Capacity to be Bound to the Contract

In the aspect of law, a contract is a legally binding agreement between two or more parties which contain elements of a valid legal agreement which is enforceable by law. An agreement is said to be reached when an offer offered by the offeree has been accept by the acceptor as an acceptance. These parties must have the capacity to be bound to the contract and the contract must not be insignificant, vague, unfeasible, or against the law. In daily life, most contracts can be and are made orally, such as purchasing a can drink or stationeries. Any oral agreement between two parties can form a legal binding contract as long as the good or service provided is legal. However, some contracts require material evidence, written documents for example purchasing a house as sometimes written contracts are required by either the parties, or by statutory law within various jurisdictions. When disputes arise among parties of the contract, the courts will have to decide the judgment based on wheatear to place emphasis on intention of parties to the contract or other policy of considerations.

2.0 Intention to Create Legal Relations

2.1 Definition

The Law recognizes that often the parties do not intend to create a legally binding contract. The law therefore says that there must be an intention to create legal relations and make a distinction between social and domestic agreement (where the assumption is that there is no intention to create legal relations) and commercial and business agreements (where the law assumes that the parties intend the agreement to be legally binding).

2.2 Social and Domestic Agreements

2.2.1 Agreements treated as not legally binding

The cases suggest that agreements within families will generally be treated as not legally binding. For example, in Jones V Padavattan (1969), Mrs. Jones offered a monthly allowance to her daughter if she would give up her job in the USA and come to England and study to become a barrister. Because of accommodation problems, Mrs. Jones bought a house in London, where the daughter lived and received rents from other tenants. They later quarreled and the mother sought repossession of the house. The courts decided that there was no intention to create legal relations and that all the arrangements were just part of ordinary family life. Therefore, the mother was not liable on the maintenance agreement and could also claim the house.

In Balfour V Balfour (1919), the issue was the promise made by a husband to pay his wife allowance while he was abroad. He failed to keep up the payments when the marriage broke down. The wife sued but it was held that arrangements between husband and wives are not contracts because the parties do not intend them to be legally binding. The court also decided that she had given no consideration for the husband’s promise.

2.2.2 Agreements treated as legally binding

In the case of Merritt V Merritt (1970), the husband had already left his wife and they met to make arrangements for the future. The husband agreed to pay 40 pounds per month maintenance, out of which the wife would pay the mortgage. When the mortgage was paid off he would transfer the house from joint names to the wife’s name. He wrote this down and signed the paper, but later refused to transfer the house. The court was held that when the agreement was made, the husband and wife were no longer living together; therefore they must have intended the agreement to be binging and their intention to base their future actions on the agreement was evidenced by the writing. The husband had to transfer the house to the wife.

The courts have also had to consider cases that do not just involve members of the same family, and here the principle they apply is that the presumption that the arrangement is a purely social one will be rebutted if money has changed hands. For instance in the case of Simpkins V Pays (1955), a lodger and two members of a household entered a competition in the lodger’s name and paid equal shares. It was held that the presence of the outsider rebutted the presumption that it was a family agreement and not intended to be binding. The mutual agreement was a joint enterprise, to which cash was contributed on the understanding that any prize would be shared.

2.3 Commercial and business agreements

2.3.1 Agreements treated as not legally binding

According to UK law, if either of the parties clearly stated that the agreements not to be bonded in law, then the court will respect the wishes of both parties. (ArticlesBase.com, 2005-2010) Under the case Rose and Frank Co. v J.R. Crompton & Bros Ltd, two business men signed an agreement regarding the production and sale of carbon paper. The agreement included the clause:

This arrangement is not entered into, nor is this memorandum written, as a formal or legal agreement … but it is only a definite expression and record of the purpose and intention of the … parties concerned to which they each honorably pledge themselves with the fullest confidence, based upon past business with each other, that it will be carried through by each of the … parties with mutual loyalty and friendly co-operation.

