BA4 Fundamentals of Ethics, Corporate Governance and Business

Law

Module: 7

Contracts

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1. The nature of a simple contract

For people to work with one another in business or society, it is fundamental

for them to make agreements. This simple but essential part of society relies

on the people with whom the agreement involves to commit to doing whatever

it is that the agreement is about.

It doesn't require a lot of imagination to picture what the world would look like if

agreements and committing to these agreements did not exist. Loans and

mortgages would be impossible, workers could find they'd been taken

advantage of by their employers, someone could sell something and then

claim it had never been sold or someone could take payment for a service

and then never provide that service.

So what is it that forces parties to uphold their end of an agreement? The

answer is of course, a contract.

A contract is a binding agreement between two or more people that the

law acknowledges, and which sets out what they should or shouldn't do.

For instance a customer may take his selected goods to the cash desk, pay

for them and walk out of a self-service shop with no verbal or written

exchanges with the shop-keeper. In this contract one party must pay the

selling price for the item and the other must provide the advertised goods.

Even without a written or oral agreement, there still exists a legally binding

contract between the business and the customer.

Not every contract has to be written. Some contracts are oral. Nevertheless

the form of contract must be correct for the type of transaction being

undertaken. Some are committed to paper through enforcement of law, such

as sale of land. Others are done so voluntarily.

Simple contracts are those made orally or in written form.

Specialty contracts are made by deed, a signed and delivered agreement.

This is often used for the ownership of property or legal rights.

The majority of contracts are simple contracts- that is, they do not need to be

in any particular form. In this chapter we will examine both types of contract.

Anyone over 18 years old can make a contract, and sometimes people

younger than 18. Once you have made a contract you are usually bound to it,

but there are exceptions- such as mental illness or disability.

Discharge of a contract is the term used for circumstances in which the

contract is brought to an end. Where a contract is discharged, each party is

freed from their continuing obligations under the contract.

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Elements required in a valid contract

Form A contract must use the correct form, e.g. the sale of land in the

UK requires a deed rather than just 'shaking hands on it'.

Terms

The terms used in the contract must be the appropriate.

Inappropriate terms would be ones that required too much risk or

loss. So a contract with terms stating the other must tight rope

across the Grand Canyon or Niagara falls would be

inappropriate.

Consent

If one party gives false information (known as

misrepresentation) it may affect the validity of the contract.

e.g. if someone said they owned a car they were selling but they

did not actually own it.

Legality A contract deemed by the courts to be illegal or contrary to

public policy will not be valid. So a contract to kill someone

wouldn't be valid (sorry assassins).

Capacity

Not everyone has the capacity to form contracts. Examples:

certain local authority bodies are not authorized to do so. In the

UK minors (under 18 years of age) cannot enter into certain

contracts such as credit agreement to get a loan or credit card.

Corporate capacity to contract

Capacity in UK law refers to the ability of a contracting party to enter into

legal relations. One of the deciding factors of whether a transaction entered into by a company is valid and binding is the company’s legal capacity to

enter into a particular contract.

In the UK for example up to the 2006, all companies were required to spell out

the ‘objects’ or the legitimate range of tasks of their business, for example ‘to

create software’. If a company acted outside of this it considered invalid or ‘ultra vires’. Ultra vires is the Latin term for ‘beyond the powers’. This clause

reduced the flexibility of companies and hindered business as was removed. However the point is clear the company must have the right to enter into

a contract for it to be valid.

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Written contracts

Some contracts need to be in writing for them to be legally enforceable.

In the UK for instance, these contracts relate to:

A transfer of shares in a limited company.

Sale or disposal of an interest in land promises to transfer title at a

future date. Under the Law of Property (Miscellaneous Provisions) Act

1989 it must be in writing.

Consumer credit and hire purchase contracts. Such a

contract should providing information required by the Consumer

Credit Act 1974.

Bills of exchange, cheques and promissory notes (all of which

relate to the promise to pay for something at a later point).

