DR. RAM MANOHAR LOHIYA NATIONAL LAW UNIVERSITY

2014-15Project On:Intention to Create Legal Relationship is an Essential Ingredient for ContractSubmitted by:Shivani Singh2nd semesterRoll no.: 128

Submitted to:Dr. Visalakshi VegesnaAssociate ProfessorDr. Ram Manohar Lohiya National Law University

Signature______________________

ACKNOWLEDGMENTOn the very outset of this report, I would like to extend my sincere & heart felt obligation towards all the personages who have helped me in this endeavor. Without their active guidance, help, cooperation & encouragement, I would not have made headway in the project. I am ineffably indebted to Dr. Visalakshi Vegesna, Associate Professor (law) for her conscientious guidance and encouragement to accomplish this assignment. I am extremely thankful and pay my gratitude to Prof (Dr.) C.M. Jariwala, Dean (Academics)for his valuable guidance and support on completion of this project. I also acknowledge with a deep sense of reverence, my gratitude towards Madhu Limaye Library and my parents, who has always supported me. At last but not least gratitude goes to all of my seniors and friends who directly or indirectly helped me in completion of this project.

TABLE OF CONTENTSTOPICPAGE NO.

Essentials to contract formation4

Commercial agreement6

Family and domestic agreements9

Social agreements14

SCs view on intention16

Conclusion18

Bibliography19

ESSENTIALS TO CONTRACT FORMATIONSection 10 of the Indian Contracts Act, 1872 states that,All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void. Nothing herein contained shall affect any law in force in India, and not hereby expressly repealed, by which any contract is required to be made in writing or in the presence of witnesses, or any law relating to the registration of documents.

Thus according to section 10, the following are the essential elements of contract:i. It should be an agreementNow according to section 2(e) of the Indian Contract Act Every promise and every set of promise, forming the consideration for each other, is an agreement. Thus we can say that an agreement consists of an offer and its acceptance. This requires the meeting of the minds.ii. Free consent of partiesConsent is when two or more parties agree upon the same thing in the same sense.[footnoteRef:1] This consent is said to be free when it not obtained by coercion, undue influence, fraud, misrepresentation, or mistake.[footnoteRef:2] [1: Section 13, Indian Contract Act, 1872] [2: Section 14, Indian Contract Act ,1872]

iii. Competency to enter into a contractAny person who has obtained majority and who is sound in mind and is not disqualified from contracting by any law to which he/she is subject to is competent to enter into contract.[footnoteRef:3] [3: Section 11, Indian Contract Act,1872]

iv. Lawful considerationA consideration or object is said to be lawful if it is not forbidden by law, or defeats the provisions of any law or is fraudulent, or is regarded as immoral, or opposed to public policy.[footnoteRef:4] [4: Section 23, Indian Contract Act,1872]

v. Lawful object not expressly declared void

Of these one of the most important ingredient for one to enter into a contract is intention. Without ones intention to enter into a legal relationship, no binding contract cannot be formed. In contract it is expressly stated that the parties intend to enter into a legal relation or else the parties may decline their intention itself thus making the whole contract void. Sometimes as in the case of commercial contracts it can be implied that there was an intention to contract because of the nature of contract. Whereas in the case of domestic or social agreements it is generally seen that there is absence of intention to come under the obligation of contract.

COMMERCIAL AGREEMENTSIt is seen that in the cases of commercial agreements like a contract between two firms, or a consumer and a company that the parties intend to be legally bound. However, it is not necessary that the parties ought to be legally bound. They can state in their contracts if they wish the contrary and then there would be no legal obligation. This is often done through the use of honour clauses, letters of intent, memoranda of understanding and other similar devices, although the ultimate conclusion would depend, not on the label attached to the document, but on an objective assessment of the language used and on all the attendant facts. So there is presumption that the parties intend to contract.The strength of the presumption is such that the issue rarely arises in commercial litigation. One case in which it did arise, and which produced a division of judicial opinion, is the decision of the House of Lords in Esso Petroleum Ltd v. Commissioners of Customs and Excise[footnoteRef:5]: [5: [1976] 1 WLR 1]

