Essay: Elements of a contract

A contract is referred to as a legally binding agreement between two parties. Within this essay, I will be discussing the elements that are essential in the making of a legally bound contract, the biggest factor being the intention to create legal relations. I will examine the presumptions made in several cases, across two types of contract and how these presumptions may conclude that court action is not required. The cases that can be found throughout the essay, show an in depth understanding of the different rulings found by the judges depending on the intentions of those involved in the agreement brought to court. There are four main elements that must first be put in place to allow a contract to be legally bound. This process begins with an offer and acceptance, and is then followed by consideration, legal capacity and intention to create legal intentions.

 

For a contract to be enforced legally, an offer and acceptance are necessary. An offer is willingness to create a contract that includes specific terms and is made with the intention of it becoming legally bound once it has been accepted by the party it has been addressed to. It can be made to one party, several parties or to the whole world and they can withdraw from the offer before it has been accepted if they feel the outlined terms have not been met. For example; Party A (offeror) offers to sell a car to Party B, and before any agreement is reached, Party B declines it. Therefore, there is no legally binding contract. An offer must be accepted based on the terms strictly stated within the offer and “any duress, false statements, undue influence or unconscionable dealing could make the contract illegal or void.” It is also important to distinguish between an offer and an invitation to treat. An offer will lead to a binding contract whereas an invitation to treat cannot be accepted as it is an invitation for the recipient to make an offer, e.g. advertisements. The difference between the two was established in the case of Pharmaceutical Society of GB v Boots Cash Chemist [1953] 1 QB 401. Boots introduced a new self-service system whereby customers could take a selection of products off the shelf and pay for them at a till point. The Pharmaceutical Society of Great Britain took an action against them regarding the legality of the system as pharmaceutical products, by law, are to be sold in the presence of a pharmacist. The outcome was that good on a shelf constitute an invitation to treat but not an offer. When the customer takes an item to the till, they are making an offer to purchase and it is up to the sales assistant to accept this offer. Therefore, the pharmacist at the till is present during the sale of a good.

Then there is consideration which is something of value, money or a promise, given by both parties to a contract that encourages them to enter in to the agreement to exchange mutual performances (quid pro quo). A valuable consideration, in the sense of the law, may consist either of some right, interest, profit or benefit accruing to the one party, or some forbearance, detriment loss or responsibility, given, suffered or undertaken by the other.” Consideration is referred to as executory or executed but not past.

Another main building block of a contract is legal capacity. This essentially states that not everyone is entitled to enter a contract as some people have problematic consent and will therefore have a separate dealing. The list includes; people with mental impairment, minors, people who have been declared bankrupt, corporation i.e. people who act on behalf of a company and convicted prisoners.

For an agreement between two parties to stand in court, there must be the intention to enter into a legally binding agreement. The body of this essay will be based around how the presumptions of the court can sometimes go against the intentions of the what the parties seek. It may happen that when a case is brought to court, there may be an offer and acceptance as well as a good consideration but the intention to create legal relations may be absent and this can influence the court’s decision and prevent the making of a contract. Basically, the aim of intention to create legal relations in contract law is to get rid of cases that aren’t seen as fit or appropriate for legal action, and without evidence of this intention, no case will stand before the courts despite any existence of consideration for the contract.

There are two type of contract that the courts acknowledge; domestic or social settings and commercial settings, which both have different legal presumptions that may go against the intentions of the parties involved.

In domestic or social agreements, are usually made among friends or family and the law presumes that generally the parties do not seek to create any legal relations. It must be proven that the parties intended the create a legally binding document to enforce a domestic or social contract. In the case of Balfour v Balfour [1919] 2 KB 571, we see how presumptions of domestic agreements went against the intention of Mrs. Balfour. After a visit to England Mrs. Balfour remained in the country having been diagnosed with rheumatic arthritis and was unable to return to Ceylon with her husband. Mr. Balfour agreed to pay his wife £30 a month, however they soon separated after spending so long apart. The Plaintiff (Mrs. Balfour) sued her husband for not receiving the payments of money he promised. The issues put forwards to court questioned;

_1) Did the defendants offer intend to become legally bound?

_2) Does the fact they were husband and wife matter?

Mrs. Balfour was given decree nisi and managed to obtain an order for alimony as at first, it was held that Mr. Balfour was obliged to support his wife. The verdict was appealed and it was unanimously decided that no enforceable agreement was made and Warrington LJ dissented, that there was no intention to create a legally bound agreement and to dispose the case. Duke LJ, touched on the fact that they were not yet divorced and that the onus of proof was on the plaintiff, Mrs. Balfour to show that there was a deemed promise of contractual nature.

It was held that the law of contract is not used for personal family relationships and that when a domestic agreement is made, there is a rebuttable presumption against the intention to create a contract that is legally enforceable. In the Court of Appeal, the plaintiff did not rebut the presumption. This is a prime example of how the operations of presumptions in domestic agreements can go against the intentions of, in this case, the party of Mrs. Balfour. We can see a contrast in the presumptions with the case of Merritt v Merritt [1970] 2 All ER 760; [1970] 1 WLR 1211 where the court distinguished between the fact that at the time of the agreement, Mr and Mrs. Merritt were married, but estranged and any agreements or promises made between the two were made with the intention to create a legal contract. The difference between these two cases were that Merritt v Merritt was a written agreement and had legal standing whereas Balfour v Balfour was only an oral promise.

