Critical Analysis on the Theories of Intent

Contracts are the basis of day to day life. It is not incorrect to say that millions of contracts are made in a day. If to cite some examples, we can think of transactions between shopkeepers, contracts between multinational companies, contracts between governments with world financial institution, taking lunch or dinner in a restaurant, going in a bus and purchasing tickets amount to a contract. It is to say that we enter into contracts and we do not know that we are entering into a contract.

India too has the “Branch of Contract”, a bare act where all the rules governing to a valid contract is stated. Since, she was the colony of the British; there is Common Law influence in the contracts. The Law of Indian Contract does not state many precise rights and duties which the Law will protect and uphold. The Law of Contract only states some principles and rules which regulate a valid and an enforceable contract.

In order to proceed to the essence of the topic, it is necessary to explain what a contract is in the Indian scenario.

According to section 2(h) which defines Contracts, “An agreement enforceable by law is a contract.” We can say that in order for the formation of Contracts it is essential that an agreement between parties should be enforceable by the Law of the land.

According to the words of section 2(e) Of The Indian Contract Act, 1872 which defines an agreement, “Every promise and every set of promises, forming the consideration for each other, is an agreement.” So, it is clear from the words of Section 2(e) that the main subject matter for the formation of contract is the promises between parties entering into a contract. Before a contract is formed, there needs to be some sort of promises between parties.

Section 2(b) Of The Indian Contract act, 1872, defines the most important part of contract which is the “Promise”. It states that “When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a promise.”

We can conclude that in order for a Contract to be formed it is the compilation of Promises made between the parties entering into a contract.

In order for a valid Contract, there are various essential elements of a Contract.

According to Section10 of The Indian Contract Act,1872, “All agreements are contracts if they are made by the free consent of parties competent to contract ,for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void.”

Therefore, the main essential elements of a Contract are discussed here below:

Agreement.

Intention to create a legal relationship.

Free and genuine consent.

Parties competent to contract.

Lawful consideration.

Lawful object

Agreements not declared void or illegal

Certainty of meaning

Possibility of performance Necessary legal formalities consideration [1]

As we have seen that in order for the formation of a contract, it is necessary to have intention on both the parties entering into a “Contract”. In English Law there is a well settled principle that in order for the formation of a contract there must be a common intention of the parties .

“To create a contract there must be a common intention of the parties to enter into legal obligation”, this principle was laid down in the landmark case Rose and Frank co v. J.R. Crompton Bros [2] .It is an important English case which states regarding the intention to create a legal relationship in case of commercial arrangements.

The main issue in this case

Is an agreement which the parties have clearly stated is not intended to create legal relations nonetheless enforceable as a binding contract?

Ratio

Agreements between commercial actors, as in this case, are presumed to have been intended to create legal relations. In this case, however, the parties had, through the honourable pledge clause, clearly rebutted the presumption. Therefore, the agency agreement was found to be unenforceable in a court of law. [3]

But, on the contrary there is no mentioning of “intention of creating a legal relationship”. There is no provision which states that an offer or its acceptance should be made with the intention of creating a legal relationship. But the Supreme Court of India has expressed its intention for a separate requirement of “intention to contract” under the contract Act. Under the criticism of the West, the Court found that it was a necessity of those systems where consideration was not a requisite of enforceability. But there is still a debate going about whether the inclusion of the phrase “intention to contract”. In the case of Banwari Lal v. Shukdarshan Dayal, [4] it was recognized the need for the inclusion of the intention phrase.

Since we are talking about the need for intention, it is necessary to define what are the types of intention are there in Contracts. There are two types of intent.

The two types of intent are

Subjective Intent theory

Objective Intent theory

Subjective intent: In simple terms, a subjective intent can be defined as when a third party does not understand the intention of the party offering, but the party or promisor knows that there is an intention to make an offer or the formation of a contract, subjective intent comes. In the Subjective theory of intent, there is an implied expression of intention; but not the expressed intent of the contracts. Subjective intent addresses the party’s personal intent.

During the earlier times “The Courts of England” used to emphasize more on the Subjective content rather emphasizing on the objective intent for the formation of the “Contracts”. In modern days, Common Law courts have stopped using “Subjective Intent Theory” in deciding the intent and as well as the formation of the contracts. But, they still play an important role in cases.

