The Essence of Contract

It has long been argued that an essential element of contract formation is to question whether the parties in dispute may be seen to have voluntarily assumed the legal consequences associated with intentionally creating a binding relationship. [1] In spite of this, more recent debate has questioned the essentiality of the principle as matters of intention which find themselves before the courts are seen to be arbitrary, easily dealt with, and ‘go without saying in the vast majority of cases’. [2] In addition, legal scholars such as Professor Williston, have argued that:

The common law does not require any positive intention to create a legal obligation as an element of contract … A deliberate promise seriously made is enforced irrespective of the promisor’s views regarding his legal liability. [3]

As a result, the suggestion has been made that the issue of intention in contract law may be out-dated, unnecessary, and satisfactorily dealt with by the doctrine of consideration. [4]

In spite of this, it may be seen that not all parties in a dispute will necessarily be bound by the laws of contract, regardless of the relevant legal presumptions or the existence of consideration. Similarly, situations may exist whereby the parties involved may specifically express an intention not to be legally bound to the promises made throughout their arrangements. As a result, an essential element of the law is its ability to distinguish between the intentions of non-contractual and legally binding relationships. This essay will attempt to illustrate that matters of intention are not always straight-forward, or circumvented by the existence of consideration. Moreover, the author will also demonstrate through relevant case law that voluntary assumption remains an essential element of contract formation.

II THE PRESUMPTIONS

A Family and Domestic Agreements

It has been argued that the majority of disputes that appear before the courts relating to any particular party’s objective intention to be bound by a legally enforceable duty may be dealt with simply by the presumptions provided by the common law in this country. [5] For instance, it has long been established that family, social and domestic agreements are, for the most part, not legally enforceable. As a result, the courts draw a distinction between public and private matters, suggesting that the latter are matters to be dealt with by the parties concerned. An example of this may be found in Balfour v Balfour, [6] where a husband who had been living in India whilst his wife remained in England for medical treatment, had agreed to send his wife a specific amount of money each month. After the marriage dissolved, Mrs Balfour claimed that her husband had not fulfilled his promise and subsequently sued him for the outstanding amount. On appeal, Lord Atkin stated that:

Commonly parties to a marriage will make arrangements for personal or household expenses. But they do not amount to contracts, even though there may be present what would amount to consideration if it had occurred between different parties. They are not contracts because the parties do not intend that legal consequences should follow. [7]

Similarly, in Jones v Padavatton, [8] it was agreed that arrangements formed between close relations such as mother and daughter, are not considered to be bound by law. Lord Justice Salmon observed that the law in such circumstances is reasoned by way of social fact, as ‘experience of life and human nature shows that in such circumstances men and woman usually do not intend to create legal rights and obligations, but intend to rely solely on family ties of mutual trust and affection’. [9]

In spite of this presumption, the common law provides an avenue of rebuttal for parties who dispute the lack of intention imposed by the courts on matters concerning domestic and family agreements. Whilst the onus of proving the existence of an intention to be legally bound lies with the party trying to enforce the contract, the presumption is regarded as weak and can be easily overturned with evidence that suggests a reasonable person would have assumed that a legal duty existed. As a result, the line between cases that fall on either side of the presumption is blurred, and the need to prove an intention to create legal relations becomes evident.

An example of this may be found in Merrit v Merrit, [10] where an agreement between an estranged couple for the transference of land was held to be legally binding. In this case, His Honours found that a reasonable person would assume that once a relationship between two closely related parties becomes inimicable, any agreements made after that fact may not be governed by the presumption at law.

Similarly, in Roufos v Brewster [11] it was found that the facts of the case may prove more influential than the relationship between the parties when determining whether any intention to create a legally binding contract exists. In response to the defence’s argument that the agreement fell under the auspices of the presumption, Bray CJ stated that:

It is true that the appellant is the son-in-law of the respondents, but they were conducting separate businesses at Cooper Pedy … The whole setting of the arrangement is commercial rather than social or domestic. [12]

Moreover, in Australia the courts have found that the presumption governing domestic and family agreements may be outweighed by the level of detriment incurred by the promisee. Consequently, Australian rulings may be seen to have aligned the severity of the detriment to the concept of intention, rather than prescribe detriment as a matter of consideration. [13] For example, it was suggested in Wakeling v Ripley [14] that a reasonable person would assume that the seriousness of the consequences faced by the plaintiffs, directly related to their reliance on the execution of the promises made by defendant. As a result, the fact that the plaintiffs had been persuaded by Mr. Ripley to sell their home and resign from steady employment in England to live with him in Australia was seen to be a more important factor than the close relationship held by the parties. This would seem to be in direct contrast to the interpretation of detrimental reliance made by courts in England in relation to family agreements. For instance, the court in Jones v Padavatton [15] found that regardless of the detriment incurred by the plaintiff in leaving her home and job in the United States, the agreement made between a mother and daughter was based ‘on the good faith of the promises which are made and are not intended to be rigid, binding arrangements’. [16] Consequently, the majority of the court may be seen to have placed a heavier burden on the relationship between the parties than the ‘prospective detrimental reliance’ [17] faced by the promisee.

