying [2020]: an agreement concerning “entitlement
entirety) to a capital assent of substantial value [an apartment]”
(c) Snelling [1973]: concerns finance of family-owned company
(d) Pearce v Merriman [1904]: tenancy agreement (husband paid rent to wife)
(e) Errington v Errington & Wood [1952]: an agreement to transfer title of
property on condition of the repayment of monthly mortgage
(f) Hardwick v Johnson [1978]: an agreement to reside a house in exchange for
monthly payment towards the purchase price

III. Certainty of Terms (too uncertain to be itself enforceable as contract)

 Uncertain agreement’s term can impede attempt to rebut presumption
against contractual relation in agreement between family members

 Uncertainty on essential terms + lack of protest for any unfairness stemmed from
uncertainty = likely family arrangement (on good faith) lack intentions
*** Jones v Padavatton [1969]
Facts: A mother promised to pay her daughter $200 per month if she gave up her job in the
US and went to London to study for the bar. The daughter was reluctant at first as she
had a well-paid job in Washington but the mother persuaded her to do so. This initial
agreement in 1962 wasn't working out as the daughter believed the $200 was US
dollars whereas the mother meant Trinidad dollars which was about less than half
what she was expecting. The daughter could only afford to rent one room for her and
her son to live in. The mother in 1964 agreed to purchase a house for the daughter to
live in. She purchased a large house so that the daughter could rent out other rooms
and use the income as her maintenance. The daughter then married and did not
complete her studies. The mother sought possession of the house.
Held: 1) Terms of 1962 agreement were deliberately uncertain on the value of monthly
allowance and lack of protest from daughter when allowance is paid in lower
 value, all consistent with family arrangement which depends on good faith of
promises
2) 1964 arrangement was flexible adaptation to 1962’s and remained unsettled in
essential aspects, pointed to family arrangement that lacked contractual intention

IV. Relationship of parties

 Easy to rebut the presumption against contractual intention where
parties were not on amicable (friendly) terms at the time agreement was
made

 Where the parties are separated

*** Merritt v Merritt [1970]
Facts: A husband and wife reached an agreement, after they had separated, whereby the
husband would pay $40 per month in maintenance. The wife agreed to meet monthly
mortgage repayment out of that sum, and the husband promised to transfer title to her
once the obligation to mortgage had been discharged.
Held: It is appropriate to presume that domestic agreement between spouse living in
amity are not intended to legally binding. For the spouses who are separated,
binding…
 Relationship between two parties is distant (son-in-law and daughter’s mum)
Ho Lai King v Kwok Fung Ying [2020]
Held: P’s relationship with her son-in-law was distant and lacked common language

And conversely, what “amicable at the time agreement was made” means
Balfour The husband and wife were, at the time their maintenance agreement was made,
[1919] living together in amity
Padavatton At the time their agreement was made, mother and daughter were on very good
[1969] term and very close to each other

V. Subsequent/Post-contractual Conduct
 The parties’ conduct after conclusion of their agreement may indicate
whether they intends to be legally bound.

 Failure to contest or settle material terms [or either of commercial conduct]

Padavatton Post-contractual conduct indicated their intention not to create legal intention:
[1969] (a) the daughter’s failure to contest the amount of monthly allowances;
(b) failure to settle many material terms on daughter’s occupancy of the house
(c) declaration by her daughter by surprise that her mum commenced proceedings
Ho Lai King Post-contractual conduct indicated their intention to create:
v Kwok (a) P always expressly confirmed the term of the agreement with her son-in-law
Fung Ying (b) P introduced her son-in-law as her fully authorized agent to mainland officials
[2020] (c) P entrusted her son-in-law with managing the mainland property which was
subject matter of the agreement

VI. Consequence (seriousness) and Reliance

 The more the parties have placed reliance on the agreement and the
greater the reasonably foreseeable consequences in the event of breach,
more likely it will rebut presumption against contractual intention

