FORMATION OF AN AGREEMENT INTENTION TO CREATE LEGAL RELATIONSHIP

This article is written by Sarthak Sikarwar of 4^th Semester of BALLB (Hons.) of University of Petroleum and Energy Studies, an intern under Legal Vidhiya

ABSTRACT

In numerous legal jurisdictions across the globe, the fundamental component of each legally binding agreement is the “intention to create legal relations.” The paper makes the case that if “Consideration” is the fundamental prerequisite for establishing the creation of a legally binding contract in any given jurisdiction, then such a requirement is neither necessary nor intentional. The study makes the assumption that “consideration” is, and ought to be, a sign of this kind of intention. Consequently, in common law countries, “consideration” should be sufficient to address the parties’ intentions and there shouldn’t be a need to independently establish a “intention to create legal relation.”
The foundation of contract law is the formation of legally binding contracts that are enforceable. The idea of the parties’ purpose to create a legal relationship is essential to this idea. This study explores the complex dynamics that surround this essential component of contract creation, providing insight into its importance, intricacies, and legal ramifications.

The investigation starts with breaking down the legal definition of an agreement and the fundamental idea that separates a legally binding contract from a simple social pledge or declaration of purpose. The purpose to establish legal ties is a key factor in this differentiation. Knowing this distinction serves as the foundation for the analysis that follows.

A thorough analysis is conducted, examining the variables that impact and ascertain the existence of this kind of intent in many situations. The examples covered in the paper range from social and domestic agreements to commercial contracts, each with its own set of dynamics that affect the determination of legal intent. Significantly, the subtleties between contracts in the business and personal or family domains are examined, emphasizing how the law understands and ascertains the purpose of establishing legal interactions in various contexts.

Additionally, the study critically looks at how behaviour, communication, and situational factors contribute to proving or disproving the existence of legal intent. It clarifies how courts read written and spoken correspondence in addition to the actions of the parties to determine their actual intentions. The surrounding circumstances add layers of complexity to the legal analysis by complicating the finding of intent further. These conditions include the parties’ connection, the subject matter of the agreement, and prevailing society standards.

To provide clarity, the research demonstrates the practical implementation of the purpose of establishing legal relations by referencing notable case law and precedents. These actual cases provide priceless insights into how judges understand and implement this concept, reshaping the law and affecting subsequent contracts.

In the end, this study emphasizes how crucial it is for agreements to be formed with a precise and unambiguous aim to establish legal connections. It emphasizes how important it is for parties to clearly state their intentions to guarantee the enforceability and legality of their agreements under the framework of contract law.

Keywords

Contract Law, Intention to Create Legal Relations, Domestic Contracts, Consideration, legally binding agreements, social and domestic agreements, commercial contracts, legal intent, behavior, and communication.

INTRODUCTION

The foundation of business dealings and private agreements, contract law is based on the essential idea that a contract becomes enforceable only when the parties want to establish a legal relationship. The foundation for the enforceability of contracts is the idea of purpose to establish legal relations. This introduction lays the groundwork for an in-depth examination of this crucial component of contract formation, illuminating its importance, intricacies, and legal ramifications.Contracts are essential for enabling interactions between communities and economy since they are legally binding agreements. Fundamentally, parties communicate their intention to establish legal relations between them, resulting in the recognition and upholding of rights and obligations by the law. This is how contracts are formed. This shared purpose sets apart contracts from social pledges or simple intentions, drawing a divide between legally enforceable agreements and informal transactions.

Every aspect of contract law is influenced by the idea of purpose to form legal relations, which has an impact on how agreements are understood, upheld, and occasionally declared invalid. Determining purpose is critical in all situations, whether they include business transactions, interpersonal relationships, or family commitments. In order to fully understand this basic idea, it is necessary to examine the components that make an agreement qualify as a legally binding contract.[1]

Legally speaking, an agreement is more than just a friendly discussion or a declaration of future intentions. Rather, it symbolizes an agreement reached by both parties with the intention of being legally bound by the conditions they both agree upon. This difference signifies the change from a social agreement with no legal ramifications to a legally enforceable contract.

OBJECTIVES

This study article aims to achieve the following main goals:

1. Examine the concept of intention to create legal relations in contract formation.
2. Explore case law and precedents to illustrate the significance of intention in contract formation.

