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Lecture 5 Intention to create legal relations
Importance of intention
An agreement is a contract only if both parties intend to be legally bound by the agreement. Intentions refer to chemical reactions or electrical discharges of a person‘s nervous system but the medical science is not advanced enough to tell with certainty what message they convey in a given situation. The courts, therefore, look at the external conduct of the parties, 1. their bodily manifestations 2. the background in which the alleged agreement was made. 3. the existing relationship of the parties 4. the time the agreement was made 5. the subject matter of the agreement, statements made by them, 6. the circumstances in which the agreement was made 7. whether the agreement was made by word of mouth, in writing, and in writing and under seal in the presence of witnesses
The objective test: Whether a legally binding agreement has come into existence or not is judged objectively;
a) the fact that one party considers that an agreement has come into existence is not relevant, if it is clear from the external behaviors of the parties that they have not reached finality in their negotiations
b) on the other hand, ―If whatever a man‘s real intentions may be, he so conducts himself that a reasonable man would believe that he was assenting to the terms proposed by the other party and that other party upon that belief enters into the contract with him, the man thus conducting himself would be equally bound as if he had intended to agree to that party‘s terms.‖ World food fair ltd & Anor v HK Island development ltd [2007] 1 HKC 387 Fact: D (appellant) was the owner of a shopping mall and Ps (respondents) wanted to rent retail shops in the mall for operating food and beverage outlets. They orally agreed, inter alia, on
monthly rent, management fees and air conditioning charges. An initial deposit of $200,000 was paid by Ps and they were allowed access to the premises for fitting works. However, no formal tenancy agreement was signed between D and Ps.
Held: the court held that there was no intention to make a legally binding agreement. The court observed that whether the parties intended to enter into a concluded agreement must be looked at objectively. Here, since the parties had not concluded a formal tenancy agreement, objectively, it could not have been the intention of the parties to be bound by the oral negotiations and arrangements; the facts presented to the courts only showed that the parties anticipated concluding a contract but they never did it.
Presumptions applied to determine the parties’ intentions
1.Usually social and domestic agreements are presumed to be not intended to create legal relations
2.Usually commercial agreements are presumed to be intended to create legal relations. Social and Domestic Agreements
a) Husband and Wife – where they live in amity
Key principles: the domestic agreements are presumed to be not intended create legal relations. Balfour v Balfour [1919] 2 KB (P187=) Fact: A husband and wife loved each other very much. The husband was employed in Ceylon (Sri Lanka) and went there with his wife. They then returned to England for some months. This
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time, the husband did not take the wife with him on doctor‘s advice but promised her to pay ￡30 a month until he returned to England. The wife sued for the arrears of maintenance, alleging there existed a binding arrangement between her and her husband.
Held: The court refused to enforce the husband‘s undertaking to pay his wife maintenance
Atkin LJ said: ―All I can say is that the small courts of this country would have to be multiplied one hundredfold if these arrangements were held to result in legal obligations. They are not sued upon, not because the parties are reluctant to enforce their legal rights when the agreement is broken, but because the parties, in the inception of the arrangement, never intended that they should be sued upon. Agreements such as these are outside the realm of contracts altogether. The common law does not regulate the form of agreements between spouses. Their promises are not sealed with seals and sealing wax. The consideration that really obtains for them is that natural love and affection which counts for so little in these courts.‖
b) Husband and Wife – where there is no harmonious relationship key principles: The presumption that wife and husband do not intend to enter into a legally binding agreement can be rebutted where they are not living in amity Merritt v Merritt [1970] 1 WLR 1211 (P190) Fact: Mr. Merritt had deserted his wife and was living with another woman. He promised Mrs. Merritt that he would transfer their former matrimonial home into her exclusive name if she would pay off all the outstanding mortgage instalments. But Mr. Merritt did not act on his promise.
Held:There was a binding contract. Because the parties were in fact not living as husband and wife, the presumption that husband and wife did not intend to create legal relations was inapplicable
Lord Denning said:
―…the parties are not living in amity but are separated, or about to separate. They then bargain keenly. They do not rely on honorable understandings. They want everything cut and dried. It may safely be presumed that they intend to create legal relations.‖
Parent and child
Key principles: usually the agreements between them are presumed not to be intended to create legal relations. Sun Er Jo v Lo Ching & others [1996] 1 HKC 1 Fact: P brought legal proceedings against two of her sons, claiming 1) expenses incurred in rearing her youngest son and 2) RMB 100000 given to him as gift to bring it to Hong Kong because she could not do so
Held: Applying Balfour v Balfour, no intention could be implied to claim back such expenses and it was not clear from the facts if the son undertook to pay back RMB 100000. Moreover it was not clear what the sum of RMB 100000 was for. Jones v Padavatton [1969] 1 WLR 32 (P190) Fact: Mrs. Jones wished her divorced daughter to leave Washington and go to England to become a barrister and offered her a monthly allowance while she studied in England. Her
daughter accepted the offer. Mrs. Jones subsequently bought a house in London and agreed with her that she could live in one part of the house and the rest of it was let to tenants to cover her maintenance. Mrs. Jones and her daughter fell out and Mrs. Jones issued a summons, claiming possession of the house. The daughter had not finished her bar exams at the time of the hearing.
