By Law Teacher
2.3.1 Certainty & Intention to Create Legal Relations Lecture – Introduction
Welcome to the second lesson of this module guide – certainty and intention to create legal relations! An agreement may not qualify as a valid and enforceable contract if it lacks certainty, and not all agreements are legally binding or have an intention to create legal relations. It is for these reasons that this topic is of importance, as these elements must be proven for a successful contract.
The chapter begins with an introduction to the concept of certainty, before considering the issues of vagueness and incompleteness. Intention to create legal relations is then outlined in light of the developed case law. The test of reasonableness is discussed. The chapter further moves on to the presumptions under social, domestic and commercial agreements and their effects on the intention to create legal relations. Finally, intention is contrasted with consideration.
Below are some goals and objectives for you to refer to after learning this section.
Goals for this section
- To understand what certainty is
- To understand what intention to create legal relations is
- To understand their importance to the successful creation of a contract
Objectives for this section
- To understand the need certainty
- To understand the need for intention to create legal relations
- To understand the issues of vagueness and incompleteness with regard to certainty
- To be able to use the test of reasonableness
- To understand the case law surrounding intention to create legal relations
- To be able to determine which agreements are legally binding and have an intention to create legal relations
- To be able to distinguish between social and domestic agreements and those made in the commercial context
2.3.2 Certainty & Intention to Create Legal Relations Lecture
Once an offer and acceptance are considered valid, an agreement is formed. Certainty Is the next requirement to make the agreement legally enforceable. If an agreement is not considered certain and thereby lacks this requirement, then it will not be enforceable – Gunthing v Lynn (1831) 2 B7 Ad 232.
Every case involved with a dispute as to whether a contract lacks certainty is heavily fact based and individual. As such, it is always important to pay close attention to the facts surrounding the agreement, and any clauses or wording relating to said agreement.
The two areas that need to be considered when reviewing whether an agreement is certain can be broadly placed into two categories: (a) vagueness of the agreement and (b) whether it is incomplete.
If an agreement is considered too vague or abstract, and without altering the agreements’ terms, or without adding new terms it could not be reconciled, no effect will be given to the agreement – Mileform Ltd v Interserve Security Ltd  EWHC 3386.
In G Scammell & Nephew v Ouston  AC 251 it was held that an agreement concerning goods subject to a hire purchase clause could not be given effect as the terms of this clause were not actually specified.
As considering all vague agreements to be contractually unenforceable would not be realistically appropriate, the Court has various methods at its disposal, that can provide certain agreements with legally enforceability.
Methods for resolving vagueness
- Use of business customs and trade usages: In the interest of contractual and commercial certainty, a Court will often give effect to vague agreements by filling their gaps in with business, customs and trade usages – Courtney v Fairbairn Ltd v Tolaini Bros (Hotels) Ltd  1 All ER 453. If a party however is not used to any such business, customs and trade usages the Court may not find it appropriate to use this method of curing vagueness – Hollingworth v Southern Ferries  2 Lloyd’s Rep 70.
- Reasonableness: Where a contract would fail through virtue of an uncertainty the Court will apply an objective standard to the agreement to fix the issue. A great case example to illustrate this fact, would be Hillas & Co v Arcos Ltd (1932) 147 LT 503. In this case, a contract was made for the supply of goods described as “fair”. As “fair” in terms of goods is not an adequate description, the Court applied an objective assessment and determined that “fair” in the context of the agreement could be adequately defined.
- Doctrine of severability: If a clause is irreconcilable with the agreement due to how vague it is the Court may completely strike it from the agreement so the rest of said agreement can be legally enforced. In Nicolene Ltd v Simmonds  1 QB 543, an agreement was subject to “usual conditions of acceptance”, as the Court considered this phrase meaningless they excluded them from the agreement. Similarly, if a phrase contradicts itself then the Court may remove it from the agreement – ERJ Lovelock v Exportles  1 Lloyd’s Rep 163.
- The contract itself: The contract itself may also be able to resolve any ambiguity in the work. In Foley v Classique Coaches Ltd  2 KB 1, all disputes concerning the potential vagueness of the contract were to be resolved by an arbitrator.
- Look out for terms that are ambiguous e.g. lots, many, large, -ish (the suffix).
- Make sure the type of contract is reviewed e.g. commercial or private.
- Are the parties aware of each-others’ needs?
- Is there a clause that seems contradictory or meaningless within the terms?
- Check whether the contract contains terms within itself to resolve disputes.