DISCUSSION

Section 2H of the Contract Act says Contract is an Agreement, enforceable by law.
Section 10 Gives us the five essentials –

1. Free Consent E.g.

a. All facts should be present

• Contract Shouldn’t be forced
• There Should be no undue influence
• Competency – Qualified, Eligibility

a. If the party is under 18 then the contract is void under Section 19.

• Object – Meaning and purpose should be lawful.
• Consideration – The Prize you pay, something that is of benefit to both parties
• Not hereby expressed to be void under any other law.

Apart from these five essentials there also has to be an intention to create a legal relationship.

If all Section 10 Essentials are met but there is no intention to create a legal relation then there is no contract.

One of the most essential components of the law is the intention to establish a legal connection. It is described as the desire to enter into a legally enforceable agreement or contract, and it indicates that the parties understand and agree to the consequences of breaking the agreement. A party’s willingness to accept the legal ramifications of entering into an agreement constitutes their intention to establish legal ties.

Additionally Mulla pennings For there to be a contract, there must be mutual agreement between the parties over the same matter. Hence, no contract would exist between two people if they entered into an apparent agreement over a specific person or ship and it later transpires that each of them, duped by a name similarity, had a different person or ship in mind.

Leading case laws regarding intention to create a valid contract –
Balfour V Balfour [2] –

Facts –

1. Mr. Balfour was an engineer who served as the Director of Irrigation for the Government of Ceylon, which is now Sri Lanka. He was living with Mrs. Balfour. When Mr. Balfour’s wife became ill and needed emergency medicine in 1915, they both returned to England for a vacation. It turned out that Mrs. Balfour had rheumatoid arthritis. Her physician recommended that she remain in England since the weather in Ceylon might be harmful to her health.
2. They came to the decision and understanding that Mr. Balfour would go back to Ceylon and his wife, Mrs. Balfour, would remain until she gets better.
3. Mr. Balfour verbally offered her 30 pounds in maintenance each month till all fell into place, barring a recovery and return to Ceylon, since his yacht was ready to go.
4. This understanding was reached during a time when their relationship was positive and free of any sourness.
5. For several months, he gave his wife the specified amount, but as time went on, they drifted away and their marriage failed. Mr. Balfour wrote that it was best for them to be apart. He stopped giving his wife the required amount of upkeep.
6. However, Mrs. Balfour decided to go to court in an attempt to have the verbal arrangement he had made enforced. and initiated legal action against Mr. Balfour in 1918 for failing to pay the sum he was required to.
7. Judge Charles Sargant initially ruled that Mr. Balfour had a duty to provide for and compensate his wife, and Mr. Balfour appealed this decision since they had a clear and binding agreement.

Issues Raised –

1. Was there a legal agreement between the defendant and the plaintiff?
2. Did Mr. Balfour intend to get into a contract with his spouse?
3. Is the parties’ agreement a legally binding contract?
4. Is it possible for a spouse’s agreement to be upheld in court?

Contentions –

1. Mr Balfour – On Mr. Balfour’s behalf, it was argued that he had no intention of forming a formal contract and that the agreement he had with his wife was strictly domestic. It is therefore not enforceable by law.
2. Mrs Balfour – The respondent contended that since the husband engaged into a domestic contract by offering his wife £30, to which she accepted and remained in England, the woman is presumed to have received £30. Her stay in England would cost her thirty pounds a month, according to the husband’s agreement, which was enforceable by law.

Judgement – The Court of Appeal had decided unanimously that Mr. and Mrs. Balfour had not entered into any such legally binding arrangement. The principle that a contract may only be valid if both parties intend to establish a legal relationship is at the center of the legal system. This served as the case’s ratio decidendi. By analyzing the conditions surrounding the contract’s execution, it is possible to ascertain whether or not the parties intended to establish a legal connection.
According to Justice Atkin, the parties’ agreement was only domestic in nature. Agreements between spouses, in his opinion, belonged in a distinct category than contracts. The specific agreement was only a domestic pledge that could not be sued upon, not a legally binding contract. The court is not allowed to meddle in a husband and wife’s daily business.
Ratio Decidendi –

1. Since Mr. Balfour had already married her and promised to pay the agreed-upon amount in 1915 when they were in England, Mrs. Balfour was not claiming for maintenance in this case.
2. The fundamental components of any legally binding agreement are: Taking into account
   The purpose of forming a legal contract.

