Intention to create legal relations

Statement of the Rule To create a contract there must be a common intention of the parties to enter into legal obligations, mutually communicated expressly or impliedly (Rose and Frank Co v JR Crompton & Bros Ltd). It is open for the parties to use express language to indicate an intent (or lack of) to impose legal obligations on each other. Alternatively, this intention can be impliedly from the circumstances. The courts use an objective test in making a determination about the intention of the parties. In making an objective determination of the parties, intention the court looks at the surrounding circumstances and asks if a reasonable person would regard the agreement as intended to be binding. Domestic and social relationships Presumption The presumption is that domestic and social agreements are not intended to have legal force. Rebutting the presumption The presumption can be easily rebutted for example if parties who are in a familial relationship are contracting in a business context or if a husband and wife enter into an agreement in circumstances in which they are no longer living in harmony. Similarly, if the words used in the contract indicate a legal intention, the presumption that may otherwise have arisen may be rebutted. Case Examples a) Husband and Wife (Balfour v Balfour) Parties intended involved in a domestic relationship, will generally not have intended legal consequences to follow their arrangement thus a contract will not be enforceable. Given many couples now choose to cohabit without marrying, the same presumption should apply where an agreement is entered into between ac acouple living ain a de facto relationship. b) Separated husband and wife (Merrit v Merrit) Where parties are divorced, separated, or in the process of separating, the negotiation do not take place in the context of natural love and affection therefore there is no room left for the application of such a presumption and the court will generally find that the requisite contract intent existed. c) Other familial relationships (Jones v Padavatton) Parties in other familial relationships are considered the same as married or de facto couples, and it is presumed that they do not intend to cerate legal relationships as the agreement is made in this context are based on natural love and affection. The bond of natural love and affection is likely to weaken according to the remoteness of the tie and will subsequently be easier to rebut. In fact, those cases where the court finds that the presumption has been rebutted, one or more of the following factors are often relevant The seriousness of the conduct involved (such as moving countries or giving up full time employment) The expense involved, especially if the relevant party is not wealthy

 Whether there is or has been a degree of hostility in the relationship The closeness of the family ties Whether the subject matter of the agreement is business or commercial in nature Examples Jones v Padavatton A resident of England invited her daughter who lived and worked in the United States to move to England to study. They agreed that the mother would let the daughter stay in the house rent free. A dispute arose and the mother brought an action to evict the daughter from the house. The court found for the mother in that there was no legally binding agreement between the parties regarding the offer to live in the house in reliance on the presumption that family members do not intend to enter into legal relations. This was the case, notwithstanding the seriousness and expense of the daughters actions in moving. Wakeling v Ripley An elder many of considerable wealth invited his sister and her husband, who gave up paid employment, to come to Australia to live with him and care for him until his death in which he agreed to give consideration of this of an income for life provided by the elderly man and his property upon his death. A dispute arose and the couple sued for breach of contract. The could held that in the circumstances the agreement was something more than a familial relationship because of the serious consequences of the arrangements for the plaintiffs, namely the husband giving up his salaried position and pension and both of them moving permanently to Australia. Roufos v Brewster Mr. and Mrs. Brewster owned a motel at Coober Pedy while their son in law, Roufos, ran a small store. Roufos drove the Brewsters truck to Adelaide for repairs. It was agreed between them that if Roufos could arrange for someone to drive the truck back to Coober Pedy, Roufos could transport goods for his business back on the truck. The truck was involved in an accident and the Brewsters sued Roufos for the cost of repairs. The court held that the parties had entered a binding contract as the setting of the agreement was commercial and no domestic or social. d) Social Relationships The presumption of lack of legal intent can extend beyond familial relationships to agreements entered into in a social context, or agreements made between friends. In Heslop v Burns the deceased allowed his fiends to stay in a house owned by him free of charge. In an action for possession by the deceaseds estate the friends argued they were in possession as tenants at will but were unsuccessful, the court finding that in the circumstances in which possession was given the parties had not entered legal relations. Commercial Agreement Presumption

Where parties negotiate and agree in a business setting, it is assumed that the parties intended the agreement to have legal consequences. Therefore, the party alleging that an agreement relating to business matter is of no legal effect has the heavy onus of demonstrating that to be the case. It can sometimes be difficult determining whether a transaction has taken place in a business setting (Esso Petroleum Co Ltd v Customs & Excise). In Esso Petroleum v Customs & Excise Esso, for promotion purposes distributed millions of coins, of no intrinsic value, to petrol stations that sold Esso petrol. The advertisement to the public indicated that these coins were a gift and for every four gallons of petrol purchased a coin would be given. The matter before the court was whether the coins were being sold (and therefore liable to be assessed for purchase tax). On of the issues was whether the parties had the necessary intention to form a contract. In a 3:2 majority, the court held that the parties possessed the requiste legal intent in relation to the provision of the coins upon a customer buying the ptrole. First, the promotion took place in a business setting, it was intended that sales would be promoted as a result of the coins. Second, this scheme had a potentially large commercial benefit to Esso. Third, this view was supported by authority (Rose and Frank v JR Crompton). The contrary view was that the offer of a gift of a free coin could not properly be regarded as a business matter that attracted legal intention. Rebutting the Presumption The intention not to create legal relations may be evident in a number of different ways. For example, the agreement may contain an express clause that no legal consequences flow from the document, or the overall tenor of the particular document may indicate that the parties had no intention to enter into legal relations.