An agreement does not require every minute detail to be addressed for it to be capable of legal enforceability. Every vital/essential piece of information however is required – Grow With Us Ltd v Green Thumb (UK) Ltd  EWCA Civ 1201.
The degree to which a term is considered vital/essential within an agreement varies depending of the facts surrounding the agreement. Where in one case a period of a lease and the property being conveyed are essential terms within the agreement (Harvey v Pratt  1 WLR 1025) in another the price of goods being sold may not actually be considered important (Bushwall Properties v Vortex Properties  1 WLR 591).
It is always prudent then to pay direct attention to the facts when making a conclusion based on potential incompleteness of a contract, the key thing to consider is the extent to which a term is in fact vital to the agreement. The other important things to consider are the other methods in which a contracts’ potential incompleteness can be resolved.
Methods of resolving incompleteness
- Determination by a contracting party: If a term within a contract is missing e.g. price of goods to be sold, there may be a clause in the contract that permits a particular party to resolve the issue – Bulk Trading Co v Zenziper Grains and Feedstuffs  1 Lloyd’s Rep 357.
- Determination by a third party of mechanism: If a situation arises where a contact is incomplete through a lack of terms due to a third party requirement or mechanism needing to be activated, such as an independent valuation. The Court themselves may ensure that this term is given effect in order to ensure the contract is provided with its missing terms – Sudbrook Trading Estate v Eggleton  1 AC 444. This however can be contrasted by cases where the third party assistance or mechanism is itself essential to the agreement, such as a very specific third party needing to value a particular thing. The Court in these situations is unable to give effect to the agreement themselves – Gillatt v Sky Television,  1 All ER 461.
- Always look at the specific facts of the case. Incompleteness and vagueness are often difficult to distinguish.
- Is the missing term vital to the contract? Remember this requirement is debatable depending on the facts.
- Make sure to check whether there is a method the Court can employ to resolve the incompleteness or would they be over-stepping to do so?
Intention to create legal relations
The intention to create legal relations, simply, is the requirement that parties to an agreement wish to be legally bound to said agreement.
There is a large controversy surrounding the concept of requiring intention to create legal relations. Williston a leading academic, argues that objectively, providing consideration for an agreement is evidence enough of the parties’ intention to contract. While the other side, namely academics such as Treitel, submits that it must be subjectively determined that a party contemplated to be legally bound by the agreement.
In terms of academic debate, this issue is a large source of controversy. The Courts in response have adopted an objective based test of reasonableness to determine whether parties intended to be legally bound by an agreement. However present within the test are a number of presumptions that provide it with a subjective element. A balance of the previous academic opinion is thereby provided as result.
The test of reasonableness
The test of whether there was intent present to create legal relation on formation of an agreement is one of fact. This means the Court does not review the subjective opinions of the parties, only an objective assessment of the situation in which the agreement arose. This objective standard is determined by the “reasonable man” – Smith v Hughes (1871) LR 6 QB 597. The test therefore is whether or not the parties would have reasonably believed themselves to be entering into a contract, of which failure to adhere would have legal repercussions – Albert v Motor Insurer’s Bureau  AC 301.
Situations where a promise is uncertain will often cause an agreement to be non-legally binding, such as agreements made under serious emotional influence – Licenses Insurance Corporation v Lawson (1896) 12 TLR 501.
This test is only ever applicable where the facts suggest there may have been no form of contractual intent.
As mentioned previously, there are a number of presumptions applicable to the test of reasonableness.
Exceptions and presumptions
- Domestic agreements: Domestic agreement are presumed to be considered non-contractually binding – Balfour v Balfour,  2 KB 571. Understandably this is due the public policy concerns related to governing marital and household arrangements. Although this presumption seems obvious in its applicability, it itself has rebuttals;
- Lack of cohabitation – In situations where the parties normally considered to be close enough in proximity for the purposes of the rule to apply e.g. husband and wife, the rule can be rebutted if they lack the necessary degree of cohabitation – Merritt v Merritt  1 WLR 1211.
- Commercial attributes – If a domestic agreement is commercial in nature, then it will rebut the domestic agreement presumption – Granatino v Radmacher,  UKSC 42. Commercial attributes also extend to situations like sharing a bank account and owning property.
- One party has acted on a promise to a detriment – If a party acts on an agreement to a detriment then the agreement may in fact be contractually binding. An example to illustrate this point is best demonstrated by Tanner v Tanner  1 WLR 1346. In this case a party was induced to sell their property based on the promise that the other party (with whom they cohabited) would allow them to stay the property currently being cohabited in. When this promise was not acted upon, the Court found the detriment caused by selling the house was sufficient to make the agreement contractual.