 Reliance: sales of Parker’s house & donate proceeds to daughter

*** Parker v Clark [1959]
Facts: The Clark invited their niece and her husband, the Parkers to live with them. The
Parkers said they would like to, but it would mean they would have to sell their own
house. The Clarks assured the Parkers that in doing so they would leave a share of the
Clark’s house to Mrs Parker, and her daughter, in their will. The Parkers sold their
house, lent the balance of the money to their daughter who in turn bought a flat. The
Parkers moved in. But they fell out. The Clarks asked them to leave, and the Parkers
sued for breach of contract.
Held: Despite being one of domestic character (where relatives agree to reside and share
their company), the reliance Parker placed upon the agreement was extensive
(never been in the position to buy another property). It was held that presumption
against contractual intention was rebutted and a legally binding contract.

 Reliance: contribution (including her brother) to the flat

HK *** Ma Chi Wing Wendy v Estate of Ma Vincent (deceased) [2005]
Facts: P and her old brother agreed to share a large flat in which their elderly mother would
also reside. They agreed that each of them would contribute $18000 per month
towards the rent and other expenses. Her brother suffered a stroke and made no
further payment, which left P to pay the whole amount. By the time her brother died,
 he still owed $162000 under the agreement. P claimed this amount but her brother’s
estate argued that the agreement is morally binding arrangement which involved no
intention.
Held: Although a family arrangement to look after aged parents appeared to be domestic
(Sample) character, the extend of P’s reliance on the agreement (to her detriments) and
foreseeable consequence of her brother’s non-performance were sufficient to rebut
the assumption against contractual intention.

3. Social Agreements
A. Presumption against intention
 General Rule: A rebuttable assumption against an intention to create legal
relations exists in an agreement of social nature (i.e. made by
friends/strangers)
 Social agreement made within context of paid employment has such
assumption as well.

 Difference between social (b/w friends) and commercial agreement

*** Coward v Motor Insurers Bureau [1963]

Facts: Coward paid his friend a small weekly sum to take him to and from work by riding
pillion on a motorcycle. He was killed in collision. Coward's widow sought to claim
damages from MIB since the rider's insurance did not cover pillion passengers.
Nevertheless, Insurance was only compulsory for pillions if they were carried for hire
or reward. MIB argued that to amount to a contract for hire or reward there had to be
an intention to create legal relations which was absent in agreements of this nature
between friends.
Held: Neither the two deceased workmen would have agreed that they had a binding
contract. No contract for hire or reward exists since it is only social agreement.

B. Rebuttal of presumption
 Exception: Where reasonable persons in the position of the parties would
regard their arrangement as having legal obligations, it is possible to rebut
presumption against contractual intention
  Joint Purchase of Lottery tickets
*** Wu Chiu Kuen v Chu Shui Ching [1992]
Facts: Plaintiff and defendant were acquaintances who shared a semi-regular bet in a popular
lottery competition. The court started with presumption that social arrangement was
not intended by parties to be legally binding.
Held: Reasonable parties would regard a regular arrangement by which friends
contributed funds for the purchase of lottery tickets to result in legal entitlement to
a share of winning for the contributions.

 Mutual arrangement, no matter how informal, formed legally binding agreement

*** Simpkins v Pays [1995]

Facts: A Grandmother, granddaughter and a lodger entered into a weekly competition run by
the Sunday Empire News. The coupon was sent in the Grandmothers name each week
and all three made forecasts and they took it in turns to pay. They had agreed that if
any of them won they would share the winnings between them. The grandmother
received £250 in prize money and refused to share it with the other two. The lodger
brought the action to claim one third of the prize money.
Held: A binding contract because there was a mutuality of the arrangement, by which
they agreed to the manner of the submission of the forecast in Miss Pays name on
a weekly basis and that, if there was a success, all three persons would share the
prize equally.

