Contracts 1 Main Copy

8/3/2019 Contracts 1 Main Copy

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INDIAN CONTRACT ACT

INTENTION TO CREATE LEGAL RELATIONS

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Contents

Table of Cases.............3 Introduction..4 Family and Social Agreements..6 Cases laws related to social arrangements..7

o Balfour vs Balfour .7o Jones v. Padavatton .8

Commercial Agreements ..9o Esso Petroleum Ltd v Commissioners of Customs & Excise.10o Rose and Frank Co. v J.R. Crompton & Bros Ltd .12

Conclusion 13 Bibiography. 15

o Bookso Websites


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Table of Cases

Balfour vs Balfour 1919] 2 KB 571

Jones v. Padavatton (1969) 2 ALL ER 616 - Electronic Version. Esso Petroleum Ltd v Commissioners of Customs and

Excise [1976] 1 WLR 1.

Rose and Frank Co. v J.R. Crompton & Bros Ltd [1923] 2KB 261; [1925] AC 445

Albert v Motor Insurers Bureau [1971] 2 All ER 1345


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Intention To create Legal Relations

Introduction

According to Section 2 (h) of the Indian Contract Act: An

agreement enforceable by law is a contract. A contract, therefore, is

an agreement the object of which is to create a legal obligation, i.e., a

duty enforceable by law.

Apart from offer, acceptance, and consideration, the final

ingredient for a contract to be entered into which is enforceable at law

is that the parties must have an intention to create legal relations.

Without it there is no binding contract. Under Indian law, an

agreement supported by consideration is not enough to create a legally

binding contract; the parties must also have an intention to create legal

relations. Often, the intention to create legal relations is expressly

stated by the contracting parties. In other situations, the law will readily

imply the intention, because of the nature of the commercial dealings

between the parties. Generally it is assumed that in social and domestic

type of agreements this type of intention is absent, but parties do

intend to create legal relations in commercial agreements. It is assumed

that this doctrine was not clearly established until 1919.

Alternatively, it can be said that the Doctrine is based upon

public policy; that is to say that, as a matter of policy, the law of

contract ought not to intervene in domestic situations because the

courts would then be swamped by trifling domestic disputes. We can

have an example of it; I promise to pay my wife 50 if she will type the


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manuscript of this chapter of the book. My wife agrees. Does this

agreement create a legally enforceable contract? On the face of it there

appears to be no reason why it should not. We have reached

agreement and the agreement is supported by consideration. But it islikely that an English Court would conclude that we had not entered

into a legally binding contract because we lacked an an intention to

create legal relations, which has been held to be an essential element

in any contract.

It could be said that the doctrine is based on the intention of

the parties, objectively interpreted; that is to say, my wife and I did not

intend that our agreement would have legal consequences. But my wife

certainly expected to receive the money if she typed the manuscript,

although it is unlikely that neither of us intended that she would have

to go to court in order to get her money.

It was observed by the Scottish Law Commission, 1977,

it is, in general,l right that courts should not enforce

entirely social engagements, such as arrangements to play squash or to

come to dinner, even though the parties themselves may intend to be

legally bound thereby.

In Singapore Contract Law, Section 4 describes the requirement of

Intention to Create Legal Relation1

1Law of Contract Singapore 4(1)


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In the absence of contractual intention, an agreement, even

if supported by consideration, cannot be enforced. Whether the parties

to an agreement intended to create legally binding relations between

them is a question determined by an objective assessment of therelevant facts

Family and Social Agreements

In domestic arrangements it is generally assumed that the

parties do not intend to relate legal relations. In many domestic

agreements, for example those made between husbands and wives and

parents and children, there is no intention to create legal relations and

no intention that the agreement should be subject to litigation. Familial

relationships do not preclude the formation of a binding contract,

though to create contractual relations, there must be a clear intention

on either party to be bound.

While there are conflicting legal authorities on whetherspecific facts involving familial relations result in binding and

enforceable agreements, it seems settled that in domestic agreements

there is a rebuttable presumption that the parties do not have

intention to create legal relations.

Much importance is given to the policy that private lives of the

citizens should be protected from too much interference from thecourts. Chen-Wishart calls this Freedom from contract.

2

2(Adams & Brownsword 2004:93-94)


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Cases laws related to social arrangements:

Balfour vs Balfour3:

Facts: Mr. Balfour (D) and Mrs. Balfour (P) lived in Ceylon and visitedEngland on a vacation. The plaintiff remained in England for medical

treatment and the defendant agreed to send her a specific amount of

money each month until she could return. The defendant later asked to

remain separated and Mrs. Balfour sued for restitution of her conjugal

rights and for alimony equal to the amount her husband had agreed to

send.

Mrs. Balfour obtained a decree nisi and five months later was

granted an order for alimony. The lower court entered judgment in

favor of the plaintiff and held that the defendants promise to send

money was enforceable. The court held that Mrs. Balfours consent was

sufficient consideration to render the contract enforceable and the

defendant appealed.

