CONTRACT: LAW 402

INTENTION TO CREATE LEGAL RELATIONS

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Even when the other requirements of a legally binding contract are present the courts
will not enforce an agreement unless there was an intention to create legal relations / to
be legally bound.
Contracts "must not be the sport of an idle hour, mere matters of pleasantry and badinage, never
intended by the parties to have any serious effect whatever."
per Lord Stowell: Dalrymple v Dalrymple (1811) 2 Hag Con 54 at 105

DOMESTIC AND SOCIAL AGREEMENTS

In the case of these agreements the courts presume that there was no intention to
create legal relations but in all these cases an objective test is applied and this
presumption can be rebutted if the circumstances suggest the contrary.

Domestic – family agreements

Social – agreements between friends
"In all these cases the court does not try to discover the intention by looking into the minds of the parties.
It looks at the situation in which they were placed and asks itself: would reasonable people regard the
agreement as intended to be binding?"
Lord Denning MR in Merritt v Merritt (1970) see below.

Balfour v Balfour (1919) 2 KB 571, CA

An English married couple lived in Ceylon, where the husband worked. They agreed that
for reasons of health the wife would stay in England while the husband continued to
work overseas and that he would pay her £30/month for living expenses. Subsequently
they became estranged and the husband stopped paying. The wife sued to enforce the
promise of financial support.

CA held: it was not legally enforceable. Atkins LJ stated, “I think it is plainly established
that the promise here was not intended by either party to be attended by legal
consequences.”

Merritt v Merritt (1970) 2 All ER 760, CA

The husband began an affair and left the matrimonial home. Subsequently the husband
and wife met to sort out their financial affairs; the husband promised to pay her
£40/month and to transfer his share in the house when she paid off the mortgage. Later
however he reneged on this promise and the wife sued.

Held: The presumption was rebutted. Lord Denning distinguished this case from Balfour
and declared that: “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.”

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Jones v Padavatton (1969) 2 All ER 616

C sought to persuade her daughter to take up a new career by offering to pay her fees
and a living allowance if she pursued studies in London to become a barrister. C also
bought a house, in which the daughter had rooms, the rest being let to tenants. The
daughter failed the Bar exams a number of times and fell out with her mother,
whereupon the mother sought to evict her from the house.

CA held: it was a domestic agreement and therefore presumed there was no intention to
create legal relations. Accordingly, the daughter had no right to stay in the house, as
there was no enforceable contract between her and her mother.

Simpkins v Pays (1955) 1 WLR 975

C was a lodger in D’s house. Together with D’s granddaughter, they entered newspaper
competitions and shared the cost of entry. C filled in forms in name of D and promised to
share any winnings. On one occasion D won £750 but refused to give c her share of the
prize, claiming that she had not intended to be legally bound by the agreement.

Held: The presumption regarding social agreements was rebutted. The court upheld C’s
claim, as they had all contributed with the expectation that any prize would be shared.

BUSINESS AGREEMENTS

The courts presume that the parties intend to create legal relations unless the party
wishing to rebut that presumption has evidence to the contrary - even then it is difficult
to rebut the presumption in a business transaction.

Edwards v Skyways (1964) 1 All ER 494

C was a pilot employed by D. As part of a redundancy agreement, D promised to make

an ex gratia (as a favour) payment in return for C not claiming his full pension rights.
Later D refused to make the payment and claimed the words ‘ex gratia’ showed there
was no intention to create legal relations.

CA held: this was a commercial agreement and there was therefore a strong
presumption in favour of creating legal relations. The words ‘ex gratia’ merely signified
that the employers were not admitting any pre-existing liability to make the payment; it
did not mean that they were not bound by the agreement.

Carlill v Carbolic Smokeball Co. (1893) 1 QB 256

D argued that their statement was ‘a mere puff’, an advertising gimmick which was
never intended to be taken seriously. This contention was rejected by the court, which
pointed out that the advertisement stated that the company had deposited £1,000 with
their bankers ‘to show our sincerity in the matter’, which was strong evidence that they
had intended to be legally bound.