4. Commercial Agreement
A. Presumption in favor of intention
 General Rule: Commercial agreement in general is presumed that the parties
did intend to create legal relations

Lo Yuk Sui v Fubon Bank (HK) Ltd [2016]

Held: 1) The party seeking to rebut the presumption in favor of intention in
commercial agreements bears a particularly heavy burden.
2) In deciding whether onus has been discharged, the courts will be influenced
by
(a) the importance of the agreement to the parties,
 (b) the fact that one of them acted in reliance on it

*** New World Development Co Ltd v Sun Hung Kai Security [2006]
Held: The party entered into an express agreement which was commercial in nature.
Both sides acted throughout on the basis that their agreement had given rise to
enforceable contractual obligations.

B. Rebuttal of presumption
I. Expressed negotiation of intention
 Presumption will be rebutted if the commercial agreement expressly
stated that it does not create legal binding obligation
 Honorable pledge clause --- express acknowledgement
*** Rose and Frank Co v JR Crompton and Brothers Ltd [1923]
Facts: The claimants and defendants entered an agreement for the supply of some
carbonized tissue paper. Under the agreement the claimants were to be the defendant's
sole agents in the US until March 1920. The contract contained an honorable pledge
clause which stated the agreement was not a formal or legal agreement and shall not
be subject to the jurisdiction of the courts in neither England nor the US.
Held: The court gives effect to the express acknowledgement that the agreement was not
intended to legally binding. Contractual intention must also be excludable
expressly.

*** Jones v Vernon Pools Ltd [1938]

Facts: P alleged that he had duly completed a coupon in respect of a prize pool of football
matched organized by D, but D asserted non-receipt of the coupon by words appeared
on the coupon: “This coupon…shall not give rise to any legal relationships”
Held: There was no intention to create legal relations because the coupon shall suffice to
one’s understanding that there was no claim.

II. Subject to Contract3

 General Rule: Presumption in favor of intention will be rebutted where
either party has stipulated in negotiation that a binding agreement is
“subject to contract”
 Reasonable Person would have interpreted the words as indicated that
3
In Hong Kong, Ribeiro PJ “the parties agreed that they should each have the right to withdraw from
the agreement unless and until an unconditional contract was executed”
 there is no final agreement until a particular formality is compiled with
 Alternative 1: If negotiating parties have made it reasonably clear that a
formal contractual instrument is required, it will suffice to suspend
intention until the instrument has been executed

 Terms within a “subject to contract” was contractually void

*** UNION Insurance Society of Canton Ltd v The Hong Kong Land Co Ltd [1977]
Held: During negotiation, it stated that it “will be prepared to enter into a written
agreement” containing an obligation to retain the structure’s name. It was held
that the statement is sufficient to indicate D’s intention not to be bound until parties
agreed to a formal document.
 Alternative 2: If it is clear from the circumstances that the parties
intended and knew that they were at liberty to withdraw, the fact
that they did not use ‘subject to contract’ is not fatal
Cobbe v Yeoman’s Row Management Ltd [2008]

 Alternative 3: A stipulation that an agreement is subject to

conclusion of formal contract will defeat contractual intention even
there has been substantial performance

 No detriments is proved + both parties agreed “subject to contract” & not

binding
Attorney-General v Humphreys Estate (Queen’s Gardens) Ltd [1987]
Facts: HKG agreed with Humphreys (part of HKL) that there would be exchange of land.
The agreement was subject to contract but payment was made and building on
Queen’s Gardens was demolished. Both parties make it clear that each party still
proceed on the basis that it was free to back out of transaction. HKL then withdrew
negotiations.
Held: There was no clear assurance and detrimental reliance by the Government.

 Conduct may not prevail if the parties stipulated “subject to contract”

*** World Food Fair Ltd v Hong Kong Island Development Ltd [2007]
Held Even if there was fairly extensive performance of a settled commercial tenancy
agreement, the fact that the parties had stipulated to be “subject to formal lease”
means the agreement was not binding until formal document has been executed.
Contrast: Hong Kong Housing Authority v Hung Pui [1987]:
Despite the landlord’s acceptance was headed “subject to contract” and expressed
that it will depend on “formalities”, the conduct (rent was paid by reference to
agreed value) constitute unequivocal agreement to expunge qualifying words in
acceptance.

