Intention to create legal relations

Intention to Create legal relations and mistake

2 presumptions:

• Parties do not intend to create legal relations in social and domestic agreements;

• Parties do intend to create legal relations in commercial agreements.

Counterpoints to the presumptions to create legal intentions

1. Superfluous- an intention to be legally bound is already necessary to find an offer, an acceptance and for overcoming uncertainty or incompleteness.

2. Fictitious- parties will often have given the matter no thought anf will have no discernible

3. Inconclusive- any intentions the paties have are likely to be inconsistent (1 party intending the agreement to be legally binding, and the other intending it to be morally binding only).

Public policy and practical considerations

• Floodgates of Litigation: the judicial system should not be swamped with social and domestic disputes. As Atkin LJ comments in Balfour v Balfour (1919): ‘the small Courts of this country would have to be multiplied one hundredfold if these arrangements were held to result in legal obligations’

• Facilitating market transactions: (no state coercion (by awarding remedies for breach) to enforce agreements for which informal social sanctions are absen)

• Freedom from contract:. Atkin LJ in Balfour v Balfour (1919): Agreements such as these are outside the realm of contracts altogether. The common law does not regulate the form of agreements between spouses … The consideration that really obtains for them is that natural love and affection which counts for so little in these cold Courts. The terms may be repudiated, varied or renewed as performance proceeds or as disagreements develop, and the principles of common law … find no place in the domestic code … In respect of these promises each house is a domain into which the King’s writ does not seek to run.

Intention to create legal relations

• An agreement is contractually binding only if the parties intend it to have legal consequences.

• Objective test: would a reasonable person, considering the parties’ words, conduct and circumstances, understand that they intended legal commitment?

(Edmonds v Lawson [2000] QB 501: intention is assessed objectively. “The context is all-important.”)

Two rebuttable presumptions guide the analysis:

• Commercial agreements: presumed intention to create legal relations.

• Social and domestic agreements: presumed absence of that intention.

Presumption: commercial agreements are intended to be legally binding. Clear evidence is needed to displace this presumption. (WHAT ARE THE CASE EXAMPLES?)

• Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256: depositing £1,000 in a bank demonstrated the seriousness of the advertised reward.

• Esso Petroleum v Commissioners of Customs and Excise [1976] 1 WLR 1: the commercial purpose of a promotional coin scheme supported contractual intention.

• Kleinwort Benson v Malaysia Mining Corporation [1989] 1 WLR 379: the relevant statement in a comfort letter expressed existing company policy, without promising future financial support.

• Blue v Ashley [2017] EWHC 1928 (Comm): an alleged £15 million promise during pub conversations was not binding. The social setting and joking character of the exchange indicated no contractual intention.

Presumption: ordinary social and family arrangements are not intended to create legal obligations. (WHAT ARE THE CASE EXAMPLES?)

• Balfour v Balfour [1919] 2 KB 571: a husband’s promise to pay his wife an allowance, made while their relationship was amicable, was not binding.

• Merritt v Merritt [1970] 1 WLR 1211: a written agreement between separated spouses concerning ownership of their home was binding.

• Jones v Padavatton [1969] 1 WLR 328: a mother’s arrangement to support her daughter while she studied for the Bar did not establish an enforceable continuing obligation.

• Parker v Clark [1960] 1 WLR 286: selling a home in reliance on a family arrangement supported a finding of contractual intention.

• Relevant factors: separation, written terms, property interests and substantial reliance. No single factor automatically determines the outcome.

Nuptial Agreements

Radmacher v Granatino [2010] UKSC 42

The approach of English law to nuptial agreements differs significantly from the law of Scotland, and more significantly from the rest of Europe and most other jurisdictions. Most jurisdictions accord contractual status to such agreements and hold the parties to them, subject in some cases to specified safeguards or exceptions. Under English law it is the court that is the arbiter of the financial arrangements between the parties when it brings a marriage to an end. A prior agreement between husband and wife is only one of the matters to which the court will have regard. The uncertainty as to the weight that the court will attach to such agreements has led to calls for reform. [para 3]

The court should give effect to a nuptial agreement that is freely entered into by each party with a full appreciation of its implications unless in the circumstances prevailing it would not be fair to hold the parties to their agreement [para 75]

Mistakes

“There is no branch of the law of contract which is more uncertain and difficult than that which is concerned with the effect of mistake on the formation of a contract” Professor Goodhart (1941)

Position of mistakes in English contract law

“much of what passes for mistake can be explained in terms of other rules of English law that have been dressed up in language borrowed from the civil law and which are arguably inappropriate to the common law conception of contract. The reason for this civil law influence appears to be that the writing of systematic legal treatises began in France much earlier than it did in England and that, at the end of the eighteenth century and the beginning of the nineteenth century, the writings of the celebrated French lawyer, Pothier, gained a certain currency in England. The transference of the notion of mistake from one legal system to the other was misguided, however, since French law at the time was committed to a much more subjective approach to the formation of contracts than ever prevailed in England.”