If we take a closer look at Jones v Padavattan [1969] 1 WLR 328, another domestic or social agreement regarding a parent and child. “In 1962, Mrs Jones offered her daughter a monthly allowance if she gave up her job in Washington to come to England to sit the bar and become a barrister. Due to accommodation problems Mrs Jones bought a house in London where the daughter lived and received rents from other tenants. In 1967, they fell out and Mrs Jones claimed the house even though the daughter had not yet passed half of her exams”. “There is a presumption that contracts entered into with family members do not give rise to legal relations. These are rather good faith commitments, and the law does not enforce promises made in good faith. The issues put forward by Dankwerts LJ in this case questioned;

1) “Was there intention to create legal relations?”

2) “Was the agreement ‘so obscure and so uncertain’ that it could give rise to legal relations?”

Dankwerts compared the case of Balfour v Balfour to that, as the same principles apply to dealings that involved other relations whether it be husband and wife, father and son or mother and daughter. Salmon LJ came to the same conclusion but by a different route, through the presumption of fact, not law. He explains that a family situation such as this did not have the intention to create legal relations but intend on “family ties of mutual trust and affection”. Atkinson LJ had an objective approach, stating that the whole agreement was “far too vague to give rise to legal relati
ons” as there was already a dispute and misunderstanding from the start of the agreement regarding the sum of the allowance.

“It was held that the first agreement to study was a family arrangement and not intended to be binding. Even if it was, it could only be deemed to be for a reasonable time, in this case five years. The second agreement was only a family agreement and there was no intention to create legal relations. Therefore, the mother was not liable on the maintenance agreement and could also claim the house”. If both parties wanted to seek a legally bound agreement (rebut the presumption), they would need a solicitor to do so. Due to the absence of a legal agreement, the presumption was not rebutted.

In the cases of Balfour v Balfour, Merritt v Merritt and Jones v Padavattan, we see how the different presumptions of contract law are established. The general presumption however, is that domestic or social agreements, do not have the intention to create legal relations and therefore, do not need enforcement by the courts. Domestic and social agreements attract a rebuttable presumption that there is no intention to create legal relations, however in commercial agreements there is a rebuttable presumption that the parties involved, intend to create a legal contract.

In the case of Esso Petroleum Ltd. v Commissioner of Customs and Excise [1976] 1 A11 ER 117, the presumption is very difficult to rebut. In the 70’s, the taxpayers (Esso) created a petrol sales promotion scheme, where for every 4 gallons of petrol bought by customers, they received a coin which bore likeliness to one of the members of the English soccer team. The purpose of the scheme was to encourage people to buy petrol in return for coins and collect them until they had gathered all 30 coins. The Esso company provided posters and TV advertisement, with phrases such as ‘Going Free, at your Esso Action Station now’. The Customs and Excise commissioners filed a suit against the petroleum company claiming that the coin was chargeable to purchase tax under section 2(1) of the ‘Purchase Tax Act 1963’. The issue put forward questioned;

1) “Was consideration provided for the receipt of the world cup coins?”

Esso argued that the coins were given away for free and therefore were not resell-able items and the promotion was not intended to create any legal agreements. The Commissioners concluded that the promotion arose from a contract of sale of money. The court held there was intention to create legal intentions as the process took place in a business setting and was accepted by customers. However, despite the legal intentions there was no consideration as the coins were transferred under a separate contract of sale of petroleum. The coins were offered by means of commercial context, and it cannot be accepted that Esso had no intention to create legal relations. Esso obviously presumed their customers would find value in these coins because if they didn’t, why would they run the promotion in the first place? The presumption can certainly be raised that there was intention to create legal intentions.

Another example that shows that presumptions can go against the parties, is the case of Rose & Frank Co v Crompton Bros [1925] AC. Rose & Frank Co.(RFC) were the American distributor for J.R Crompton’s (JRC) new paper product. Both entered into an agreement whereby by the plaintiffs (RFC) were the sole agents for the sale of the defendant (JRC) paper in the US. However, within in this agreement included an “honourable pledge clause”, which stated that they were not entering into a formal or legal agreement and would not be subject to legal jurisdiction. Later a dispute arose and Crompton Bros, terminated their agreement, because of this RFC sued them. They were successful and J.R Crompton appealed. The issue questioned in this case was;

1) Can a clause be placed in a contract stating that it is not legally binding or is there a contract regardless of that?

The judgement was reversed in the Court of Appeal. This decision shows how the honourable pledge clause rebutted the presumption which normally exists in commercial agreements that the parties intend to be legally bound by their agreements. The agreement therefore had no legal affect and was not enforceable by the courts. This proves that although a contract was established, the court respects and honours the clause contained within the contract stating that it is not a legally bound agreement and therefore, there was no intention to create legal relations.

In conclusion, the doctrine of intention to create legal relations bares a huge role in the making of a contract and how it is interpreted. The cases of ‘Balfour v Balfour [1919] 2 KB 571’ and ‘Jones v Padavattan [1969] 1 WLR 328’ allow us to understand how domestic or social settings can impact the legality of a contract or agreement and the cases of ‘Esso Petroleum Ltd. v Commissioner of Customs and Excise [1976] 1 A11 ER 117’ and ‘Rose & Frank Co v Crompton Bros [1925] AC 445’, show how commercial settings differ. The operations of its presumptions, essentially decide whether a contract is legally bound and whether court action is required.