Intention to create legal relations is one of the essential prerequisites to forming a valid, enforceable contract.
An agreement is a much wider term than a contract. It is widely said that every contract is an agreement but every agreement is not a contract. An agreement becomes a contract when the following essential conditions are satisfied:
- An offer is made by one party and its acceptance is given by the other.
- There is an intention to create legal obligations.
- There is some consideration (price) for it.
- The parties are competent to contract.
- Their consent is free and is not caused by any kind of coercion, undue influence, fraud, misrepresentation, or mistake.
- Their object is lawful, i.e., it is not forbidden by law.
- The agreement must not be expressly declared to be void.
- The terms of the agreement should not be vague.
- The agreement must be capable of performance (there must not be an impossibility of performance).
- Other legal formalities
Intention to create legal relations
As stated above, one of the essential elements of a contract between two or more parties is that there must be an intention on the part of the parties to establish a legal relationship between them. If neither party intends to establish a legal relationship with the other, the agreement will never go to the stage of a contract. Therefore, it is essential that the parties entering into a contract have the intention to establish a legal connection with one another for the agreement to be considered a contract. The contract should be made with the understanding that if one party fails to fulfill his/her responsibilities, the other party may file a lawsuit to hold the defaulting party accountable.
Importance of forming a legally binding relationship
It is important that the parties to a contract must accept the terms of the contract with the intention to form a legally binding relationship. This is so because:
- In the absence of intention, the parties cannot sue one other.
- If there is no intention to establish a legal relationship, the contract will be unenforceable and will not have a binding effect.
- If the intention to create legal relations is not present, then the contract is merely a promise.
Presumptions regarding the Intention to create legal relations
The intention of the parties is to be ascertained from the terms and conditions of the agreement and the surrounding circumstances. In social or family agreements, viz., agreements between husband and wife, an agreement to entertain a person with dinner, or to go to a movie, etc., it is usually presumed that the parties do not intend legal consequences. On the other hand, in business agreements, it is usual that the parties intend legal consequences to follow.
However, these presumptions can be rebutted too. That is, the parties could intend legal consequences in family agreements and likewise do not intend so in business agreements (i.e., rely on each other’s good faith and honour).
The Courts assess the facts and circumstances of each case to determine whether or not there is an intention to form legally binding contracts.
Test of contractual intention
Further, the test of contractual intention is objective, and not subjective. It means that what matters is not what the parties had in mind, but rather what a reasonable person would think their intention to be in the circumstances of the arrangement. Merely because a promisor asserts that there was no intention to create a legal relationship may not exempt him from liability if the Courts decide that the opposite is true. (Carlill v Carbolic Smoke Ball Co.)
Relevant case laws
Wakeling v Ripley (1951)
The defendant (Ripley) wrote a letter to his sister (Wakeling) in England and requested that she and her husband relocate to Sydney, Australia in order to care for him. Ripley promised that they could live rent-free and that he would leave his house to them in his will. The plaintiffs made a number of sacrifices to move to Australia. Later, misunderstandings arose between the two parties and the defendant sold his house and altered his will to disinherit the plaintiffs.
According to the Court, sufficient evidence was found to believe that the parties had made a definite and binding contract. The correspondence between the parties regarding the arrangements for relocation to Sydney was such that it demonstrated their intention to be legally bound. Read the full case here.
Simpkins v Pays (1955)
Simpkins v Pays (1955) is a famous contract law case wherein a paying lodger sued the defendant for a share in the prize of a newspaper competition which they had submitted entries for. Here, the presence of the lodger in the case, among other things, had the impact of negating the presumption that this was purely a domestic affair with no legal consequences at all.
Jones v Padavatton (1969)
In Jones v Padavatton (1969), the Court determined that a contract entered into between a mother and her daughter was null and void since there was no evidence that the parties intended to be legally bound. In other words, the presumption that the parties did not intend to be bound by the agreement was not rebutted.
Rose and Frank v Crompton & Bros. (1925)
You may also want to have a look at another case law named “Rose and Frank v Crompton & Bros.”. Here, the intention of the parties to create a legal relationship in the context of a business agreement was the subject matter.
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