Issues:

1.Must both parties intend that an agreement be legally binding inorder to be an enforceable contract?

2.Under what circumstances will a court decline to enforce anagreement between spouses?

Holding and Rule:

1.Yes. Both parties must intend that an agreement be legallybinding in order to be an enforceable contract.

3[1919] 2 KB 571


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2.The court will not enforce agreements between spouses thatinvolve daily life.

Agreements between husband and wife over matters that

affect their daily lives are not subject to contractual interpretation,

even when consideration is present. Spouses normally intend that the

terms of their agreements can be varied as situations develop. The

court held that it was presumed that the parties made the agreement

as husband and wife and did not intend that it could be sued upon. The

court held that as a matter of public policy it could not resolve disputes

between spouses.

Disposition:

Judgment for plaintiff Mrs. Balfour reversed.

Point Decided:

Contracts related to the social aspect of marriage will not be enforced

by the courts. Contracts between spouses related to business

relationships can be enforced, however. Courts are willing to support

negotiated divorce settlements and written statements of support.

Jones v. Padavatton:4

This case Jones v. Padavatton like BalfourVBalfour1919,

demonstrates that domestic arrangements, however complex, are

presumed not to create contracts, unless there is clear indication to the

contrary. Unlike the earlier case, however, the complexity and precision

of the arrangements in this one meant that the facts had at least to be

4(1969) 2 ALL ER 616 - Electronic Version.


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considered, rather than being dismissed as outside the realm of

contracts.

Facts:

A mother, Mrs Violet Lalgee Jones, agreed with her daughter,

Mrs Ruby Padavatton, that if she would give up her secretary job at the

Indian embassy in Washington DC and do the bar here, the mother

would pay maintenance (from Trinidad, East Indian descent). The

mother gave monthly payments and then bought a London house

(moving out of a one room flat in Acton to 181 Highbury Quadrant,

Highbury) which she lived in and rented out. Then they had a quarrellwhile Mrs Padavatton was still completing her bar exams at Lincoln's

Inn. The mother brought an action for possession of the house. The

daughter argued there was a binding contract that she could stay.

Judgment:

The Court held that there was no binding contract. Although there

would have been a contract if it was not the domestic parties related,there was insufficient evidence to rebut the presumption against

domestic arrangements.

Commercial Agreements:

Commercial agreements differ from domestic and social

agreements in that the presumption operates the other way. It is here

that there is a very strong presumption that there is an intention to

create legal relations. For anyone to come along after they have made

an ordinary commercial contract and argue that there was no intention


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to create legal relations would be wasting their time. For such an

argument to succeed there must be a very clear and explicit statement.

One way in which this can happen is if parties who are negotiating for a

contract want to make absolutely sure that their negotiations do notinadvertently become a contract. We looked at this issue earlier when

we examined. In the case of commercial transactions the courts

presume that the parties did intend to create legal relations and the

presumption is not an easy one to displace. The strength of the

presumption is such that the issue rarely arises in commercial litigation.

One case in which it did arise, and which produced a division of judicial

opinion, is the decision of the House of Lords in Esso Petroleum Ltd v.Commissioners of Customs and Excis.

5

Esso Petroleum Ltd v Commissioners of Customs and Excise

Facts:

In 1970 the taxpayers (Esso) devised a petrol sales promotionscheme. The scheme involved the distribution of millions of coins to

petrol stations which sold Esso petrol. Each of the coins bore the

likeness of one of the members of the English soccer team which went

to Mexico in 1970 to play in the World Cup competition. The object of

the scheme was that petrol station proprietors should encourage

motorists to buy Esso petrol by offering to give away a coin for every

four gallons of Esso petrol which the motorist bought. The coins were

of little intrinsic value but it was hoped that motorists would persist in

buying Esso petrol in order to collect the full set of 30 coins. The

5[1976] 1 WLR 1.


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scheme was extensively advertised by Esso in the press and on

television with phrases such as: Going free, at your Esso Action Station

now, and: We are giving you a coin with every four gallons of Esso

petrol you buy. Folders were also circulated by Esso to petrol stationswhich stated, inter alia: One coin should be given to every motorist

who buys four gallons of petroltwo coins for eight gallons and so on.

4,900 petrol stations joined the scheme. Large posters were delivered

by Esso to those stations, the most prominent lettering on the posters

stating: The World Cup coins, One coin given with every four gallons

of petrol. The Customs and Excise Commissioners claimed that the

coins were chargeable to purchase tax under s2(1) of the Purchase TaxAct 1963 on the ground that they had been produced in quantity for

general sale and therefore fell within Group 25 of Sch 1 to the 1963

Act.

