INTENTION TO CREATELEGAL RELATION

EXPECTED LEARNING OUTCOME

At the end of this section on Intention to create legal relations you will have a basic
understanding of the following:

 Intention to create legal relations as an essential element of a contract;

 Intention to create legal relations in social agreements;
 Intention to create legal relations in commercial agreements.

INTENTION TO CREATE LEGAL RELATIONS AS AN ESSENTIAL

ELEMENT OF A CONTRACT

In the section on agreement we noted that one essential element of a contract is

agreement. But this does not mean that if two parties reach an agreement there is always
a contract. Not all agreements amount to contracts. Another essential element of a
contract is an intention to create legal relations. The parties who reach an agreement must
intend legal relations for them to acquire contractual rights and be bound by contractual
duties.

INTENTION TO CREATE LEGAL RELATIONS IN SOCIAL AGREEMENTS

A social agreement is an agreement between relatives, neighbours and friends. In such

agreements the law presumes that the parties did not intend to create legal relations.

In Balfour v. Balfour [1919] 2 K.B. 571, Court of Appeal, Atkin L.J. stated: "...there are
agreements between parties which do not result in contracts...one of the most usual forms
of agreement which does not constitute a contract appears to me to be the arrangements
which are made between husband and wife. It is quite common,...that the two spouses
should make arrangements between themselves...those agreements,...do not result in
contracts at all...they are not contracts because the parties did not intend that they should
be attended by legal consequences...They are not sued upon,...because the parties, in the
inception of the arrangement, never intended that they should be sued upon..." In this
case a husband promised his wife that he will give her £30 per month. After a while he
failed to honour his promise and his wife sued him for breach of contract. She did not
succeed in her action. The court presumed that as the parties were husband and wife and
on amicable terms at the date of the agreement, they did not intend to create a legally
binding obligation.

The courts take a similar approach to agreements between parent and child. So if I
promise to give my car to my son and he promises to give me a box of chocolates in
return, there is agreement and consideration. But if I decide not to give him my car and
my son sues me for breach of contract, he will not succeed, as we are related and were on
friendly terms at the date of the agreement. The authority for this is the case of Jones v.

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Padavatton [1969] 2 All ER 616, Court of Appeal, where a mother persuaded her
daughter to come to England to study for the Bar, and promised to allow her to stay in a
house owned by the mother. After some years the daughter had not passed any Bar
examinations. The mother and daughter quarrelled and the mother brought an action
claiming possession of the house. Fenton Atkinson L.J. stated: "At the time when the first
arrangement was made, the mother and daughter were, ...'very close'. I am satisfied that
neither party at that time intended to enter into a legally binding contract." So the mother
succeeded in gaining possession of the house, as the daughter could not prove that the
mother was contractually bound to permit her to stay in the house until she finished her
Bar studies.

The two cases cited above do not mean that agreements between relatives, neighbours
and friends can never amount to contracts. In Merritt v. Merritt [1970] 2 All ER 760,
Court of Appeal, the husband left the family home, which was in joint names, to live with
another woman. The husband and wife met to discuss the financial arrangements. They
reached an agreement, but the husband failed to carry out the promise that he made of
transferring the house to her sole name once she paid off the mortgage. When the wife
sued the husband for breach of contract, Lord Denning M.R. stated: "...The first point
taken on his behalf by counsel for the husband was that the agreement was not intended
to create legal relations. It was, he says, a family arrangement such as was considered by
the court in Balfour v. Balfour and in Jones v. Padavatton. So the wife could not sue on
it. I do not think that those cases have any application here. The parties there 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..."

In Simpkin v. Pays [1955] 3 All ER 10, Chester Assizes, the court held that an agreement
between a lodger and her landlady to share the winnings of a competition, was a
contractual arrangement, despite the fact that the parties were clearly living in amity at
the date of the agreement. Read this case in the IOLIS Resource book - section on
Contract - Introduction to Contract. Parker v. Clark [1960] 1 All ER 93, Exeter Assizes,
is another case where although the parties (who were relatives) were on friendly terms at
the date of the agreement, the court held that the parties had intended legal obligations. In
this case the fact that the claimant, who was invited to live in the defendant's house, sold
his own house, to move in with the defendant was evidence that the parties had intended
contractual obligations.

INTENTION TO CREATE LEGAL RELATIONS IN COMMERCIAL

AGREEMENTS

In commercial agreements the presumption is that the parties did intend to create legal
relations. So in Carlill v. Carbolic Smoke Ball Co. one of the defences raised by the
company was that they did not intend to create legal relations. They claimed that the
advertisement was a mere business puff. The Court of Appeal, however, rejected this

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defence and held that the statement that they had deposited £1000 in the bank to show
their sincerity, was evidence of an intention to create legal relations.

The presumption of an intention to create legal relations, can, however, be rebutted by

express words in the commercial agreement such as 'binding in honour only'. In Jones v.
Vernon's Pools Ltd. [1938] 2 All ER 626, the court noted that the pools coupon
contained the words 'binding in honour only'. Atkinson J stated; "...it means that they all
trusted to the defendant's honour,...and that they fully understood that there should be no
claim possible in respect of the transactions...he has agreed that the money which prima
facie became due to him if that coupon reached them is not to be the subject of an action
at law. There is no legal liability to pay."

In Rose and Frank Co. v. Crompton Bros. [1925] A.C. 445, House of Lords, the
defendants, an English firm which made paper tissues, appointed the claimants, an
American firm, as their sole agents in the United States. The written agreement between
the claimant and defendant contained the following words: "This arrangement is not
entered into...as a legal agreement, and shall not be subject to legal jurisdiction in the law
courts either of the United States or England." It is clear that the parties did not intend to
create legal relations. But despite this the parties continued to have business dealings for
some years. In 1919 the defendants suddenly terminated the agreement. Before the
termination they had accepted some orders placed by the claimants, but refused to supply
the tissues. It was held that the claimants had contractually bound themselves when they
accepted the orders and were in breach of contract for not supplying the goods.

Assume that you have been made redundant and your employer has promised to make an
ex gratia payment. If your employer refuses to make this payment, do you have an action
against your employer? In Edwards v. Skyways Ltd, [1964] 1 All ER 494, Queen's
Bench, Skyways had made Edwards redundant and promised to make him an ex gratia
payment. They did not make the payment and when Edwards sued them, contended that
the words ex gratia meant that they had not intended legal relations. Megaw J. stated:
"...litigation or threatened litigation is frequently compromised on the terms that one
party shall make to the other a payment described in express terms as "ex gratia" or
"without admission of liability". The two phrases are, I think, synonymous. No one
would imagine that a settlement, so made, is unenforceable at law. The words ... are used
simply to indicate ... that the party agreeing to pay does not admit pre-existing liability on
his part; but he is certainly not seeking to preclude the legal enforceability of the
settlement itself by describing the contemplated payment as "ex gratia". So you do have
an action for breach of contract against your employer, if s/he refuses to honour the
promise to make an ex gratia payment.

YOU HAVE TO DO THE FOLLOWING IN PREPARATION FOR YOUR

TUTORIAL ON INTENTION TO CREATE LEGAL RELATIONS

1. Try the interactive computer tutorial on Intention to Create Legal Relations.

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2. Prepare the class tutorial questions for the tutorial on Intention to Create Legal
Relations.