In 1970 the taxpayers (Esso) devised a petrol sales promotion scheme. The scheme involved the distribution of millions of coins to petrol stations which sold Esso petrol. Each of the coins bore the likeness of one of the members of the English soccer team which went to Mexico in 1970 to play in the World Cup competition. The object of the scheme was that petrol station proprietors should encourage motorists to buy Esso petrol by offering to give away a coin for every four gallons of Esso petrol which the motorist bought. The coins were of little intrinsic value but it was hoped that motorists would persist in buying Esso petrol in order to collect the full set of 30 coins. The scheme was extensively advertised by Esso in the press and on television with phrases such as: Going free, at your Esso Action Station now, and: We are giving you a coin with every four gallons of Esso petrol you buy. Folders were also circulated by Esso to petrol stations which stated, inter alia: One coin should be given to every motorist who buys four gallons of petrol two coins for eight gallons and so on. 4,900 petrol stations joined the scheme. Large posters were delivered by Esso to those stations, the most prominent lettering on the posters stating: The World Cup coins, One coin given with every four gallons of petrol. The Customs and Excise Commissioners claimed that the coins were chargeable to purchase tax under s2(1) of the Purchase Tax Act 1963 on the ground that they had been produced in quantity for general sale and therefore fell within Group 25 of Sch 1 to the 1963 Act.In the case the decision was given in the ratio of 3:2. The majority opinion given by Viscount Dilhorne, Lord Simon of Glaisdale and Lord Wilberforce said that there was an intention to create legal relations. The coins were offered in a commercial context which raised a presumption that they did intend to be bound. However, the coins were not exchanged for a money consideration and therefore the coins were not for resale. Whereas the minority decision by Lord Fraser and Lord Russell suggested that the coins given were like a free gift and did not make any further contract. Any motorist buying 4 gallons of petrol could not be disentitled from receiving the coin but did not hold any further importance. Just as if a baker offers an additional bun with each dozen purchased, the customer is actually purchasing the extra bun, and in this case, the coin.

This presumption can be rebutted only in a few cases. One of them is the case of Rose and Frank Co. v J.R. Crompton & Bros Ltd[footnoteRef:6]. [6: [1923] 2 KB 261]

The defendant manufactured carbon paper in England. The plaintiff bought the defendants paper and sold it in New York. After dealing with each other for a number of years they entered into a written agreement as to the plaintiff having exclusive rights to buy and sell the defendants goods. The agreement said inter alia: This agreement is not a formal or legal agreement. It will not be subject to the jurisdiction of either the British or American courts. It is a record of the intention of the parties to which they honourably pledge themselves and is to be carried out with mutual loyalty and friendly co-operation.Following a series of disputes the plaintiff claimed that the defendant was in breach of the agreement and the trial judge held that it was legally binding. The defendant appealed. In the appeal it was held by the Court that there was no legal contract. The clause had the effect of negating any other objective evidence of intention to create legal relations. Justice Vaisey, writing for the Court, reasoned that it was a gentlemens agreement which is not an agreement entered into between two persons, neither of whom is a gentleman, with each expecting the other to be strictly bound, while he himself has no intention of being bound at all.

FAMILY AND DOMESTIC AGREEMENTSThe fate of a family or domestic agreement is the same as that of a social agreement. There is a presumption that the parties did not intend to enter into a legal relationship. In most of the domestic agreements, for example the ones made between husband and wife, or parents and children, there is no intention to create legal relations and no intention that the agreement should be subject to legal consequences unless stated otherwise by the parties.Though there has been a bit of contention on the binding and enforceability of family relations it seems that it is well settled that in domestic agreements there is a presumption that the parties do not have intention to create legal relations as in the form of a contract. They might be subjected to some other law depending upon the matter and facts but will not be subjected to contractual law.The principal had been set in the case of Balfour v. Balfour[footnoteRef:7]. The facts of the case were: [7: [1919] 2 KB 571]

Mr. Balfour and his wife went to England for a vacation, and his wife became ill and needed medical attention. They made an agreement that Mrs. Balfour was to remain behind in England when the husband returned to Ceylon (Sri Lanka) and that Mr. Balfour would pay her 30 a month until she returned. This understanding was made while their relationship was fine; however the relationship later soured and Mr. Balfour stopped paying her monthly allowance. Mrs. Balfour sued him to keep up with the monthly payment.Here, Lord Atkin held that the law of contracts is not made for personal family relationships. As there was no intent to be legally bound when the agreement was agreed upon, there can be no legally binding contract. Lord Atkin also added that if the courts were to allow all wives to come to court when agreements had been broken with their husbands then the courts would be overrun with frivolous cases. Lord Warrington, concurring in the result, agreed substantially with Lord Atkin, but added that there was no bargain of any kind made by Mrs. Balfour sufficient for a binding contract.Thus it may be noted in the case that this was a family agreement and hence the offer made was not a valid offer as in the terms of a contract and thus the contract was not valid. Here, when Mr. Balfour offered to pay monthly allowances he did not intend to enter into a legal relationship and thus the contract never came into existence.However, there can be a contract amongst family and in social matters too. The only requirement is that the parties must intend legal consequences. This can be illustrated from the case of Jones v Padavatton[footnoteRef:8]. [8: 1969 1 WLR 328]

