#7429 - Intention To Create Legal Relations - Contract Law

Week 7- Intention to create legal relations

Page 91-103

What is the third requirement to create a contract?

• There must be intention to create legal relations.

• This requirement is closely related with consideration. Parties will not make a contract if they did not have the intention to create a legal obligation.

What is the objective approach?

• The court is concerned with whether the parties manifested an intention to create legal relations and not whether they actually intended to do so.

• They look at whether a reasonable person would be regarded as bound under a contract.

• However if A knew that B was play acting in making the contract, then the contract would not be formed. The court will take the subjective approach into account in this circumstance.

What does the court presume about each kind of contract?

• Commercial contracts:

  • The court presumes that the parties made the contract with the intention to create legal obligations.

  • The onus of proof is on the person denying that a contract exists.

  • An exception is the letter of comfort.

    1. Where the business tries to offer a good faith assurance that they will perform the obligation without creating a clear liability. They try and make the terms ambiguous and woolly to prevent an intention being found. In Branque Brussels Cambert SA v Australian National Industries Ltd they did not get away with preventing a legal obligation through a letter of comfort.

  • Ermogenous v Greek Orthodox Community of SA inc warns people that these rules are just used to establish a burden of proof and do not forbid certain groups from making contracts.

• Non binding commercial agreements.

  • People may purposely enter an agreement where they want to exclude the court’s jurisdiction and create honour clauses (agreement is binding only in honour).

  • The only way to do this is if the agreement is not binding on both of the parties.

  • If an agreement is made binding, any attempt to exclude court intervention is contrary to public policy and is void.

• Agreements between family members.

  • It is hard to claim that there is the intention to create legal obligation.

  • The person wanting the court to recognise a contract has the onus of proof.

• Financial agreements between spouses.

  • Courts will often not go into the family sphere or the private sphere.

• Agreements between separated spouses.

  • The court will recognise the intention to contract because it is safe to assume this.

  • The Family Law Act 1975 makes provisions for married parties relating to financial affairs. It covers property distribution and maintenance of one party in marriage.

• Other agreements between family members.

  • Often there is not contract in families.

  • But Todd v Nicol is an example. A crucial factor is the degree of reliance by the plaintiff on the agreement.

  • But if the nature of the transaction is commercial with family members, it will be a contract.

• Non commercial arms length agreements.

  • Assume there is no contract for people not conducting a business like private sales, nannies and housekeepers.

• Government agreements:

  • A commercial agreement is contractual.

  • The implementation of an administrative policy is not contractual. E.g. Australian Woollen Mills Pty Ltd v Commonwealth. Administration of Papua New Guinea v Leahy is another example.

What is a preliminary agreement?

• Parties write an agreement and intending to have more formal agreement in the future. For example, “subject to contract...or to preparation of a formal contract”.

• You can pull out of the preliminary contract sometimes according to Masters v Cameron.

  • Parties have finalised the bargain terms. They want to be bound immediately. A contract is needed only to make the terms more precise. Parties are bound without the formal contract.

  • Parties agree on the terms but have made the performance of the terms conditional upon the execution of a formal contract. They are bound to bring the formal contract into existence.

  • Parties don’t intend to make a formal agreement until a formal contract is executed. They are not bound until this time.

  • A fourth category? The parties intend to be bound but want to introduce more terms to a formal contract. An agreement is not binging if it depends on further agreement between the parties.

Cases

Presumptions that the court makes about commercial v family contracts

Page 124

Ermogenous v Greek Orthodox Community of SA (2002)

Facts:

• Ermogenous served as an Archbishop for 23 years in the Greek Orthodox church.

• When he resigned, he claimed that he was owed money in respect of accumulated annual leave and long service leave.

• He was treated like an employee and believed he was entitled to the payments.

Remedy sought:

• Ermogenous wants the money owed.

Prior proceedings:

• The Full Court of the Supreme Court allowed an appeal because the parties had not intended to create legal relations.

