How does the law determine whether parties to an agreement has intended legal consequences or not?

The next requirement of forming a valid contract is intention. This means that the parties must have intended for an agreement to be legally binding between them. To determine if this element has been satisfied, an objective approach must be taken (see Ermogenous v Greek Orthodoc Community of SA Inc [2002] HCA 8).

It does not matter if a party to an agreement secretly did not intend to be legally bound. It also does not matter if a party denies an intention by simply saying that he or she did not intend to be legally bound by an agreement. What matters here is what the parties have said and done. You must ask, would a reasonable person regard the agreement as intended to be binding on the parties? (see Merritt v Merritt [1970] 1 WLR 1211).

Generally, the Court will consider the following factors when determining this issue:

1. Content of an agreement;
2. Language and conduct of the parties to an agreement;
3. The relationship between parties and the presumption arising out of that relationship;
4. The context in which the agreement was made; and
5. Other relevant surrounding circumstances.

The traditional approach taken by the Courts was to apply various presumptions to different situations. For example, there was presumed to be an intention in a commercial context and presumed not to be intention in a family or social context. However recently, the High Court of Australia has proposed that these presumptions should simply indicate which party has the onus of proving the intention.

Commercial Transactions 

Where a party denies that they are legally bound by an agreement in a commercial context, that party has the onus of proving that all parties have manifested an intention not to create a legally binding agreement.

A party will often rely on an express or ‘honour’ clause in an agreement. In the English case of Rose & Frank Co v J R Cromption & Bros Ltd [1925] AC 445, the Court considered such a clause in an agreement between a manufacturer and a distributer. The clause provided that the agreement was not a legal agreement between the parties but was simply a record of the parties’ purpose and intention to ‘which they honourably pledge themselves’. The Court held that the agreement was not legally binding, however the Court also held that each individual order made by the distributor would have created separate contract when each order was accepted by the manufacturer.

Agreement between Family Members

There have been some circumstances where the Courts has been prepared to find that there is an intention to be legal binding between family members and spouses where:

1. The spouses have separated or are about to separate;
2. Where a transaction between family members is essentially commercial in nature; and
3. Agreement relates to housing.

The critical factor in these cases is the degree of reliance and the serious consequences on either party to an agreement. In the case of in Todd v Nichol [1957] SARS 72, one party promised to provide a right in real property if the other party moved from Scotland to Australia. The Court held that an intention to be legally bound ought to have been inferred because the agreement contemplated a permanent arrangement and involved valuable property rights.

While these cases provide some guidance on understanding when there may be an intention to be legally bound by an agreement, the question can only be answered by considering the specific facts of each case.

A contract in English law is a bargain.  For a contract to be formed, the following five key criteria must be met. There must be:

• A valid offer;
• A valid acceptance of that offer;
• Consideration provided by both parties; (both parties must bring something to the bargain);
• An intention to create legal relations on the part of both parties; and
• Certainty of terms.

This article concentrates on what is possibly the most overlooked key criteria; intention to create legal relations.

What is ‘intention to create legal relations’?

In its simplest form, intention to create legal relations means that the parties must intend to enter into a legally binding arrangement in which the rights and obligations of the agreement are enforceable.  As simple as this seems, the question as to whether the parties to a negotiation did intent to create legal relations is highly fact sensitive.  It is relatively certain that representatives of a business, meeting in a formal commercial scenario to negotiate a contract do intend to create legal relations. However, what about two people discussing a joint venture over a drink in a pub?  This was the exact question that the court was presented with in the recent case of Blue v Ashley [2017] EWHC 1928.

Blue v Ashley

This case concerned an action brought against the well known entrepreneur, Michael Ashley.  Mr Ashley was pursued by a business consultant by the name of Mr Jeffrey Blue.  Mr Blue alleged that he had been employed by Mr Ashley’s company, Sports Direct Group, to provide business consultancy services.

The evidence of Mr Blue was that, at a meeting in a pub with Mr Ashley and three other representatives of Sports Direct, Mr Ashley (after drinking at least 8 pints of beer) had promised to pay a £15 million bonus to Mr Blue if he could ensure that Sports Direct’s share price moved above £8 per share. It was common ground between the parties that the meeting in the pub had been an informal social setting. Mr Blue alleged that Mr Ashley had nonetheless made him an offer, intending to be bound by legal relations and that Mr Blue had accepted that offer.

Subsequently, the share price of Sports Direct did indeed rise above £8 per share.  When Mr Ashley refused to pay Mr Blue the £15 million, Mr Blue issued proceedings in the High Court to recover the sum.

The outcome

Giving judgment in the High Court, Mr Justice Leggatt dismissed Mr Blue’s claim. This was on the grounds that the parties had not intended that Mr Ashley would be legally bound by his rather extravagant promise to Mr Blue.  The Judge made a number of observations; the main being that an evening of drinking in the pub was an unlikely setting for formal contract negotiations.  Further, it was not actually within Mr Blue’s power to achieve the aim of increasing the share price above £8. Finally,  it would have been out of Mr Ashley’s character in any event to make such a promise.

Consequently, the Judge concluded that considering the predominantly social nature of the meeting, when he applied the necessary objective test then the only reasonable conclusion was that Mr Ashley’s statements had amounted to no more than mere “banter”.  As such Mr Blue could not rely upon Mr Ashley’s statements as a binding contract.

Conclusion

Intention to create legal relations is often overlooked, but this case highlights how this principle can sometimes be critical to the enforceability of a contract.

While individuals and small businesses in particular may be attracted to the idea of an informal agreement (based maybe upon a handshake or a gentleman’s agreement), such an informal accord could be dangerous.  It is particularly so if the agreement was formed in an environment that wouldn’t lend itself to normal business negotiations.  It is vitally important for parties who wish to form a binding legal contract that they properly write out the terms so that there can be no disagreements as to the intention of the parties.

If you would like advice in relation to a commercial contract, our solicitors can help. Call 0800 988 7756 for a free initial consultation.

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