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Formation of contracts | Intention to create legal relations


Agreement - men shake handsFor a contract to exist the parties to an agreement must intend to create legal relations.

This page will look at the general rules to be used when determining intention and then will look at how this might operate in specific types of situations.


General rules

For a contract to exist the parties to an agreement must intend to create legal relations. Usually, the presence of consideration will provide evidence of this - if the promisor has specified something as the price for the promise this - in most cases - carries with it an intention that the parties be bound.

However, intention remains an independent requirement and must be separately demonstrated and there are cases in which consideration has been present but no contract found to exist because this pre-condition has not been fulfilled.

In determining if there is contractual intent an objective approach is taken; it doesn't matter if one party secretly did not intend to be legally bound if it would appear to a reasonable observer that they did.

When assessing each case the courts used to apply certain presumptions to different types of contract; thus, typically, domestic or social contracts were presumed not to have been created with an intention to create legal relations and commercial agreements were presumed to have such intention. Recently, however, the High Court in Australia has indicated that presumptions should not be used when determining intent - in each case intention must be proved without the aid of such presumptions.

  • Ashton v Pratt (NSWCA, 2015)
    (Effect of Ermogenous is that recourse should not be had to presumptions of intent in family arrangements)


Domestic and social agreements

Although there is no presumption against parties to domestic or social arrangements having an intention to create legal relations, it will often (perhaps normally) be the case that no such intention exists - at least when the agreement is entered into whilst relations are harmonious.  Consequently, a plaintiff is likely to face an uphill battle proving intent in such cases.

  • Todd v Nicol (SA Supreme Court, 1957)
    (agreement with family - sister-in-law and niece)


Commercial agreements

If an agreement is a commercial one, the parties will normally intend that it to be legally binding. Although it will not be presumed that there is such an intention, it will normally not be difficult for the plaintiff to prove this element.

Where the parties to a commercial agreement do not intend it to be binding, they may demonstrate this by including an "Honour clauses", indicating theyto indicate that the agreement is binding in honour only – not legally.  

  • Rose & Frank (UK, KB, 1923)
    (Honour clause in commercial agreement)

Agreements with government

Normal commercial agreements with Government are likely to have been intended by the parties to be legally binding, just as is the case for other types of commercial agreements. However, there may be some policy-based agreements for which this is not the case.  The Australian Woollen Mills case and the case in Administration of PNG v Leahy provide examples

  • External link Placer Development (HC 1969)
    (agreement involving Cth - promise of subsidy at rate to be determined by Cth)

Conditional agreements

In some cases parties may make their agreement 'subject to contract'. This raises an issue about whether they intend to be legally bound immediately or only when and if a formal contract is concluded. In Masters v Cameron the High Court identified three possible interpretations of subject to contract clauses [para 9, page 360]:

  1. '... the parties have reached finality in arranging all the terms of their bargain and intend to be immediately bound to the performance of those terms, but at the same time propose to have the terms restated in a form which will be fuller or more precise but not different in effect.'
  2. '... the parties have completely agreed upon all the terms of their bargain and intend no departure from or addition to that which their agreed terms express or imply, but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document.'
  3. '...the case may be one in which the intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract.'

In the first two cases there is an immediately binding contract. The third class of cases is different - agreement doe snot have contractual effect unless and until formal document is concluded.

The relevant category for any given arrangement depends on the intention of the parties, but words such as 'subject to contract' or 'subject to the preparation of formal contract' suggest parties do not intend to be bound unless and until a formal contract is concluded (para 13, page 363).