Intention To Create Legal Relations And Capacity Notes

• Intention to Create Legal Relations (ICLR)

  - ICLR: objective test (Smith v Hughes) – can be expressed or presumed.

  • ICLR: parties intend their agreement to have force of law + to be bound.

    • ‘common intention to enter legal obligations, mutually communicated expressly or impliedly’ (per Atkin LJ in Rose and Frank).

  • objective test: courts seek to give effect to intention of parties.

    • Smith v Hughes [1871]: [Blackburn J] test – a reasonable man believes a party is assenting to the terms proposed by the other party + other party enters contract on that belief.

  • broad general distinction (Rose and Frank Co. v Crompton Bros. [1925])

    • commercial agreements: rebuttable presumption for ICLR.

    • domestic agreements: rebuttable presumption against ICLR.

  - Contextual approach: Edmonds v Lawson [2000] – modification to Smith v Hughes test.

  • facts: barrister pupil suing Chambers (with their support – test case) for minimum wage no application: pupil barrister not a ‘worker’.

  • test: objective (Smith v Hughes) + ‘context is all important’ (per Bingham LJ).

    • broadens test: court has regard to whole context.

  - Commercial + business agreements: presumption for ICLR – will be implied by courts.

  • courts readily imply commercial ILCR: Well Barn Farming Ltd v Backhouse [2005] – ICLR implied from arrangement of ‘slight importance’ + temporary nature – trivial nature of transaction not relevant.

  • difficult to rebut presumption:

    • Bunn & Bunn v Rees & Parker [2002]: heads of agreement preliminary to fuller contract enough to establish ICLR.

      • 1. heavy burden for party to commercial agreement to rebut ICLR.

      • 2. terms:

        • typical of commercial agreement intended to be binding.

        • not so vague that parties could not have intended to be bound.

      • 3. ICLR possible even if all details not worked out: expectation of further more detailed agreement not inconsistent with ICLR.

        • comfort letters, letters of intent etc. can be binding.

      • 4. business experience: commercial parties should know effect of signing clear agreement – if not: should not have signed or included further clear provisions.

    • Bowerman v Assoc. of British Travel Agents Ltd. [1996]: objective test – meaning as understood by reasonable member of public binding on ABTA (notice displayed in member’s office).

      • esp. when party benefits from promise: ABTA would not have had business if not for guarantee on members.

  - Rebutting presumption of ICLR in commercial agreements.

  • Hadley & Others v Kemp & Another [1999]: [Park J]: presumption only a generalisation not law – can be rebutted.

  • express clause in agreement: honourable pledge clause (‘binding in honour only’).

    • Rose and Frank Co. v Crompton Bros.: ‘this agreement is not entered into … as a formal or legal agreement, and shall not be subject to legal jurisdiction in the law courts of either the United States or England’.

      • CoA: neither agreement nor subsequent orders/acceptances binding.

      • HoL: agreement not binding but orders/acceptances valid contracts.

      • but problems: (a) clause itself not binding if contract not?; (b) rule against jurisdiction of courts being ousted only if ICLR?

    • wording must be clear: Edwards v Skyways [1964]: employer agreed to make ‘ex gratia’ payment to employee pension not sufficient to show no ICLR.

  • ‘subject to contract’: judicially recognised term – no ICLR prima facie.

    • Chillingworth v Esche [1924]; Eccles v Bryant and Pollock [1948].

  • statement made in jest or anger (on objective view):

    • Licences Insurance Co. v Lawson [1896]: no ICLR from heat-of-moment statement in angry meeting.

    • Leonard v Pepsico [US, 1999]: no ICLR from mere advertising ‘puffery’.

  • comfort letters: can express intention, but no ICLR if not.

    • Kleinwort Benson Ltd. v Malaysia Mining Corp [1989]: comfort letter setting out current ‘policy’ no ICLR as not clear enough.

  • collective agreements: agreements formed by labour unions on behalf of employer/employees – Trade Union and Labour Relations (Consolidation) Act 1992 s179.

  • advertisements: exception to presumption – rationale: reasonable people do not see advertising claims as contractual promises.

    • but not if ICLR clearly expressed: unilateral offers.

      • Carlill v Carbolic Smoke Ball Co Ltd [1893]: ICLR shown by deposit of money in bank account. (cf. Leonard v Pepsico: must be serious offer).

    • sometimes debatable: Esso Petroleum Co. v Comms. of Customs and Excise [1976]: debate over whether offer of free coin to petrol buyers binding on garage owners.

  - Social + domestic agreements: presumption that no ICLR (when relations in amity).

  • rationale: common sense – parties would not reasonably envisage right to sue for failure to honour agreement.

  • married couples: Balfour v Balfour [1919] – husband promised wife 30 pm when in amity could not be enforced after...

Buy the full version of these notes or essay plans and more in our GDL Contract Law Notes.