Topic > Law of 3 Contract (Intention to Create Legal Relations) LEARNING OUTCOMES > INTRODUCTION Any agreement made between the parties (the proposer and the acceptor) will only become a binding contract if both parties intend to make the contract enforceable. The element of intention has not been defined in the Contracts Act 1950 and there is no provision in the Act which clearly provides the element of intention as one of the elements to form a valid contract. The provisions which may impliedly refer to the element of intention is the word ‘with a view’ used in Section 2(a), and the word ‘at the desire’ used in Section 2(d) of the Act. However, the principles in the English common law will apply in the absence of36D TOPIC 3 LAW OF CONTRACT (INTENTION TO CREATE LEGAL RELATIONS) such provision under the Contracts Act 1950. In determining whether there is an intention by the parties to create a legally binding contract, the law has divided an agreement into two categories: (a) Domestic, Family and Social Agreements (b) Business Agreements 3.1 DOMESTIC, FAMILY AND SOCIAL AGREEMENTS In domestic, family and social agreements, the presumption made is that the parties in the contract do not intend their agreement to have legal relations. This means, the parties to the agreement do not contemplate any legal consequence to arise from their agreement. It is because this type of agreement is made every day between the family and social members and between spouses for many arrangements, that no parties would intend to go to the court for breach of such arrangements and promises made. The English case which pointed up the principle is the case of: | Beton v. Balfour [1919] 2 K.B. 571 In the case, a husband was employed in a government post in Ceylon. He } returned with his wife to England on leave, but she was unable to go back to Ceylon with him for medical reasons. He consequently promised orally to make her an allowance of £30 a month until she rejoined him. The husband failed to make the payment and the wife sued him. The Court held that: Although it was not impossible for a husband and wife to enter into a contract for maintenance, in this case they never intended to make a bargain which could be enforced in law. Thus, there was no enforceable contract between the parties. Therefore, in the above case that involves husband and wife, there is a presumption of no intention to create legal relations. However, if the presumption can be rebutted on the evidence that there was a serious intent, then a different situation will appear. For example, where a husband and wife were living together but not in amity or were separated when the agreement was made, the court may enforce the agreement. The following case illustrates the situation:TOPIC 3__LAW OF CONTRACT (INTENTION TO CREATE LEGAL RELATIONS) 437 Me [1970] 2 All ER 760 In this case, a meeting was held between the husband and the wife after the husband had left her to live with another woman. The husband agreed to pay the wife £40 per month for maintenance and wrote and signed a document agreeing that if the wife paid all charges in connection with their matrimonial home until the mortgage repayments had been settled, the husband would transfer the matrimonial home to the wife as a sole owner. The wife paid off the mortgage but the husband did not subsequently transfer the property to her. She then claimed ownership of the property and asked for an order that her husband should transfer the house to her. The husband’s defence was that the agreement was a family arrangement and there was no intention to create legal relations. The Court held that: The agreement which was made when the parties were not living together in amity was enforceable. Furthermore, the payment of the balance of the mortgage was a detriment to the wife and the husband has received the benefit of being relieved of liability to the building society, ice. the financier. Therefore, the wife was entitled to the relief claimed. The above case shows that the presumption that no intention is present in ordinary domestic or social arrangement may be rebutted if there is a proof of the true intention of the parties which may be inferred from the language they use and the circumstances in which they use it. Apart from the cases involving husband and wife, there were other cases which involved other family and personal relationships. The following cases illustrate the situation in which the court presumed that legal relations were intended.38 TOPIC 3 LAW OF CONTRACT (INTENTION TO CREATE LEGAL RELATIONS) Simpkins v. Pays [1955] 3 All ER 10 The defendant and the defendant's granddaughter in this case made an agreement with the claimant that they submitted a weekly coupon in the defendant's name to a Sunday newspaper fashion competition. The coupon contained a forecast by each of them. On one occasion, a forecast by the granddaughter was correct and the defendant