“ An agreement is regarded as a contract when it is enforceable by a law “ explain and illustrate.
1.INTRODUCTION:
An agreement between a number of parties, binding them to carry out certain actions and intending to have legal consequences. A contract is formed under the principle of Consensus ad idem, that is, all parties are in agreement as to the particulars of the contract. A contract can involve multiple consenting parties, or it can be unilateral.[1] One of the fundamental principles of contract law is that parties to a contract must have an intention to be legally bound There is a presumption that social, domestic or family agreements are not legally binding as individuals make promises to each other on a regular basis that they would not intend to have legal effect.[2]A further presumption revolves around the idea that in commercial agreements, it is thought that such intention exists. It is clear that the parties may rebutted but it is difficult to prove to the courts that a commercial agreement was not intended to have legal effect. Also the validity of the contract is correlated on its essential elements.
2.Domestic and social relationships
Presumption[3]
The presumption is that domestic and social agreements are not intended to have legal force.[4]
Rebutting the presumption
The presumption can be easily rebutted for example if parties who are in a familial relationship are contracting in a business context or if a husband and wife enter into an agreement in circumstances in which they are no longer living in harmony. Similarly, if the words used in the contract indicate a legal intention, the presumption that may otherwise have arisen may be rebutted.
Case Examples
a) Husband and Wife (Balfour v Balfour)[5]
Parties intended involved in a domestic relationship, will generally not have intended legal consequences to follow their arrangement thus a contract will not be enforceable. Given many couples now choose to cohabit without marrying, the same presumption should apply where an agreement is entered into between ac a couple living in a de facto relationship. 2
b) Separated husband and wife (Merrit v Merrit)[6]
Where parties are divorced, separated, or in the process of separating, the negotiation do not take place in the context of natural love and affection therefore there is no room left for the application of such a presumption and the court will generally find that the requisite contract intent existed. 3
c) Other familial relationships (Jones v Padavatton)[7]
Parties in other familial relationships are considered the same as married or de facto couples, and it is presumed that they do not intend to cerate legal relationships as the agreement is made in this context are based on natural love and affection. The bond of natural love and affection is likely to weaken according to the remoteness of the tie and will subsequently be easier to rebut. In fact, those cases where the court finds that the presumption has been rebutted, one or more of the following factors are often relevant 4
- The seriousness of the conduct involved (such as moving countries or giving up full time employment)
- The expense involved, especially if the relevant party is not wealthy
- Whether there is or has been a degree of hostility in the relationship
- The closeness of the family ties
- Whether the subject matter of the agreement is business or commercial in nature.
CASE EXAMPLE[8]
Balfour v. Balfour [1919] 2 KB 571[9]
Facts: The defendant was a civil servant working in Ceylon. When he was home on leave in
England, it was agreed that his wife would not return to Ceylon with him, due to her poor health
The husband promised to pay his wife £30 per month as maintenance while he was in Ceylon.
The defendant breached this agreement and his wife sued him, alleging breach of contract.
Decision: The action was unsuccessful. The court held that the agreement was not a
contract. This was because there was no intention to create legal relations. Aitkin LJ, in his
judgment at 578, explained why this element was missing:
It is quite common, and it is the natural and inevitable result of the relationship of husband
and wife, that the two spouses should make arrangements between themselves …
Nevertheless they are not contracts, and they are not contracts because the parties did not
intend that they should be attended by legal consequences … They are not sued upon, not
because the parties are reluctant to enforce their legal rights when the agreement is broken,
but because the parties, in the inception of the arrangement, never intended that they should
be sued upon. Agreements such as these are outside the realm of contracts altogether.
The presumption can be rebutted or negated by producing evidence that there is a
business or commercial flavour to the agreement, even though it is made between family
members or friends.