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However, the presumption of business intention to create legal relations has been
rebutted in the following circumstances:

1. Binding 'in honour' clauses:

Jones v Vernons Pools (1938) 2 All ER 464

Where a football pools coupon states that it is ‘binding in honour only’, the pools
company cannot be sued for payment by a winner.

Rose & Frank Co v Crompton Bros. (1925) AC 445 HL

A contract between the parties contained an ‘honourable pledge’ clause, stating:
“This agreement is not entered into … 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"

Subsequently D terminated the agreement without giving the specified notice and C
sued for breach of contract.

CA held: the wording of the agreement placed neither side under any obligation to go on
giving or accepting orders.

2. Agreement 'subject to contract':

Use of these words on an agreement is usually taken to mean that the parties do not
intend to be legally bound until formal contracts are exchanged.

Eccles v Bryant (1948) 2 All ER 865

After signing an agreement ‘subject to contract’, parties consulted their solicitors, who
agreed a draft contract. Each party signed the contract, and the buyer forwarded his
copy to the seller’s solicitor so that contracts could be exchanged. However, the seller
then changed his mind and decided to sell to another buyer. The buyer tried to sue for
breach of contract.

CA held: the negotiations were subject to formal contract and the parties had not
intended to be bound until they exchanged contracts. No binding obligations could arise
before this took place.

However, if the parties subsequently act upon the agreement, their conduct may be
interpreted as amounting to an intention to create the final contract.

Confetti Records v Warner Music UK Ltd [2003] EWHC 1274 (Ch)

C owned the copyright in a music track that D wished to use on a compilation album.
Terms were discussed between the parties and D sent a fax to the claimants containing
deal terms but marked it ‘subject to contract’. However, shortly afterwards, C sent D a
copy of the track and an invoice stating that it was licensed for ‘three years non-
exclusive’.

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Court held: this amounted to an offer which was accepted when D started to record the
album. It was therefore too late for C subsequently to withdraw the track, as there was
already a binding contract.

3. ‘Letters of Comfort’:

Kleinwort Benson v Malaysia Tin (1989) 1 All ER 785

C bank agreed to make a loan facility available to a wholly owned subsidiary of D. In the
course of negotiations D had provided a ‘letter of comfort’, containing the key sentence:

"it is our intention to ensure that the business is at all times in a position to meet its liabilities to you..."
When the tin market collapsed, the subsidiary ceased trading and went into liquidation
without paying its considerable debt to C. C then sued D, claiming that this sentence was
a contractual promise, which had been breached.

CA held: it was no more than a statement of present intention and not a promise about
the future conduct of D. Therefore it had no contractual force.

4. Collective Agreements:

See Trade Union and Labour Relations (Consolidation) Act 1992

There is no intention to be legally bound in collective agreements between employers

and trade unions (regarding pay and conditions with the workforce) unless they
expressly state otherwise in writing, eg if the terms of the agreement are incorporated
into the employment contract.

Also note: Whether or not there is an intention to create legal relations has divided the
Law Lords – see:

Esso Petroleum v Commissioners for Customs & Excise (1976) 1 All ER 117

Esso ran a promotion whereby purchasers of 4 gallons of petrol received a free ‘World
Cup Coin’. These coins had no real value but C&E sought to recover purchase tax on
them, on the ground that they were produced for general sale.

3:2 majority of HL held: there must be an intention to create legal relations in respect of
the transfer of the coins between garage proprietors and customers, relying on the
business context and the large commercial advantage Esso expected to derive from the
scheme. On the other hand, two of their Lordships came to the opposite conclusion,
relying on the language of the offer, the trivial value of the coins, and the fact that it was
unlikely that any motorist denied a coin would bring an action in the belief that a legal
remedy was available to him.