received a prize of £750. The claimant sued for her share of that sum. The defence given by the defendant was that there was no intention to create legal relations but that the transaction was a friendly arrangement binding in honour only. The Court held that: There was an intention to create legal relations. The evidence showed that it was not merely a friendly domestic arrangement but a joint enterprise. Thus, the parties expected to share any prize that was won. Parker v. Clark {1960] 1 W.L.R. 286 The defendants in this case, an elderly couple, agreed with the plaintiffs (who were twenty years younger) that if the plaintiffs would sell their cottage and come to live with the defendants and sharing household expenses, the male defendant would leave them a portion of his estate in his will. The plaintiffs sold their cottage and moved in with the defendants. But difficulties developed between the two couples. The defendants then repudiated the agreement by requiring the plaintiffs to find somewhere else to live. As a result of this, the plaintiffs claimed damages for breach of contract. It was argued by the defendants that the agreement amounted to no more than a family arrangement. The Court held that: The circumstances indicated that the parties intended to affect their legal relations and thus the defendants were liable. Since the true intention of the parties may be inferred from the language they use, it is important that the words used by the parties are certain. If the words are uncertain, then the agreement will not be enforced because the uncertainty may lead to the conclusion that there is no intention to create legal relations. Example of cases are as follows:TOPIC 3_LAW OF CONTRACT (INTENTION TO CREATE LEGAL RELATIONS) 4 39. Gould v. Gould [1969] 3 All ER 728. In this case, a contractual intention was negatived when a husband (who was leaving his wife) undertook to pay her £15 per week “so long as I can manage it”. The word “so long as I can manage it” in the case of Gould was considered as uncertain and does not create an intention to enter into a legally binding contract. | Jones v. Padavatton [1969] 2 All ER 616 Mrs Jones (the claimant) made an offer to her daughter, Mrs Padavatton (the defendant) that she would provide the daughter a maintenance at the rate of £42.a j]| month if she leave her job in Washington and go to England and read for the Bar. | The agreement was an informal one and there was uncertainty as to its exact terms. However, Mrs Padavatton came to England (bringing her child with her) in November 1962 and began to read for the Bar. Her fees and maintenance were paid for by Mrs Jones. Later, Mrs Jones offered to buy a large house in London to be occupied by the daughter and partly by tenants. The income from the rents would go to the daughter in lieu of the maintenance. Again, there was no written agreement. In January 1965, Mrs Padavatton moved into the house and the tenants also arrived. It was still uncertain what was to happen to the surplus of the rent income and what rooms Mrs Padavatton was to occupy. There was an uncertainty as to the utilisation of the surplus of the rent income and the room that Mrs Padavatton would occupy. In 1967, Mrs Jones claimed possession of the house from Mrs Padavatton. Mrs Padavatton counter-claimed for £1,655 18s 9d (the amount she had paid for running the house). the good faith of the parties in keeping promise made and not intended to be rigid binding agreements. Furthermore, the agreements were too vague and uncertain to be enforceable as contracts. Although the agreement to maintain while reading for the Bar might be regarded as creating a legal obligation in the mother to pay, the daughter could not claim anything in respect of that agreement. The arrangements in relation to the home were very vague and must be regarded as made without contractual intent, Thus, the mother was entitled to possession of the house and had no liability under the maintenance agreement. Held by the court: The arrangements were family agreements depending upon40 > TOPIC 3 LAW OF CONTRACT (INTENTION TO CREATE LEGAL RELATIONS) In Padavatton’s case, although there seemed to be an assumption that there was a contractual intent in the mother’s promise because it caused Mrs Padavatton to leave her job to study law, the vagueness of the arrangement with Mrs Jones had negatived that intent. (b) © (d) © How does the law determine the existence of an intention in any agreement between the parties? What is the presumption on intention to create legal relations in a domestic, family and social agreement? In relation to question (b) above, is this presumption rebuttable? How? What was the principle established by the court in the case of Merritt v. Merritt [1970] 2 All ER 762? Must the words used by the parties in their agreement, certain and unambiguous? Why? Discuss the following problems by applying the principle of law