There is a brief explanation on the objective theory of Intent

Objective Intent: Objective intent exists if a reasonable person would understand from a party’s words or actions that he intended to form a contract. [5] Objective theory of intent looks at the external manifestation of the intent of the parties. According to this theory, it does not take care as to whether there was an intention to enter into a contract, but a Reasonable Person” or a third party should understand that there was expressly intent to form a contract. .Objective intent exists if a reasonable person would understand from a party’s words or actions that he intended [6] . Objective theory of contract is a doctrine which states that a contract is not an agreement in the sense of a subjective meeting of the minds. However, a contract is instead a series of external acts giving the objective resemblance of agreement. This principle states that the existence of a contract is determined by the legal significance of the external acts of a party to a purported agreement, and not by the actual intent of the parties. [7]

“A principle in U.S. law that the existence of a contract is determined by the legal significance of the external acts of a party to a purported agreement, rather than by the actual intent of the parties.” [8]

Although the objective theory of contracts applies in virtually all jurisdictions in the United States as well as the Common Law Jurisdiction, some aspects of subjectivity or subjective theory of are nevertheless present in American law. For instance, many of the grounds by which a party or parties may avoid a contract, such as mistake or duress, are based upon the subjective beliefs or intentions of the parties [9] .

Before proceeding further is a Critical Analysis of the Section 2(a) Of The Indian Contract Act, 1872, “ When one person signifies his another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal.” It is clear from the words of section 2(a) that in order to enter into a contract, it is necessary that the promisor must show his intention to make an offer through electronic communication, or by meeting the promise for the agreement. It is clear that the promisor must act. It need not necessary to have intent, but that intent should also be showcased. So, it favours the objective theory of intent.

There is a famous quote from the 1911 case, Hotchkiss v. National City [10] which states that

“Contract has, strictly speaking, nothing to do with the personal, or individual, intent of the parties. A contract is an obligation attached by the mere force of law to certain acts of the parties, usually words, which ordinarily accompany and represent a known intent. If, however, it were proved by twenty bishops that either party when he used the words intended something else than the usual meaning which the law imposes on them, he would still be held, unless there were mutual mistake or something else of the sort” [11] .

Seidensticker v. The Gasparilla Inn Inc

In this decision, the Court of Chancery has once again held that a contract means what it says, not what the parties say they subjectively intended. Thus, if the contract is unambiguous in its language, the Court will not accept explanations of what it was supposed to mean. Instead, the Court will enforce the contract as written. This opinion is useful for its review of recent case law that some have suggested adopted a “subjective” theory of contract interpretation under which, as the Cheshire Cat once said, “A word means what I say it means.” Not so in Delaware.

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Simpkins v Pays: [13]

A Grandmother, granddaughter and a lodger entered into a weekly competition run by the Sunday Empire News. The coupon was sent in the Grandmothers name each week and all three made forecasts and they took it in turns to pay. They had agreed that if any of them won they would share the winnings between them. The grandmother received £250 in prize money and refused to share it with the other two. The lodger brought the action to claim one third of the prize money. [14]

In this case, the court held that she was bound to do so, for any reasonable man looking at their conduct would at once conclude that they must have intended to share the prize. In the case Merritt v. Merritt [15] , the Court applied the necessity of objective intent. Here it was stated that an agreement to transfer to the wife the beneficial ownership of the matrimonial home made at the time of separation was held to be binding.

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But, there has always being a contradiction whether deciding subjective or objective intent. In the cases below we will find contradictions to the above discussion.

Air Great Lakes Pty Ltd v KS Easter (Holdings) Pty Ltd

In this case, there is a debate whether there should be an objective intent or subjective intent. In the opinion of Mahoney JA, there should be a subjective intent to contract which the law takes into account in determining whether a contract exists but it is not, or not always, the determining factor. According to him, the actual existence of a contract is a consequence which the law imposes upon, or sees as a result of, what the parties have said and done. He emphasized on the subjective intent of the contract. His judgement was taken into consideration while determining whether there is a need for a subjective or objective intent.

The Supreme Court following the facts of an English Case i.e. Edwards v. Skyways [17] stated in the Indian case Bahamas Oil Refinning Co v Kristiansands Tankrederie [18] , the court stated that “In deciding whether there or not there was any contract in relation to a certain transaction, or whether or not sufficient notice of a certain term was given, the law applies an objective and not subjective test……In the absence of such evidence, how can the court assume, that the master did intent to enter into a contract.” [19]

A View of France approach to Intent determination.

So, it is clear that there are contentions about the position of Subjective or objective theory. In France judicial system , the topic is different. It is more or less concerned with the Subjective theory of Intent.

“The French position on the subjective theory of contracts is revealed through the recurrent repetition of statements like this one from the Calamari and Perillo Hornbook on Contracts: “the subjective theory dominates thinking about contract [in France.] Or this one: For a contract to exist in French law there must be a subjective agreement as to its terms; in English law an objective agreement suffices’” [20]

From the above discussion it is clear that in order to decide whether a contract is judged on the basis of intent i.e. Subjective intent or Objective intent, it is necessary to inculcation of both the intentions. Only then, it is easier for a judge to determine the case. In my opinion, there needs to be approach towards determining both the intents. In the case Perala Krishnayyam Chettiar v. G. Paimanathan Chettiar [21] , where the facts of the case presented a subjective theory of intent rather than objective in the formation of intent. So, I would like to concentrate on the inculcation of both the subjective as well as the objective intent of theory.