Judgement:

Viscount Dilhorne - Esso are engaged in business, and are

supplying these coins in order to promote the sale of their petrol. But it

does not necessarily follow that there was any intention on their part

they should enter legally binding contracts with respect to the coins.

Nor is there any reason to impute to the motorist an intention to enter

into a legally binding contract for the supply of a coin.

If it were found that Esso, the dealer, and the customer

intended to create a contract, it would seem to preclude the possibility

of any dealer ever offering a free gift, however negligible the value. A

common intention to enter legal relations would be found more easily

if the item were something of value to the purchaser. But here the


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coins were of little intrinsic value. If there were any contract relating to

the coins, the consideration for it would be not the payment of money,

but the entry into a contract to buy petrol.

The presumption in favour of legal relations in commercial transctions

can be rebutted but the cases in which it has been rebutted are few. It

can be rebutted by the express stipulation of the parties. We can have

its example by the case of Rose and Frank Co. v J.R. Crompton & Bros

Ltd.6

Rose and Frank Co. v J.R. Crompton & Bros Ltd

Facts:

The defendant manufactured carbon paper in England. The

plaintiff bought the defendants paper and sold it in New York. After

dealing with each other for a number of years they entered into awritten agreement as to the plaintiff having exclusive rights to buy and

sell the defendants goods. The agreement said :

this agreement is not a formal or legal agreement. It will not be

subject to the jurisdiction of either the British or American courts. It is a

record of the intention of the parties to which they honourably pledge

themselves and is to be carried out with mutual loyalty and friendly co-

operation.

6[1923] 2 KB 261; [1925] AC 445


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Following a series of disputes the plaintiff claimed that the defendant

was in breach of the agreement and the trial judge held that it was

legally binding. The defendant appealed.

Judgement:

The Court held that there was no legal contract. The clause had

the effect of negating any other objective evidence of intention to

create legal relations. Justice Vaisey, writing for the Court, reasoned

that it was a gentlemens agreement, which is not an agreement

entered into between two persons, neither of whom is a gentleman,

with each expecting the other to be strictly bound, while he himself hasno intention of being bound at all.

Point decided:

A collective agreement shall be conclusively presumed not to

have been intended by the parties to be a legally enforceable contract

unless the agreement

(a) is in writing, and

(b) contains a provision which (however expressed) states that the

parties intend that the agreement shall be a legally enforceable

contract.

Conclusion:

The doctrine of intention to create legal relations has not

lacked its critics. Some, such as Professor Freeman, are critical of the

way in which it has been used to deny legal effect to agreements made


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in a family context. Others points out that the doctrine rests on a fiction

in that the parties to the alleged agreements frequently have no

discernible intention one way or the other. . But it is assumed that it is a

necessary part of contract. In the case ofAlbert v Motor InsurersBureau

7, it was stated by the Upjohn LJ-

The hazards ofeveryday life, such as temporary

indisposition, the incidence od holidays, the possibility of a change of

shift or different hours of overtime, or incompatibility arising, make it

most unlikely that either contemplated that the one was legally bound

to carry and the other to be carried to work.

It is stated inChitty on Contracts8thus:

An agreement, even though it is supported by

consideration, is not binding as a contract if was made without any

intention of creating legal relations. Of course, in the case of ordinary

commercial transactions, it is not normally necessary to prove that the

parties in fact intended to create legal relations.

In our Indian law the intention to create legal relations is not given

as an essential ingredient of contract law, but even the apex court of

India has expressed its reservation about the need of this separate

requirement ofintention to contract under the contract act. Going

by the criticism which is already there in the West, the court found that

it was a necessity of those systems where consideration was not a

requisite of enforceability. Thus it is still an open question whether the

requirement of intention to contract is applicable under the Indian

Contract Act in the way in which it has been developed in England.

7[1971] 2 All ER 1345

8(25th Edition, Volume I, para. 123)


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Bibliography

Books:

Avtar Singh, Law of Contract and Specific Relief (10th edition2006) Beatson J, Anson`s Law Of Contract (28th edition Oxford, Delhi) Ewan Mckendrick, Contract Law (6th edition Palgrave Macmilan,

Hampshire 2005)

Michael Furmston, Cheshire, Fifoot & Furmstons Law of Contract(15th Indian edition Oxford, Delhi 2007)

Jill Poole, Text Book on Contract Law (8th edition Oxford, London2006)

Mindy Chen-Wishart, Contract Law ( 5th edition Oxford, London2007)

Websites:

http://www.australiancontractlaw.com/law/formation-intention.html

http://netk.net.au/Contract/05Intention.asp http://netk.net.au/Contract/Balfour.asp http://www.google.co.in/search?hl=en&q=intention+to+create+le

gal+relationship+in+social+and+domestic&meta=&aq=f&oq=

www.usyd.edu.au/lec/subjects/Merritt%20v%20Merritt.

http://netk.net.au/Contract/Esso.asp http://netk.net.au/Contract/Edwards.asp

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