- Executed agreements – Agreements that require execution to be binding are given even less legal weight in domestic situations; if parties to an agreement are both sufficiently proximate and they have not performed any of the obligations under the agreement, the Court will not view the existence of a contract favourably – Rob Purton Richwood Interiors v Kilker Projects Limited  EWHC 2624.
- Social agreements: In a similar fashion to domestic agreements, social arrangements will often not exhibit the necessary intention required to form legal relations – Lens v Devonshire Club (1914) The Times, December 4. Agreements such as carpooling between colleagues, even if one party pays the cost (Wyatt v Kreglinger & Fernau  1 KB 793) and sharing of a house (Monmouth BC v Marlog) for example are not enforceable. Like domestic agreements, social agreements also have rebuttals.
- Simpkins v Pays  1 WLR 975– Third parties can rebut the presumption of an agreement forming a contract such as the addition of a lodger in a contract between a granddaughter and grandmother.
- Commercial agreements: In contrast to the other two presumptions, this presumption rests in favour of presuming intent to form legal relations. In the Esso Petroleum Ltd v Commissioners of Customs and Excise  1 WLR 1 this was firmly established. Although in this case it was later found that respondent did not in fact intend to create legal relations. It was their duty to prove this was so. It could be said then that the burden of proof in these instances is to prove there is no intent to create legal relations.
This presumption is so strong that even in cases where an agreement is executed as an “honourable arrangement” the Court may infer an intent to create legal relations (Home and Overseas Ins Co v Mentor Ins Co (UK),  1 Lloyd’s Rep 473).
Much like the other presumptions, this presumption also has a series of rebuttals;
- Collective agreement between trade union and an employer – Collective agreements between a trade union and an employer are not enforceable. For example, a statement of aims placed into a contract from an employer at the request of a trade union is not legally binding – Kaur v MG Rover IRLR 40.
- Honour clause – Honour clauses are terms within agreements that highlight that an agreement is never intended to cause legal relations to form a great example is contained within the case of Rose and Frank Co v JR Crompton and Bros Ltd  AC 445. The clause stated;
“This arrangement is not entered into, nor is this memorandum written, as a formal or legal agreement and shall not be subject to legal jurisdiction in the law courts …, but it is only a definite expression and record of the purpose and intention of the three parties concerned to which they each honourably pledge themselves”
The Courts as such, did not find that the agreement intended to give rise to legal relations.
- Pre-contractual promise, comfort letter or letter of intent – Contractual intent may be negated in cases where the promise is made at a pre-contractual stage. Letters of intent and comfort letters (letters providing basic reassurances) will also not be held as giving rise to legal relations by Courts – Kleinwort Benson Ltd v Malaysian Mining Corporation  1 WLR 379. However, a letter of intent sent that has then been acted upon over a long period of time and has cost indispensable monies can in fact cause legally binding relations to rise – Turriff Construction Ltd v Regalia Knitting Mills (1971) 22 EG 169.
Finally, in certain situations where a formally written agreement or record has not been kept when it should normally/reasonably be done so. Any intent to form legal relations may be negated – Meates v Westpac Corp The Times (5 July 1990).
Intention versus consideration
While in a number of other jurisdictions consideration and intent are not separate entities. The English/Welsh position on this matter is entirely different. Consideration will be discussed further in the next chapter.
A large number of academics and other common law legal systems have found that the concept of intention when forming contractual legal relations is nonsensical. It is often argued to be an unnecessary step placed into the usual offer-acceptance-consideration process. It is also proposed that the concept of consideration actually evidences any intention relevant to a contracts formation and as such, searching independently for intention is not required.
In the English/Welsh system however intent to create legal relations has been isolated as its own separate and distinct requirement for the formation of a contract. Therefore, both intent and consideration should be discussed as separate entities if a question arises concerning contractual formation. Do not however be disheartened if the two doctrines seem to overlap, this is common and as such is nothing to worry about.
2.3.3 Certainty & Intention to Create Legal Relations Lecture – Hands on Example
The following scenario seeks to assess your understanding of the concepts of “contractual certainty” and “intention to create legal relations” on a practical standpoint.
