Intention To Create Legal Relations
Intention To Create Legal Relations
Intention To Create Legal Relations
http://dx.doi.org/10.4236/blr.2013.42011
This paper is partially to refute the submissions by Gulatis article recently published on Beijing Law Review which proposes abandoning the requirement of proving intention to create legal relations for the
formation of an enforceable contract. After a critical analysis of the abandonists arguments, this paper
argues that intention to create legal relations is the marrow of contractual relationships and the arguments for abandoning such a requirement because of the existence of consideration and/or offer and acceptance as test(s) of contractual enforceability is untenable and unconvincing. Consideration and/or offer
and acceptance may be evidence of serious intention to be bound somehow but unnecessary intention to
be bound legally. For a number of reasons, the doctrine of consideration is very unlikely to work any better than the intention to create legal relations test. If a test of contractual enforceability must be abandoned,
that should be the doctrine of consideration rather than the intention to create legal relations. This paper
compares the current positions of some common law jurisdictions, upholds the needs of stability, consistency, and the harmonisation of contract law in the modern global era, and proposes a conservative approach of contract law reform regarding the intention requirement and the related presumptions, that is, all
common law jurisdictions should go back to the orthodox English position.
Keywords: Intention to Create Legal Relations; Consideration; Contract Theory; Contract Law
Introduction
Recently, Beijing Law Review published an article written
by Bhawna Gulati, entitled Intention to Create Legal Relations: A Contractual Necessity or an Illusory Concept (Gulati,
2011). Gulati suggests that intention to create legal relations
is not a contractual necessity but an illusory concept and
strongly argues for abandoning the requirement of proving an
intention to create legal relation in case of countries that require the existence of consideration for forming a valid and
enforceable contract (ibid, p. 132).
Gulati (2011) raises again the interesting issue whether the
intention to create legal relations should be a separate requirement, additional to agreement (offer and acceptance) and
consideration, for the formation of a legally enforceable contract. The word again is used here because there has been a
long-lasting debate on this issue and the argument for abandoning the requirement of (proving) intention to create legal
relations (or intent to contract or contractual intention) is not
new (Williston, 1957; Hepple, 1970).
For the convenience of discussion, this paper labels abandonists those who argue for or propose abandoning the intention to create legal relations as a requirement for the formation
of a contract. This paper will critically analyse the abandonists
arguments. Contrary to the abandonists view, this paper argues
that intention to create legal relations is not an illusory concept
but a necessity for the formation of a legally enforceable contract; and that consideration and/or offer and acceptance are not
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For example, the Judicature Act 1908 (NZ), s 92 provides that an acknowledgement in writing and signed by a creditor of the receipt of a part of his
debt in satisfaction of the whole debt shall be enforceable notwithstanding
any rule of law. Here, the most relevant rule of law is that a (promise of)
part payment of an existing due debt in satisfaction of the whole debt is
unenforceable because of the lack of consideration, established by the House
of Lords in Foakes v Beer (1884) 9 App Cas 605.
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This can be illustrated by the United States Uniform Written Obligation Act
(drafted by Williston and is adopted in Pennsylvania), s 1, which proposes:
A written release or promise hereafter made and signed by the person
releasing or promising shall not be invalid or unenforceable for lack of
consideration, if the writing also contains an additional express statement, in
any form of language, that the signer intends to be legally bound. See
Uniform Written Obligations Act, s 1, in Handbook of the National Conference of Commissioners on Uniform State Laws and Proceedings 584 (1925),
cited in Klass (2009: p. 1450).
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1995: p. 22). Justifications claimed for the doctrine of consideration have been forcefully argued illusory and untenable (Koo,
2011).
Secondly, there have been official law reform proposals for
abandoning the doctrine of consideration but there is none for
abandoning the intention test. The United Kingdom Law Revision Committees 1937 Report proposed a reform of some of
the rules on consideration, such as writing as a substitute for
consideration and moral obligation as good consideration
(Chloros, 1968: p. 144). It is observed that [I]n effect, the Report spelt the abolition of the doctrine through the back door
(ibid). Later in 1968, a paper commissioned by the United
Kingdom Law Commission pointed out that the rest aspects of
the doctrine of consideration would have been modified by the
Committees other proposals, e.g., the proposal to abolish the
rule that past consideration is no consideration and [h]ad
these proposals been put into effect they would have resulted in
the virtual abolition of the doctrine of consideration although in
theory English law would have still been governed by that doctrine (ibid). The 1968 paper, after detailed discussions, concluded that English law would lose nothing if the doctrine of
consideration were to be abolished (ibid, p. 164).
