Contracts – intention to enter into a legally enforceable relationship

Date: Sep 14, 2014
Document Type: Article

As noted in earlier article ‘what is a contract’ a contract is a legally binding promise. The requirements for a valid and enforceable contract are:

  • an agreement between two or more parties;
  • value passing between the parties; and
  • an intention of all parties to enter into legal relations.

The last element is particularly important. Without it, all the agreements we make over the day could potentially create legally enforceable obligations, for which we could be sued if we didn’t comply. Imagine if your work colleague could sue you for breach of contract after you forgot to pick up their coffee for them, simply because you agreed to go on a coffee run (agreement) and they gave you money to pay for it (value). The element of intention to enter into a contract is vital to avoid such absurd results in everyday life.

How is intention ascertained?

The test for figuring out what the parties’ intention was in entering into an agreement is objective. Therefore, a party seeking to enforce a contract doesn’t have to prove that they consciously adverted to the legal implications of entering into the agreement. They only need to show that it can be inferred from the facts that such an intention was express or implied in the agreement. The inference of such a fact is assisted by two main presumptions regarding intention; family or domestic agreements and business or commercial agreements. However, these presumptions can be rebutted and do not cover the field.

Presumption 1: Family, social or domestic agreements

There is a presumption of no intention to create legal relations for family, social or domestic agreements. For example, if parents decided to give their daughter an allowance on the condition she keep her grades up, it is unlikely this will be regarded as a contractual arrangement. This presumption is based on the idea that families prefer to rely on mutual trust and affection rather than contracts to enforce their obligations to each other.

The easiest way to rebut this presumption would be to create a written contract with the assistance of a lawyer. However, the presumption can also be rebutted if for example husband and wife have separated or possibly in circumstances where an elderly relative promises their house to a family member in return for caring for them until their death. Whether the presumption has been rebutted will depend on the facts of the case.

Presumption 2: Business or commercial agreements

There is a presumption of an intention to enter into a legally enforceable contract for business or commercial situations. It is rare for the conclusion to be drawn that parties did not intend business agreements to be attended by legal consequences. Such a presumption could be rebutted if there is an express, clear and unambiguous exclusion of that intention by the parties.

Although these presumptions are helpful, difficulties arise when there are overlaps of these categories (eg. family businesses) or situations that do not fit neatly within either category. In those situations, intention will have to be judged by the general principle of objectivity.

If you require assistance in relation to contracts, please do not hesitate to contact us.

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