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Intention to Create Legal Relations: A Necessary Fiction?

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About The Author

Suleha Baig (Regular Writer)

Suleha Baig is an incoming third-year law student at Durham University, aspiring for a career at the commercial Bar. She is passionate about human rights causes and enjoys writing and editing articles for online Blogs across a variety of different subjects. In her spare time she likes to read both classic and contemporary literature as well as do Pilates. 

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Intention to Create Legal Relations

The intention to create legal relations has been established as an essential element in the formation of a contract alongside other elements including agreement, certainty, and consideration. It is seen as necessary as it demonstrates the readiness of the parties to enter into a legally binding agreement. It is well-established under the current law that the intention to create legal relations is to be determined objectively. Recently, Lord Bingham in Edmonds v Lawson [2000] EWCA Civ 69 purported that:

‘Whether the parties intended to enter into legally binding relations is an issue to be determined objectively and not by inquiring into their respective state of mind.’

The reasoning behind this has long been accepted as contracts should only be enforced where their effect is intended to be serious. Lord Stowell acknowledged that ‘Contracts must not be the sports of an idle hour, mere matters of pleasantry and badinage, never intended by the parties to have any serious effect whatever’ (Dalrymple v Dalrymple (1811) 161 ER 665).

This has led to a conventional divide in the courts’ analysis of intention to create legal relations, developing entrenched principles to assist when deciding whether such intention exists. The divide involves examining whether the agreement is one made in a social, family or domestic context or a commercial context. There is a presumption that in a domestic relationship there is no intention to create legal relations, though this can be rebutted where objective circumstances evince an intention. The court, in this context, presumes that there is no intention to create legal relations which are binding upon the party. This contrasts their approach to commercial relationships (discussed below) where a different rebuttable presumption is made which assumes an intention to create legal relations between the parties in that relationship.

Domestic Relationships

The above principle for domestic relationships usually refers to spouses living happily together, for which the leading authority is Balfour v Balfour (1919) 2 KB 571. In this case, an agreement for monthly payments for the wife’s maintenance made when the husband and wife were happily married was held not to be legally enforceable. This was later distinguished in Merritt v Merritt [1970] AC 806, where the presumption was successfully rebutted and an intention to create legal relations was found to exist between an estranged husband and wife. The court will analyze all the factors objectively before concluding whether there is an intention to create legal relations in such cases.

The same principle applies to family relationships as in Jones v Padavatton [1968] EWCA Civ 4 which involved an agreement between a mother and daughter where the mother - Mrs Violet Jones - would pay for maintenance of her daughter - Mrs Ruby Padvatton - if she gave up her job in America and studied for the English Bar. There is a presumption of no intention to create legal relations between a parent and child, but this is rebuttable, depending on whether the language used by the parties evinces such an intention. In this case, Mrs. Jones bought a London house where Mrs Padvatton stayed whilst studying at Lincoln’s Inn. There was a quarrel and Mrs Jones brought an action for possession but Mrs Padvatton argued that their agreement formed a legally binding contract and thus she could remain in the house until she had finished her bar exams.

The Court emphasised the presumption that family agreements are usually based on mutual trust and affection with no intention to create legal relations. Here, the terms of the agreement were very vague, it was an informal agreement and Mrs Padvatton’s occupancy was dependent upon her completing her bar exams, but six years had elapsed since and she had still not managed to pass them. On these facts, it was held there was no evidence of an intention to create legal relations, therefore the agreement was not legally enforceable and Mrs Jones was awarded possession of the house. This case demonstrated the court’s close examination of the full scope of the interactions between the parties to determine whether the presumption can be rebutted.

The approach is identical towards social relationships between friends where there is also a presumption of no intention to create legal relations, as illustrated in Coward v Motor Insurers’ Bureau (1962) 1 All ER 531. An agreement between friends for a lift to work, riding pillion on a motorcycle was held not to be legally binding as there was no intent that it would create legal obligations for each party. This presumption was successfully rebutted in Albert v Motor Insurers’ Bureau  (1971) 2 All ER 1345 where a similar agreement which involved an individual driving his colleagues to work over eight years was held to be contractual and so did give rise to liability for damages. The court determined that the passenger’s expectation to pay for the service as well as the nature of the activity which went beyond mere social kindness and amounted to a business activity elicited an intention to create legal relations despite the social relationships involved.

Commercial Relationships

On the other side of the conventional divide, there are commercial relationships where an intention to create legal relations is generally presumed but again the circumstances can refute this. The leading authority for this principle is Edwards v Skyways (1964) 1 All ER 494 which concerned an agreement between the defendant company and an airline pilot who was to be made redundant. The informal agreement stipulated that if the pilot withdrew his funds from the company’s pension fund, he would receive an ex gratia payment equivalent to his contribution. The pilot followed the terms, but the company subsequently faced financial difficulty and did not make the payment. The Court of Appeal upheld the agreement as legally binding because it had been made in a commercial context and the company’s use of the term ‘ex gratia’ raised a strong presumption that they intended to create legal relations.