There were these two crucial components absent.

According to Lord Justice Atkins, familial and intimate ties are outside the domain of contract law. There can be no legally enforceable contract since there was no purpose to establish a legal relationship. According to Atkins, courts would be dealing with pointless cases if they let wives to intervene in circumstances where there was a breach of contract between the parties.

It was noted that a limitless number of lawsuits would ensue if such domestic agreements were accepted by a court of law.

Jones v Padavatton [3]–

Facts –

1. The parent of the defendant was the plaintiff. The defendant and the person making the claim came to an agreement. According to the terms of the agreement, the defendant would quit her job in the US and go to England to study for the bar with her family. The plaintiff would give her £42 a month in return. Afterwards, the parties decided that the claimant would also give the defendant a place to live.
2. The defendant hadn’t finished her education in five years, which caused the connection between the parties to deteriorate. The claimant asked to be given ownership of the home. The accused contended that she had the right to remain and get her £42 a month. She said that this was because she and her mother had come to a legally enforceable agreement.

Issue – Did the parties intend for the arrangement to bind them legally?

Judgment – The claimant was found to be in favor by the Court of Appeal. It was assumed that neither party wanted to be bound by the law. There was insufficient evidence presented by the defendant to refute this assumption. As a result, the defendant lacked both a right to the £42 and a defense against the possession claim.

Simpkins v Pays [4]–

Facts – At the residence of Ms. Pays, who shared a home with her granddaughter, Ms. Simpkins was a paid tenant. Ms. Simpkins regularly participated in newspaper contests. Regarding a weekly competition in the Sunday newspaper, the three decided that Ms. Simpkins would fill out a weekly coupon, each person would make three predictions, submit them under Ms. Pays’ name, and split the winnings if anyone won. In one of the coupons that was submitted, a prediction made by Ms. Pays’ granddaughter won a £750 reward under Ms. Pays’ name. According to their agreement, Ms. Simpkins was entitled to one-third of the prize, but Ms. Pays refused to give it to her.

Issues – The issue of whether the Parties’ informal arrangement intended to establish legal contacts in order to make a formal agreement to divide the shares arose.
Judgment –

1. The Court determined that, regardless of the informal setting and family ties, there was mutuality in the agreement between the Parties, whereby they consented to the weekly submission of the forecast in Ms. Pays’ name and that, in the event of a win, the three would split the prize money equally.
2. Notwithstanding the home setting, Ms. Simpkins’ completion of the coupon was not a gratuitous act towards Ms. Pays; rather, it was done in accordance with a contract in which both Parties shared in the outcome, demonstrating a desire to establish legal relations. The Court decided that the mutual agreement to split the shares in thirds, regardless of how informal it was, constituted an enforceable contract.

Social Engagements and Niceties –

Legal relations are presumed to be created by family agreements unless there is compelling evidence to the contrary. Legally unenforceable agreements will be declared invalid by the courts.  A just domestic agreement that does not result in a formal relationship is the simple act of a man and his wife opening a joint bank account or the guy offering to buy her a car in an effort to repair their damaged marriage.[5]

In the 1919 case of Balfour v. Balfour, Lord Atkin determined that there was no evidence of an intention to be legally bound even though the woman was dependent on the husband’s maintenance payments and he was unable to make them while working in Ceylon (after the husband failed). The Court stated that agreements between spouses are generally illegal and emphasized how absurd it is to take the contract into consideration in this particular case, where the wife appears to be making more or less insignificant promises to her husband that can be enforced. The plaintiff is responsible for reaching a legally binding agreement, the court has found.
It was decided in Spellman v. Spellman that a husband’s promise to buy a car from his wife and the contract he signed to buy the car on her behalf—which included a ban on selling the car—were not intended to create a legal partnership or grant rights to the car or the purchase agreement. Contrary to Spellman v. Spellman, a strictly domestic arrangement was signed. The deal was all domestic, and neither a fair transfer nor a trust were intended to be carried out.

The same idea holds true for agreements between parents and kids that are rebuttable based on whether the parties’ language indicates that they intended for them to be legally binding but are generally not.