Mrs. Padavatton a divorced woman living in Washington with her son where she was employed as an assistant accountant in the Indian Embassy on attractive terms. Her mother, Mrs. Jones, was in Trinidad and wished her daughter to be near her. She persuaded her daughter, against her will, to take legal education in England and finally to come back to Trinidad as a practicing lawyer. The mother undertook to foot the expenses. Subsequently the mother bought a house in England, part of which was allowed to the daughter and rest tenanted out. For five years, the daughter could not complete her education. She also remarried in the meantime. Differences arose between them and the mother stopped payment and also commenced proceedings to evict the daughter.

DANCKWERTS LJ allowed the mothers appeal. His Lordship said, There is no doubt that this case is a most difficult one, but I have reached a conclusion that the present case is one of those family arrangements which depend on the good faith of the promises which are made and are not intended to be rigid, binding agreements. SALMON LJ also allowed mothers appeal but on a different ground. In his words, The parties cannot have contemplated that the daughter should go on studying for the Bar and draw the allowance until she was seventy, nor on the other hand that the mother could have discontinued the allowance if the daughter did not pass her examinations within, say, 18 months. The promise was to pay the allowance until the daughters studies were completed, and to my mind there was a clear implication that they were to be completed within a reasonable time. Studies are completed either by the student being called to the Bar or giving up the unequal struggle against the examiners. It may not be easy to decide, especially when there is such a paucity of evidence, what is a reasonable time. The daughter, however, was a well-educated intelligent woman capable of earning the equivalent of over 2,000 a year in Washington. It is true that she had a young son to look after, and may well (as the learned judge thought) have been hampered to some extent by the worry of this litigation. But, making all allowance for these factors and any other distraction, I cannot think that a reasonable time could possibly exceed five years from November 1962, the date when she began her studies.Thus according to Salmon LJ, though there existed a contract between the mother and the daughter, but the agreement could have lasted only for a reasonable time and not her lifetime. It could have lasted only till the time the daughter was supposed to complete her education and the period of five years was more than sufficient for the same. She could not have expected her mother to support her, her son and her husband forever.Thus from the cases of Balfour v. Balfour and Jones v. Padavatton, it is clear that intention to enter into a binding agreement is very necessary in case of domestic agreements in the absence of which there would be no legal consequences. Also, there is a presumption that generally the parties do not intend for legal consequences. However, the presumption can be rebutted by evidence proving the contrary. The evidence may consist of the following:1. A written agreement;One of the best case to explain this would be Errington v Errington Wood[footnoteRef:9]. The facts of the case were as follows: [9: [1952] 1 KB 290]

In 1930, a father bought a house for his son and daughter-in-law (Wood) to live in, telling her that the down-payment was a gift, but they were expected to pay the mortgage and that "the house will be your property when the mortgage is paid". He also said that when he retired he would put the house in their names. Wood paid mortgage instalments regularly for some time, but when they found them too burdensome the father agreed to make those payments as well. The father died leaving his estate to his wife (Errington). After the father's death, Wood split from Errington's son as he went on to live with his mother but Wood did not want to go. She continued to pay the mortgage installments. The mother then bought an action against the daughter-in-law for the possession of the house.The court in the case held that the daughter-in-law was entitled to the possession of the house. She had paid-off the mortgage as was the agreement between the couple and the father. This amounted to a valid contract and thus couldnt be moved out of the house. The father had made the couple a unilateral offer. The wife was in course of performing the acceptance of the offer by continuing to meet the mortgage payments. Under normal contract principles an offer may be revoked at any time before acceptance takes place, however, with unilateral contracts acceptance takes place only on full performance. Lord Denning held that once performance had commenced the Mother was estopped from revoking the offer since it would be unconscionable for her to do so. Furthermore there was an intention to create legal relations despite it being a family agreement.2. Where the parties have separated;This can be illustrated form the case of Merritt v. Merritt[footnoteRef:10] where the husband and wife had entered into a contract. [10: [1970] 1 WLR 1211]

