Question 2

One of the elements that need to present for an agreement to be legally enforceable is the legal
intention of the parties to be bound by a legally binding contract. This element is not being
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. In the absence any provision
in the Statute, the principles in the English common law will apply.
The law divides an agreement into two categories in two. They are domestic or family
agreements and commercial agreements. The distinction between domestic agreements and
commercial agreements can be fine. In the case of Coward v Motor Insurance Bureau (1963),
.........................
Where an agreement is made in a commercial context, the law raises the presumption that the
parties intend to create a legal relation by their agreement. To determine whether requisite
intention exists, the court will look into not only at the words used, but at the entire context in
which the agreement is made.
The presumption is very strong and therefore the burden to rebut the presumption is heavy. This
is seen in the case of Esso Petroleum v Commissioners of Customs & Exercise (1976), where
Esso ran a promotion whereby any person buying 4 gallons of petrol would get a free coin from
their World cup Coins Collection. The issue in the case was whether those coins were produced
in quantity for general resale, if so they would be subject to tax and Esso would be liable to pay
tax. Esso argued that the coins were simply a gift and promotion was not intended to have legal
effect. However, the court held that there was an intention to create legal relations since the coins
were offered in a commercial context which raised the presumption that they did intended to be
bound.
Similarly, in the case of Edwards v Skyways (1964), the court found that there was a
presumption that the agreement had been made in the business context where the claimant was
an airline pilot working for the defendant. He was to be made redundant. The defendants said
that if he withdrew his contributions to the company pension fund, they would pay him the
equivalent of company contributions in an ex gratia payment. The claimant agreed to this and
withdrew his contributions. The company then ran into further financial difficulty and went back
on their promise relating to the ex gratia payment.
Although the presumption is a strong one, there are circumstances where this presumption is
rebutted in commercial agreements. In such circumstances; the agreement is unenforceable for
lack of intention to create legal relation. The intention not to create legal relations may be
evident in a number of different ways. For example, the agreement may expressly state that no
legal consequences would flow from the document.
The presence of an honourable pledge clause in the commercial agreement indicates by express
words that they do not intend that the agreement to have any legal consequences. In the case of
Rose & Frank v Crompton Bros (1925), the honourable pledge clause rebutted the presumption
which normally exists in commercial agreements that the parties intend to be legally bound by
their agreements. The agreement therefore had no legal effect and was not enforceable by the
courts.
Moreover, there are other various clauses used in commercial agreements that makes no
intention to be bound the agreement hence unenforceable. In this regard, most common words
used include, agreement to negotiate, subject to contract or subject to formal contract. In the
case of Winn v Bull (1877), 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 binding contract.
This means that, legal intention to create any legal relation comes only after entering the
subsequent contract. However, the Privy Council in the case of Daiman Development Sdn Bhd v
Mathew Lui Chin Teck & Anor (1981), it rejected a subject to contract where it involved a
booking pro forma signed by the purchaser to purchase a house to be built by a housing
developer.
Furthermore, the courts treat comfort letters differently. In the case of Kleinwort Benson Ltd v
Malaysia Mining Corp Bhd (1989), the comfort letter lacked contractual force in this case.
However, it is a matter of construing the document in each case. In the case of Banque Brussels
Lambert SA v National Industries Ltd, the court considered certain points in assigning legal
intent to the letter of comfort. They are whether the terms of the letter were sufficiently
promissory in nature, the letter was part of a commercial transaction in which there is
presumption that legal relation is intended, an intention can be deduced from the document as a
whole based on the background of a particular industry.
Therefore, to find an intention of parties to be legally bound by their agreement, although there
is strong presumption for the commercial agreements to be legally binding on the parties, this
presumption can be rebuttable. The presumption can be rebutted by inserting a clause to the
contrary, by stating that they did not intend to be bound. Moreover, courts sometimes treat
agreements made in certain circumstances to be legally binding between the parties based on the
circumstances and terms of the agreement between the parties although one party may in infact
did not intend it to be legally enforceable against them.


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