Finally but most importantly, some severe problems with the
doctrine of consideration have been recognised, and the possibility of abolishing the doctrine has been seriously discussed
and considered, by courts in some common law jurisdictions.
For example, as Professor Coote noted, in re Selectmove Ltd
[1995] 1 WLR 474, a differently constituted [English] Court
of Appeal has found impossible to reconcile the English
Court of Appeal discussion in Williams v Roffey Bros &
Nicholls (Contractors) Ltd [1990] 1 All ER 5123 with the decision of the House of Lords in Foakes v Beer (1884) 9 App Cas
605 (Coote, 1995: p. 22). Most notably, judges in the Singapore
High Court and Court of Appeal, recently, in a number of case
judgements, openly questioned the utility of the doctrine [of
consideration] (Koo, 2011: p. 464). In Chwee Kin Keong v
Digilandmall.com Pte Ltd [2004] 2 SLR(R) 594, Rajah JC (as
he then was) of the Singapore High Court in obitor, strongly
doubted the necessity of consideration in commercial contracts
and upheld the intention test. His honour stated (at para. [139]):
The modern approach in contract law requires very little
to find the existence of consideration. Indeed, in difficult
cases, the courts in several common law jurisdictions have
gone to extraordinary lengths to conjure up consideration.
(See for example the approach in Williams v Roffey Bros
& Nicholls (Contractors) Ltd. [1990] 1 All ER 512.) No
modern authority was cited to me suggesting an intended
commercial transaction of this nature could ever fail for
want of consideration. Indeed, the time may have come
for the common law to shed the pretence of searching for
consideration to uphold commercial contracts. The marrow of contractual relationships should be the parties intention to create a legal relationship [Emphasis original].
Another Judge, Phang J, in another Singapore High Court
case of Sunny Metal & Engineering Pte Ltd v Ng Khim Ming
Eric [2007] 1 SLR(R) 853, also in obitor, extended the judicial
criticism of the consideration doctrine to non-commercial transactions. His honour suggested that the doctrine of considera3
In this case, the English Court of Appeal invented the concept of practical
benefit to get around the consideration requirement in order to achieve a
just outcome.
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tion may be outmoded even outside the context of purely commercial transactions (at para. [29]) because (at para. [30]):
[T]he combined effect of Williams v Roffey Bros & Nicholls (Contractors) Ltd. and the well-established proposition that consideration must be sufficient but need not
be adequate [make it] all too easy to locate some element
of consideration between contracting parties. This would
render requirement of consideration otiose or redundant,
at least for the most part.
Most recently in 2009, Phang JC (this time sitting as a Court
of Appeal judge), in his judgement of the Singapore Court of
Appeal case of Gay Choon Ing v Loh Sze Tie Terrence Peter
[2009] 2 SLR(R) 332, continued his attacks on the doctrine of
consideration. After the conclusion of the judgment, he added a
lengthy (11 pages) critique entitled A coda on the doctrine of
consideration (at para. [92-118]), which discussed the history
and rationale of, and difficulty, with the doctrine, and suggested
that doctrines of economic duress, undue influence and unconscionability are possible alternatives of the doctrine of consideration (at para. [113]).
The above analysis shows that the problems with the doctrine
of consideration have been recognised, and the possibility of
abolishing the doctrine has been seriously considered and argued for, not only by academics, but also by official law reform
reports and judicial opinions in some common law jurisdictions.
This is, however, not the case regarding the intention to create
legal relations requirement. This shows that the doctrine of
consideration is very unlikely to work any better than the intention to create legal relation test.
Some might argue that in the United States intention to create
legal relations is not required for a contract, because Section 21
of the Restatement (Second) of Contract provides that [n]either real nor apparent intention that a promise be legally binding is essential to the formation of a contract. Such an argument ignores the proviso of the Section 21 (Which provides
but a manifestation of intention that a promise shall not affect
legal relations may prevent the formation of a contract), the
Comments to the section4 and the fact that the Restatement is
only black-letter rules which does not necessarily describe
judicial practice in the United States (Klass, 2009: p. 1448).
