Intention to Create Legal Relations

There are some agreements made, where even though a valid offer has been made and then accepted, the courts still might decide that it is not legally enforceable. This is because when the parties made their agreement, they didn’t intend it to be legally binding. To determine if an agreement is legally binding, the courts have different rules for social/domestic agreements and business/commercial agreements. After all, it would be ridiculous if children could sue their parents for failing to give them their weekly pocket money. It wouldn’t be ridiculous, however, for a company to sue if their suppliers failed to give them their supplies, resulting in a loss of earnings.

Commercial Agreements - Arrangements made in business contexts are generally regarded as being legally binding, unless evidence can demonstrate that this was never the intention. It must be determined on a case-by-case basis. This was illustrated in the case of Edwards v Skyways Ltd, where an agreement was made to pay out in the case of a redundancy. Skyways Ltd attempted to avoid making this payment after the agreement was made, but the court refused to allow this, even though there was no need for the agreement to be made in the first place.

Intention to Create Legal Relations, figure 1

In order to identify an intention, the courts distinguish between a basic agreement (where further details may be added at a later stage) and situations where a final decision is deferred until some matter is resolved between the two or more parties. In situations where free gifts or prizes are offered in promotions or competitions, these are agreements which must be honoured. This was seen in the case of McGowan v Radio Buxton, where the claimant won a competition, with the prize being a Renault Clio car. The radio station tried to give the winner a toy Renault Clio, stating that there was no legally binding contract. The court disagreed, arguing that there was an intention to create legal relations and furthermore that there was not even a hint that the prize would be a toy car.

The only way for an intention to not be legally binding is where it is stated in the agreement itself, often in the small-print. For example, in Jones v Vernon’s Pools Ltd, an agreement clearly stated that there was no legal relationship between the winner and Vernon’s Pools Ltd, but is “binding in honour only”. So when the claimant argued that his winning coupon had been lost by the company, the clause in the agreement rendered his claim invalid.

Social and Domestic Agreements - As mentioned earlier, agreements made within families should generally be regarded as not legally binding. Key cases to illustrate this are Balfour v Balfour and Merrit v Merrit. In the Balfour case, the claimant argued that her husband had agreed to pay his wife an allowance. However, the intention was only to be honoured during the course of their marriage. Since the husband only stopped paying the allowance after their separation, there was clearly a different set of circumstances, so the court decided he was not liable for the payments. Agreements made within marriage should not be considered to be legally binding. In contrast, a similar situation arose between Mr and Mrs Merrit. Only this time, the agreement was made after the marriage had broken down. Since this was an agreement made outside the marriage, it should be considered to be legally binding. Not only that, but it was put into writing.

Intention to Create Legal Relations, figure 2

In cases which don’t involve family members, but which are still “social” agreements, one must consider whether money had changed hands. Once this happens, the agreement goes beyond the normal social conventions and the parties have entered into a legally binding agreement. In Parker v Clarke, the Parkers, a young couple, agreed with the Clarkes to sell their house and move in with the older couple in order to share living expenses. In return, the younger couple would also inherit the older couple’s house. When the initial social agreement was put into writing and money was exchanged, the agreement stopped being a social agreement and became legally binding.

Are social agreements and commercial agreements governed by the same rules?
The type of agreement where further details may be added at a later stage is called what?
True or false: Arrangements made in business contexts are always regarded as being legally binding?
What must change hands in order to make a social agreement into a commercial one?