Formation of Contract (4) – Contractual Intention

What is Contractual Intention?

In English contract law, no particular form is required for a contract to be legally binding. A contract may be made orally, and there is no requirement that any specific words be used. Because of this flexibility, a central question frequently arises: did the parties genuinely intend their agreement to have legal force? This is the doctrine of contractual intention, or more precisely, the requirement that the parties possess an intention to create legal relations.

The courts assess this question objectively, asking not what each party subjectively believed, but what a reasonable person would conclude from the parties' words and conduct. Where the circumstances are ambiguous, English law applies two well-established presumptions — one for domestic and social agreements, and one for commercial agreements — each of which may be rebutted in appropriate circumstances.

Cases Where Contractual Intention Has Been Found

Where a Party Has Taken Drastic Steps

In Parker v Clark [1960], the courts held that where one party has changed their position and taken drastic steps in reliance upon an agreement, that party must be taken to have possessed the requisite contractual intention. In that case, the claimants had sold their own home and moved in with the defendants in reliance on a promise that they would eventually inherit part of the defendants' property. The court found that the gravity of the steps taken by the claimants — giving up their own home — was inconsistent with the agreement being merely a social or family arrangement lacking legal force.

This principle illustrates that the more significant and irreversible the actions taken in reliance on an agreement, the more readily a court will infer that the parties intended to be legally bound.

Where There Is Mutual Understanding in an Informal Arrangement

Simpkins v Pays [1955] concerned an informal lottery syndicate in which the claimant, the defendant, and the defendant's granddaughter regularly entered a newspaper competition together, sharing entries and agreeing to split any winnings. When one entry won a prize and the defendant refused to share the proceeds, the court held that the mutual understanding between the parties was sufficient to establish contractual intention. The claimant was entitled to her share.

The case demonstrates that even casual, informal arrangements between friends or family members can give rise to legally enforceable agreements where a genuine mutual understanding exists. The absence of legal formality does not, of itself, negate contractual intention.

Presumption 1: Domestic and Social Agreements

The General Presumption Against Legal Intention

The first major presumption in this area of law is that domestic and social agreements — that is, agreements between family members or friends — are not intended to have legal effect. Parties in such relationships are generally presumed to be acting out of affection, goodwill, or social obligation rather than any desire to create enforceable rights and duties.

The leading authority is Balfour v Balfour [1919], a Court of Appeal decision in which a husband promised to pay his wife a monthly allowance whilst she remained in England for health reasons. When the marriage broke down, the wife sought to enforce the promise. The Court of Appeal held that the agreement was not enforceable because, as a domestic arrangement between spouses, it lacked the intention to create legal relations. Agreements of this nature, made in the context of an amicable family relationship, are treated as matters of honour rather than law.

Rebutting the Presumption

The presumption applicable to domestic and social agreements is rebuttable. Where the circumstances demonstrate that the parties clearly intended their agreement to have legal consequences, the courts will give effect to it accordingly.

Merritt v Merritt [1970], another Court of Appeal decision, provides a striking contrast to Balfour v Balfour [1919]. In Merritt, a husband and wife who had already separated met to discuss the matrimonial home. The husband agreed in writing that if the wife paid off the outstanding mortgage, he would transfer the house into her sole name. The Court of Appeal held that this agreement was legally binding. Unlike the arrangement in Balfour, the agreement in Merritt was made at a time when the parties were estranged and dealing with each other at arm's length, and was reduced to writing. These features were sufficient to rebut the presumption against legal intention in a domestic context.

The contrast between these two cases reveals the key factors that can displace the presumption: formality of the arrangement, the parties' relationship at the time of contracting, and the seriousness with which they approached the agreement.

Presumption 2: Commercial Agreements

The Very Strong Presumption in Favour of Legal Intention

Where the agreement is commercial in nature, the law applies the second presumption: there is a very strong presumption that the parties intend to be legally bound. Business parties dealing at arm's length in a commercial context are taken to understand the legal consequences of their arrangements, and courts are generally reluctant to find that such an agreement lacks contractual force.

Edwards v Skyways [1964] is the principal authority for this presumption. In that case, an airline agreed to make an "ex gratia" payment to a redundant pilot. The defendant argued that the use of the phrase "ex gratia" indicated no intention to be legally bound. The court rejected this argument and held that in a commercial context, the presumption in favour of contractual intention is very strong and could not be displaced merely by the use of the phrase "ex gratia", which was interpreted simply as denoting a payment made without admission of prior liability rather than a payment made without any legal obligation going forward.

Rebutting the Presumption

Whilst the commercial presumption is very strong, it is not irrebuttable. It may be displaced where the parties have used very clear words to indicate that their agreement is not intended to have legal effect.

Rose & Frank Co v JR Crompton & Bros Ltd [1925], a House of Lords decision, illustrates this point. The parties had entered into a business arrangement containing an "honourable pledge" clause, which stated in express terms that the arrangement was not to be regarded as a formal or legal agreement and was not subject to legal jurisdiction. The House of Lords held that this clause was sufficient to rebut the strong commercial presumption, and that the arrangement was therefore not legally binding. The language used was clear and unambiguous in its intention to exclude legal enforceability.

Rose & Frank Co v JR Crompton & Bros Ltd [1925] thus establishes that whilst courts will not lightly find that a commercial agreement lacks legal force, parties are free to structure their arrangements on a purely voluntary or "honourable" basis, provided they do so in terms that are sufficiently clear and explicit.

Summary

The following table sets out the two presumptions and the leading cases in which each has been applied or rebutted.