Section 21 of the Restatement in effect merely indicates enforcement as a default with an opt-out rule and subject to exceptions where the proof of intention is required (ibid). It cannot be said that intention to contract has been abolished from
the contract law of the United States. This issue will be discussed further in part III of this paper where the current position of the US law is analysed. Further, even some scholars
who strongly argue for abandoning the intention requirement
has noted that US [.] and UK require the establishment of
intention to create legal relations in addition to the existence
of consideration (Gulati, 2011: p. 127).
A few scholars have noted that [c]ase authorities in many
common law jurisdictions show that both animus contrahendi
and consideration are prerequisites to contract (Cheshire and
Fifoot, 1969: p. 189). It should also be noted that the case
authorities referred to are limited to those before 1970, far
4
before the notable cases demonstrating the confusion and difficulties of the doctrine of consideration, such as Williams v Roffey Bros & Nicholls (Contractors) Ltd. [1990] 1 All ER 512, Re
Selectmove Ltd. [1995] 1 WLR 474, and the recent Singapore
cases discussed above. Importantly, these suggestions, whether
true or not, at least do not point in favour the argument that the
consideration test works better than the intention test hence it is
the intention test rather than the consideration should be exiled
from common law.
In summary, consideration is neither sufficient nor necessary
in proving intention to create legal relations. The doctrine of
consideration is under fierce attacks, both by academics and
judicial opinions, and it is very unlikely to work any better than
intention to create legal relations as a test of enforceability of
agreements.
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tract.
Therefore, it is the intention to be bound somehow rather
than the intention to be legally bound is is already necessary
for the finding of offer and acceptance and to overcome any
uncertainty. In this sense, the above problems raised are even
more troublesome for consideration, because offer and acceptance have already required the parties intention to be bound
somehow by the promises made in exchange for each another.
They are exactly what consideration functions in that the existence of consideration also indicates the parties intention to be
bound somehow. If something is superfluous for the formation
of an enforceable contract that must be consideration rather
than the intention to create legal relations.
It might also be argued that the seriousness of the parties intention is already required for the finding of offer and acceptance, because an offer (acceptance) not seriously made is simply not an offer (acceptance) at all. This is true but similar to
what this paper argues above in part II A, in making effective
offer or acceptance, the offeror and offeree must show their
seriousness about undertaking some kind of obligations, but
unnecessarily seriousness about undertaking legal obligations.
If an offer was not seriously made, the maker did not express an intention to create any relations, legal or otherwise
(Smith, 2005: p. 37, emphasis original). Merely serious intention to be bound is not enough for a legally enforceable contract,
there must be serious intention to be legally bound. Again, if
something must be abandoned, that will be consideration rather
than the intention to create legal relations, because consideration only indicates the parties serious intention (not necessarily
legal intention) and such seriousness is already necessary for
the finding of offer and acceptance and to overcome any uncertainty, each of which is already a constituent of an enforceable
contract (Chen-Wishart, 2009: p. 444).
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sactions. Close relations between the parties inevitably influence their cognitive and psychological aspects which impair the
ability/mood/environment for a rational decision making. The
closer the relations between the parties are, the more likely the
parties may make irrational decisions and the more severe the
irrationality may be. Even if both family members in domestic agreements and parties in commercial transactions are irrational, their degrees of irrationality could still be so substantially different that it is inappropriate for contract law to treat
the two categories of agreements in a same way.
Difficulty of Distinguishing Domestic/Social from
Commercial Agreements
It is argued that determining the category of the agreement in
issue is a prerequisite for the courts to choose an appropriate
presumption of the parties intention, but it could be extremely
difficult to determine whether a particular agreement is a domestic/social one or a commercial one in certain circumstances,
especially, where the two types of relations are intermingled,
such as a family business (Gulati, 2011).