 VERY Exception 1: where the circumstances suggest it is contrary

to the freedom to withdraw from the transaction (my interpretation)

 The agreement is drafted to require duty to perform within specific timetable

*** Alpenstow Ltd v Regalian Properties plc [1985]
Facts: The parties agreed in writing for the sale of land, the agreement contained a right of
pre-emption. In the event of the owner wishing to sell it was to offer to sell a share in
the property by notice. Within 28 days of the notice, the grantee was to accept the
offer ‘subject to contract’. Within seven days thereafter a draft contract was to be
submitted; the draft was to be approved within 28 days, subject to any amendment
reasonably required, and contracts were to be exchanged seven days thereafter.
Held: The agreement was binding. There was an incompatibility between the freedom to
withdraw from the transaction which the words ‘subject to contract’ suggested, and
the duty to submit a contract and to exchange it within a particular timetable

 Exception 2: “subject to contract/formalities” will be disregarded if

they are meaningless (i.e. when such stipulation has already
fulfilled)

 When negotiations had concluded, the contract is binding & no further

formalities
** Hong Kong Housing Authority v Hung Pui [1987]
Facts: The tenant offered to pay a revised monthly rent of HK$120,000. The letter was
See above headed ‘subject to contract’. These words normally indicate that the parties are still
for negotiating but here they appeared at a time when negotiations had concluded and no
unequivocal formalities were required or contemplated. The tenants later paid rent at the agreed
bullshit!! revised level.
Held: Godfrey J held that the words ‘subject to contract’ in the landlord’s acceptance
could be ignored since (a) they had no meaning in this context because the rent
was binding and there were no further formalities and (b) the tenant’s subsequent
 words and conduct showed an intention to be bound by the agreement.
Judges the words could be ignored ‘where the parties by their words or conduct have
unequivocally demonstrated that they have agreed that the words may be treated as
expunged (removed) from the instrument which contains them

 Subject to contract will be meaningless if the contract is already binding

Michael Richards Properties Ltd v Corporation of Wardens of St Savior’s Parish, Southwark [1975]
Held The intention of the parties in tender is to enter into a binding contract as soon as
an offer has been accepted. There was a binding contract since the tender
documents set out in full the description of the property and the terms of the
transaction.

 Test for waiving a stipulated formality “subject to contract” (difficult to satisfy)

RTS Flexible Systems Ltd v Molkerei Alois Müller GmbH & Co KG (UK
Production)
Held The parties may waive a stipulated formality “subject to contract”:
1) all terms (the parties intended to bound by) were agreed(基本合約條文已同意)
2) terms were varied without reiterating the stipulation (合約更改不以 STC 為由)
3) agreement as varied has been substantially performed
4) the result in agreement by conduct which unequivocally waives the stipulated
formality (以合約為由的行為能反映合約無須再作商議 ) [also no reasonable
alternative explanation for that conduct]
Professor’s In other words, (ii) variation and (iii) performance will conclude a new modified
views contract if they are not made under “subject to contract/formality”. This new
modified contract may apply to performance under the agreement while it was still
“subject to contract”

C. Presumption not easily rebutted

I. Clear language required to rebut
 Presumption in favor of contractual relations attaching to commercial
agreement is strong, and clear language is required in order to rebut it
 Even language which might understand as lacking contractual intention
will be ineffective if the language is reasonably interpreted in a way that
consistent with maintaining the presumption Edward v Skyways Ltd
[1964]
*** Edward v Skyways Ltd [1964]
Held The subject matter of the agreement is business relation and the onus is the party
who asserts that no legal effect was intended. Onus is heavy. The word “ex gratia”
do not carry necessary implication that the agreement is to be without legal effect.

II. Formal contractual documents (less likely rebuttable)

 It is VERY difficult to displace the intention to create legal relations if
the parties have signed contractual document

 Relationship with stockbroker

*** Ever-long Securities Co Ltd v Wong Sio Po [2004]
Fact D signed an agreement with a stockbroker for the purpose of stock trading
Held He would intend a legal relationship to be created by reasons of document

 Submission of written lease

*** Man Ip Hung v Lai Chuen (t/a Kin Hung Factory) [1957]
Held Where parties enter into lease4, they have entered into a binding relationship.