The relationship between the two parties broke down and one of the parties broke the agreement. Rose and Frank Co. sued on enforcement of the agreement. Both parties agree that the agreement signed will not be bounded under the law. When both parties broke up and either of the parties has broken the agreement, another party will not have the power to sue the party who break the contract. It is because both of the parties also agree that agreement signed will not be controlled by the law.

2.3.2 Agreements treated as legally binding

In some of the cases, the used of words in the contract may not be considered as a term of the contract as it may depends on the intention of the parties. (Ms. V. Maharaj, n.d) Based on the case Edwards v Skyways ltd 1964, Skyways ltd has used a term ‘ex gratia’ payment. It means that the extra payment offered by Skyways ltd to Edwards is not legal liable as it is only a voluntary act from Skyways ltd to Edwards. Skyways ltd has promised Edwards to pay him ‘ex gratia’ payment after he resign from the company but Skyways ltd refuse to respect the agreement after Edwards made his promise. When the case has brought to the court, the court is seeking the intention of both parties in the contract and takes consideration of the term ‘ex gratia’ payment. Finally, the court has decided that the term ‘ex gratia’ payment used in the contract is not strong to rebut the presumption made between the parties. It is because the additional payment offered to Edwards is the main reasons that encourage him to resign from Skyways ltd. If Skyways ltd does not offer the ‘ex gratia’ payment, Edwards might not interested resign from the company. Therefore, Skyways ltd is liable to make the payment to Edwards as the ‘ex gratia’ payment is the intention of Skyways ltd to convince Edwards resign from the company.

3.0 Policy Considerations

3.1 Floodgate

Floodgate is a tool used by the court to prevent the burden of liability to the court and the defendant from becoming too heavy. This is by controlling the amount of cases rise before the court. Cases that arise are usually either from social and domestic agreements or agreements made in a commercial context. The floodgate is brought in by the court to bottleneck the number of cases coming from social and domestic agreements.

If the court allow opening of the floodgates, allowing social and domestic agreements to be a valid intention to create a legal relationship the court and administrative will unable to cope with the excessive number of cases thus resulting in an economic loss.

Secondly, it will obstruct the operations and activities of a properly functioning society because there will be an existence of social and public interest dimensions of whether uncontrolled liability.

Thirdly, there will be practical justice fear within the society concerning a possible burden of limitless liability. For example monetary recovery for physically injuries or psychiatric injuries inflicted in social and domestic agreements. Merely because a physically injured person has a family, every or any member of that family, will necessarily suffer a pathological reaction as a result of the physical injury.

An accident at a nuclear or industrial plant may result in radioactive or chemical poisoning of thousands if not millions of people and of vast areas of land, as illustrated by the explosion in one of the re-actors at the nuclear plant at Chernobyl, Ukraine, on 26 April 1986 and the escape of a large quantity of deadly methyl isocyanate from the Union Carbide Battery Plant in Bhopal, India, on 3 December 1984. Defects in the production of goods may likewise physically injure a very large number of people, as has been alleged in the case of defective silicone breast implants. The possibility of a multitude of claims from the one incident is not, however, a ground on which the courts would deny relief in actions for physical injury or property damage caused by such an accident. This was recognised by the fact that in the United Kingdom the legislature saw the need to enact the Nuclear Installations Act 1965 (UK), which limits the liability of nuclear operations to £5,000,000.

3.2 Protecting social relationships

Chen-Wishart stated that this is also known as ‘freedom from contract’ which indicates that the courts are prohibited to intervene too much in social affairs of the citizens (Hujo, 2005).

In the case of Jones v Padavatton, a daughter, who had a good job in Washington, was offered by her mother, an allowance of $200 a month if she would go to England to study for the Bar. The daughter agreed and accepted a payment of 200 West Indian dollars. In 1964, by a second agreement, it was arranged that the mother would buy a house in London for the daughter to live in. She was to rent out some of the rooms and use the income to maintain herself in place of the $200 per month. In 1967, the mother claimed possession of the house; the daughter had not yet passes the Bar examinations. The case held that the mother/ daughter relationships was not contractual because of a lack of intention.