B Commercial Agreements

There is also a strong presumption of law that agreements made between commercial parties intend to create legal relations, and anyone who alleges that there is no intention bears the onus of proof. As a result, it is far more difficult to rebut the existence of a contract where a question of intention is involved. In spite of this fact, the doctrine does not automatically suggest that the courts will invariably find that all business and commercial relationships have voluntary assumed a legally enforceable duty to honour their promises.

For example, parties may use an honour clause to expressly state that they do not wish to be legally bound to their agreements. This may be seen in Rose and Frank v Crompton Ltd [18] , where the parties incorporated the following clause to a contract for the supply of goods:

This agreement is not entered into, nor is this memorandum written as a formal or legal agreement, and shall not be subject to legal jurisdiction in the law courts… [19]

As a result, the findings of the courts in such cases have shown that the honour clause may be seen as a valuable tool for parties who wish to circumvent the presumption of intent in business relationships. Conversely, it must also be said that those who use such clauses must be wary of the fact that it is illegal to expressly preclude the court’s jurisdiction. [20] Moreover, the courts may find that the clause will only relate to future dealings and not the performance of promises already accepted by the parties. [21]

Another example where intention may be seen as an essential factor in determining whether contractual obligations exist is the concept known as a ‘letter of comfort’. The use of such letters may be seen in cases where a third party or parent company refuses to give a guarantee to a lender, yet is willing to advise them of the viability of the company seeking the loan. It was suggested in Kleinwort Benson v Malaysia Mining Corp [22] that the use of such letters may impose no more than a moral responsibility on the third party to its representation. In spite of this, the findings of the court in Banque Brussels Lambert SA v Australian National Industries Ltd [23] represents the more recent argument that letters of comfort should be interpreted as an intention to create legal relations. For instance, Rogers J stated that:

There should be no room in the proper flow of commerce for some purgatory where statements made by business men, after hard bargaining and made to induce another business person to enter into a business transaction would, without any express statement to that effect, reside in a twilight zone of mere honourable agreement. [24]

Intention may also be seen as essential when it is necessary for the courts to determine whether parties to a commercial arrangement have finalised their contractual relations, or intend to rely on the performance of a particular clause before any legal obligations exist. An example of this may be seen in Masters v Cameron [25] , where the court specifically stated three possibilities that could arise when parties dispute the commencement of a binding contract. In this case, it was found that the use of specific words such as ‘subject to contract’ may displace the presumption that intention may be inferred from the commercial nature of the agreement. Moreover, where an explicit intention does not exist, the courts have found that the overall conduct of the parties, [26] complexity of the agreement, [27] and value of the subject matter, [28] may be used to decide whether the parties had intended to be immediately bound or were awaiting the formal execution of the agreement.

C Government Arrangements

Whilst there is no strict presumption at law which suggests that arrangements involving the government do not intend to create legal relations, [29] it is accepted that agreements entered into for the purpose of policy implementation and community programs, are not bound by contractual obligations. In spite of this, governments who enter into contracts outside the scope of public policy may in fact be legally enforceable. As a result, the intention of the parties is essential in determining whether the government should be treated in the same way that the law treats private contracts. An example of this may be seen in Australian Woollen Mills Pty Ltd v The Commonwealth [30] , where the Privy Council found that the Australian Government should not be bound to any contractual obligations as the arrangement formed between the parties was based on a subsidy scheme, and therefore administrative in nature.

III THE LIMIT OF CONSIDERATION

It has been argued by Williston that the doctrine of intention is made redundant by the presence of consideration between parties in commercial agreements. [31] Conversely, it has been suggested that ‘to argue that a contract can exist without this element is to deny the distinction, fundamental in any system of contract law, between a mere negotiation and a fully concluded bargain’. [32] One may also point out that the presence of consideration in domestic arrangements which do not involve estranged relations, [33] or commercial agreements made between closely related parties, [34] is not enough to prove that an intention to be legally bound exists. For example, in Jones v Padavatton [35] , the court found that the presence of consideration is not enough to indicate that the parties to a domestic arrangement intend to be legally bound to the promises made to one another. In addition, Lord Atkin pointed out in Balfour v Balfour [36] that the existence of consideration between parties in a marriage does not necessarily impose legal obligations, as what amounts to consideration in such circumstances is love and affection. [37] More specifically, Atkin LJ stated that: [38]

…consideration, as we know, may consist either in some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other…I think, that such arrangements made between husband and wife are arrangements in which there are mutual promises, or in which there is consideration in the form within the definition that I have mentioned. Nevertheless, they are not contracts, and they are not contracts because the parties did not intend that they should be attended by legal consequences.

IV CONCLUSION

The court in Ermogenous v Greek Orthodox Community of SA Inc [39] best describes the fact that an intention to create legal relations may not be simplified by the rebuttable presumptions associated with the concept of animus contrahendi. The case exemplifies the fact that the courts should take into consideration all the circumstances surrounding the dispute in question, and that the lone importance of the presumptions lies with ‘identifying the party who bears the onus of proof’. [40] Furthermore, the fact that the presence of consideration may not alone be enough to prove an intention to be legally bound, suggests that an essential element of contract formation remains to be the need to establish a voluntary assumption of a legally enforceable duty.