Contract Law - Intention to Create Legal Relations Revision Sheet and Key Cases

Introduction

Contract law is a foundational subject of legal studies, providing the framework for understanding how agreements are formed, enforced, and interpreted. There are five elements of a contract:

• Offer and acceptance

• Consideration

• Intention to create legal relations

• Certainty of terms

• Capacity

For any student studying contract law, mastering the key legal principles and cases is essential for academic success. This article serves as a no-nonsense guide to intention to create legal relations and provides a table of landmark cases that have shaped this area of English contract law. Familiarity with these key principles and cases will help equip students with the necessary tools to navigate the complexities of contract law and provide the foundations to succeed in their exams.

Revision Sheet

🔑 Core Principles

o      What is Intention to Create Legal Relations?

o      Domestic and Social Agreements

o      Commercial Agreements

o      Letters of Comfort

📌 What is Intention to Create Legal Relations?

An agreement will only be legally enforceable if the parties intended to create legal relations. The courts apply an objective test by considering what a reasonable person would have understood from the parties’ words and conduct.

💡Example: A agrees to sell B their laptop for £500. Both parties negotiate the price, agree the terms and intend the agreement to be legally binding. The requirement of intention to create legal relations is satisfied.

📌 Domestic and Social Agreements

The general rule is that agreements made between family members or friends are presumed not to create legal relations because they are usually based on mutual trust rather than legal obligation.

This presumption can be rebutted where the evidence shows that the parties intended the agreement to be legally binding.

💡Example: Parents promise to pay their son £100 if he tidies his bedroom every week. The agreement is unlikely to be legally enforceable because it is a domestic arrangement.

In Balfour v Balfour [1919], a husband promised to pay his wife a monthly allowance while they were living apart due to his work overseas. When the relationship later broke down, the wife sought to enforce the promise. It was held that the agreement was not legally enforceable because it was a domestic arrangement and there was no intention to create legal relations.

Exception

The presumption may be rebutted where:

o      The agreement is made after the relationship has broken down.

o      The agreement is recorded in writing.

o      The surrounding circumstances indicate an intention to create legal relations.

💡Example: A husband and wife separate and sign a written agreement concerning the division of their property. The agreement is more likely to be legally enforceable because it was made after the relationship had broken down.

In Merritt v Merritt [1970], a husband and wife had separated and entered into a written agreement that the husband would transfer ownership of the family home to the wife once she had paid off the mortgage. When the husband later refused to transfer the property, the wife brought a claim. It was held that the agreement was legally enforceable because the parties were separated and intended to create legal relations.

✅ Exam Tip

o      Is this a domestic or social agreement?

o      Does the presumption against legal relations apply?

o      Has the presumption been rebutted?

📌 Commercial Agreements

The general rule is that agreements made in a commercial or business context are presumed to create legal relations. However, this presumption may be rebutted if the parties clearly state that they do not intend their agreement to be legally binding.

In Edwards v Skyways Ltd [1964], an airline company promised to make an ex-gratia payment to an employee who agreed to leave his employment. The employer later refused to make the payment, arguing that there was no intention to create legal relations. It was held that the agreement was legally enforceable because agreements made in a commercial context are presumed to create legal relations.

In Esso Petroleum Co Ltd v Commissioners of Customs and Excise [1976], Esso offered commemorative World Cup coins to customers who purchased a specified quantity of petrol. It was held that the promotion was intended to create legal relations because it was made in a commercial context, where agreements are presumed to be legally binding.

Exception

The commercial presumption may be rebutted where:

o      The agreement contains an honour clause.

o      The parties clearly state that the agreement is binding in honour only.

o      The wording objectively shows that legal relations were not intended.

In Rose & Frank Co v JR Crompton & Bros Ltd [1925], two companies entered into a commercial agreement containing an honour clause stating that the agreement was not intended to create legal relations. It was held that the agreement was not legally enforceable because the parties had clearly stated that they did not intend to create legal relations.

✅ Exam Tip

o      Is this a commercial agreement?

o      Is there any wording excluding legal enforceability?

o      Has the commercial presumption been rebutted?

📌 Letters of Comfort

A letter of comfort generally expresses confidence that contractual obligations will be met but does not usually create legal obligations.

Whether such a statement is legally binding depends upon its wording and the objective intentions of the parties.

In Kleinwort Benson Ltd v Malaysia Mining Corporation Berhad [1989], a parent company issued a letter stating that it was its policy to ensure that its subsidiary would be in a position to meet its financial obligations. When the subsidiary later became insolvent, the lender sought to enforce the letter. It was held that the letter did not create legal relations because it merely expressed the parent company’s present policy and did not amount to a legally binding guarantee. 

🔑 5 Step Exam Checklist

1. Identify the nature of the agreement

   Is the agreement domestic/social or commercial?

2. Apply the correct presumption

   Domestic/social agreement

   Commercial agreement

   
   

3. Consider whether the presumption has been rebutted

   Domestic/social agreement → Has the relationship broken down? Is there a written agreement?

   Commercial agreement → Is there an honour clause or wording such as binding in honour only?

   
   

4. Apply the objective test

   Would a reasonable person conclude that the parties intended to create legal relations

   
   

5. Consider any special commercial wording

   Is there a letter of comfort or other wording indicating that the parties did not intend to create legal relations?

Key Cases

Case Name	Facts	Legal Principle
Balfour v Balfour [1919]	A husband promised to pay his wife a monthly allowance while they were living apart due to his work overseas.	Agreements between family members are presumed not to create legal relations.
Edwards v Skyways Ltd [1964]	An employer refused to honour an ex-gratia payment promised to an employee who had agreed to leave his employment.	Confirms the strong presumption that agreements made in a commercial context are intended to create legal relations.
Esso Petroleum Co Ltd v Commissioners of Customs and Excise [1976]	Esso offered commemorative World Cup coins to customers who purchased a specified quantity of petrol.	Commercial promotions are presumed to create legal relations where they are intended to induce customers to enter into transactions.
Jones v Padavatton [1969]	A mother promised to support her daughter financially while she studied for the Bar in England. After their relationship broke down, the daughter sought to enforce the agreement.	Reinforces the presumption that domestic and family agreements do not usually create legal relations unless the circumstances indicate otherwise.
Kleinwort Benson Ltd v Malaysia Mining Corporation Berhad [1989]	A parent company issued a letter stating that it was its policy to ensure that its subsidiary could meet its financial obligations. When the subsidiary became insolvent, the lender sought to enforce the letter.	A letter of comfort will not generally create legal relations unless it contains a clear contractual promise.
Merritt v Merritt [1970]	A separated husband and wife entered into a written agreement concerning ownership of their family home.	The domestic presumption may be rebutted where the parties intended the agreement to be legally binding.
Rose & Frank Co v JR Crompton & Bros Ltd [1925]	Two companies entered into a commercial agreement containing an honour clause stating that the parties honourably pledged themselves to the agreement and did not intend it to create legal relations.	The commercial presumption may be rebutted where the parties clearly state that they do not intend to create legal relations.