We will now consider some examples where the presumption has been successfully
Wakeling v. Ripley (1951) 51 SR (NSW) 183[10]
Facts: Ripley was a bachelor who lived in Sydney. The plaintiffs were Ripley’s sister and her
husband who was a lecturer at Cambridge University in England. Ripley wrote to his sister
in 1946 to try to convince her to move to Australia. He promised to give the plaintiffs a
home and a living if they moved. He also promised to leave all his property to his sister on
his death. The plaintiffs agreed. They sold their house and the husband resigned his
lectureship. After a year of living together, the parties argued and the defendant reneged
on his promise to leave his property to his sister. He sold his house and disinherited the
plaintiffs. The plaintiffs sued for breach of contract.
Decision: When the court heard the matter for the first time, it said there had been a
breach of contract. The defendant appealed, alleging there had been no intention to
create legal relations. The court found again in favour of the plaintiffs, deciding that there
was a contract. The court said that the agreement had intention to create legal relations
despite the fact it was made between family members. Factors considered relevant in
coming to that decision were that one of the plaintiffs had left his job and that the plaintiffs
had moved to another country.
d) Social Relationships
The presumption of lack of legal intent can extend beyond familial relationships to agreements entered into in a social context, or agreements made between friends. In Heslop v Burns [11]the deceased allowed his fiends to stay in a house owned by him free of charge. In an action for possession by the deceased’s estate the friends argued they were in possession as tenants at will but were unsuccessful, the court finding that in the circumstances in which possession was given the parties had not entered legal relations.
3.Commercial Agreement
Presumption[12]
Where parties negotiate and agree in a business setting, it is assumed that the parties intended the agreement to have legal consequences. Therefore, the party alleging that an agreement relating to business matter is of no legal effect has the heavy onus of demonstrating that to be the case.
It can sometimes be difficult determining whether a transaction has taken place in a business setting (Esso Petroleum Co Ltd v Customs & Excise).
In Esso Petroleum v Customs & Excise Esso, for promotion purposes distributed millions of coins, of no intrinsic value, to petrol stations that sold Esso petrol. The advertisement to the public indicated that these coins were a gift and for every four gallons of petrol purchased a coin would be given. The matter before the court was whether the coins were being sold (and therefore liable to be assessed for purchase tax). On of the issues was whether the parties had the necessary intention to form a contract.[13]
In a 3:2 majority, the court held that the parties possessed the requiste legal intent in relation to the provision of the coins upon a customer buying the ptrole. First, the promotion took place in a business setting, it was intended that sales would be promoted as a result of the coins. Second, this scheme had a potentially large commercial benefit to Esso. Third, this view was supported by authority (Rose and Frank v JR Crompton). The contrary view was that the offer of a gift of a free coin could not properly be regarded as a business matter that attracted legal intention.
Rebutting the Presumption
The intention not to create legal relations may be evident in a number of different ways. For example, the agreement may contain an express clause that no legal consequences flow from the document, or the overall tenor of the particular document may indicate that the parties had no intention to enter into legal relations.
4.Government Activities
Commercial Agreements
If a government contract arises out of the commercial need for the operation of government, for example the order of stationary or contracts to purchase vehicles, the usual contractual principles apply to determine whether a contract has been formed. [14]
It is important to make sure that all of your business contracts are drawn up professionally and are legal watertight, as it is essential that both parties understand the terms included and are aware of their rights and responsibilities afforded by the contract. Poorly worded contract terms could have serious implications for both parties and their stakeholders.
Commercial contracts can cover:
Terms and conditions of sale
Terms and conditions of purchase
Trading agreements
Distribution agreements
Agency agreements
Franchise agreements
Facilities management agreements
Joint ventures
Generally, a contract should be drawn up specifically and carefully considered to reflect an agreement between two parties and include an offer, acceptance, consideration, and the intention to create legal relations. Thusly, it is not advisable to rely on precedent when making a contract, as every agreement is different and therefore it is worth consulting a legal specialist when creating agreements.[15]
Policy Initiatives
Where the government activity relates to a policy initiative a court may be less likely to find that the parties intended to enter contractual relations (Administration of PNG v Leahy). In PNG v Leahy the department of Agriculture, at the request Leahy, provided assistance to help Leahy eliminate an infestation of cattle tick on his property, an activity which was consistent with government policy. After the exercise, the Department was sued by Leahy who claimed damages for breach of contract on the basis that the departmental officers did not perform their activities skillfully.