Fenton Atkinson LJ claimed that the daughter had never thought her mother or herself to attend to the court in order to impose legal responsibility. In addition, she also stated that she feels absurd that a family agreement should develop into a subject in the court. At the time when the first promise was made, there was no indication of intention shown by both parties to be resulted in a contract. The daughter relied on the promise to a show a sense of esteem towards her mother’s promise of support, while the mother trusted her daughter that she would pass though the examinations as early as possible (Beale, Bishop & Furmston, 1990). Thus, both of the parties relied on the bond of trust developed rather than a contract.

Other than that, the same theory applies in Balfour v Balfour, Atkinson LJ also stated that most of the people who are involved in domestic and social agreements did not intend their agreements to be enforced by the court of law, and thus they are not legally bound. The agreements made between husbands and wives are based on mutual promises. However, this is not a form of contract as they do not intend to bring up the issue to the court of law. Agreements between spouses are said to be outside the field of contract and the court do not govern this form of agreement (Beale, Bishop & Furmston, 1990).

3.3 Promoting Market Transactions

Another fact to indicate that the courts are more concerned with other policy considerations is based on the primary objective of the contract law to facilitate commercial transactions. The general presumption states that all agreements made in a business context are to be legally binding, with the exception of three situations: (1) when an offer is vague and only represents a ‘mere puff’; (2) when a contract comprises of specified honour clauses; and (3) when an agreement is ‘subject to contract’. This is a crucial aspect which provides a guaranteed level of security and assurance when two parties enter into a commercial transaction because the involving parties would be certain of the formation of a contractual relationship between them. In this case, any promises, agreements or statements made between the contracting parties become more reliable as a claim regarding the breach of contract would be upheld by the court. Consequently, the public is encouraged into various business dealings with each other on the basis of the presumption mentioned earlier; whereby they possess a higher degree of confidence since the risk of the other party violating the contract has been counteracted. Hence, the decision of courts to judge on such policy considerations supports trading and promotes business transactions between parties whom otherwise might not have entered into the commercial contract. A prominent case to support the discussion above is Edwards v Skyways Ltd (1964), where the plaintiff was a pilot employed by the defendant. As part of a redundancy agreement, Skyways promised to make an ex gratia payment of a specified amount in return for Mr. Edwards not claiming his full pension rights. Later, the company refused to make the payment, claiming that the words ‘ex gratia’ showed that there was no intention to create legal relations. The Court of Appeal rejected this argument, stating that this was a commercial agreement and there was therefore a strong presumption in favour of creating legal relations. The words ‘ex gratia’ merely signified that the employees were not admitting any pre-existing liability to make the payment; it did not mean that they were not bound by the agreement.

3. 4 Illegal Contracts

Illegality is not just for criminal illegality but also concept that encompasses both contracts which are strictly illegal (prohibited by law) and those which are void (invalid and simply unenforceable law). If any of the terms or purpose are contrary to public policy at common law or under statute, the contracts may be void or void and illegal. Illegal contract is when they involve a degree of moral wrong, which caused the contract to be void.

A contract is also illegal at common law if the terms of the contract or intentions of either party involve the commission of one of the following. At common law on grounds of public policy, there are six types of contract that are illegal. They are:

Contracts to commit crimes, torts or fraud.

Contracts promoting sexual immorality.

Contracts promoting corruption in public life.

Contracts prejudicial to the administration of justice.

Contracts prejudicial to the public safety.

Contracts to defraud the revenue.

Example case of Immoral contract which is illegal can be seen in Pearce v. Brooks (1866) 1 Exch 213. It is know that prostitute cannot enforce contracts for payment for their services, therefore, in this case, a contract for hire of a carriage to the defendant knowing that it was to be used to solicit was void.

