Intention to create legal relations

The reasonable man would deem that the promise of a reward was intended to be binding.

Counterintuitively, the best way of discovering whether the parties intended to contract is not to ask them, as this "subjective test" would give the rogue an easy loophole to escape liability. (He would reply, "No! I did not intend to be bound".) Instead, just as in Carlill v Carbolic Smoke Ball Company,[1] the court applies the "objective test" and asks whether the reasonable bystander, after taking into account all the circumstances of the case, thinks that the parties intended to be bound.[lower-alpha 2] Since the advertisement (pictured) stated that the company had "deposited £1,000 in the Alliance Bank to show sincerity in the matter", the court held that any objective bystander who read this would presume an intention to contract.

The rebuttable presumption establishes a burden of proof; but the burden may be rebutted by evidence to the contrary. The civil standard of proof is "a balance of probabilities", while the criminal standard of proof is "beyond reasonable doubt". Here, different presumptions will apply, according to the class of agreement. For these purposes, there are four classes of agreement:

• Family agreements: a presumption of no contract
• Social agreements (i.e. agreements between friends): no presumption (case decided on its merits, using the objective test)
• Commercial agreements: a presumption of a valid contract
• Collective agreements: a presumption of no contract

Family agreements are presumed not to give rise to legal relations unless there is clear evidence to the contrary. The courts will dismiss agreements which for policy reasons should not be legally enforceable.[2]

In 1919, Lord Atkin held in Balfour v Balfour[3] (where a husband promised his wife to pay maintenance while he worked in Ceylon) that there was no "intention to be legally bound", even though the wife was relying upon the payments. The judge stated that as a general rule, agreements between spouses would not be legally enforceable:

The matter really reduces itself to an absurdity when one considers it, because if we were to hold that there was a contract in this case we should have to hold that with regard to all the more or less trivial concerns of life where a wife, at the request of her husband, makes a promise to him, that is a promise which can be enforced in law.[4]

In a more modern case, Jones v Padavatton,[5] the court applied Balfour v Balfour and declared that a mother's promise to allow her daughter an allowance plus the use of a house provided that she left the USA to study for the English Bar was not an enforceable contract.

However, if there is clear intent to be contractually bound, the presumption is rebutted. In Merritt v Merritt,[6] a separation agreement between estranged spouses was enforceable. In Beswick v Beswick[7] an uncle's agreement to sell a coal delivery business to his nephew was enforceable. Also, in Errington v Errington,[8] a father's promise to his son and daughter-in-law that they could live in (and ultimately own) a house if they paid off the balance of the mortgage, was an enforceable unilateral contract.

With social agreements, there is no presumption, the case being decided solely on its merits.

Although many sources consider "social and domestic agreements" to be a single class, it is better to regard "family agreements" as a class separate from "social agreements", as the latter invokes no presumption, and only the objective test applies.

In Simpkins v Pays,[9] an informal agreement between a grandmother, granddaughter and a lodger to share competition winnings was binding. Sellers J held, applying the objective test, that the facts showed a "mutuality" between the parties, adding:

If my conclusion that there was an arrangement to share any prize money is not correct, the alternative position to that of these three persons competing together as a "syndicate", as counsel for the plaintiff put it, would mean that the plaintiff, despite her propensity for having a gamble, suddenly abandoned all her interest in the competition in the Sunday Empire News. I think that that is most improbable ...

In Coward v MIB,[10] the Court of Appeal held that when a motorcyclist regularly gave a friend a pillion lift in return for some remuneration in cash or in-kind, there was no contract.[lower-alpha 3] Soon after, in Connell v MIB,[11] a case with materially similar facts, Lord Denning (violating the rule that the Court of Appeal was bound by its own decisions) said, "I am not satisfied by the decision in Coward. I think that when one person regularly gives a lift to another in return for money, there is a contract, albeit informal". In a similar "lifts for friends case", Albert v MIB,[12] the House of Lords approved Denning's decision in Connell (so that Coward may be considered bad law).

Business transactions are presumed to be binding contracts.

Business transactions incur a strong presumption of a valid contract: these agreements where the parties deal as though they were strangers, are presumed to be binding. However, "honour clauses" in "gentlemen's agreements" will be recognised as negating intention to create legal relations, as in Jones v Vernons Pools[13] (where the clause "this agreement is binding in honour only" was effective). One must be careful not to draft a clause so as to attempt to exclude a court's jurisdiction, as the clause will be void, as in Baker v Jones.[14] If a contract has both an "honour clause" and a clause that attempts to exclude a court's jurisdiction (as in Rose & Frank v Crompton)[15] the court may apply the blue pencil rule, which strikes out the offending part. The court will then recognise the remainder, provided it still makes sense, and remains in accord with the parties' bargain. The offending clause was:

This arrangement 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 either of the United States or England, but it is only a definite expression and record of the purpose and intention of the three parties concerned, to which they each honourably pledge themselves with the fullest confidence – based on past business with each other – that it will be carried through by each of the three parties with mutual loyalty and friendly co-operation.

When the words "and shall not be subject to legal jurisdiction in the Law Courts either of the United States or England," are "blue-pencilled out", the remainder becomes legally acceptable, while staying true to the intended meaning.

The party asserting an absence of legal relations must prove it; and any terms seeking to rebut the presumption must be clear and unambiguous.[16] Where in Edwards v Skyways Ltd[17] a bonus payment, described as 'ex gratia', was promised to an employee, this was found to be legally binding. He had relied upon the promise in accepting a redundancy package, and his employer could not adequately prove that they had not intended their promise to become a contractual term.[18]

A collective agreement is a special type of commercial agreement, such as one negotiated through collective bargaining between management and trade unions. At common law, Ford v Amalgamated Union of Engineering and Foundry Workers,[19] the courts held that collective agreements were not binding. The Industrial Relations Act 1971, introduced by Robert Carr (employment minister in Edward Heath's cabinet), provided that collective agreements were binding, unless a contact clause in writing declared otherwise. After the demise of the Heath government, the law was reversed.[20] The law is now contained in the Trade Union and Labour Relations (Consolidation) Act 1992 s.179:

"Any collective agreement made after the commencement of this section shall be conclusively presumed not to have been intended by the parties to be a legally enforceable contract, unless the agreement:

(a) is in writing, and

(b) contains a provision which states that the parties intend that the agreement shall be a legally enforceable contract".[21]