Assignment of debts (i.e. Bob owes you £20. You agree to pass

over (assign) that debt to your friend Chris as he's done you a favour

– so Bob now owes Chris the £20. This would need to be done in

writing for it to be legal).

A guarantee: this is an example of a contract, which can be made

orally but is not legally binding unless evidenced in writing.

Deeds

A deed is a formal written agreement that is created using set rules to

ensure that their can be little doubt that the agreement was indeed

made. It required for certain transactions e.g. often required for the transfer

of land.

A deed must be:

• in writing

• signed

• attested (meaning that it is evidenced as being truthful e.g.

independent parties may witness that they have seen the document

being signed as independent evidence that the signatories are the

people in the contract)

• indicates on is face that it is a deed

• Delivered (i.e. formally given to the other party). Contracts

commonly required to be in the form of a deed include:

• Transfer of a legal estate in land

• Long term leases (over three years)

• Patents.

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Covenants

A covenant is an agreement which offers solemn promises and may be

part of a deed or stand alone.

For example, when a lease is taken out a landlord may promise to repair the

property during the lease term.

In business covenants are often made when companies take out loans. They

may, for instance, promise not to take out further loans until this one is paid off

giving the bank more confidence that the company will be able to repay the

loan.

Here's a summary of the different contract types.

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2. Agreement

As previously discussed, in order for much of business and society to function,

parties need to make agreements.

Contractual agreement refers to terms of offer and acceptance.

One party, the offeror, makes an offer which, if accepted by the offeree,

creates a binding contract. The agreement may be oral. After one party

makes an offer, the contract does not become a contract until the other party

indicates their willingness to accept the terms of that offer.

Gary offers Jim (a plumber) £50 to fix his tap. He has made an offer. If Jim

accepts that offer he would show his acceptance by fixing the tap.

Consideration

Consideration is something of value that a party brings to a contract, such

as goods or services. It is expected that both parties bring a consideration

to a contract.

So in the leaking tap example, the Jim's consideration is the service of fixing

the tap, Gary's consideration is the £50.

Intention

Parties must have the intention to create legal relations for a contract to

be binding. What matters is not what the parties have in their minds, but

the inferences that reasonable people would draw from their words or

conduct.

Let's use the leaking tap example again to help us understand. Gary has

hired Jim to fix tap. Whilst Jim was fixing the tap he realised there were

more serious issues with the pipes and fixed them as well. The intention of

the contract was that the plumber would only fix the tap, not replace all the

pipes, so there would be no obligation to pay the plumber for more than fixing

the tap.

Of course if the contract was more vague and stated that Jim was hired to fix

the plumbing, then it would be reasonable to assume the contract would

include replacing faulty or broken pipes as well. Even if the customer thought

it was only the tap.

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3. Offers and ITTs (invitation to treat)

When does the advertisement of a product by a company legally become an

offer? This question was first answered in Carlill v Carbolic Smoke ball Co

1893, where the company had advertised that their product would protect the

user from the flu and promised a reward of £100 for anyone who did contract

the flu after using it.

The claimant bought the device, called a “smokeball”, followed the instructions

and subsequently contracted the flu! She sought to get the £100 reward but was

refused.

It was judged that due to the specificity of the advertisement, it could be

accepted as an offer and therefore a contract could be created and broken if

its terms were not met, as was the case in this instance.

From the example above, it should become clear that an offer does not

have to be to a specific person. An offer is a made up of a definite

promise bound on specific terms. The binding part of the contract is an

agreement made by offer and acceptance.

An offer must be distinguished from other similar actions or statements. Only

an offer in the proper sense can form a binding contract if accepted.

An offer must be distinguished from an invitation to treat or ITT. Unlike a

contract, an ITT is not binding. It is merely a thing that acts as an

inducement to encourage another person to make an offer.

Examples of ITTs are:

Goods on display in a shop window

Public advertisements

Goods on a shop shelf.

There are several types of statements or actions that do not constitute

actual offers in the eyes of the law. They are:

If it is only is a statement of intention.

If information only is supplied. If an advert stated that a product was

normally sold at £10 they wouldn't have to sell it for £10.