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Held: Both agreements (the agreement to read for the Bar in England in return for a monthly allowance and the agreement to allow the daughter to stay in the house in London) were not binding. The terms were not put in writing and the duration of the agreements was not precisely defined. Ma Chi Wing Wendy v The Personal Representative of the Estate of Ma Vincent, Deceased (HCA 3913/2001, [2005] HKCU 638, 20 May 2005) It was held that a family arrangement to look after aged parents may never be intended as a legal contract.
Social agreements – friends and acquaintances Key principles: no intention to create legal relations. Coward v Motor Insurance Bureau [1963] 1 QB 259 (189) Fact: Coward was a pillion passenger on a motor cycle driven by Cole. An accident occurred due to Cole‘s negligence, killing them both. Coward contributed to the running costs of Cole‘s vehicle. Coward‘s widow sued MIB.
Held: Her claim failed because Coward was not carried for ―hire or reward‖; there was no legally binding agreement between them.
Upjohn LJ: ―We should be reluctant to conclude that the daily carriage by one of another to work upon payment of some weekly (or it maybe daily) sum involved them in a legal contractual relationship.‖
The provision of free residential accommodation for some time for a close friend also does not amount to a legally binding contract; it is considered an act of bounty done without any intention to create a legal relationship. Exception
a) The presumption that friends and acquaintances do not intend to make a legally binding agreement can be rebutted where the facts clearly suggest that they wanted to be bound Simpkins v Pays [1955] 1 WLR 975 Fact: A group of investors submitted a joint entry in a newspaper fashion competition on the apparent basis that any winnings will be shared equally between them Held: There was a valid and binding agreement between them
Sellers J said: ―I think that in the present case there was a mutuality in the arrangement between the parties.‖
b) Where the consequences of breach of an agreement are likely to be very serious to one of the parties, the courts view such agreements as creating legal obligations. Thus, an agreement between relatives to share a house was held to be binding as P, on the faith of the promise, had taken the drastic and irrevocable step of disposing of his own residence. P could not have taken such a step of selling his house without being certain that he had the right to live in D‘s house. Parker v Clark [1960] 1 WLR 286 (P190) Facts: C. wrote to P. offering to share his house with P. and Mrs. P. on terms as to sharing expenses, also offering that he and his wife would on their death leave their house to Mrs. P., her sister and her daughter, and suggesting that P. and Mrs. P. should sell their cottage. P. accepted the offer and the two couples shared the C.s' house until the P.s left as an alternative to being evicted.
Judgment: An agreement between relatives to share a house was held to be binding as P, on the faith of the promise, had taken the drastic and irrevocable step of disposing of his own residence.
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P could not have taken such a step of selling his house without being certain that he had the right to live in D‘s house. Both sides having intended to create a legally binding arrangement, there was a good contract of which C.'s letter was a sufficient memorandum
Business relationships
Key principles: usually commercial agreements are presumed to be intended to create legal relations.
Commercial agreements such as those relating to sale and purchase of goods and immovable property, employment and tenancy are presumed to be intended to create legal relations. Usually, no further evidence is required. The mere fact that the agreement is a commercial agreement shows that the parties intend to create a binding relationship
In Carlill v Carbolic Smoke Ball (discussed before), D offered to pay a reward to anyone who used their medicine but was not cured of flu. The court regarded this offer as being a serious one and not in the nature of a puff. The court enforced the contract for the purpose of it was commercial, to promote the sale and circulation of the medicine. Carlill v Carbolic Smoke Ball (discussed before) Facts: D offered to pay a reward to anyone who used their medicine but was not cured of flu. The court regarded this offer as being a serious one and not in the nature of a puff.
Judgment: The court enforced the contract for the purpose of it was commercial, to promote the sale and circulation of the medicine. In Edwards v Skyways [1964] 1 WLR 349 (P190) Fact: P agreed to the termination of his contract and to get ex-gratia redundancy payments from his company.
Held: This agreement regulated the parties‘ business relationship and therefore it could be safely assumed that the parties intended legal consequences to follow and the use of the word ―ex-gratia‖ in a contract dealing with terms of employment did not make the contract unenforceable; it only showed that the company did not accept any pre-existing liability．And if there was no ex-gratia, the employee wouldn‘t agree to be redundant. So that means that the employee is very serious with the agreement and had an intention to create a contract. Esso Petroleum Ltd. v Commissioners of Customs and Excise [1976] 1 WLR 1 Facts: As part of a promotion campaign, a petrol station proprietor displayed posters supplied by Esso offering one ―World Cup Coin‖ for every 4 gallons of petrol. Millions of coins were
distributed. The Commissioners claimed that the coins were chargeable to purchase tax as they had been produced in quantity for general sale.
Judgment: There was no intention for the sale of the coins within the meaning of the Sale of Goods Act in England. The coins were not sold but distributed as gifts. The consideration for the promise to supply a coin was not money (but offer to buy petrol) and therefore there was no sale of goods for money within the Sale of Goods Act. The supply of a free coin was like an agreement to offer free air to motorists buying petrol. Exception:
Key principles: The presumption that commercial agreements are intended to be binding can be rebutted where the agreement contains an ―Honorable Pledge Clause‖ or is subject to contract or formal contract or contracts to be drafted by solicitors a) Agreements containing ―Honourable Pledge Clauses‖ Rose and Frank Co v Crompton Bros [1925] AC 445 (P191) 24