It is important to note that the contemplation of a contract does not rebut the presumption as there is an expectation that businessmen and women will make the ‘normal inference…that the parties are not bound unless and until they sign.’ (Sir Andrew Morritt C, Whitehead Mann Ltd v Cheverny Consulting Ltd (2006) EWCA Civ 1303). The presumption that there is an intention to create legal relations in this context can be rebutted by any evidence including advertising (Carlill v Carbolic Smoke Ball Co Ball (1893) 1 QB 256), express declarations (Rose and Frank v Crompton & Brothers (1923) 2 KB 261) and implied agreements (Baird Textiles Holdings Ltd v Marks & Spencer plc (2001) EWCA Civ 274). Ultimately, the court will always carry out a holistic analysis of the facts and circumstances surrounding the agreement before concluding regarding where legal intent exists. This expansive set of principles highlights the necessity of this particular element in contract formation.

The Objective Test vs A Subjective Test

The courts currently employ an objective test when determining whether there is an intention to create legal relations. This approach was recently clarified as ‘a consideration of what was communicated between them by words or conduct, and whether that leads objectively to a conclusion that they intended to create legal relations and had agreed upon all the terms which they regarded or the law requires as essential for the formation of legally binding relations’ (Lord Clarke, RTS Flexible Systems Ltd v Molkerei Alois Müller GmbH & Co KG [2010] UKSC 14, para 45). The advantages of an objective test are that it allows for legal certainty as well as relying upon concrete evidence.

A subjective approach would involve examining the respective expectations of the parties, and examining their states of mind. Although this approach is widely rejected, it does allow for the consideration that when communicating, there may be misunderstandings or deliberate concealment of facts which when analysed objectively may amount to an inaccurate representation of actual legal intent. At its most serious miscommunication can lead to invalidity of a contract. In this respect, a subjective approach is advantageous. The disparity that is possible between an individual’s objective and subjective intent highlights the issues with taking a purely objective approach.

However, there are problems with looking at subjective intent; namely that it will inevitably broaden the number of contracts that are enforceable. This could lead to increased ingenuity in legally binding agreements due to the more realistic interactions between parties being accounted for. However, this may also mean that the courts take in irrelevant information wasting valuable judicial time, increasing backlog, and exhausting parties’ funds (UpCounsel, ‘What is the Subjective Approach to Contract Law?’). Consequently, the objective approach is preferred as it acknowledges only the prima facie legal intentions of the parties. This is arguably more suited to how the law is expected to work effectively and thus justifies the purely objective approach taken by it.

Academic Debate

This area of law is heavily debated with differing views surrounding the concept of intention to create legal relations and its actual importance in contract formation. The concept of an intention to create legal relations is problematic because it is essentially a legal fiction. Hedley argues that in exercising the presumptions under the existing law, there is an ‘insistence that the parties must have had some intention or other which forces the courts to invent an intention’ and this has led to the objective approach towards determining legal intent. He argues that cases such as Balfourwhere no such intention was found were decided based on ‘what the law should regard intention as being’ rather than the actual intentions of the parties and so this makes this a question of policy rather than fact (Stephen Hedley, ‘Keeping Contract in its Place – Balfour v Balfour and the Enforceability of Informal Agreements’ (1985) 5 OJLS 391, 396). As a result, this threatens to be an area in which policy overtakes legal practicality in the decisions of courts.

However, this principle can be critical in deciding whether an agreement is legally binding as illustrated in the recent case of Blue v Ashley (2017) EWHC 1928.  The case concerned an agreement between Mr. Michael Ashley, the owner of the Sports Direct Group, and Mr. Jeffrey Blue, a business consultant which stipulated that if Mr. Blue could secure the share price of Mr. Ashley’s company to be above £8 per share, Mr. Ashley would pay him a £15 million bonus for his services. The agreement was made in a pub alongside other representatives of Sports Direct and the company’s share value did rise to above £8 but Mr. Ashley alleged that the agreement was mere ‘banter’ and refused to pay Mr. Blue the bonus. Subsequently, Mr. Blue brought an action. In the High Court, Mr. Justice Leggatt focussed on whether there was an intention to create legal relations. The case turned on the factual setting in which the alleged contract was formed and ultimately the claim was dismissed on the grounds that the social setting did not suggest, on the objective test, that a formal contract had been made therefore Mr. Blue could not rely on the agreement to elicit legal consequences. This case illustrates the importance of intention to create legal relations in the formation of a contract as a crucial element in the court’s analysis in practice which ultimately cannot be undermined.

Conclusion

The legal principles that have developed in this area of law leading to the traditional ‘domestic and commercial relations’ divide is entrenched and actively employed in practice as the case law demonstrates. This shows how the intention to create legal relations has led to the creation of a comprehensive set of legal rules which are invaluable in contract law today. It could be argued that a subjective approach towards intention to create legal relations would lead to an increase in genuine contracts, however, the objective test allows the courts to filter out unnecessary details helping them to evaluate the facts more effectively and increasing legal certainty therefore it is preferable. Some academics argue that the intention to create legal relations is a legal fiction created by the courts as it is simply a matter of policy enabling them to regulate contract formation and thus it is not strictly a legal requirement for contract formation. However, case law such as Blue v Ashley (2017) exemplifies how the intention to create legal relations can be the critical consideration on which the court decides whether a contractual agreement exists, and the case turns. This emphasises how the intention to create legal relations remains a necessary element in contract formation under the current law.

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Tagged: Commercial Law, Company Law, Contract Law

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