If it is an open offer. An offer which is made to everyone. For

example, if you put an advert in the newspaper saying you were

selling a lawnmower for £50. You wouldn't have to sell that

lawnmower.

If the offer has not been communicated to the other party. A store

has a sale giving 20% off for loyal customers. They have sent out

leaflets to loyal customers informing them of the offer. The shop is

not legally to sell the goods with 20% off to any other person. This is

because they did not communicate the offer to everyone, so no offer

legally exists to anyone other than loyal customers.

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Care must be taken in the case of auctions, in advertising and in to

exhibiting goods for sale, where specific rules apply as to what can be

considered an offer.

Note: We will now consider an example of the application of this principle to

UK Law, and will see further examples in future sections. You do not need to

learn these examples as they will not be directly examined as no specifics

of any individual legal system are examined, but instead should use them as a

way to understand how the law can be applied in one jurisdiction, that being

the UK.

Case example: Harvey v Facey (1893) Privy Council

Harvey contacted Facey by telegram asking him to sell them a Bumper Hall

Pen “at the lowest cash price”. Facey's telegram replied that the lowest

price for the pen was £900. Harvey replied saying he agreed to pay £900.

Facey then refused to sell Harvey the pen and so Harvey took it to court.

The court concluded that Facey had not actually answered Harvey's actual

question which was whether he would “sell the pen at its lowest price”.

Facey had merely responded to a request for information saying what the

lowest price was and this was not an offer. There was therefore no contract

concluded between the parties, and there was, therefore, no evidence of

an intention that the telegram sent by Facey was an offer.

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4. Acceptance

Offer and acceptance, together with consideration, are the “glue” that

binds the contract.

Acceptance is unconditional agreement to all the terms of an offer. It can

be either written, verbal or by conduct.

Acceptance means the offeree (the person accepting an offer) agrees to be mutually bound to the terms of the contract by giving consideration or

something of value, like money, to seal the deal. Acceptance is valid if the

product or service given is exactly what was stated in the offer.

So if the plumber fixed the tap exactly as specified then it would be a valid

acceptance, if he only partially fixed it then it would not be valid.

In the case of a unilateral contract the offer can only be accepted by

performing an action.

If we think back to the plumber fixing the tap. There was an agreement that the

plumber would fix the tap and Gary would pay the plumber. Their contract

would only be properly formed once the tap had been fixed. Before then,

neither person is obliged to do anything.

Acceptance of an offer which is subject to contract is binding on neither

party until completion.

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The ‘postal rule’

Let’s say you are in discussions with someone over the sale of a house. You

offer them the house for £300,000 and tell them that if they want it they need

to send a letter confirming it by Friday. Friday comes around and no letter is

received. You assume they didn’t want it and decide that actually you’d rather

keep the house.

However, as it turns out they posted it on next day delivery on Wednesday and it was simply lost in the post. Too bad for them, right?...Wrong! Under

the postal rule the moment of acceptance is deemed to be the time they

posted the letter. The fact that you never received it is irrelevant and the

acceptance stands, therefore you are now contractually obligated to sell

the house for the price quoted.

Admittedly in these days of instant messaging and communication, issues like this are less and less frequent. However, the principle still applies that

sending is acceptance. So the fact that you didn’t receive that email/

facebook message/text etc. doesn’t overrule the other parties

acceptance.

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5. Termination of a contract

Sometimes a contract needs to be stopped. But how is this done?

An offer can only be accepted while it is considered to be open. If an offer

has been terminated it cannot be accepted. An offer can be terminated

through rejection, lapse and revocation.

Rejection

An express rejection is saying “no” to the offer.

A counter offer by the offeror amounts to both a rejection of the

initial offer and a new offer. This means the offeror cannot accept

the original offer once the counter offer is made.

A Lapse of time

An offer must be expressed to last a specified time. If no time is stated, the offer is

deemed as lasting for a reasonable period of time.

Let's return to Gary and his leaky tap from the previous sections. He offers

Jim the plumber £50 to fix it that day. The plumber says he can't get to

Gary's house that day, so Gary hires someone else to do it. The next day Jim

turns up to fix the tap and is annoyed that Gary hired another plumber to fix it.