Robert Merkin and Séverine Saintier, Poole’s Textbook on Contract Law (17th ed, OUP 2025) [8.1.1]

The different approaches across Europe can create confusion?

Void/ voidable contracts

Void: A contract which is void is not legally binding ab initio, i.e. from the very beginning and does not have any legal effect

Voidable: A contract which is voidable can be rescinded but unless and until is rescinded is valid

This distinction has important implications for third party rights

Categories of Mistake

Agreement Mistake

Mutual mistake

Unilateral mistake

Non-agreement mistake (common mistake)

Common Mistake

Both parties operated under the same mistake

If the common mistake is sufficiently fundamental it renders the contract void (Great Peace Shipping Ltd v Tsavliris Salvage International) Ltd [2003] QB 679)

Mutual Mistake

The parties are at cross-purposes

Raffles v Wichelhaus (The Peerless case) (1864) (Court of Exchequer)

“the plaintiff should sell to the defendants, and the defendants buy of the plaintiff, certain goods, to wit, 125 bales of Surat cotton, guaranteed middling fair merchant's Dhollorah, to arrive ex “Peerless” from Bombay”

FACTS:

There were two ships called Peerless

one ship left Bombay in October

the other ship left Bombay in December

D refused to accept the C’s cotton alleging breach of contract. C commenced legal proceedings

The Court found for D without giving reasons

“Raffles v Wichelhaus was a case of latent ambiguity. More commonly an objective appraisal of the negotiations between the parties may disclose that they were at cross-purposes, so that no agreement was ever reached. In such a case there will be a mutual mistake in that each party will erroneously believe that the other had agreed to his terms. ”

Great Peace Shipping Ltd v Tsavliris (International) Ltd [2002] per Lord Phillips MR

Scriven Brothers & Co v Hindley & Co [1913] 3 KB 564

Hindley & Co bought bales of tow thinking that it was buying (more expensive) bales of hemp at an auction

The catalogue did not disclose this difference in the nature of the commodity

“the parties were never ad idem as to the subject-matter of the proposed sale; there was therefore in fact no contract of bargain and sale.”

“It was peculiarly the duty of the auctioneer to make it clear to the bidder either upon the face of his catalogue or in some other way which lots were hemp and which lots were tow. To rely upon a purchaser's discovering chalk marks upon the floor of the show-room seems to me unreasonable as demanding an amount of care upon the part of the buyer which the vendor had no right to exact”

“Such a contract cannot arise when the person seeking to enforce it has by his own negligence or by that of those for whom he is responsible caused, or contributed to cause, the mistake.”

Unilateral Mistakes

There is an objective agreement conforming with the intentions of one party but not the other

Adopting the objective approach, the unilateral mistake of one of the parties should be ignored

BUT

Not if the other party was aware of the other’s mistake (where a reasonable person would be) and did nothing

The mistake must be a mistake as to a term of the contract not a collateral matter

Hartog v Colin & Shields [1939] 3 All ER 566

FACTS:

Colin & Shields mistakenly offer to sell hare skins at 10 1/4d per pound

Colin & Shields intended to sell at the same price per piece

The trade custom was to sell hare skins per piece. Colin & Shields’s offer was about 1 /3 of the normal value of the hare skins

“I am satisfied that it was a mistake on the part of the defendants or their servants which caused the offer to go forward in that way, and I am satisfied that anyone with any knowledge of the trade must have realised that there was a mistake…. The offer was wrongly expressed, and the defendants by their evidence, and by the correspondence, have satisfied me that the plaintiff could not reasonably have supposed that that offer contained the offerers' real intention. Indeed, I am satisfied to the contrary. That means that there must be judgment for the defendants.”

Centrovincial Estates Plc v Merchant Investors Assurance Co Ltd [1983]

“It is a well-established principle of the English law of contract that an offer falls to be interpreted not subjectively by reference to what has actually passed through the mind of the offeror, but objectively, by reference to the interpretation which a reasonable man in the shoes of the offeree would place on the offer. It is an equally well-established principle that ordinarily an offer, when unequivocably accepted according to its precise terms, will give rise to a legally binding agreement as soon as acceptance is communicated to the offeror in the manner contemplated by the offer, and cannot thereafter be revoked without the consent of the other party. Accepting, as they do, that they have not yet proved that the defendants knew, or ought reasonably to have known, of their error at the relevant time, how can the plaintiffs assert that the defendants have no realistic hope of establishing an agreement of the relevant nature by virtue of the two letters of the 22nd and 23rd June 1982 ?”

