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Supreme Court of New South Wales

Intention to create legal relations

AustraliaAir Great Lakes Pty Ltd v KS Easter (Holdings) Pty Ltd

Supreme Court of New South Wales [1989] 2 NSWLR 309


Parties entered into an agreement for the sale of an airline business. Air Great Lakes alleged that the agreement had been repudiated by Easter and claimed damages. Easter argued, in part, that there was no intention for the document signed by the parties to be legally binding. They succeeded at first instance.

Held (Mahoney JA)

In discussing whether a subjective or objective approach should be taken to determining intent, his Honour noted that:

"The proper view is, in my opinion, that the existence of a contract is a consequence which the law imposes upon, or sees as a result of, what the parties have said and done. Actual subjective intention to contract is a factor which the law takes into account in determining whether a contract exists but it is not, or not always, the determining factor.

The matter may be tested by an example: A says, "I promise to sell Black Acre to B for S100"; and B says, "I promise to buy Black Acre from A for that price", the promises being made orally. In such a case, a binding contract will be held to exist. And this will be so even though neither A nor B subjectively adverted to (and therefore had no actual subjective intention to) whether, by the exchange of those promises, a binding contract would made. The law will hold a binding contract to have been made even though neither had any actual subjective intention that there be a contract, in the sense that neither party gave any thought to the matter."

Where A conducts himself so that a reasonable person would think he was intending to contract, then a subjective reservation by A not to contract will not prevent a contract existing!  Subjective intention may, however, be relevant if B knew of A’s actual subjective intent; thus, if A is ‘pretending’ to contract (play-acting), and B knows this, then the law would not impose upon either party the relationship of a contract (even though it might objectively appear as if they were!).

McHugh JA

Noted the current supremacy of the ‘objective theory of contract’.  Nevertheless, issues remain about whether the objectivity is assessed from the point of view of the reasonable bystander, the promisor or the promisee.

McHugh JA did not accept ‘that a subjective intention to contract is a necessary element in the formation of a contract. The weight of authority in favour of the objective theory is too great.’   However, the objective approach does not mean that subjective factors cannot be taken into account at all.  For example:

"A party may prove that words which manifest a contract were made in jest or as a joke or a dramatic performance, although he will be bound even in that class or case if a reasonable person would have understood his words in a promissory sense. …. Again a party may prove that a "contract" was a sham. … Moreover, the court is entitled to look beyond the promissory words to the relationship of the parties for the purpose of determining whether they intended to create a legally enforceable contract. …."

Intention can be proved, not by the ‘document’ itself (where one exists) but statements of the parties and other outside material may also be considered.