III. Essential terms settled (difficult to rebut)

 Commercial negotiation are frequently complicated that it is unclear at
what point an agreement has been reached.
 Where the parties have settled with sufficient certainty all essential
terms, it will be difficult to displace the presumption to create intention
(Baird Textile Holdings Ltd v Marks & Spencer plc [2001])
 Where all essential terms are not expressly settled, contractual intention
could be inferred from parties’ conduct if
conduct is reasonably explained by reference to an essential term
which was agreed but not expressed
conduct could not be explained by other basis (if ambiguous, such
essential terms will not be implied and presumption is not rebutted)
(World Food Fair Ltd v Hong Kong Island Development Ltd [2005])

4
“having regard to the principle that a document is to be construed in accordance with general intention
revealed by the document”
 Baird Textile Holdings Ltd v Marks & Spencer plc [2001]
Held An intention to create legal relations is presumed in the case of an express
agreement satisfying that all essential terms with sufficient certainty, while case of
implied contract by inference from parties’ conduct
Similar case Yiu Yau-ping v Fong Yee-lan [1992] & iRiver Hong Kong Ltd [2008]:
Interim agreement which settled all essential terms were binding as they were
intended to be binding though final agreement settling non-essential terms had not
been reached

*** World Food Fair Ltd v Hong Kong Island Development Ltd [2005]
Held Payment of deposit by putative lessee and giving of vacant possession by putative
lessor were ambiguous and reasonably explained by reasons other than implied
agreement of essential terms, and hence the presumption is disapproved

5. Letter of Comfort
 Definition: a parent company may refuse to provide a formal guarantee of the
subsidiary’s liability but issued a statement of the subsidiary’s capacity to meet its
obligation (母公司拒絕提供契約保證，但向借款方陳述附屬企業的業務情況)
 Issue: whether the letter intended to create contractual relations b/w creditor
and parent company, if creditor seeks to recover against parent company
 Where the words used in letter are reasonably understood as “a statement of
present fact & not a promise as to future conduct”, not contractual enforceable

Kleinwort Benson Ltd v Malaysia Mining Corp Bhd [1989]

Fact P merchant bank made a loan to D’s subsidiary after D had furnished a letter which
provided that “it is our policy to ensure that the business of [our subsidiary] is at all
time in a position to meet its liability to you under the above arrangement”
Held It was held the words used as “a statement of present fact (refer to company policy)
but not a promise as to future conduct” The letter created no contractual
obligations.

Mention this point as well for further details!! Tutorial’s comment

Toppan Printing Co v Chinese United Press Ltd [2005]
Fact A letter was sent by D’s parent company to P in order to induce P to extend further
credit to D. The operative sentence provided “Naturally, 36.com Holdings Limited
 takes full responsibility for CPU Limited accounts and financially supports the
publishing business of CUP”
Held Lack of requisite degree of certainty that the parties could not have intended to
have been bound by the terms of the letter

 There is no presumption against/in favor of contractual intention!!!

 Critically ascertain, having regard to (a) language used, (b) context it was
uttered and (c) language in the context of transaction as a whole, whether the
letter has made a statement of present fact or a promise as to future conduct

**** Bouygues SA v Shanghai Links Executive Community Ltd [1998]

Fact Defendant argued that the parties’ letters which referred to the payment terms were
only “letters of comfort”, which contained no express promise of future conduct but
merely informed Plaintiffs that money had been set aside for making payments.
Judgment “The paragraph used language which can only sensibly be construed as amounting
Cited to a promise of future conduct – namely that the obligations of D and the investors
under subscription agreement would be performed. Thus, the letter reads: “… under
[the] agreement …, … the funds … will be deposited”, not “under [the] agreement
…, … the funds … are required to be deposited”. Again, the it reads: “Payment …
will be made from this account”, not “Payment … is required to be made from this
account”
Held Although the letter itself is promissory to the future conduct, it did not guarantee
any arbitration award for breach of contract brought by Plaintiff’s claim.