intention to create legal relations Flashcards
privity of a contract and intention to create legal obligations (21 cards)
Intention to create legal relations:
Once you have formed the agreement with offer and acceptance, there must also be an assumption to create legal relations, the parties to a contract expressly or impliedly agree that the contracts legally binding and enforceable in court
General presumptions for legal relations:
Two general presumptions:
1) For social or domestic agreements, there is a presumption that there is no intention to create legal relations
2) for commercial agreements, there is a presumption that there is a legal relation
(these can be rebutted)
Comercial Business agreements
general presumptions is that these are seen as having a legal intention, i.e. a gentlemen’s agreement states that the contract is binding in honour only.
Jones v Vernons Pool:
Mr Jones claimed that he had a winning football pool coupon, the coupon which he signed stated that the agreement was binding in ‘honour only’, as the agreement was based on the honour of the parties and not legally binding, there was no intent to create legal relations and no legal contract.
Burden of proof
If you do wish to rebut the presumption in a commercial setting that there is an intention to create legal relations then the following applies,
‘ In a commercial context, the onus of demonstrating that there was a lack of intention to create legal relations lies on the party asserting it and it is a heavy one’ Atkins
Edwards v Skyways Ltd:
example of rebutting:
The plaintiff was a pilot who had been made redundant, he was offered and accepted a payment which stated to be ‘ex gratia’, the company then found the terms that had been offered would be more expensive than realized, they denied that there was any legal obligation to make the payment, the argument failed because it was a business agreement and they failed to rebut.
Free gift:
the offer of a free gift cab create problems as if it is to promote a business it can be legally binding.
Esso
Esso Petroleum Co. Ltd Commissioners of Customs and Excise (1976)
Esso gave a world cup coin with every four gallons of petrol purchased. Should this free gift act tax?
If the free gift is to promote a business, this is legally binding and Esso had to pay tax
Competition prizes
this is another area of problem, this is the same as the free gift if the prize for the competition is meant to promote the company, McGowan v Radio Buxton
McGowan v Radio Buxton (2001)
The claimant entered a radio competition, the prize was stated to be a Renault Clio car. The winner was given a four inch scale model of a Renault Clio, Radio Buxton argued that there was no intention to create legal obligations, the court decided that there was legal intention
Letter of comfort
a written assurance usually provided by a parent company in respect of its subsidiary’s financial obligations to a bank. Usually where the parent company wishes to give some assurance to the lender is respect of the subsidiary’s ability to repay the loan but has no obligation to pay on its self.
It was found to be a moral obligation not a legal obligation.
The court of appeal also stated that the letter had only represented to a fact that it was their present intention to ensure that Metals Ltd would be able to meet its liabilities, as a result intention to create legal relations was irrelevant.
Kleinwort Benson Ltd v Malaysian Mining Corporation (1989)
Malaysia Mining Corporation Metals Ltd (MMC Metals) was a wholly owned subsidiary of the defendant, MMC BHD. MMC Metals approached the claimant KB Bank for a loan. MMC Metals was a relatively newly formed company lacking in the size and resources of MMC BHD. The bank approached MMC BHD asking if they would act as guarantor for the loan. MMC refused to act as guarantor but stated they it was their company policy to ensure that their subsidiaries are always in a position to meet their debts. In reliance of this letter of comfort the bank advanced money to MMC Metals. MMC Metals subsequently went into administration having not paid the loan. KB brought an action against MMC BHD to recover their loss based on the assurance given in the comfort letter.
Held:
The comfort letter had no legal effect. The fact that MMC BHD had refused to act as guarantor demonstrated they did not intend to be legally bound. The comfort letter referred to company policy at that time. There was nothing to stop the company changing its policy.
Business or Domestic?
Some cases may fall in between social and business agreement.
Sadler v Reynolds
Sadler v Reynolds (2005)
Contract between journalist and business men who were also friends. It was held that their agreement fell ‘somewhere between an obviously commercial transaction and a social exchange’
The burden was on the journalist to prove that there was an intention to create legal relations, that it was a business agreement not a social one
So the presumption was that there was no legal intention unless he proved otherwise.
Social and domestic arrangements:
Presumed not to be legally binding, the presumption can be rebutted as seen in Merritt v Merrit and Balfour v Balfour.
Balfour v Balfour:
A husband worked abroad, his wife stayed in England he promised her an income of £30 per month, When they divorced she tried to claim her £30. As the agreement had been made at an amicable point in their relationship, it was purely a domestic agreement and therefore not legally enforceable.
Merritt v Merritt
Mr Merritt had left his wife, an agreement to pay the wife an income if she paid the outstanding mortgage was held to be intended to create legally binding and was enforced by the courts.
Blurred lines:
Some famillies may make arrangements that appear to be business arrangements due to the nature of it.
The court must then examine the real purpose of the arrangement as seen in Jones v Padavatton.
Jones v Padavatton (1969)
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 to do so at first as she had a well paid job with the Indian embassy in Washington and was quite happy and settled, however, the mother persuaded her that it would be in her interest to do so. The mother’s idea was that the daughter could then join her in Trinidad as a lawyer. This initial agreement 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. This meant the daughter could only afford to rent one room for her and her son to live in. The Mother then 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. The question for the court was whether there existed a legally binding agreement between the mother and daughter or whether the agreement was merely a family agreement not intended to be binding.
Held:
The agreement was purely a domestic agreement which raises a presumption that the parties do not intend to be legally bound by the agreement. There was no evidence to rebut this presumption.
Money involved:
If there is money involved, then even if the agreement is made socially, it will likely be a business agreement and legally binding.
Simpkins v Pays:
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:
There was a binding contract despite the family connection as the lodger was also party to the contract. This rebutted the presumption of no intention to create legal relations.