The husband and wife were married in 1941 and had three children. In 1966, the husband became attached to another woman and left the matrimonial home to live with her. At that time, the matrimonial home, a freehold house, was in the joint names of the husband and wife, and was subject to an outstanding mortgage of some 180. The wife pressed the husband to make arrangements for the future, and on 25th May 1966, they met and talked the matter over in the husbands car. The husband said that he would pay the wife 40 a month out of which she must make the outstanding mortgage payments on the house and he gave her the building society mortgage book. Before leaving the car the wife insisted that the husband should put down in writing a further agreement, and on a piece of paper he wrote: In consideration of the fact that you will pay all charges in connection with the house until such time as the mortgage repayment has been completed, when the mortgage has been completed I will agree to transfer the property in to your sole ownership. The husband signed and dated that agreement, and the wife took the piece of paper away with her. In the following months she paid off the mortgage, partly out of the husbands monthly payment to her and partly out of her own earnings. When the mortgage was paid off the husband refused to transfer the house to the wife.The court here held that that the written agreement was intended to create legal relations between the parties because the presumption of fact against such an intention where arrangements were made by a husband and wife living in amity did not apply to arrangements made when they were not living in amity but were separated or about to separate, when (per Lord Denning MR at p 762 a, post) it might safely be presumed that they intended to create legal relations; the surrounding circumstances in the present case showed that the parties did so intend; accordingly, the wife was entitled to sue on the agreement, and it being sufficiently certain and there being good consideration by the wife paying off the mortgage, she was entitled to a declaration that she was the sole owner of the house and to an order that the husband joining in transferring it to her.This case can be distinguished from Balfour v. Balfour on the grounds that the couple were separated. Where spouses have separated it is generally considered that they would intend to legal consequences in case of breach as it would be a contract between any two individual and no longer a husband and wife. Moreover, the written agreement was a further proof that both the parties intended to enter into the contract and would move to the court of law in case of breach.3. Or where there is an involvement of a third party.This can be shown with Simpkins v. Pays[footnoteRef:11]. The facts of the case were: [11: [1955] 1 WLR 975]

There were three ladies, two of them being grandmother and granddaughter and the third being a paying a guest, together they made entries into a crossword puzzle in the name of the mother, the expenses being met by one or the other, without any rules. The entry was successful. They had agreed that if any of them won they would share the winnings between them. The mother received 250 in prize money and refused to share it with the other two. The lodger brought the action to claim one third of the prize money.Here there was no expressed agreement between the three but the court held that she was bound to share the prize, for any reasonable man looking at their conduct would at once conclude that they must have intended to share the prize and that is why in turns used to enter the crossword puzzle.

SOCIAL AGREEMENTSAs in the case of social agreements it is presumed usually that the parties had not intended to enter into a legally bound relation and hence face legal consequences. For example, if a person A invites B for dinner at home and when B turns up at As house he sees that the house is locked. In such cases it is observed that the parties did not intend to enter into a legal relationship and thus A would not be liable to B for any breach of contract as it had not come into existence because of the absence of intention. The parties are to state otherwise if they intended to enter into a legal relation.The fate of social agreements is quite similar to domestic agreements. In the case of Cowardv.Motor Insurers Bureau[footnoteRef:12]: [12: [1963] 1 QB 359]

Mr. Coward was killed whilst riding pillion on a motorcycle driven by a friend and work colleague on the way to work. The collision was due to the negligence of the friend. Coward's widow sought to claim damages from the Motor Insurance Bureau since the rider's insurance did not cover pillion passengers. The MIB have an agreement whereby accidents and consequential claims would be satisfied by the Government in circumstances where the driver has no relevant policy of insurance. The Motor Insurance Bureau would only be obliged to pay if insurance for the pillion was compulsory. Insurance was only compulsory for pillions if they were carried for hire or reward. Coward paid the friend a small weekly sum to take him to and from work each day. The widow therefore argued that this was a contract for hire or reward. However, the MIB argued that to amount to a contract for hire or reward there had to be an intention to create legal relations which was absent in agreements of this nature between friends.The court held that the widow was therefore not entitled to compensation. There was no contract of hire or reward as it was a social and domestic agreement and therefore no intention to create legal relations. The practice of colleagues sharing a lift to work (or carpooling) is an accepted and wide spread practice. Parties will usually agree that one will take their car and in return the others will make a contribution towards the petrol costs. This is usually a matter of convenience, reducing costs or even a conscious decision to reduce emissions from each separately taking a vehicle. It cannot be said however that the agreement is so formal as to form a contract for the provision of this service. The contrast is to that of the public transport. There are no tickets, conditions or terms of agreement and no business or profit making organization is involved. There can be no obligation upon people in this scenario to ensure that transport is always made available to the party that pays. What would happen when the owner of the vehicle went on holiday or there was a shift change? In these circumstances an element of common sense must come into play. Most people will make informal agreements ranging from carpooling to picking up children from school or even being the designated driver on a night out. None of these create a contract as the intention is one of informal assistance or a mutual benefit, not to create legal relations.