on intention to create legal relations: (a) (b) Three sisters, Viv, Valerie and Victoria, agree to form a syndicate for the purpose of making a weekly entry in a fashion contest in a local newspaper. Viv and Valerie do not know much about fashion and give Victoria RM7.00 each week. Victoria fills in and sends off the contest forms every week and she always fills the forms in her own name. After one month, one of the entries that Victoria sends wins a RM10,000 prize. Viv and Valerie are very happy to know about the news and they want to claim their shares. Victoria now refuses to share. Advise Viv and Valerie. Mr. Alan and Mrs. Alan are husband and wife. Lately, they had a quarrel over the week because Mr. Alan was very busy with his business trips and had no time for a vacation with Mrs. Alan. Mrs. Alan had expressed her intention to go back to her hometown if the situation remained the same. After a series of argument, Mr. Alan promised Mrs. Alan that if he got a new business offer, he would take Mrs. Alan to Neverland for a vacation. Mrs. Alan was very happy and she gave up her intention to go back to her hometown. Two months later, Mr. Alan was offered a new business contract and Mrs. Alan wanted to enforce the promise made by her husband. Explain whether she will succeed in her claim.TOPIC 3 LAW OF CONTRACT (INTENTION TO CREATE LEGAL RELATIONS) 441 3.2 BUSINESS OR COMMERCIAL AGREEMENTS In business or commercial agreements, the presumption made is that the parties in the contract have the intention to create legal relations. This means the parties to the agreement contemplate a legal consequence to arise from their arrangements. The presumption is a strong one and can be seen in the judgement of the case of: Edwards v. Skyways Ltd [1964] 1 All ER 494 In this case, the defendants who had promised to make an ex gratia payment to the employees contended that they were not bound to fulfil || their obligation. However, the Court held that: the use of the words ex gratia in regard to an airline pilot's contractual redundancy payment did not alter the presumption. Therefore, the airline had to make the payments || because the agreement was enforceable. However, it is not necessary that there is an intention to create legal relations just because the parties are in business. The parties to a business transaction may state that they do not intend to enter into any legal obligation. In such a case, the court will then treat their promises as binding in honour only. The following cases illustrate this point: Jones v. Vernon’s Pools Ltd [1938] 2 All ER 626 The claimant in this case had sent to the defendants a successful football coupon but the defendants denied having received it and relied on a clause printed on every coupon. The clause provided that the transaction should not “give rise to any legal relationship.....or be legally enforceable .... but binding in honour only”. The Court held that: This clause was a bar to any action in a court of law.42> TOPIC 3 LAW OF CONTRACT (INTENTION TO CREATE LEGAL RELATIONS) || Rose and Frank Co. v. Crompton (JR) & Brothers Ltd [1925] AC 44! | In this case, the agreement between the claimant and the defendants contained an ‘Honourable Pledge Clause’ as follows: “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 courts of the United States of America or England...” The Court held that: The agreement was not binding on the parties. It is however important to note that most business agreements are to be regarded as binding in the absence of the ‘Honorouble Pledge Clause’ or anything similar to this, because such clauses are relatively rare in the business world. Apart from the above clauses, there are other various clauses used in business agreements that negates the contractual intention. The most common is the use of the words “subject to contract” or “subject to formal contract”. Such agreement gives rise to no legal liability. The case to explain this is the case of: Winn v. Bull (1877) 7 ChD 29 A written agreement was drawn up whereby the defendant agreed to take a lease of a house for a definite period and at a fixed rent, but “subject to | the preparation and approval of a formal contract”. The Court held that: There was no contract. Therefore, the insertion of the words “subject to contract” renders the agreement to be unenforceable. It means a binding contract will come into existence only when a subsequent formal contract is entered into by the parties. Up to this time, either party is free to renegotiate or even to withdraw from their arrangements.TOPIC 3 LAW OF CONTRACT (INTENTION TO CREATE LEGAL RELATIONS) 4 43 The decision in the case of Winn v. Bull was cited in the case of: 9 Low Kar Yit & Ors. v. Mohd. Isa & Anor. (1963] MLJ 165 The defendant in this case gave an option to the plaintiffs’ agent to buy a parcel of land subject to “a formal contract to be drawn up and agreed upon by the parties”. Subsequently, the