However, Gary's offer was to have it fixed on that day only, so when Jim

couldn't get to Gary's house for that day the contract became void.

A lapse of time may be implied, as in the case of Ramsgate Hotel v Montefiore.

UK case example: Hyde v Wrench

Defendant Wrench offered to sell his estate to the plaintiff Hyde for

£1,200. Hyde declined.

Wrench then made a final offer to sell the farm for £1000 pounds. Hyde

then made a counter offer of £950. Wrench later rejected the offer. Hyde

then replied that he accepted Wrench’s earlier offer to sell for £1000.

When Wrench refused, Hyde sued for breach of contract.

The court decided that if one party makes an offer and the offeree makes

a counteroffer, the counteroffer invalidates the original offer.

UK Case Example: Ramsgate Victoria Hotel Co v Montefiore 1866

The defendant Montefiore applied to buy shares in June and paid a deposit.

In November the company accepted his offer and requested payment of the

balance due. The defendant contended that his offer had expired. It was

held that the offer was for a reasonable time only. Five months was much

more than reasonable time, hence the offer had lapsed.

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Death of an offerer/offeree

The death of the offeree terminates the offer. The offeror's death

terminates the offer, unless the offeree accepts the offer in ignorance of the

death, and the offer is not of a personal nature.

For example, if the Jim plumber died there would be no contract between

him and the Gary. If Gary died, the contract would also be ended unless Jim

fixed the tap without knowing that Gary had died.

Failure of a condition of a contract

An offer may be conditional on particular criteria. If the condition is not

satisfied, the offer cannot be accepted.

So if Jim “fixed” the tap, but it still leaked a bit, then the condition that the tap

be made to stop leaking would not have been satisfied and the contract

incomplete. Therefore, acceptance is never achieved.

Revocation of an offer

An offerer can revoke his offer any time before acceptance. However

revocation must be communicated at any time before acceptance.

Gary offers the plumber £50 to fix it that day. The plumber says he can't get to

Gary's house to fix the leak, but he'll be there first thing tomorrow. If he

wishes, Gary can take back the offer and find someone who can fix it that

day instead.

UK case example: Routledge v Grant (1828)

The defendant offered to buy the claimant's house for a fixed sum,

requiring acceptance within six weeks. Before six weeks had elapsed, he

withdrew his offer. The decision of the court was that the defendant could

revoke his offer at any time prior to acceptance, even though the time

limit had not expired.

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Summary

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6. Consideration

Consideration is one of the three main building blocks of making a contract. A consideration can be anything of value, such as an item or service.

The basic rule under English Law (and many other international

jurisdictions) is that every simple contract must be supported by a

consideration. i.e. each side must promise to give or do something for one

another.

One exception: speciality contracts such as deeds, however, do not

require a consideration unless it is expressly requested under the terms of

agreement.

Consideration must be something of value in the eyes of the law. It can be in

the form of:

Money

Goods

Services

The promise of any of these.

Effectively, each party to a contract must be both a promisor and a

promisee. They must each receive a benefit and each must suffer a detriment if the contract is to be binding.

Should one party decide to later change the deal, both must agree. One

cannot force the other person to agree to accept less, or to give more than

was originally agreed. These principles are central to consideration.

Example: Sarah has agreed with her internet provider to pay £30 a month for

her internet access for 1 year. 6 months into the contract the internet provider

try to increase the monthly payments from £30 to £40. They can't do this

unless Sarah agrees.

Illegal acts: An illegal act is not sufficient to amount to a consideration.

Unfortunately for assassins, illegal acts are not considerations. So the offer to

kill someone would not oblige the person to pay for the assassination.

Although, I don't think assassins need to worry too much about that!

A better example might be in employment law. If the contract states the person's

pay at an amount which is below a National Minimum Wage then that would not

constitute a consideration. This is because it is illegal to pay below the National

Minimum Wage.