SUPREME COURTS VIEW ON REQUIREMENT OF INTENTIONThe Supreme Court has expressed its reservation about the need of this separate requirement of intention to contract under the Indian Contract Act. Going by the consideration which is already there in the West, the court found that it was necessity of those systems where consideration was not a requisite of enforceability. Thus it is still an open question whether the requirement of intention to contract is applicable under the Indian Contract Act in the way in which it has been developed in England.[footnoteRef:13] [13: Avtar Singh, Law of Contracts and Specific Relief (11 edn Eastern Book Company, 2012)]

However, before this judgment a little recognition was given to the applicability of the principle in India by the Supreme Court in Banwari Lal v Sukhdarsahn Dayal[footnoteRef:14]. This case deals with the ownership of a plot which was said tobe used as aDharamshala: [14: (1973) 1 SCC 294]

An extensive area of land was sub divided by the co-owners into small plots as a part of a housing scheme. The case of the purshasers of the plots (the plaintiff-appellants) was that on the basis of a representation made to them that a particular plot will be reserved for being used in common as Dharmshala, they paid high prices for their plots and the plot was sold to a third party who in turn sold it to the defendant. The plaintiff contended that the co-owners had no right to sell the plot to anyone because it was announced over a loudspeaker, while the housing scheme was being advertised, that a plot will be reserved for Dharmshala and also because in the map, which was annexed to some of the sale deed, that plot was described as Dharmshala. The plaintiff-appellants also took the plea of estoppel and claimed that the co-owners were estopped from disputing the right of the purchasers to ask that plot shall remain reserved for Dharamshala.[footnoteRef:15] [15: Banwari Lal v Sukhdarsahn Dayal, (1973) 1 SCC 294]

In this case it was held that though modern contrivances like microphones are useful aids in propagation of views of dissemination of information, they have not yet acquired notoriety as carriers of binding representations. Promises held out over loudspeakers are often claptraps of politics. In this case, the announcement was a puffing up of property put up for sale. Moreover neither of the sale deeds on record contains a stipulation that the plot would be reserved for common use as Dharmshala.

In a more recent and subsequent case of CWT v Abdul Hussain Mulla Muhammed Ali[footnoteRef:16], the Supreme Court noted the general proposition that in addition to the existence of an agreement and the presence of consideration there is also the third contractual element in form of intention of the parties to create legal relations, and also noted that this proposition, though accepted in English Law, has not passed unchallenged. [16: (1988) 3 SCC 562]

CONCLUSIONWe can see that as in the case of English laws, it is now a well settled principle that intention to enter into a legal relationship is also an essential to enter into a contract. This is true for commercial contracts as well as domestic and social contract. However there lies a difference in the presumption of intention. It is assumed that that parties intend to enter into a contract in case of commercial agreements unless proved otherwise, whereas the contrary is true in case of domestic and social contract barring a few exception in both.As for Indian law it is still not a well settled principle whether intention is an essential element or not. However it has been seen in a few cases that the judiciary has borrowed the principle from English law and used it as a necessary element.

MY OPINIONI think that in our Indian judicial system too, we should take intention as a necessary element as there is no point in entering into a contract with someone when there is no meeting of mind. It is equivalent to forcing someone to enter into a contract, which would mean a lack of free consent and hence there be would be an absence of free consent itself which is a very basic element of contract formation. The Indian Contract Act is silent about the intention to enter into a contract however amendment should be made in the Act. Though I accept that it is very difficult to prove if a person intended to enter into a contract or not but the courts should look at this matter objectively, and not subjectively. As in the case of Simpkins v. Pays, it is the circumstances which should be looked at not what the person has in mind.

BIBLIOGRAPHY The following websites and books have been referred in completion of this project. Avtar Singh, Law of Contracts and Specific Relief (11 edn Eastern Book Company, 2012) https://www.scconline.com Indian Contract Act, 1872

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