The court held that the agreement between the parties was not contractual in nature. The conduct of the parties constituted an administrative arrangement by which the Administration in pursuance of its agricultural policy gave assistance to an owner to prevent that stock contracting a disease which was prevalent in the territory. The work done was analogous to a social service which generally does not have as its basis a legal relationship of a contractual nature.
Similarly in Australian Woollen Mills v The Commonwealth [16] a company was unsuccessful in its action against the commonwealth for breaching the government’s subsidy arrangement which was merely an announcement of policy.[17]
Voluntary associations
Rules or constitutions of voluntarily association do not constitute a binding legal contract between parties ‘unless there was some clear positive indication that the members contemplated the creation of legal relations inter se, the rules adopted for their governance would not be treated as amounting to an enforceable contract (Cameron v Hogan). The parties could possess requisite legal intent if the member has a proprietary interest in the club.
4.Essential Elements of a Valid Contract
An agreement must possess the essential elements of a valid contract. The essential elements of a valid contract are as follows. [18]
a. Offer and acceptance. There must a ‘lawful offer’ and a ‘lawful acceptance’ of the offer, thus resulting in an agreement. The adjective ‘lawful’ implies that the offer and acceptance must satisfy the requirements of the contract act in relation thereto.
b. Intention to create legal relations. There must be an intention among the parties that the agreement should be attached by legal consequences and create legal obligations.
c. Lawful consideration. The third essential element of a valid contract is the presence of ‘consideration’. Consideration has been defined as the price paid by one party for the promise of the other. An agreement is legally enforceable only when each of the parties to it gives something and gets something. The something given or obtained is the price for the promise and is called ‘consideration’ subject to certain exceptions; gratuitous promises are not enforceable at law.
d. Capacity of parties. The parties to an agreement must be competent to contract. But the question that arises now is that what parties are competent and what are not. The contracting parties must be of the age of majority and of sound mind and must not be disqualified by any law to which they are subject . If any of the parties to the agreement suffers form minority, lunacy, idiocy, drunkenness etc. The agreement is not enforceable at law, except in some special cases e.g., in the case of necessaries supplied to a minor or lunatic, the supplier of goods is entitled to be reimbursed from their estate .
e. Free consent. Free consent of all the parties to an agreement is another essential element. This concept has two aspects.(1) consent should be made and (2) it should be free of any pressure or misunderstanding. ‘Consent’ means that the parties must have agreed upon the same thing in the same sense . There is absence of ‘free consent,’ if the agreement is induced by (i)coercion, (ii) undue influence, (iii) fraud, (iv) mis-representation, or (v) mistake (sec. 14). If the agreement is vitiated by any of the first four factors, the contract would be voidable and cannot be enforced by the party guilty of coercion, undue influence etc. The other party (i.e., the aggrieved party) can either reject the contract or accept it, subject to the rules laid down in the act. If the agreement is induced by mutual mistake which is material to the agreement, it would be void .
f. Lawful object. For the formation of a valid contract it is also necessary that the parties to an agreement must agree for a lawful object. The object for which the agreement has been entered into must not be fraudulent or illegal or immoral or opposed to public policy or must mot imply injury to the person or the other of the reasons mentioned above the agreement is void. Thus, when a landlord knowingly lets a house to a prostitute to carry on prostitution, he cannot recover the rent through a court of law or a contract for committing a murder is a void contract and unenforceable by law.
g. Writing and registration. A contract to be valid, must be in writing and registered. For example, it requires that an agreement to pay a time barred debt must be in writing and an agreement to make a gift for natural love and affection must be in writing and registered to make the agreement enforceable by law which must be observed.