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Forms of consideration

Executory consideration

This is the promise to perform an action in the future. Contracts can be formed by an exchange of mutual promises. This is known as

an executory contract.

A couple book their hotel room for their honeymoon. They promise to pay the

hotel money and the hotel promises to give them access to the room for the dates

requested. The hotel and the couple have given executory promises.

Executed consideration

This is an act performed at the time the contract was made. It is an act given

in return for a promise. It means that if an act is undertaken in return for a

promise, the promise only becomes obligatory after the act has been performed.

For example, a couple wishes to stay at a hotel. They pay their bill for their room

months in advance. In so doing, they have provided an executory consideration

(payment) and the hotel has provided a promise (the room) in return. As soon as

the couple paid the hotel, the hotel was obliged to fulfil their promise.

In the eyes of the law, a consideration does not have to be considered

adequate, but it must be sufficient.

Sufficiency means that a consideration must have some monetary value,

and that it must be capable of amounting to a consideration under the

law. For instance, affection does not count as a consideration. If someone

offers you £100 for you to 'love them' then that's not a legally binding

contract!

Courts are not concerned with whether the parties have made a good or bad

bargain. For example, a court wouldn't care that someone sold their house

for £100,000 when it was worth £500,000. In other words the court wouldn't

care that the payment was adequate. As long as there is some element of

value in the deal, the courts are unlikely to intervene on behalf of a party

who has agreed to a bad bargain.

Performance of existing contractual duties

Carrying out of existing contractual obligations is not sufficient consideration.

However, if some extra service is given this may be sufficient consideration.

UK case example: Collins v Godefroy (1831)

The claimant had been summoned to give evidence on behalf of the

defendant in a case. The claimant alleged that the defendant promised to

pay him for appearing. The decision was that there was no consideration

for this promise because Collins was under a public duty to attend court.

Godefroy was not required to pay him.

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Consideration must come first from the promisee

The person who wishes to enforce the contract (the promisee) must show

they provided consideration.

Third party consideration

If a party is contracted to do something by a second party, but is already

bound by contract to do this for a third party, this is still a good

consideration.

That's a bit complicated so let's look at an example to demonstrate what it means.

A gardener (party 1) is paid by a woman (party 2) to mow her lawn every week

for a year. The gardener and the woman have a contract.

Then the woman's boyfriend (party 3) approaches the gardener and offers to

pay him to mow the lawn every week for the same year. Of course the

woman is already paying for this service, so is this second contract valid?

Well actually it is.

Both contracts are valid as the gardener's consideration for both is valid.

Although the gardener has provided the same consideration (mowing the

lawn) to both parties (woman and boyfriend) they are valid because they

have been made to separate parties.

If the woman had an accident and had amnesia so forgot that she'd paid the

gardener once before and did so again, that second contract would not be

valid because the same consideration (mowing the lawn) can not be used for

two contracts with the same person. When she remembers she's paid twice

she has a right to her money back!

UK case example: Tweddle v Atkinson (1861)

A brides' father entered into an agreement to pay the father of the groom a

sum of money if the young couple married. Before he had paid, the bride's

father died without having paid. Then the groom's father also died.

The groom felt that the money should now be paid from the bride's father's

estate to him. However his claim was not upheld as he was not one of the

parties who had made the agreement. He was not the 'promisee', his father

was, and as his father had not provided any consideration the contract was

void.

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Part payment of debt

If a party owes a debt to another and agrees to pay part of this debt, this

is not sufficient consideration for a promise to forgo the balance. This is

because the party is already bound to pay the full amount.

Adequacy and sufficiency of consideration

Something done before a promise has been given is not usually binding

past consideration.

e.g. Jon gives Bob an old washing machine at no charge. Bob takes it home,

plumbs it in and it works so well he phones up Jon and promises to pay for it

anyway. Bob never pays. Can Jon claim on the promise? No. Because the

consideration (the washing machine) had already been provided before Bob

promised to pay.

