Legal Relationship Intention For Commercial Agreements

Background of Intention

Discuss about the Legal Relationship Intention for Commercial Agreements.

It is inconceivable that a contract will be binding without an intention to create a legal regal relationship. The test for determining the intention of the parties has always been determined by the rebuttable presumptions that an intention to create a legal relationship did or did not exist between the parties. The rebuttable presumption test is a prominent common law precept that is applied in determining intention of the parties in social, family and commercial agreements.

Background of Intention

In pursuing this discussion it is apt to commence with the background or history of the use of the rebuttable presumptions in determining intention that will guide us to either agree with the contentions made in the two cases above.

In family and social agreements promises even if they were breached, were not legally enforceable in court as was held in Jones v Padavatton.[1] Moreover, the presumption was also extended to spouses who can be deemed to have been living at the time.[2] However this presumption could not extend to spouses who had been judicially separated or divorced.[3] Where there was a commercial agreement between persons who are deemed to be related socially of domestically such a presumptions will no longer exist. The courts then were of the opinion that is such a presumption is extinguishes then that will open floodgates for numerous suits and furthermore in Balfour case it was stated that the substance of common law does not regulate the kind of agreements that spouses should enter into.

If the agreement had considerably exceeded that which could be deemed as a social or family agreement the rebuttable presumption could not be applied as an intention here is already construed as existing.[4] For the commercial agreement it was automatically presumed that the parties in such an agreement had the requisite intention to be legally bound. The onus of proving that such an intention did not exist in commercial agreements was indeed an uphill battle.[5] A way of avoiding such an intention to be legally bound in a commercial agreement was to insert an ‘honor clause’ in the agreement that expressly states that the parties do not intend to be legally bound.[6]

Ermogenous Summary

The case of Ermogenous v Greek Orthodox Community of SA Inc (Ermogenous)[7] diverted form what is regarded as the traditional approach of determining the intention of the parties. The case involved Archbishop Ermogenous who was making a claim for service at the Greek orthodox community. The court of first instance was guided by the rebuttable presumptions and the claimant action that maintained that there was a legal intention failed. On appeal, the court held that the test should not be rested on the rebuttable presumptions but it should be an objective one. They further stated that the presumption could misguide the court to easily construe that there was no intention by the parties because of the nature of employment. The court affirmed that when determining the intention of facets of the case must be regarded.

Ermogenous Summary

In Evans v Secretary, Department of Families, Housing, Community Services and Indigenous Affairs (Evans)[8] the court reiterated the position in Emogenous case and went ahead to determine that the rebuttable presumptions had even been extinguished. The issue in court in this case was whether a contract existed between an adult child and a parent and the application of the rebuttable presumptions was again called to question.

Observations (State, with reasons, whether you agree or disagree with the assertion made by the author that the rebuttable presumptions have in fact been extinguished I have given so many reason s below .)

From the above it is discernable that the courts had a well defined mechanism rooted in common law of determining an intention of the parties, however, the Emogenous case presents a blanket approach to determining the intention of the parties which is to the effect that the courts should consider all aspects of the case before it is able to reach to an informed conclusion. The precedent in Emogenous and Evans case aroused a magnanimous legal discontent where some critics argued that majority of social and family agreements normally, are not intended to be enforceable in a court or binding and therefore by extinguishing the presumption rule, a miscarriage of justice will occur for one party because the other is only enforcing the agreement for legal expedience.[9] Thus it can be conceded that the objective test will not give an equitable justice to the parties.

In applying the Balfour case above, it can be contended also that, without such presumptions the plaintiff in any such case will always be faced with an onerous duty of proving that an intention to be legally bound exists.  It has also been agued that the courts should uphold the presumptions that have been set by common law but should supplement the common law with other equitable principle and not entirely extinguish the common law presumption rule.[10] The court should be guided by the wording of the agreement and the conduct of the parties if they could lead a reasonable person into being persuaded on a balance of probability that the parties intended to be legally bound as was held in Smith v Hughes.[11] This test i will be effective and will avoid leaving one party on the losing side of the scales of justice and therefore equitable justice will have been rendered to the parties.