In answering the issues, you should apply the theory and principles, alongside the cases discussed above. While referring back to the notes may be helpful, not all of the content will be relevant here. Hence, you should be able to identify the applicable heads and related case law. Further, given that the notes do not (and cannot possibly) capture all decided cases until date, you should be able to research on, review and understand other relevant cases on the subject, and apply them to the scenario. This however should be done once you have obtained a thorough conceptual understanding, for which the notes should help.
While the solutions may be quite subjective and case-specific, probable answers are provided at the bottom of the page. Start by identifying the legal issues involved in each problem.
The facts concern the following two transactions between Anthony and Xylem Ltd, a UK registered company:
1.Anthony paid £20,000 to Xylem Ltd in anticipation of entering into a share subscription agreement towards investing and issuance of shares of the company. The monies were advanced against a term sheet executed between Anthony and Xylem Ltd, which contained a clause-
“9.1 This term sheet will have no binding effect on the parties, except the provisions relating to dispute resolution, exclusivity, and severability, provided in clauses… “
Further, as regards the number of shares to be issued, valuation, transfer restrictions, pre-emption rights, and dividend rights, the term sheet referred to the future subscription agreement to be executed between the parties.
Later, Xylem Ltd, owing to change in business plans, did not issue the shares to Anthony, who brought a claim for breach of contract against Xylem Ltd. Can Anthony succeed in his claim?
2.Anthony and Xylem Ltd were shareholders in Trident Ltd, a London based company, operating in the consumer sector. Prior to its demerger, Anthony and Xylem Ltd orally agreed to apportion certain proceeds from the demerger amongst themselves in 1:2 ratio, without elaborating further upon the mechanism of such payment. Following this, the demerger was undertaken pursuant to a written contract, which however did not mention the apportionment at all.
After the demerger, Anthony sought to recover his share of proceeds, failing which he brought an action of breach against Xylem Ltd. Does Xylem Ltd have a binding obligation to abide by the apportionment (1:2) of the proceeds?
1.The issue is whether the term sheet in anticipation of the investment and share subscription agreement constitutes a binding contract. The issue needs to be appraised in two stages: (i) whether the clauses in the term sheet are clear and certain as regards the essential aspects of the transaction, and (ii) only if so, whether the parties contemplated the term sheet to have legal effect and consequences.
Considering that the term sheet was of the nature of an “agreement to agree” in future upon the most vital terms of the share issuance (including the number of shares and valuation, aside to other related matters of transfer, pre-emption, dividend- normally decided at the stage of share subscription itself), it cannot be reckoned as clear and certain enough so as to constitute a valid and binding contract. An agreement cannot be implemented or enforced if it lacks certainty as regards the essential and vital terms, left to be agreed in future. This position is well-established through cases like Barbudev v Eurocom Cable Management Bulgaria,  EWHC 1560, and Dhanani v Crasnianski,  EWHC 926, (discussed in the notes).
This is more so, as the term sheet contains an express non-binding clause, hinting at the intention of the parties to not effectuate any legal consequences out of it. This is notwithstanding that the term sheet was a document of commercial character, and carried a presumption of being intended to have legal effect. Nonetheless, Anthony may seek restitution and recover £20,000 already being paid to Xylem Ltd, owing to the failed share issuance and subscription. The conclusion can be traced to the recent case of Kowalishin v Roberts,  EWHC 1333.
2.The issue is whether an oral agreement, not confirmed in a subsequent written one executed between the parties, can be enforced as a valid and binding contract. Again, the issue needs to be appraised in two stages: (i) whether the oral agreement can be reckoned to be so certain and clear on the essential attributes so as to be enforced as on a stand-alone basis, and (ii) only if so, whether the parties contemplated such oral agreement on the apportionment to have legal effect and consequences.
Firstly, as regards certainty, the oral agreement only provided a sketch of the proposed apportionment without detailing the payment mechanism- a vital requirement for the apportionment to be implemented. Thus, the agreement was incomplete and uncertain.
Moreover, given that the parties did not incorporate the apportionment in the final documented and executed demerger agreement, it is clear that they never intended to legally effectuate it, regardless of any presumption in favour of it being so as a commercial arrangement. This finds support from the recent ruling in Barnsley v Noble,  EWHC 2657, in which the court held that it is not enough for the parties to merely agree on some matter. Rather, it must be proved (or disproved in commercial agreements) that they intended their agreement to have the status of a legally binding and enforceable contract. Considering that neither party intended so, and there was no express agreement following the oral one (which was abstract and incomplete on essential aspects), the presumption and the contractual claim must fail.