However, in business situations, where consideration can be implied at the

outset it will not be considered as past. i.e. if you would normally expect to

pay for something then it is fair that a charge be paid.

e.g. Jon is an electrician and when he next visit's Bob's house, Bob asks him

to fix a broken light. Jon does so and then Bob promises to pay Jon. As you

know by now, Bob is not always the most trustworthy of people and he

doesn't pay. Can Jon claim on the promise this time? Yes. Because the

consideration (fixing the light) is something that Jon would normally get paid

UK case example: Pinnel's Case (1602)

The claimant was owed £8 and 10 shillings. The defendant paid £5 and 2

shillings and 2p. The claimant then sued for the amount outstanding.

The case held that the claimant was entitled to the full amount even if

they agreed to accept less. Part payment of a debt is still not valid

consideration for a promise to pay the rest owed unless at the promisor's

request part payment is made before the due date.

UK case example: Re McArdle (1951)

A dying mother made her 4 children sign an agreement to reimburse her

daughter in law for money spent on upkeep of the house, which under the

will they were entitled to after their mother's death. The children agreed

in writing to repay the daughter in law in consideration of carrying out

certain alterations and improvements. At the mother's death they refused

to do so.

The decision was that work on the house had all been completed before

the documents were signed. The improvements were past consideration

and therefore the promise was not binding.

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for.

Case Example: Stewart v Casey (1892)

The claimant was asked by the defendant to promote their patent. Once

the work was finished the defendant promised to pay the claimant. The

court decided that promotion work is generally paid for, which was implied

at the outset. Therefore a valid contract existed.

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7. Privity of contract

As a general rule, someone who is a party to a contract has enforceable

rights or obligations under it. Other related parties are not able to sue to

enforce their rights or claim damages

Jon and Bob agree for Jon, an electrician, to rewire his house. Jon does this

but as Bob is his friend doesn't bother asking Bob to pay. Jon's wife is furious

and takes Bob to court. However she was not a party to the contract and has

no rights to enforce it.

It's worth noting that there can be some exceptions to this rule. Each

jurisdiction will have their own rules. In the UK for example exceptions to

privity under common law include:

Trusts: The beneficiary of a trust can sue the trustee to carry out the

contract.

Collateral Contracts: These are contracts between a third party and

one of the contracting parties that relates to a contract. e.g. Bob

searches online with CompareTheInsurance.com and takes out

insurance with GoCar (i.e. Bob and GoCar enter into a contract). As

CompareTheInsurance.com have a contract with GoCar to gain a

commission when people entered into a contract with the insurance

company after visiting their website they have a right to that

commission.

Land Law: If the contract benefits neighbouring land then restrictive

covenants (a clause which limits what a landowner can do with the

property) are imposed upon subsequent purchasers of the land. So if

there is a restrictive clause which states the owner can't build an

extension because it would block the neighbours view that clause

would be carried on into the contracts of the next owners.

Third-party insurance: A third party may claim under an insurance

policy made for their benefit, even when that party was not paying

the premiums. e.g. A mother pays her son's home contents insurance.

The son can make claims off of this insurance.

UK case example: Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd

(1915)

Dunlop produced tyres, and wanted to maintain a standard resale price.

Dunlop agreed with its dealers (in this case Dew & Co) not to sell them

below its recommended retail price, and bargained for dealers to get the

same undertaking from their retailers (in this case Selfridge). Should a

retailer sell below the list price, they were expected to pay £5 a tyre in

damages to Dunlop. Dunlop was therefore a third party to a contract

between Dew and Selfridge.

Selfridge sold the tyres below the agreed price, and Dunlop claimed

damages. The judge ruled that as Dunlop were a third party the case

against Selfridge must fail, and no damages were to be awarded.

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Where a contract to supply a service is made in one person's

name, but is for the benefit of the group. Those in the group can

sue under common law even though there is no privity of contract

between them and the supplier of the service. e.g. If a resident pays to

have the plumbing of their house fixed and the plumbers don't fix it

properly then the other residents could sue the plumber.

In the UK's Road Traffic Acts 1972 and 1988. A person injured in a

road accident may claim against the other motorist's insurance.

