#14987 - Consideration And Estoppel Intention To Create Legal Relations - Contract Law

A contract will only be formed if both parties intend their agreement to create legal relations between them (i.e. intend the agreement to grant legal rights to and impose legal obligations upon each of them), their intent being judged ‘objectively’ (i.e. without inquiring into their actual beliefs).

Carlill v. Carbolic Smoke Ball [1893] crystallised the doctrine. CA held that the Carbolic Smoke Ball Company’s advertisement made plain that prospective customers were intended to believe that the company was making a binding offer to pay 100 pounds if the product did not work, particularly since the company declared that 1000 pounds had been ‘deposited in the Alliance Bank’ as a token of its serious intent.

This doctrine stems from the principle of freedom of contract. The ‘intent’ doctrine allows the parties to contract out of the legal regime through ‘honourable pledge’ clauses and ‘subject to contract’ clauses.

The ‘intent to create legal relations’ doctrine also allows the court to take into account various practical/policy factors. It can be used to deny legal effect to technical bargains (i.e. arrangements would be enforceable if consideration alone determined the question of enforceability)

• There is the objective triviality of any social or domestic promises; it would also be inappropriate for domestic/social promises to be subject to the heavy-handed and intrusive process of the system of contract law.

• There is also the fear of excessive litigation if every technical ‘bargain’ were capable of being sued upon.

As it may be difficult to tell from parties’ conduct whether they did have an intention to create legal relations, the courts have developed a number of presumptions as to the parties’ intent:

If the agreement is concluded in a domestic/social context, it is presumed that the parties did not intend to create legal relations unless there is clear evidence to the contrary (Balfour v Balfour [1919])

In Balfour v Balfour (decision approved by Lady Hale in Granatino v Radmacher [2011]), where the wife sued her husband over his promise to pay her money every month during their enforced but ostensibly amicable separation, CA held that there was no contract. Thus Balfour negatives promises between spouses even where consideration is present, only if the promise is made while the marriage is harmonious. Majority in Granatino v Radmacher [2011] held Balfour principle (ie harmonious or not) would apply in ante or post nuptial arrangements and not draw a distinction between them.

• Cf Merritt v. Merritt [1970], the promise was made while the marriage had broken down. The husband left his wife for another woman, and his wife insisted that he write down his promise that the wife would become solely entitled to the matrimonial home if she paid off the remaining mortgage instalments. CA issued a declaration that the property should be transferred from their joint names into the wife’s sole name

• Could also be due to performance of the contract by one party ie the wife paying off mortgage in this case

• Cf Jones v Padavatton (1969) (Mother gave daughter licence, daughter took too long to finish studies, fell out with mother, mother kicked her out), only Danckwerts LJ supports familial presumption in Balfour case. Other judges (Fenton-Atkinson and Salmon LJJ) examined the particular facts (eg contractual licence ended followed by the effluxion of a reasonable period of time which the daughter was expected to complete her legal studies) rather than resorting to mechanical presumptions

• Supports view that Balfour decision confined only to promises during happy matrimonial relations and mostly social and informal undertaking (unlike Jones v Padavatton (1969) where there was no licence)

• Cf Parker v Clark (1960) where a promise between friends was held to be enforceable. Agreement to live in estate and provide “support services”, in return will get one-third joint estate. Friends later fell out. Held the promise was enforceable

• Devlin J emphasis placed that the arrangement occurred over a significant period that resulted in it being enforceable

These factors seem to guide the courts in determining whether the presumption will be rebutted:

1. Where one party has performed his side of the agreement and is seeking to hold the other party to their side of the deal, the court will be more likely to find that the presumption is rebutted, because it seems unfair that one party should do something for the other without getting what he was promised in return (Meritt v Merritt [1970], where wife paid off mortgage)

2. Where both sides have performed the alleged contract, it will be unrealistic to suggest that there was no intention to be legally bound

3. The more commercial the context, the more likely it is that the presumption will be rebutted.

4. The closer the parties are to dealing at arm’s length, the more likely the presumption is to be rebutted, so if the relationship was close to breakdown at the time of the agreement, this will point towards rebuttal eg Meritt v Merritt [1970]

In any case an agreement by deed will seal matters in favour of enforcement (in the absence of misrep, duress or undue influence).

If an express agreement is concluded 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.

If it is alleged that an implied agreement has been reached in the commercial context, it is for the party alleging the existence of the contract to show that there was an intention to create legal relations (i.e. the presumption that there is an intention to create legal relations in the commercial context only applies if there is an express agreement (Baird Textile v M&S [2001] where held M&S no intention to create legal relations as no long term agreement. Mance LJ: this case shows that the “commercial” presumption of enforceability cannot apply unless the court can first identify an “explicit” or “apparent” promise)

The presumption will be rebutted if the agreement expressly provides that there is no intent to create legal relations. Examples include:

(a) `honourable pledge’ clause clearly stating that the agreement was not a legal agreement.

(b) `subject to contract’

The words "subject to contract" have a prima facie meaning in making the formation of any contract contingent upon the execution of a formal document. Parties should be careful to label their pre-contractual negotiations as subject to contract if they do not want find themselves inadvertently bound to a contract, if the other party manages to convince the court that there has been offer and acceptance + intention to create legal relations + consideration.

Even if the phrase ‘subject to contract’ is not explicitly used, CA in Grant v Bragg [2009] acknowledged that a clear requirement that an oral/emailed consensus should be finalised in writing is sufficient to imply that the parties’ dealings are ‘subject to contract’. Lord Neuberger interpreted the statement ‘I understand that Russell would definitely require your signature to the [draft contract]’ as making it clear that there was to be no contract until there had been a formal signing of the draft.

In exceptional cases such a condition will not be given this effect, such as where in context the parties cannot have intended the words to have the usual meaning. In Alpenstowv Regalian[1985], the court held that one would expect to find the words “subject to contract” at the preliminary stage of a negotiation, not some four to five months into negotiations.Here, the court interpreted the ‘subject to contract’ formula to mean that that defendants’ acceptance should be conditional on the coming into existence of some OTHER contract.

SC in RTS v Molkerei [2010] (D insisted that because “SUBJECT TO CONTRACT” had still been included, there was no contract, as CEO had yet to formally sign the contract though work for installation of the machinery had already begun) held that the parties conduct can indicate a joint intention to disapply the ‘subject to contract’ bar. However, the court will need to find clear evidence that all points of dispute have been resolved during the negotiations AND that the parties have substantially performed under the intended transaction.

Letters of Comfort: no intention to create legal relations: Kleinwort Benson v Malaysian Mining [1989] where letter written “it is our policy to ensure that of business of [X, the subsidiary company] is at all times in a position to meet its liability to you under the [loan facility] arrangement”. Comforted by this, C lent money to X. X went insolvent and C later sued. Held letter was not an intention to create legal relations

• The presumption that commercial arrangement are legally enforceable, as recognised in Edwards v Skyways Ltd (1964), only applies if one can identify a promise

• But letter was couched in the present tense (though this phrase was not explicitly said by the court) and thus did not constitute a promise that it would continue to ensure that this was so

• This was also read in light that the parent company refused to give C a standard guarantee, seen as further evidence that the letter was not intended to create a legal obligation

Estoppel can also override the ‘subject to...