plaintiffs’ agent exercised the option but the defendant failed to sign the agreement for sale. The plaintiffs brought an action for specific performance or (alternatively) damages for breach of contract. The Court held that: The option was conditional upon and subject to a formal contract to be drawn up and agreed upon between the parties. Thus, the exercise of the option amounted to nothing more than an agreement to enter into an agreement. In most instances like the above cases, the use of the words “subject to contract” infers that there is no intention by the parties to create legal relations. However, the Privy Council had rejected a “subject to contract” issue in a case involving a booking pro forma signed by the purchaser to purchase a house to be built by a housing developer. The case is: Daiman Development Sdn Bhd v. Mathew Lui Chin Teck & Anor [1981] 1 MLJ 56 The purchaser (respondent) signed a booking pro forma for a purchase of a house to be built by the housing developer (appellants). After the payment of a deposit was made and the pro forma was signed, the appellants informed the respondent that the price of the house was to be increased. The respondent did not agree and applied to the court for specific performance. The appellant argued that the pro forma was “subject to contract”. Thus, no contractual obligation arose from the pro forma itself || until a further document was agreed and signed. The argument was rejected by the court. The Lordships held that: The appellants were bound by the pro forma and could not argue that it did not create an obligation to purchase and sell the propert44» TOPIC 3 LAW OF CONTRACT (INTENTION TO CREATE LEGAL RELATIONS) Note: The provision as to booking pro forma has been abolished and under the current provisions of the Housing Development (Control and Licensing) Act 1966, it is an offence to collect any money from a purchaser as a booking pro forma. (a) What is the presumption on intention to create legal relations in a business or commercial agreement? (b) Is there any reason for the parties of a business transaction to say that they do not have the intention to be bound by their arrangements? x (©) How does the clause “subject to contract” render the agreement to be unenforceable? Discuss the following case by applying the principle of law on intention to create legal relations: (a) On 10 July 2002, Mr Ferrera claimed to have submitted two football pool coupons to Bigwood Pools Ltd. Each coupon draw a fee of RM3.24, for football matches played on 11 July and one of the coupons was a winning coupon entitling him to RM174,000. Bigwood, however, refused to pay and denied that they had ever received the winning coupon. Bigwood also relied on a clause printed on each coupon which stated that: “The following transaction should not give rise to any legal relationship or legally enforceable. It is binding in honour only”. Decide whether there was a binding contract between Mr Ferrera and Bigwood Pools Ltd. * An agreement without an intention to create legal relations does not bind the parties to the agreement.TOPIC 3 LAW OF CONTRACT (INTENTION TO CREATE LEGAL RELATIONS) 445 « In domestic, family and social agreements, the parties are presumed not to have any intention to create legal relations. * The presumption of no intention may be rebutted if there is a proof of true intention of the parties. * Uncertainty of words in an agreement may render the agreement unenforceable. ‘* In business or commercial agreements, the parties are presumed to have the intention to create legal relations. * Various clauses used in business or commercial agreements have the effect that negates the contractual intention. TN eee eee eens Business agreement Intention to create legal relations Certainty Presumption Domestic agreement Rebuttable presumption Family agreement Social agreement Text Books: © Guest, A. G. (1988). Anson’s Law of Contract (26th ed.). Singapore: Oxford University Press. ¢ Harlina Mohamed On & Rozanah Ab. Rahman. (2007). Undang-Undang Perniagaan Malaysia. Selangor: Kumpulan Usahawan Muslim Sdn. Bhd. © Keenan, D. (2006). Smith and Keenan’s Law for Business (13th ed.). UK: Pearson and Longman. © WuM.A. & Vohrah, B. (2000). The Commercial Law of Malaysia (2nd ed.). Selangor: Pearson and Longman. © Balfour v. Balfour {1919} 2 K.B. 571. * Daiman Development Sdn Bhd v. Mathew Lui Chin Teck & Anor {1981] 1 MLJ 56. ° Edwards v. Skyways Ltd [1964] 1 All ER 494.46 Ph TOPIC 3 LAW OF CONTRACT (INTENTION TO CREATE LEGAL RELATIONS) * Gould v. Gould {1969} 3 All ER 728. * Jones v. Padavatton [1969] 2 All ER 616. * Jones v. Vernon’s Pools Ltd {1938} 2 All ER 626. © Low Kar Vit & Ors. v. Mohd. Isa & Anor. [1963] ML} 165. © Merritt v. Merritt[1970] 2 All ER 760. © Parker v. Clark [1960] 1 W.LR. 286. * Rose and Frank Co. v. Crompton (JR) & Brothers Ltd {1925] AC 445. * Simpkins v. Pays{1955) 3 All ER 10. * Winn v. Bull(1877)7 ChD 29.