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8. Intention

“I'll meet you in the pub at 10” Jon shouts to Bob has he leaves work. “Ok

see you then” Bob replies. At 10pm Bob arrives but Jon doesn't. At 10am the

next morning Jon arrives, but Bob's not there! The problem was in the

'intention'. Jon intended to mean 10am, whilst Bob interpreted it to be 10pm.

If such an issue arises in a contract then the rule is that: it's not what you are

trying to mean, it's what others think you mean. Put in a slightly more formal

way, it matters is not what the parties have in their minds, but the inferences

that reasonable people would draw from their words or conduct.

In our example, most people would probably think Jon meant 10pm as that's a

more normal time to meet in a pub! If there was a contract than it would be

Bob that was in the right as that's what he interpreted.

Both parties to a contract must intend the agreement to give rise to legal

obligations. Their intentions may be express e.g. “this agreement is not subject

to legal jurisdiction”, or may be inferred from the circumstances.

In fact social, domestic and family arrangements (such as between husband

and wife) are not assumed to be legally binding unless the contrary is clearly

shown and so there was no legal contract between Jon and Bob.

However, commercial agreements are assumed to be legally binding unless

the contrary is clearly demonstrated.

Domestic and social arrangements

It is usually presumed that in domestic and social arrangements, people

can work things out amicably, so intention is not usually legally

binding.

However there are exceptions to this as we'll see. Let's see some examples.

Husband and wife

If the spouses are still living together no intention is presumed. However,

courts are more inclined to agree that legal relations exist if property is

involved.

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If spouses are separating or divorced intention presumed.

In other friendly agreements no intention is presumed, unless ‘mutuality

of intention’ can be proved.

This means that the parties concerned shared the same intention at the

time.

UK case example: Balfour v Balfour (1919)

The defendant Mr. Balfour was employed in Ceylon. After he and his wife

returned to the UK it was agreed that his wife would not return to Ceylon

with him for health reasons. He promised to pay her £30 a month as

maintenance. When the marriage ended in divorce the wife sued for the

monthly allowance, which the husband no longer paid. The decision was

that an informal agreement of unspecified duration between a husband and

wife whose marriage had not at the time broken up was not intended to be

legally binding.

UK case example: Merritt v Merritt (1970)

The husband had left the matrimonial home to live with another woman.

The house was owned by both husband and wife. The spouses held a

discussion and husband agreed to pay the wife £40 a month, out of which

she agreed to keep up the mortgage payments. The husband signed a note

of these terms and an agreement to transfer the house into her name once

the mortgage was paid off. However after the wife paid off the mortgage

the husband refused to transfer the house to her.

It was decided that an intention to create legal relations could be inferred

and the wife could sue for breach of contract.

UK case example: Simpkins v Pays (1955)

The defendant, her granddaughter and the claimant (a paying boarder),

took part in a competition run by a Sunday newspaper. Entries were in the

grandmother's name and arrangements over expenses were informal. When

they won £750, the paying boarder claimed a third as their share. The

defendant refused to pay on the grounds that there was no intention to

create legal relations.

The decision was that agreement to share competition winnings could be

enforceable if there is 'mutuality in the arrangements between the parties'.

The three had all taken part together and it was implied they mutually

intended to share any rewards.

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Commercial agreements

Unless the contrary is clearly demonstrated, commercial agreements are

assumed to be legally binding. There is a very strong presumption that

such agreements are intended to be legal relations, unless this is expressly

disclaimed or the circumstances indicate otherwise. It is generally up to the

defendant to prove this is not the case.

If Bob agrees for Jon to rewrite his house and they signed a contract then it would

be assumed that both Bob and Jon intended the contract to be legally binding.

‘Binding in honour only’

If the parties in an agreement state that the agreement is ‘binding in honour only’

then it is regarded that no legal contract is intended.

UK case example: Jones v Vernons Pools (1938)

The claimant Jones claimed to have sent the defendant a football pools

coupon, which entitled him to a dividend. The defendants denied having

received this coupon. A clause on the coupon stated that the transaction

should ‘be binding in honour only'. This clause prevented any action in

court.