TOPIC 2
LAW OF CONTRACT:
4. INTENTION TO
CREATE LEGAL
RELATION
1
Introduction
• AN AGREEMENT BY ITSELF DOES NOT
CREATE A BINDING CONTRACT
• NOT EVERYONE INTENDS TO TAKE
LEGAL ACTION FOR BREACH OF
AGREEMENT
• THE PARTIES MUST INTEND THAT THE
AGREEMENT IS TO BE LEGALLY
ENFORCEABLE
• THIS INTENTION CAN BE EITHER
EXPRESS (BY WORDS) OR IMPLIED (BY
CONDUCT)
2
The Requirement
•Intention is a vital requirement of a valid
contract
•The Contracts Act 1950 is silent on the
question of intention to create a legal
relation
•Hence, reference is made to common
law as well as decided cases
3
The Rationale
Agreements are made almost daily between people
where the parties usually do not contemplate going
to court if the promise was not honoured/performed
For instance, an agreement to go to the cinema or a
promise to buy a bicycle if a child passes his exam
The parties concerned would surely not have thought
that they would sue the other party in court when
the promise was not carried out
4
How to determine intention?
• To become a contract, there must be an intention to
be legally bound i.e. intention to make a contract
• In order to determine intention, the courts will look
at the conduct of the parties and the surrounding
situation
• This include perusal of documents and the conduct
of the parties prior and subsequent to the
agreement
• For this purpose the courts have made legal
presumptions based on the types of agreement
entered into by the parties
5
Types of presumptions
• The courts make a presumption on
the parties’ intention based on the
type of agreement
• The courts have divided agreements
into two general types namely;
• Commercial agreements
• Domestic, Social or Family
agreements
6
Commercial
Agreements
This is an agreement relating to commercial
matters such as trade, services etc
The motive is profit or to make money
Therefore, any agreement to sell or buy goods
especially immovable goods, are likely to be
considered as a contract, not an agreement
7
The legal presumption
The courts presume that the parties intend to
make a legally binding contract
There is no need for either parties to prove
intention in this case
Nevertheless, if one party disagrees, he must rebut
the presumption
The burden of proof falls on the party who claims
that there is no intention to make a contract by
bringing evidence to court
8
Rebuttal of the
presumption
Rebuttal means to disprove the presumption
Hence, the party who claims that there is no
contract must prove that there was no intention to
enter into a contract
If he can successfully rebut the presumption, the
court will hold that the agreement is not a contract
despite the agreement being one of a commercial
nature
9
Low Kar Yit & Ors v Mohd Isa &
Anor (1963) MLJ 165
Facts:
The defendant gave an option to the plaintiff’s agent to buy a parcel of land
subject to a formal contract to be drawn up and agreed upon by the parties
Held:
The court held that the option was conditional upon and subject to a formal
contract to be drawn up and agreed upon by the parties. Thus, exercising
the option was only an agreement to enter into an agreement which is not
binding. Therefore, there was no contract between them
10
Koh Kia Hong v Guo Enterprises Pte
Ltd (1990) 1 CLJ 919
Facts:
The plaintiff offered to buy the defendant’s
property and paid him a deposit of RM5,000. they
both signed a typewritten note prepared by the
plaintiff. The defendant also issued an official
receipt to the plaintiff.
The defendant claimed that there was no contract
between them as they had not signed any formal
agreement.
11
Koh Kia Hong v Guo
Enterprises Pte Ltd
Held:
The court decided that there was an intention to create legal relation and
thus, a binding contract existed on the following grounds:
◦ The deposit paid by the plaintiff
◦ Both parties signed the note
◦ Issue of an official receipt by the defendant
12
Social, Family and
Domestic Agreements
This type of agreements consist of agreements
made between husband and wife, family
members or those that relates to social matters
Even though the parties are not related to each
other, the agreement would be a social one if it
does not involve commercial matters
It is up to the court’s interpretation
13
The Presumption
The parties do not intend to enter into legal
relation
This means that the agreement is not a contract
but an ordinary agreement
The parties need not prove that they have no
intention to make a contract
Nevertheless, the party who disagree has the
opportunity to rebut the presumption
14
Domestic Agreements
In Balfour v Balfour, the defendant was a civil
servant stationed in Ceylon. His wife stayed back
in England on doctor’s advice. The defendant
promised to send £30 a month to the wife until he
returned. Later on, they agreed to a divorce. The
wife sued the defendant for his failure to pay the
£30. The court held that the parties did not intend
to enter into a legal relation.
15
Balfour v Balfour [1919]
2 KB 571
The court stated that, “It is necessary to remember that
there are agreements between parties which do not result
in contracts within the meaning of that term in our law –
and one of the most usual forms of agreement which does
not constitute a contract appears to me to be the
arrangements which are made between husband and wife
– they are not contracts because the parties did not intend
that they should be attended by legal consequences”.
16
Merritt v Merritt [1970]
2 All ER 760
The husband left the matrimonial home which was in the
joint name of the couple. The wife pressed the husband to
make arrangements for the future. They later met and
discussed the matter. The husband promised to transfer
the house to his wife if she completed the mortgage
payment on the house. The wife insisted that he wrote it
down and signed it. The wife then paid the mortgage but
the husband refused to transfer the house to her.
17
Merritt v Merritt [1970]
2 All ER 760
The court decided that the principle in Balfour v Balfour does not apply to a
husband and wife who are not living in amity.
There court also took into consideration the fact that the wife had requested
the husband to write and signed a note representing the promise
18
Family Agreements
In Jones v Padavatton [1969] 1 WLR 328, a mother offered to provide expenses
if her daughter would quit her job as secretary in the USA and come to England
to study for the Bar. Later on, she also provided a house for her daughter.
When differences arose between them, the mother asked her daughter to leave
the house but she resisted on the ground that her mother was contractually
bound.
The court held that the original agreement was motivated by the mother’s
desire for her daughter to succeed at the Bar. As they were originally on good
terms, there was no intention to make a contract.
19
Vague terms
In Phiong Khon v Chonh Chai Fah [1970] 2 MLJ 114, a
Chinese woman set up home with the appellant until
her death. The appellant alleged that her son, (the
respondent) had executed a document transferring
land to him. The respondent denied this.
The court found that the terms of the agreement was
so vague that it was seriously doubted that there was
any intention to create a binding contract.
20
Conclusion
In order to create a binding contract, the parties must have the intention
to make a contract
The courts have established the two legal presumptions as a way to
reduce the difficulties associated with determining the intention of the
parties
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