4.0 Arguments

4.1 Intention

An agreement will not be considered as a contract if parties have no intention in creating a legal relation. In social and domestic agreement, there are no contracts between family members because the court mentioned that the parties do not have the intention to create legal relation. Based on the case Balfour v. Balfour, the court justify that there is no intention between the husband and wife to create a contract. The main issue is the agreement created between Mr. Balfour and Mrs. Balfour is only a social activity between spouses. There is no intention to create a legal relation; therefore, Mr. Balfour has won the case. In the aspect of commercial agreement, there is always a presumption that both parties are intended to create a legal relation. If the parties want to rebut the presumption, they must clearly mention that the contract will not be bounded under the law. For example, the case Edwards v Skyways ltd is an argument between a pilot and its company. Skyways ltd told Edwards that if he leave the company and do not claim full amount of his pension, then Skyways ltd will pay him extra money but the term stated in the contract is ‘ex gratia’ payment. Skyways ltd thought that the term ‘ex gratia’ payment can be used to rebut the presumption made between Edwards, but the court decides that the term stated is not that convincing. The main concern of the court is the initial intention of both parties as Skyways ltd has the intention to offer extra payment to Edwards if he does not take full amount of his pension and resign from the company. Therefore, the judgment is Edwards won the case as the initial intention of both parties entering into the contract is so visible. If Skyways ltd do not want to pay extra to Edwards, the contract must be written clearly the intention of both parties but not only use a term.

4.2 Policy Consideration

If all the cases regarding to social and domestic agreements were to brought up to the court of law, considering the Balfour v Balfour case, the husband promised the wife to grant an allowance of £30 a month to her during the husband’s leave, the payment made by the husband acts as fees, once the wife has accepted the money and this would indicate that the wife is willing to carry the responsibility, other than she can sue him for his inability to provide the allowance in time, he can also sue her for the failure in carrying the obligation if she did not do so. The small courts would result in multiple hundreds of such cases if these cases are attended by legal court (Beale, Bishop & Furmston, 1990). This would cause a delay in managing and settling the cases and thus effected in ineffective of the legal system. Therefore, an application of the theory of floodgates could restrict the number of cases that is being raised by the legal court.

Social and domestic agreements are constructed based on the mutual trust that is bonded in the relationships between family, spouses and friends. Thus, people do not intend to bring up the agreements in order to be considered by the court. In addition, agreements between spouses are excluded from the regulation of the court; thereby the court is restrained from interfering the social issue of the people. Consequently, the term ‘freedom to contract’ protects social relationships and prevents unnecessary cases to be brought up to the court.

Moreover, the courts are often concern with other policy considerations such that an individual who intends to be legally bound is given the affirmation of his genuine intention by forming a legal contract with the relevant party. This is an important aspect in promoting various types of business transactions in order to keep the mixed market economy in a well-balanced manner. As mentioned earlier, agreements that fall into the commercial category represents a rebuttable presumption which states that the parties do intend to form a contractual relationship, unless there is clear evidence showing that the parties did not intend to be legally enforceable. If this was not the case, the number of successful commercial agreements would definitely reduce drastically since there is no guarantee to the agreements or promises made between two parties despite them having intention to create legal relations. Referring to the case of Edwards v Skyways Ltd (1964), the court has decided to adhere to policy considerations instead of the defendant’s intention to escape from making the ex gratia payment that has been promised earlier to the plaintiff. This decision proves the significance of policy considerations in providing an assurance to parties who are made legally binding through commercial agreements. Otherwise, the defendant would not have fulfilled the promise.

In addition, policy considerations prohibit the construction of illegal agreements. The courts do not make judgments solely on the intention of the parties to form a contract. It is equally important for the agreements made to be abided by specific policy considerations to ensure that contracts that are immoral, socially or economically harmful are voided as they are illegal. This has to be complied closely regardless of the initial intention of the parties which may seem to be good in the first place. In the case of Pearce v Brooks (1886), the defendant’s claim was not upheld by the court since he was aware that the plaintiff was a prostitute before lending the brougham. Due to the fact that prostitutes cannot enforce contracts for payments of their services, this contract is considered illegal and thus, voided.