h. Certainty. ” Agreements, the meaning of which is not certain or capable of being made certain, are void.” In order to give rise to a valid contract the terms of the agreement must not be vague or uncertain. It must be possible to ascertain the meaning of the agreement, for otherwise, it cannot be enforced.
i. Possibility of performance. Yet another essential feature of a valid contract is that it must be capable of performance. “An agreement to do an act impossible in itself is void”. If the act is impossible in itself, physically or legally, the agreement cannot be enforced at law.
5. Conclution
To treat an agreement as a contract, it must create legal obligation and which contract will create a legal obligation depends on the course of actions like an agreement to go to watch Cricket match or eat dinner together does not create a legal obligation . There is no intention to create legal relation and this kind of agreements are of social in nature and not enforceable. On the contrary Business agreements are created with an intention to create legal obligation with the parties and enforceable by law. [19]At the same time it is also important for a contract to have the validity and its essential elements like offecand acceptance ,intention, lawful consideration, to work without any external pressure etc to be enforceable by law.
BIBLIOGRAPHY
- Margaret Barron, Fundamentals of Business Law, In Print,4R
- http://lawiki.org/index.php?title=Contracts
- http://netk.net.au/Contract/05Intention.asp
- http://think.io/pub/Law%20Notes/Contract%20Law/Intention%20to%20create%20legal%20relations_001.doc
- http://www.claim-advice.com/intention.html
- http://www.e-lawresources.co.uk/Esso-Petroleum-v-Customs–and–Excise.php
- http://www.lawofcontract.co.uk/formation/commercial-agreements.php
- http://highered.mcgraw-hill.com/sites/dl/free/0074711725/60777/sample_ch07.pdf
- http://www.lawontheweb.co.uk/Business_Law/Business_Contracts
- http://wiki.answers.com/Q/All_contracts_are_agreements_but_all_agreements_are_not_contracts._Explain_this_statement_and_also_give_essential_elements_of_a_valid_contract
- http://www.helium.com/items/541081-contract-law-for-dummies
- http://think.io/pub/Law%20Notes/Contract%20Law/Contracts%20Study%20Notes.doc
13. http://hubpages.com/hub/The-Law-of-Contract
[1] http://lawiki.org/index.php?title=Contracts
[2] http://netk.net.au/Contract/05Intention.asp
[3]http://think.io/pub/Law%20Notes/Contract%20Law/Intention%20to%20create%20legal%20relations_001.doc
[4] http://www.claim-advice.com/intention.html
[5] Balfour v Balfour [1919] 2 KB 571
[6] Merritt v Merritt [1970] 1 WCR 1211
[7] Jones v Padavatton [1969] 1 WLR 328
[8] http://highered.mcgraw-hill.com/sites/dl/free/0074711725/60777/sample_ch07.pdf
[9] Barron Chapter 7.qxd 17/6/02 4:19 PM Page 195
[10] Barron Chapter 7.qxd 17/6/02 4:19 PM Page 196
[11] Heslop v Burns and another [1974] 3 All ER 406
[12]http://think.io/pub/Law%20Notes/Contract%20Law/Intention%20to%20create%20legal%20relations_001.doc
[13] http://www.e-lawresources.co.uk/Esso-Petroleum-v-Customs–and–Excise.php
[14] http://www.lawofcontract.co.uk/formation/commercial-agreements.php
[15] http://www.lawontheweb.co.uk/Business_Law/Business_Contracts
[16] http://www.helium.com/items/541081-contract-law-for-dummies
[17] http://think.io/pub/Law%20Notes/Contract%20Law/Contracts%20Study%20Notes.doc
[18]http://wiki.answers.com/Q/All_contracts_are_agreements_but_all_agreements_are_not_contracts._Explain_this_statement_and_also_give_essential_elements_of_a_valid_contract