Courts consider the facts and circumstances in social connections cases, rather than relying on the assumption of purpose to establish a legal relationship. The law just requires that the parties intend for there to be legal repercussions. If there is clear intent to be bound by the terms of the contract, the presumption is refuted.

There are various methods to refute the presumption that parties to a domestic agreement do not intend to form a legal relationship. There isn’t a comprehensive list of methods for challenging the notion. Instances in which the presumption is rebutted have specific traits, albeit whether or not it is eventually rebutted depends on the facts of the case. It’s generally accepted that after divorcing, spouses plan to follow through on their promises. More evidence of a wish to be bound was offered by the signed written agreement.
Merritt v. Merritt [6]

Facts – an intention between a separated husband and wife was proven, and as a result, the separation agreement between the couple was deemed legally binding. In this case, the husband promised to give the wife £40 a month to help her pay the mortgage, and he would give her half of the property in exchange for her paying all mortgage charges until the mortgage was paid off. After the mortgage was paid off, he reduced his monthly stipend to GBP 25 and declined to transfer the home. She sued, requesting a ruling that the house was hers.
Judgment – Before concluding that there is an intention in such cases, the Court impartially examined all pertinent information. Based on the parties’ separation, the Court of Appeal distinguished this contract from Balfour v. Balfour and found that it was binding in this instance.
Parker v. Clark

Facts – Demonstrate that, despite the general consensus that domestic agreements do not create legally enforceable obligations, there are situations in which this assumption may be overcome. The claimants were the friends of the defendants, an old couple, who suggested that the claims move in with them, compelling the defendants to sell their own house. In their will, the defendants gave the plaintiffs a share of their house. After accepting this offer, the claimants sold their house, gave their daughter the money left over to help her buy an apartment, and moved in with the defendants. Consequently, the plaintiffs left the property and sued the defendants. The defendants argued that because they did not intend to establish legal ties, they did not enter into a contract.

Judgement – The Court found that the parties desired to form a legal partnership. This case demonstrates that when one party acts against the terms of the agreement, the agreement is intended to have legal ramifications.

CONCLUSION

Studying the Balfour v. Balfour case teaches us that simple household family agreements do not constitute contracts and, as such, cannot be upheld in court. Consequently, these agreements have no legal power behind them.

The second requirement is that both parties must intend to establish a legal relationship. Owing to all this, Mr. Balfour could not be sued by Mrs. Balfour in court of law. The Balfour legislation offered a fresh viewpoint on the validity of contracts.

The issue regarding the goal of contract construction is very different in England and India. Marginalization is merely a proof element in England, thanks to the legal progress on the concept of the desire to make legal ties. In India, however, it is required to provide evidence of the legal intent in order to bind contractual parties. It is an element of binding contractual responsibility that cannot be compromised.

The goal of creating legal connections is a basic aspect of contract law, although it is not explicitly mentioned in Indian law since the Indian Apex Court expressed doubts about the necessity of the specific “intention to enter into legal relations” that the contract statute requires.
In the end, we should draw the conclusion that a fundamental condition of a contract is the purpose of establishing legal connections. First off, there might be some parallels, but there are a lot of situations in which the two elements are different. It would be equivalent to two friends agreeing to go to a restaurant, with one of them promising to pay for the meal and the other for the drink, so we cannot say that there is no consideration and no purpose to form a formal relationship.

REFERENCES

1. https://blog.ipleaders.in/law-of-contracts notes/ #Intention _to_create_ legal_relationship

2. https://ipsaloquitur.com/contract-law/cases/jones-v-padavatton/

3. https://blog.ipleaders.in/law-of-contracts notes/ #Intention_to_create_ legal_relationship

4.https://www.researchgate.net/publication/267770424_’Intention_to_Create_Legal_Relations’_A_Contractual_Necessity_or_An_Illusory_Concept

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[1]https://www.researchgate.net/publication/267770424_’Intention_to_Create_Legal_Relations’_A_Contractual_Necessity_or_An_Illusory_Concept

[2] Balfour v Balfour [1919] 2 KB 571

[3] Jones v. Padavatton, 1 WLR 328, 1969

[4] Simpkins v Pays [1955] 1 WLR 975

[5] https://blog.ipleaders.in/presumption-of-intention-in-domestic-and-social-agreements/

[6] Merritt v. Merritt, 1 WLR 1211, 1970

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