Intention To Create Legal Relation-CIMA


1.  agreement is not a binding contract unless the parties intend thereby to create legal relations. Where the parties have not expressly denied such intention, what matters is not what the parties have in their minds, but the inferences that reasonable people would draw from their words or conduct – it is an objective test. In Carlill's Case the decision might have been different if there had been no deposit of money to show sincerity.

2. Any express statement by the; parties of their intention not to make a binding contract is conclusive.Case: Rose and Frank v J R Crompton & Bros 1923.A commercial agreement by which A (a British manufacturer) appointed B to be its distributor in USA expressly stated that it was 'not subject to legal jurisdiction' in either country. A terminated agreement without giving notice as it required, and refused to deliver goods ordered by B although A had accepted these orders when placed.

Held: the general agreement was not legally binding but the orders for goods were separate and binding contracts.


1. Where there is no express statement, as maybe said to be true of the majority of contracts, the courts apply two presumptions to a case:

(a)           social, domestic and family arrangements are not usually intended to be binding;

(b)           commercial agreements are usually intended by the parties involved to be legally  binding.

domestic arrangements

2. In most agreements no intention is expressly stated. If it is a domestic agreement between husband and wife, relatives or friend,. it is presumed that there is no intention to create legal relations unless the circumstances point to the opposite conclusion.

case: Bal four v Bal four 1919

The husband was employed in Ceylon. He and his wife returned to the UK on leave but it was agreed that for health reasons she would not return to Ceylon with him. He promised to pay her £ 30 p.m. as maintenance. Later the marriage ended in divorce and the wife sued for the' monthly allowance which the husband no longer paid..

Held: an informal agreement of indefinite duration made between husband and wife (whose marriage had not then broken up) was not intended to be legally binding. Similarly, use of uncertain words such as "I'll pay you £ IS as long as I can manage it" will lead the court to conclude that legal relations were not intended: Gould v Gould 1969.

Case: Merritt v Merritt 1970

The husband had left the matrimonial home, which was owned by him, to live with another woman. The spouses met and held a discussion in the husband's car in the course of which he agreed to pay her £ 40 p.m. out of which she agreed to keep up the mortgage payments on the house. The wife refused to leave the car until the husband signed a note of these agreed terms and an undertaking to transfer the house into her sole name when the mortgage had been paid off. The wife paid off the mortgage but the husband refused to transfer the house to her.

Held: in the circumstances, intention to create legal relations was to be inferred and the wife could sue for breach of contract.

3.Where agreements between husband and wife or other relatives relate to property matters the – courts are very ready to impute an intention to create legal relations.

4. Domestic arrangements extend to those between people who are not related but who have a close , relationship of some form. The nature of the agreement itself may lead to the conclusion that legal relations were intended.

Case: Simpkins v Pays /955

A woman, her granddaughter and a paying boarder all took part together in a weekly competition organised by a Sunday newspaper. The arrangements over postage etc were informal and the entries were made in the grandmother's name. One week they won £ 750; the paying boarder %%-as denied a third share by the other two.

Held: there was a ‘mutuality of agreement' amongst the parties, amounting to a joint enterprise. As such it was not a `friendly adventure' as the defendant claimed, but a contract.

commercial agreements

5. when businessmen enter into commercial agreements it is presumed that there is an intention to enter into legal relations unless this is expressly disclaimed or the circumstances (eg difficulty in enforcement) displace that presumption. Carlill's Case is yet again a useful illustration of a legal principle; the deposit of £ 1,000 at a bank was taken as proof that they

case: Edwards v Skyways 1964

In negotiations over the terms for making an employee redundant, the employer undertook to make an ex-gratia payment to him – a payment without admission of previous liability.

Held: the denial of previous liability (ex  gratia payment) did not suffice to rebut the presumption that the agreed terms were intended to be legally binding in their future operation.

6.It was held in 1969 that procedural agreements between employers and trade unions for the settlement of disputes are not by their nature intended to give rise to legal relations in spite of their elaborate and very legal contents. Ford Motor Co v AUEW 1969. That view has been confirmed by statute: s18 Trade Union and Labour Relations Act 1974.

7. The presumption that commercial agreements are not legally binding needs to be expressly rebutted; however, for many years, holding companies have given’ comfort letters' to creditors of subsidiaries which purport to give some comfort as to the ability of the subsidiary to pay its debts. Such a letter has always been presumed in the past not to be legally binding, and the decision in the case below gives the reasons for such a presumption.

case: Kleinwort Benson Ltd v Malaysian Mining Corporation Berhad 1989

The plaintiffs lent money to the defendant's subsidiary, having received a letter from the plaintiff stating

"It is our policy to ensure that the business is at all times in a position to meet its liabilities to you."

On the collapse of the International Tin Council the subsidiary went into liquidation, and the bank claimed from its holding company, MMC.


(a) the bank had clearly acted on the strength of the letter and so believed it to be of legal force;

(b)           the defendant had failed to ensure its subsidiary's liabilities could be met;

(c)            the onus was on the defendant who claimed the letter was intended to have no legal effect to prove that was so.

The Appeal Court found that the statement of policy was a representation of fact and not a promise that the policy would continue in the future. This promise could not be implied where it was not expressly stated. Because both parties were well aware that in business parlance a `comfort letter' imposed moral and not legal responsibilities, it was held not to have been given with the intention of creating legal relations. The defendant's breach of moral responsibility was of no concern to the court.


In this short chapter we have seen that, as well as consideration and agreement, the parties to a contract which is binding must have intended to enter into legal relations. Although this is rarely an issue in a straightforward business or consumer contract, where the parties are friends or are related this element can prevent an agreement from being legally binding.