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mother based her claim on the allegation that the agreement was not made with the intention of creating a legal relationship. A majority of the Court of Appeal held that there was no inten-tion to create a legal relainten-tionship between the parties and gave the mother possession of the house. Lord Salmon agreed with the decision but arrived at it on different grounds. He considered that the first agreement was a binding contract that was intended to last for a rea-sonable time in order to allow the daughter to pass her Bar Finals. When five years had gone by and she had still not passed them he considered that the contract had lapsed. The second agreement concerning the possession of the house he considered to be so ambiguous and uncertain as to be incapable of being described as a contract. Lord Salmon based his decision regarding the first agreement on the fact that he thought it inconceivable for the daughter to give up a lucrative job without there existing an enforceable promise of financial support.

Other social arrangements

Questions such as those discussed above may also occur in agreements other than those between husband and wife and parent and child, that is, in everyday social arrangements.

Similarly the presumption is against a finding of an intention to create a legal relation-ship, though this may also be rebutted by evidence to the contrary. A factor that can be very influential here is the notion of mutuality.

Simpkins v Pays [1955] 3 All ER 10

The defendant owned a house in which she lived with her granddaughter and the plaintiff, a paying lodger. The three regularly took part in a competition in a Sunday newspaper. Whilst the entries were entered under the defendant’s name, all of them contributed to the competition, though there was no regular arrangement as to the payment of postage and other expenses.

One week the entry was successful but the defendant refused to pay the plaintiff his share of the prize and claimed that there was no intention to create a legally binding relationship. It was held that the plaintiff was entitled to his share, the judge stating that there was sufficient

‘mutuality in the arrangements between the parties’ to establish a legally binding agreement to share any prize that might be won.

Commercial agreements

In these types of agreements there is a strong presumption that there is an intention to create a legally binding relationship. This presumption can, of course, be rebutted, but in fact very strong evidence is required to do this. One way of rebutting the presumption is by inserting an express statement to this effect in a written statement. In Appleson v H Littlewood Ltd [1939] 1 All ER 464 and in Jones v Vernon’s Pools Ltd [1938] 2 All ER 626 the plaintiffs in both cases attempted to claim moneys which they alleged had been won in a football pool. The words ‘Binding in honour only’ were contained on each coupon.

It was held that the words were sufficient to rebut the presumption and the plaintiffs thus failed in their action.

The decisions in the Littlewood’s and Vernon’s cases are not difficult to understand given the nature of the transactions, which could hardly be said to arise from the harsh world of commercial bargaining. A remarkable case that does, however, so emanate is that of Rose and Frank Co. v J R Crompton and Bros.

CHAPTER 4 INTENTION TO CREATE LEGAL RELATIONS

Rose and Frank Co. v J R Crompton and Bros [1925] AC 445

In this case an English company agreed to sell certain carbon copy materials in the USA through a New York-based firm. The transaction, which was made in writing, gave the plain-tiffs the sole rights to market and sell the products in the USA and Canada for a period of three years with an option to extend the period. The document contained a clause, which was described as an ‘Honourable Pledge Clause’, and which provided: ‘This arrangement is not entered into . . . as a formal or legal agreement and shall not be subject to legal jurisdiction to the law courts either of the United States or England.’ The original agreement began in July 1913 but at the end of the three-year period the option to extend was exercised; as a result the agreement was to last until March 1920. In 1919 the English defendants terminated the agree-ment and failed to give appropriate notice as required by the agreeagree-ment, and also refused to fulfil orders received by them prior to their decision to terminate the agreement.

The Court of Appeal decided that with regard to the orders already received there arose a separate and binding contract which the defendants were bound to fulfil. With respect to the grant of the selling rights, the court found that as the parties had specifically declared that the document was not to bring about legally binding consequences then none could exist; as a result there was no obligation to give orders or to receive them, though once they were given and accepted the defendants were bound to execute the order.