Government Activities Commercial Agreements If a government contract arises out of the commercial need for the operation of government, for example the order of stationary or contracts to purchase vehicles, the usual contractual principles apply to determine whether a contract has been formed. Increased formality may be required to demonstrate the necessary legal intent when one of the contracting parties is the government (Coogee Esplanade Surf Motel Pty Ltd v Commonwealth of Australia). Policy Initiatives Where the government activity relates to a policy initiative a court may be less likely to find that the parties intended to enter contractual relations (Administration of PNG v Leahy). In PNG v Leahy the department of Agriculture, at the request Leahy, provided assistance to help Leahy eliminate an infestation of cattle tick on his property, an activity which was consistent with government policy. After the exercise, the Department was sued by Leahy who claimed damages for breach of contract on the basis that the departmental officers did not perform their activities skillfully. The court held that the agreement between the parties was not contractual in nature. The conduct of the parties constituted an administrative arrangement by which the Administration in pursuance of its agricultural policy gave assistance to an owner to

prevent that stock contracting a disease which was prevalent in the territory. The work done was analogous to a social service which generally does not have as its basis a legal relationship of a contractual nature. Similarly in Australian Woollen Mills v The Commonwealth a company was unsuccessful in its action against the commonwealth for breaching the governments subsidy arrangement which was merely an announcement of policy. Voluntary associations Rules or constitutions of voluntarily association do not constitute a binding legal contract between parties unless there was some clear positive indication that the members contemplated the creation of legal relations inter se, the rules adopted for their governance would not be treated as amounting to an enforceable contract (Cameron v Hogan). The parties could possess requisite legal intent if the member has a proprietary interest in the club. Circumstances indicating absence of intention Honour Clauses The presumption that arises in a commercial context is that the parties intended to create legal relations by entering the agreement. It is however, open for the parties to form a contrary. The presence of an honour clause in contracting parties agreements will indicate by express words that they did not intend the agreement to have legal consequences (Rose and Frank Co v JR Crompton and Bros Ltd). Promotional puff and free gifts Where language such as free gift is used, or an apparently extravagant claim is set out in an advertisement, there may be a tendency to think that a person who acts in response to the advertisement may not intend legal consequences to follow. To determine whether the requisite intention exists, the court will look not only at the words used, but at the entire context in which the advertising takes place. For example, if such language is used in a business setting, or to promote a commercial end such as a gift of free coins with the purchase of petrol, a court may be persuaded that the necessary intention existed (Esso Petroleum Co Ltd v Customs & Excise Commissionersi). Similarly, if the language used conveys intention, such as the deposit of $1000 in a bank for the purpose of payment would have legal consequences (Carlill v Carbolic Smoke Ball Co). Ex gratia payments and without prejudice offers Parties who offer to make an ex gratia payment or who write a without prejudice letter which is accepted, are still seen to posses the intention to create legal relations. Both of these situations were referred to by Megaw J in Edwards v Skyways. The case involved a redundancy package for crew members negotiated between an airline company and the British Air Line Pilots Association. Agreement was reached to pay redundant air crew members an ex tratia amount approximating to the companys contribution for each member of the pension and superannuation fund. The company later refused to pay this amount and was sued by one of the pilots made redundant. The court held that the words ex gratia do not carry a necessary, or even a probably, implication that the agreement is to be without legal effect . . . a party is certainly not seeking to include the legal enforceability of the settlement itself by describing the contemplated payment as ex gratia.

Letter of Comfort Where an advance is made, for example to a subsidiary company, the lender may request the holding company to guarantee performance of the borrowers obligation. If the holding company is not prepared to give a guarantee, the lender my instead request that a letter of comfort be provided which gives an assurance that the subsidiary company will be able to meets its obligations when they fall due. Central to the determination of whether a letter of comfort gives rise to legal intent is whether the parties intended to create legal obligations by the giving and receiving of the letter. To determine this, the courts look at the construction of the document and the circumstances surrounding its sending. In Banque Brussels Lambert SA v National Industries Ltd the following points were considered in assigning legal intent to the letter of comfort: On a construction of the letter, the terms were sufficiently promissory in nature The letter was part of a commercial transaction in which there is a presumption that legal relations were intended Intention is deduced from the document as a whole seen against the background of the practices of the particular trade or industry Letter of intent and understandings Parties sometimes conduct their affairs on the basis of an understanding between them which may arise orally or put in writing. Question about its contractual standing may arise where one party no longer wishes to be bound. A related issue arises in the area of letters or documents of intent. Generally, a letter of intent or understanding will represent something short of an intention to enter a concluded agreement. In Coogee Esplande Surf Motel v Commonwealth following the negotiations for the sale of a motel but before entry into a formal contract, the Head of the relevant Department sent a letter of intent to the seller. The letter advised that approval had been given for the purchase and that the Head of the department was requested to complete the transaction in the near future. The letter of intention indicated only the intention of one party there the commonwealth to enter into a contract to buy. The reaching of an understanding between the parties has been likened to an expression of present intention, resulting in something less than a binding contract.