Admittedly, in practice it could be very difficult to distinguish domestic/social relations from commercial settings in
certain circumstances, especially, in intermingle cases. In this
regard, courts have developed rules/principles that are helpful
in dealing with borderline or intermingled cases. For example, a
business agreement between family members would be treated
as a commercial agreement and the intention to be legally
bound is thus presumed; or if it is treated as a domestic agreement the no intention presumption will be rebutted by the
commercial aspects (as in Roufos v Brewster (1971) 2 SASR
218). An ordinary commercial contract or contract of employment is not rendered unenforceable by the mere fact that
the parties happen to be closely related (Lucke, 1967-1970, p.
424). The no intention presumption does not apply to estranged couples, or the presumption is rebutted by the fact of
the estrangement (Merritt v Merritt [1970] 1 WLR 1211). Over
time, courts have identified factors pointing in favour or against
the finding of intention to be legally bound6, which could also
be helpful in determining the nature of the relationships and the
application and rebuttal of the presumptions.
Most importantly, the practical difficulty does not negate the
clear distinction of different values promoted by the different
types of agreements. Practical difficulty does not justify treating the same way the two types of agreements which are substantially different in nature. Such practical difficulty is not
unique to contract law. Many other areas of law have similar
practical difficulties, which may be even worse than the distinguishing domestic/commercial relations. For example, in tax
law, it could be extremely difficult to determine whether a particular sum spent/received is revenue or capital in nature, or
whether a tax payers conducts amounts to tax avoidance or
merely tax mitigation. The difficulty does not result in courts
treating revenue and capital, tax avoidance and tax mitigation in
the same way. This is because revenue and capital, tax avoidance and tax mitigation are completely different in nature
which justifies courts to treat them completely differently, despite the practical difficulty.
In summary, although the society has been changed over the
90 more years after the judgment of Balfour v Balfour [1919] 2
KB 571, the fundamental distinction, that is, the different val6
For case authorities and discussions on this, see Lucke (1967-1970: pp.
421-422).
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Table 1.
Comparison of current positions of US, UK and Australia/New Zealand.
Jurisdiction
Commercial agreements
Non-commercial agreements
US
UK (England)
As discussed above, the concept of cause does not correspond to the common law concept of consideration but relates more to morality or the order
public, the reason for entering into a contract, and motive or object. See
Chloros (1968: pp. 145-146).
The Australia/New Zealand approach (with the intention requirement but the presumptions displaced) is not a satisfactory
law reform choice. First, it has not substantially changed the
non-enforcement default status of domestic/social agreements,
in that intention to be legally bound is still required to be positively proved in order for the agreements to be enforceable. For
this reason, enforcement of domestic agreements has not been
made easier, as feminists and/or advocates of gay/lesbians
rights argue for8. The result of dumping the presumptions is not
an enforcement default of domestic agreement but a non-enforcement default of commercial agreements. The feminists
argument that domestic agreements should not be treated discriminately from commercial agreements is uphold, but their
proposal to make domestic agreement generally enforceable
without the need of proving intention to create legal relations
failed (in order to achieve this goal, merely abandoning the
presumptions is not enough but feminists must prove that the
intention to create legal relations should not be a requirement
for any enforceable agreement whether a domestic agreement
or not). The net effect of merely dumping the presumptions is
that a) less certainty of enforceability of commercial agreement,
b) a higher cost incurred in proving intention for the enforcement of commercial agreements.
A better option of contract law reform concerning the intention to create legal relations requirement is for all the common
law jurisdictions to adopt (or go back to) the orthodox (which is
also the current) English law position, that is, to keep both the
intention to create legal relations requirements, and the two
presumptions and the related evidentiary rules. Such a mechanism balances the need of flexibility and certainty. Flexibility
can be achieved by the development of the categories that the
domestic/social presumption is applicable, by carving out special agreements from the enforcement default), and courts
discretion in accepting and weighing of evidence to rebut or
reinforce the presumptions. The presumptions provide for certainty to some extent, in that at least it is well-known that
commercial agreements are prima facie enforceable whereas
domestic/social agreements are not. This is better than the allthings-considered approach without the presumptions, as the
current position of Australia/New Zealand law, which results in
less certainty. As the above analytical comparison shows, such
a conservative reform will not cause substantial changes to
the United States law, as regarding the intention requirement
the practical effect of the current United State law is very similar to the current English law. Nor will this reform cause
significant difficulties for Australia/New Zealand law as their
legal positions were just changed recently, and for most cases,
whether commercial or domestic/social, the outcome would not
be different, whether the rebuttable presumptions or all-thingsconsidered fact based approach is used (Burrows, Finn & Todd,
8
See, for example, Peter Goodrich, Friends in high places: Amity and
agreement in Alsatia (2005) International Journal of Law in Context 41.
