Intention to create legal relationship

No provision in the Contracts Act 1950 But, the parties must have the intention to enter into such relationship Intention = both parties agree that if one of them breach the contract, the matter would go to the court. If no such intention is created, the promise is merely an agreement, not a valid contract

How to determine ‘Intention’? No provision Need to look in ‘case law’ To determine ‘intention’ : one need to look at the type of the agreement; then apply the legal ‘presumption’ of intention of that agreement

Types of agreement Social, family or other domestic agreement: Depends upon the inference to be drawn by the court from the language used by the parties and the circumstances in which they use it. b) Commercial agreement: Presumed and must be rebutted by the other party seeking to deny it

a) Social, family or other domestic agreement Generally, the law presumed that the agreement made between husband and wife are not intended to create legal relations Case: Balfour v Balfour

Balfour v Balfour [1919] 2 KB 571 D, who was a civil servant stationed in Ceylon, came to England with his wife. Later he returned to Ceylon but his wife stayed in England on doctor’s advise. The husband, promised to give his wife $30 a month until he returned. Later, he wrote to her saying that it would be better if they remained apart and the wife obtained a decree nisi. The wife sued him on the promise to pay $30 a month. Held: no contract between them because the parties did not intend to create legal relations

Merrit v Merrit [1970] 2 AER 760 The husband left his wife. They met to make arrangements for the future. The husband agreed to pay £40 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. H: when the agreement was made, the husband and wife were no longer living together. Therefore they must have intended the agreement to be binding, as they would base their future actions on it. This intention was evidenced by the writing. The husband had to transfer the house to the wife. (a rebuttable presumption; intention to create legal binding)

The outcome of Balfour’s case is different from Merritt’s. Why?

b) Commercial agreement Presumption: the parties do intend to make a legally binding contract Rebuttal: one of the parties may rebut that there is no contract by the inference of the language used and the circumstances of the agreement

i) Advertisement Carlill v Carbolic Smoke Ball Co (1893) Facts: D had made extravagant claim in an advertisement about the efficacy of their smoke ball in preventing influenza. They supported these claims with a promise to pay $100 to anybody who used it and yet caught influenza within a given period. They stated that in order ‘to show their sincerity’ they had deposited $1000 with their bankers. P bought the product, used it and still caught with influenza. D contended that the advertisement was a mere puff and was not intended to create legal relations. COA: The bank deposit was a strong evidence that D had contemplated legal liability when they issued their advertisement

ii) ‘Honour clauses’ Rose & Frank Co v JR Crompton & Bros Facts: A, an American firm dealing in carbon paper, and R, an English company signed a document appointing A as a sole agents to sell R products in US. The document concluded: “This arrangement is not entered into, nor is this memorandum written as formal or legal agreement…but…is only a definite expression and record of purpose and intention of the parties concerned, to which they each honorably pledge themselves.” Later, R terminate the agreement without appropriate notice to A. A sued R.

What do you think is the outcome of Rose’s case What do you think is the outcome of Rose’s case? Does the ‘clause’ shows intention to create legal relation?

Held: the agreement of giving the selling rights to R did not create legal relation between the parties because of the honour clause.

iii) Memorandum of understanding (MOU) Def: it is only a memorandum witnessing the mutual understanding of intention of parties to do a certain act or enter into a certain arrangement It is usually a preparatory or preliminary arrangements before entering into a formal one Generally, it is not a valid and enforceable agreement under law However, not all MOU is not binding under law. It depends on the facts and circumstances of each case.

Sia Siew Hong v Lim Gim Chian [1995] 3 MLJ 141 Held: The label of document chosen by the parties does not bind the court. The court has to construe the nature and purport from its language and other admissible evidence to decide the relationship between the parties.

Ismail bin Mohd Yunos v First Revenue Sdn. Bhd [2000] 5 MLJ 42 Facts: P and D signed 2 MOU where D in consideration of P having secured a joint venture arrangements with the Selangor State Government, promised to pay P certain sums of money. D refused to honour the agreement, claiming that the MOU are not enforceable on the grounds of uncertainty. Held: Binding

Ratio: the clauses in the MOU clearly and unambiguously stipulated that the parties intended that it shall have the force of law of the joint venture project materialized. The MOU also contained the stipulation that time is of essence of the contract and D confirmed that he would make payments totaling of RM4.2 million as service fees to P and that it will complete the project in about 18 months. Having considered all the facts, the court held that both MOU are binding.