While the case gives effect to the intentions of the parties as expressed in the written memorandum and no doubt produces a fair result as regards the orders already received, the decision in the Court of Appeal fails to address satisfactorily two problems, both of which were raised at first instance. First, how can the clause bind the parties if there is no binding contract as alleged by the clause itself? This is obviously illogical and whilst the end result may be said to be justifiable where the contract is entered into by busi-nesspeople negotiating at arm’s length, serious problems might result if such clauses were to become part and parcel of a standard-form contract imposed on an unwary or weaker party. Second, the clause would appear to be void in any event as being contrary to public policy in that it purports to oust the jurisdiction of the courts. This principle is a fundamental element of the common law and seems to have been sidestepped by the argument that it only operates where the contract was intended to be legally binding in the first place. As Atiyah points out in An Introduction to the Law of Contract, such a distinction appears to be highly artificial.

Despite the decision in the Rose and Frank case, it still remains a strong presumption in commercial agreements that there is an intention to create a legally binding contract.

This is particularly true where a party attempts to overturn the presumption but does so in a clause that is ambiguous. The burden of proving this assertion falls on that individual.

Edwards v Skyways Ltd [1964] 1 All ER 494

The plaintiff was employed as an airline pilot when the defendants, his employers, informed him that they were making him redundant and gave him three months’ notice. By virtue of his contract the plaintiff was a member of the defendants’ contributory pension fund which entitled

COMMERCIAL AGREEMENTS equal to the defendants’ contribution to the fund. The plaintiff accepted the agreement and chose to withdraw his contributions. The defendants then paid him his total contributions but refused to make the ex gratia payment. The plaintiff sued for breach of contract and won. The judge stated that the words ex gratia did not give rise to a negative contract agreement but simply meant that the employers did not admit to any pre-existing legal liability on their part.

They failed to discharge the burden of overturning the presumption that there was an inten-tion to create a legal relainten-tionship and were thus liable to make the payment.

A development in this area has been the emergence of so-called ‘letters of comfort’.

A letter of comfortis a letter or memorandum usually written by a holding company to a lender about to lend money to a subsidiary of the holding company so as to reassure the lender of the financial viability of the subsidiary. Such letters are not guarantees in that the holding company is not willing to enter into a legally binding financial commitment.

The possible reasons for adopting such a stance could be that the amount of the guar-antee exceeds the financial commitments embodied in the articles of association of the holding company or the presence of such a financial commitment in the accounts of the holding company would have an adverse effect on its own affairs. The leading case in this area is that of Kleinwort Benson Ltd v Malaysia Mining Corporation Bhd.

Kleinwort Benson Ltd v Malaysia Mining Corporation Bhd [1989] 1 All ER 785 The plaintiff bank had agreed a loan facility to the wholly owned subsidiary of MMC, MMC Metals Ltd, which was trading in tin on the London Metal Exchange. The bank was not willing to lend the money simply on the basis of MMC Metals’ creditworthiness and called on MMC itself to guarantee the loan. MMC replied to this proposal that it was not its policy to guaran-tee the loans of its subsidiaries. After considerable negotiations MMC agreed to issue a letter of comfort in which it stated, inter alia, ‘It is our policy to ensure that the business of MMC Metals Ltd is at all times in a position to meet its liabilities to you.’ KB agreed to accept the letter of comfort but on the basis that a higher rate of interest would be charged. Eventually the world tin market collapsed, leaving MMC Metals insolvent. The plaintiff claimed the balance of the moneys owed from the parent company, the defendant.

At first instance the case was treated as one dealing with an intention to create a legal rela-tionship, the judge finding that since this was a highly commercial agreement, a contractual obligation existed on the part of the defendants. The judge relied heavily on the decision in the Skyways case, stating that in a business context an intention to create a legal relationship was presumed and that the onus of proving a contrary assertion lay on the party making it, in this case MMC. He found that MMC had not discharged this burden and they were therefore bound to meet the liabilities of MMC Metals.

The Court of Appeal disagreed with the judge at first instance and stated that the Skyways case concerned a promise supported by consideration and therefore had no application to the present case. The question that had to be asked was whether the clause conveyed an express intention to create a legal relationship in that it contained within it a contractual promise. The court found that it merely conveyed a statement as to present intention and was carefully drafted so as not to contain a statement as to future conduct. The appeal of MMC was thus allowed. Nevertheless some care has to be exercised with the case in two respects: first, the case turns very much on the court’s interpretation of the clause in question, and the absence of express words indicating a promise does not necessarily prevent a statement from amount-ing to a contractual promise. Second, the clause in question would not be devoid of all legal effect if in fact it amounted to a fraudulent misrepresentation of the existing position.