• The appeal is before the High Court.

Legal issue:

• Can a minister enter into a commercial contract with his flock or is this a purely spiritual relationship?

• Can the minister have the legal intention?

Outcome:

• Appeal allowed. The fact that there is a spiritual relationship does not prevent a contract because the priest has monetary needs. It just established that the priest has the onus of proof.

Legal reasoning:

• Gaudron, McHugh, Hayne and Callinan JJ reasoned that the relationship of the parties suggests a family arrangement. Yet this does not mean there can be no intention to create legal obligations. This just establishes who bears the onus of proof. Ermogenous had to establish a contract existed.

Ratio decidendi:

• There is no law that families cannot have the legal intention to contract. This simply establishes the onus of proof. Caution must be taken not to establish a rule of law denying family members to contract.

Letters of comfort

Page 129

Banque Brussels Lambert v Australian National Industries

Facts:

• Spedley Securities Limited took out an $US5m loan from BBL.

• BBL needed additional assurance that they would be repaid.

• ANI, who held a 45% stake in Spedley agreed to pay BBL if Spedley could not meet its obligation.

• ANI also agreed to provide BBL with 90 days notice before they sold their shares in Spedley. They gave BBL 30 days to demand payment. They ensured Spedley would always be able to meet its repayments.

• The agreement was made through a letter of comfort.

Remedy sought:

• AMI did not give 90 days’ notice before selling its shares. Spedley went into liquidation. BBL wants damages for breach of contract, equitable estoppel or deceptive conduct in breach of the Trade Practices Act 1974.

Proceedings:

• Action in the Supreme Court of NSW under Rogers CJ.

Arguments:

• BBL argued that letters of comfort are just used by parent companies to stop liabilities showing up on their books. They are still made with the intention to perform. Otherwise they would be meaningless and would have no point in the commercial world. The agreement was not one of honour.

Legal issue:

• Can both parties have legal intention if they make an agreement under a letter of comfort or was the agreement based on honour?

Outcome:

• BBL won and was awarded damages.

Legal reasoning:

• Rogers CJ reasoned that although there is no general rule about letters of comfort, under French law they are a commitment to perform (a refreshingly sensible approach). In the business world there cannot be meaningless documents because otherwise people would have no rights. This is unthinkable. The law must give proper effect to commercial transactions.

• The terms “ensure”, “90 day notice” and “intention” were intended to create legal relations. A reasonable person would deduce this. The letter is a promissory statement.

Ratio decidendi:

• A letter of comfort can establish the legal intention needed to contract if it can be shown that it was intended to be binding.

Can families have the legal intention to contract?

Page 133

Todd v Nicol (1957)

Facts:

• Nicol, a woman living in South Australia, invited the Todds to leave Scotland and share her house so she would have company.

• Nicol, changed her will so the Todds would accept the offer. She gave them ownership of the house after she died.

• The Todds accepted and sold their belongings. The niece resigned from her job.

• Their relationship deteriorated and Nicol told the Todds to leave.

Remedy sought:

• The Todds claim that they were entitled by contract to remain in the house. Nicol is counterclaiming for possession of the house on the basis that there was no contract or if there had been one it had been validly terminated.

Proceedings:

• Action before the Supreme Court of South Australia.

Legal issue:

• Can family members have the legal intention to contract?

• Are family promises enforceable in housing arrangements?

Outcome:

• Nicol won. Todds were ordered to leave the house.

Legal reasoning:

• Mayo J reasoned that there was a contract between the parties because adequate consideration was given because the Todds sold their property and travelled and abandoned employment. There was the intention to make a legally binding contract.

• Mrs Todd however breached the contract because she did not conduct herself in a sufficiently reasonable manner. The home no longer had the qualities of a home. This brought the contract to an end.

Ratio decidendi:

• Family members can have the legal intention to contract in relation to housing. The crucial factor is the degree of reliance by the plaintiff on the agreement....