“Where the nature of an offer is to enter into a bilateral contract, the contract becomes binding when the offeree gives the requested promise to the promisor in the manner contemplated by the offer; the mutual promises alone will suffice to conclude the contract. In our opinion, subject to what is said below relating to consideration, it is contrary to the well established principles of contract law to suggest that the offeror under a bilateral contract can withdraw an unambiguous offer, after it has been accepted in the manner contemplated by the offer, merely because he has made a mistake which the offeree neither knew nor could reasonably have known at the time when he accepted it.”

Statoil ASA v Louis Dreyfus Energy Services LP [2008] EWHC 2257 (Comm) (Aikens J)

“The general rule at common law is that if one party has made a mistake as to the terms of the contract and that mistake is known to the other party, then the contract is not binding. The reasoning is that although the parties appear, objectively, to have agreed terms, it is clear that they are not in agreement. Therefore the normal rule of looking only at the objective agreement of the parties is displaced and the court admits evidence to show what each side subjectively intended to agree by way of terms. If it is clear from such evidence that there was not consensus, then there can be no contract, because the parties have not truly agreed on the terms . . . “

“However, if one party has made a mistake about a fact on which he bases his decision to enter into the contract, but that fact does not form a term of the contract itself then, even if the other party knows that the first is mistaken as to this fact, the contract will be binding. That was the effect of the decision of the Court of Queen’s Bench . . . in Smith v Hughes (1871) LR 6 QB 597, see particularly at page 603 per Cockburn CJ, and page 607 per Blackburn J. The correctness of that decision and the analysis in it has never been doubted. “

Identity mistakes

Phillips v Brooks Ltd [1919] 2 KB 243: “the seller intended to contract with the person present, and there was no error as to the person with whom he contracted, although the plaintiff would not have made the contract if there had not been a fraudulent misrepresentation.”

Lewis v Averay [1972] 1 QB 198: “This is another case where one of two innocent persons has to suffer for the fraud of a third. It will no doubt interest students and find its place in the textbooks.” (Lord Denning)

“The rogue made false representations as to his identity, But it was still a contract, though voidable for fraud. It was a contract under which this property passed to the rogue, and in due course passed from the rogue to Mr. Averay, before the contract was avoided. Though I very much regret that either of these good and reliable gentlemen should suffer, in my judgment it is Mr. Lewis who should do so.”

“When one looks at the evidence of the plaintiff, Mr. Lewis himself, it is, I think, clear, as Mr. Titheridge submits, that there was not here any evidence that would justify the finding that he, Mr. Lewis, regarded the identity of the man who called himself Mr. Green as a matter of vital importance.” (Megaw LJ)

Cundy v Lindsay (1878) 3 App Cas 459: FACTS: Blenkarn placed an order for handkerchiefs by letter

“In the present case Alfred Blenkarn pretended that he was, and acted as if he was, Blenkiron & Co. with whom alone the vendors meant to deal. No contract was ever intended with him, and the contract which was intended failed for want of another party to it.”

Ingram v Little [1961] 1 QB 31

”The mere presence of an individual cannot, however, be conclusive that an apparent bargain he may make is made with him. If he were disguised in appearance and in dress to represent someone else and the other party, deceived by the disguise, dealt with him on the basis that he was that person and would not have contracted had he known the truth then, it seems clear, there would be no contract established. If words are substituted for outward disguise so as to depict a different person from the one physically present, in what circumstances would the result be different?”

Shogun Finance Ltd v Hudson [2003] UKHL 62

Majority

Lord Hobhouse:

“The first point is a matter of the construction of the written document. It admits of only one conclusion. There is no mention in the document of anyone other than Mr Durlabh Patel. The language used is clear and specific, both in the substance of the identification - name and address and driving licence number and age - and in the express words of the offer and acceptance clause – ‘the customer named overleaf”.

Lord Walker:

“I return to the question, which is of central importance to this appeal, whether (as Lord Nicholls and Lord Millett propose) the face to face principle should be applied much more generally. It may be that it should apply to an oral contract alleged to have been made on the telephone, where the parties are identified by hearing, although not by sight. An alleged oral contract made by telephone might be a case where the presumption applied, but was rebuttable. But to extend the principle to cases where the only contract was by written communication sent by post or by e-mail would be going far beyond identification by sight and hearing. Where there is an alleged contract reached by correspondence, offer and acceptance must be found, if they are to be found at all, in the terms of the documents.”