CHAPTER 4 INTENTION TO CREATE LEGAL RELATIONS

A further exception to the presumption of an intention to create a legal relation-ship in commercial agreements lies in the case of advertisements. In order to protect advertisers who make flamboyant claims regarding the products advertised, the law assumes that there is no intention to create a legal relationship, thus preventing some disappointed individual who finds the claims exaggerated from taking any action. Such exaggerated claims are referred to as mere ‘puffs’, in that they ‘puff’ up the product in order to make it more attractive and thereby induce consumers to purchase it. Very often such claims are gross exaggerations and no one really expects the products to produce the effects envisaged by the advertiser. Contemporary examples are very often visual and would appear to hope, for instance, to persuade the public to buy a certain brand of coffee to experience some unlikely romantic liaison for which a beer that reaches the parts the others cannot reach would also be required at some stage of the evening. In the past, slogans were very much the forte of the advertising agency, for example: ‘Daz washes whiter than white!’ Probably the more exaggerated the claim, the safer the advertiser is, since if the claim appears to have some semblance of credibility, the more likely it is to have a contractual effect that is legally enforceable. The case of Carlill v Carbolic Smoke Ball Co., already discussed, provides a classic example of such a case.

Summary

l An intention to form legal relations is a fundamental component of any contract.

l A contract is not enforceable if the parties lack an intention to form legal relations.

Social and domestic arrangements

l Most social and domestic arrangements are not intended to amount to a binding contract.

Family arrangements

l Family arrangements for the payment of maintenance between husband and wife cannot form a contract (Balfour v Balfour).

l The burden is on the plaintiff to rebut the presumption that there was no intention to create a contract (Merritt v Merritt).

l The burden has to be rebutted when examining intention of the parties where they are between parents and children (Jones v Padavatton).

Other social arrangements

l Jointly taking part in a competition and sharing the prize amounts to a binding contract (Simpkins v Pays).

Commercial agreements

FURTHER READING

Visit www.mylawchamber.co.uk/richards to access exam-style questions with answer guidance, multiple-choice quizzes, live weblinks, an online glossary, and regular updates to the law.

Use Case Navigator to read in full some of the key cases referenced in this chapter:

Balfour v Balfour [1919] 2 KB 571

Carlill v Carbolic Smoke Ball Co. [1893] 1 QB 256

l Gentlemen’s agreements: Honourable Pledge Clauses will not give rise to an intention to create a contract (Rose and Frank Co. v J R Crompton and Bros).

l Letters of comfort: Letters of this type aim to pacify and reassure a nervous third party entering into a contract with a subsidiary of a parent company without the parent company attracting liability for any breach (Kleinwort Benson Ltd v Malaysia Mining Corporation Bhd).

l Advertisements:

l The law protects advertisers who exaggerate their product by assuming that there is no intention to create a legal relationship.

l This presumption can be rebutted depending on how exaggerated the claims are (Carlill v Carbolic Smoke Ball Co.).

Further reading

Atiyah, An Introduction to the Law of Contract, 6th edn (Oxford University Press, 2003) Beale, Bishop and Furmston, Contract – Cases and Materials, 4th edn (Butterworths, 2001) Beatson, Anson’s Law of Contract, 28th edn (Oxford University Press, 2002)

Brown, ‘The Letter of Comfort: Placebo or Promise?’ [1990] Journal of Business Law 281 Furmston, Cheshire, Fifoot and Furmston’s Law of Contract, 15th edn (Oxford University Press,

2006)

Hedley, ‘Keeping Contract in its Place: Balfour v Balfour and the Enforceability of Informal Agreements’ (1985) 5 Oxford Journal of Legal Studies 391

Hepple, ‘Intention to Create Legal Relations’ [1970] Cambridge Law Journal 122 Treitel, The Law of Contract, 11th edn (Sweet & Maxwell, 2003)

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