We enter into contracts more often than we might think, particularly with friends or family. Most of the time we are unaware of the legal effect of our agreements.
This article explores the concept of intention to create legal relations, one of the key requirements in English contract law.
The basic position is that when two people (or companies) come to a commercial arrangement, there is an automatic presumption that they intended to create legal relations. For example, it would be presumed that a person who places an advertisement in his local newspaper for the sale of their car intended that any agreement with a buyer should have legal effect.
To claim otherwise is difficult. Few claimants in court have successfully argued that their commercial agreement was invalid because the parties did not intend to create legal relations. The policy of the law is always to give effect to business arrangements, not to strike them down without good reason.
Family and social arrangements
When the agreement is between friends or family members, the situation is different. The presumption is that the parties did not intend to create legal relations.
There are several examples of where the courts might come to this conclusion.
Informal lending agreements between husband and wife, or parent and child are presumed to be non-binding. If a wife lends money to her husband, or if a father lends money to his daughter without acting expressly in some way to create legal relations (such as using a loan agreement to formalise the arrangement) then there is no contract that binds the borrower to repay.
The law recognises that these situations are analogous with gifts: the transactions are made for personal reasons and not with a view to commercial gain. Most people would consider it highly unusual if their family agreements were given legal effect.
There are some exceptions.
At the end of a relationship
A court will usually recognise an intention to create legal relations where an agreement is made between spouses at the end of their relationship. The circumstances are deemed to be more commercial than during a relationship.
In pre-nuptial agreements
The courts have upheld pre-nuptial agreements made between couples about to marry concerning what will happen to their property in the event of divorce.
Similarly, where agreements are entered into in a social context, it is presumed that the parties did not wish for there to be legal implications.
For example, the winner of an amateur sporting tournament will not usually be allowed to sue the tournament organiser in the event that the prize is not paid. The rationale for this is to encourage voluntary social participation and preserve the informal atmosphere that surrounds such events.
Again, there are exceptions
In the past, the courts have allowed claims to be made by entrants to national newspaper competitions where big prizes were advertised but not paid. Organisation of, and participation in such competitions are deemed to be on a commercial basis.
Where there are tax consequences to attending social events, particularly concerning charitable giving, the courts are much more likely to infer that a legal contract existed. This serves to prevent abuse of the system by people seeking to evade tax.
Contracts with work colleagues
Shared transport schemes, where colleagues offer lifts to and from work to each other, are also presumed to be entered into without an intention to create legal relations. The situation is presumed to be akin to a friendship arrangement and not a commercial, contractual bargain.
It would be impractical to enforce informal contracts given the realities of the everyday commute: overtime, holidays, and sickness would complicate matters too much. It is considered much easier and better for the economy if colleagues are allowed to provide lifts to each other safe in the knowledge that they are under no obligation to do so. The implication, of course, is that a driver cannot enforce payment from his passenger.
Exceptions again relate to where the nature of the arrangement might be commercial:
- complicated journeys, where the commuting distance is long, or particularly difficult
- organised schemes, where employees were participating in a formal, organised transportation scheme and where there might a reasonable expectation of compensation if the service was not provided.
Express wishes of the parties
Despite these general presumptions, it is always open to the parties to specify whether they would like their agreements to have contractual effect.
Where parties expressly state in their contract that they intend to create legal relations, the courts will always uphold this agreement. Just like any contract, the best way of ensuring that the expression is recorded and cannot later be disputed, is to use a written agreement. There are other ways as well: the use of witnesses or subsequent actions that prove prior intent in another contract.
The requirement for there to be an intention to create legal relations in contract law is designed to reflect common sense. If the contract is commercial, it is presumed that there was intent. Informal arrangements with family and friends are presumed not to create intention, and should not involve lawyers or the courts.