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Conclusion
As contractual liability stems from the parties voluntary or
intentional assumption of obligations, intention to create legal
relations is [t]he marrow of contractual relationships (Chwee
Kin Keong v Digilandmall.com Pte Ltd [2004] 2 SLR(R) 594 at
[139]). Intention to create legal relations is necessary for the
formation of an enforceable contract. On one hand, consideration (the test of bargain), and the intention required by offer and
acceptance (with certainty) could be evidence of the parties
serious intention to be bound somehow, but serious intention is
unnecessarily intention to be legally bound. One the other hand,
there are many other ways for the parties to prove their intention to create legal relations. Therefore, consideration, as with
offer and acceptance, is neither sufficient nor necessary for the
proving of intention to create legal relations. The intention to
create legal relations should not be abandoned.
It is true that the doctrine of intention to create legal relations
is not perfect, but the doctrine of consideration is very much
more problematic. The possibility of abolishing the doctrine of
consideration, and the possible alternatives have been seriously
considered and proposed not only by academics, but also by
official law reform reports and courts in some common law
jurisdictions. The doctrine of consideration is very unlikely to
work any better than the doctrine of intention to create legal
relations. If one of the two tests of enforceability must be
abandoned, it should be the doctrine of consideration rather
than intention to create legal relations.
Although in the modern era, the distinctive underlying value
promoted by domestic/social agreements (shared interest of the
parties), significantly different from that of commercial agreements (the pursuit of each parties self-interest), remains unchanged. The presumptions based on the domestic/commercial
distinction remain justifiable.
In addition to theoretical consistency, stability, harmonisation and unification of contract law in the modern global era are
also important considerations in proposing contract law reform.
These, in addition to the findings from the comparison of the
related legal rules in some common law jurisdictions, justifies a
conservative approach, that is, common law jurisdictions should
go back to the orthodox (and current) English rule. The English
law, on one hand, requires the intention to create legal relations
for an enforceable contract, which makes it look more, than the
black letter of the United States law, in line with the position
in civil law jurisdictions. One the other hand, by the adoption of
the presumptions and other related evidentiary rules, the English rule produces practical effect substantially similar to the
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United States rule and properly balances the needs of flexibility and certainty. Such a mechanism is also widely accepted by
other common law jurisdictions to date. Such a reform will not
cause an earthquake to contract law in almost all common jurisdictions.
A conservative approach, however, does not mean a complete inaction forever. This paper submits that if something
must be abandoned from the prerequisites of formation of a
contract, the doctrine of consideration may be abandoned by
common law, but not in the near future. As argued in Part II of
this paper, an offer necessarily contains a promise by the offeror and the offerees acceptance must also contain a promise
in exchange for the offerors promise; consideration could be
evidence of the parties intention to be bound somehow, which
is already required for offer and acceptance; and intention to be
legally bound is the fundamental test of enforceability. Abandoning the consideration requirement will not only make contract law more consistent internally within contract law and
within the common jurisdictions, but also be desirable for the
harmonisation and unification of contract law internationally.
Continental law does not have the consideration concept. The
problems with the doctrine of consideration and the benefit
from abandoning this doctrine have been strongly argued for by
prominent scholars, evidenced by judicial opinions in Singapore High Court and Court of Appeal, and proposed by the
United Kingdom Law Commission. Taking into account that
the civil law concept of causa might be (thought) related to
the common law concept of consideration, a compromise can
be adopted by making the presence of reciprocity a weak
presumption of the presence of intention to create legal relations, similar to what Koo (2011) proposes. At this stage, however, a conservative reformer would better accept Phang JCs
statement in the Singapore Court of Appeal judgment of Gay
Choon Ing v Loh Sze Tie Terrence Peter [2009] 2 SLR(R) 332
at [118]:
the maintenance of the status quo may well be the
most practical solution in as much as it will afford the
courts a range of legal options to achieve a just and fair
result in the case concerned [notwithstanding] problems
of theoretical coherence [Emphasis in original].
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