It is of particular significance to note that the presumptions have in several instances been found not to be helpful in determining the intention of the parties. It has been held that the test that should be applied is the objective test alone. The primary judge in Tadrous v Tadrous[12] If it is shown on a balance of probability that the wording of the agreement and the conduct of the parties can lead a reasonable person to believe that the is a contract then such an intention to create legal relationship existed however, if the same is not shown then the intention did not exist and this objective test alone will suffice to prove an intention.

Evans Summary

In Gray v Gray[13] Young CJ and Bryson JJA found a loan agreement between a mother and son to be legally binding. They refused to apply the presumptions contending that a proper assessment should be made on every peculiar state of affairs and the context in which the parties dealing with each other, whether by applying the foregoing the court will evince an intention to be legally bound.  A more persuasive position was reached in Ashton v Pratt[14] where the court held that one should have into consideration the subject matter of the agreement, the personal relationship of the parties that existed when they were entering into the agreement and all other surrounding circumstances, to determine the intention of the parties. The court in this case applied the Emogenous case in totality and found the presumptions to have no function at all in determining the intention.

An interesting contention seem to be that where a parent and child agree that the child give up his life and career so as to take care of family business or to take care of an old aged parent and a reward is promised tin that sense, it should be inferred that from the agreement, an intention to be legally bound was living in the wording of such an agreement and the conduct of the parties.[15] It is worth noting that if the presumption test is applied in this case the child will be at a daunting risk of coming face to face with injustice. It can be stated that the presumptive test is not an exhaustive test. It is one that is subjective and looks at the case presented from the face value and only gives a conclusion based on a superficial appearance of the circumstances of the case.[16]

The only fair and just path to follow which is also the safest way, as has been argued, is through an objective examination of the actual circumstances and context of the parties and later from such an examination one can deduce whether there was an intention to be legally bound or whether the agreement was merely a sincere agreement which reflected love and trust between the parties but was legally insufficient. [17]  Over and above all, now that the presumptions have been extinguished and have lost meaning in majority of the decisions in Australia, it is implicit in these decisions that the objective test will not be applied where in a social or domestic agreement the parties include a clause stating expressly their intention to be legally bound. The effect of any such clause is that the courts will only be guided by the clause and therefore, it will infer that the parties intended to be legally bound and the agreement should be enforceable. We should take recognizance of the fact that any ambiguous word in such a clause will make the clause ineffective and therefore parties will not be able to escape the intention to be legally bound.

It has been suggested that the pervasive importance of the objective test should be underpinned by the integrity of the parties and to ensure that the test is not subjected to abuse. Further, it has been argued that subjecting the parties to an objective test to determine the intention parties prevents the parties from reneging on their obligations in the agreement and is also an incentive to ensure that the parties do not misrepresent or misinterpret the intentions of each other towards the agreement.[18]  An argument against the Objective test applied in the recent reforms in the discussion of intention in contract law is that the decision to fashion the precept of intention to be legally bound in contract law using the objective hypothesis has the effect of withdrawing the intention of a reasonable man within the circumstances and context of the case but not what was actually in the mind of the parties.[19] This has been held to be misleading as the conclusion that is arrived at after the test does not display the true intention of the parties. Parties to the agreement may in most instances understand the agreement differently and therefore it can be argued that where the court objectively derives an intention of the parties, it does not reflect a common intention of the parties since each party intended something different.[20]

It is thus a plausible conclusion that, while the courts in Australia highly advise that the presumption test should be extinguished and have actually extinguished it in most rulings, it is advised that the objective test that they prefer, should be carefully applied within the circumstances of each case. Apart from what a reasonable person on a balance of probability would infer the parties intended , other surrounding circumstances and the relationship of the parties should be keenly assessed so that the parties are fairly served by the court incases where there was a difference in  understanding between the parties .

Conclusion

Indeed, from the various aspects unfolded in the above discussion, the main argument of this paper is that while it is true that the presumptions have lost relevance in terms of their application in determining the intention of the parties the relationship of the parties, which are either social, domestic, family or commercial relationships, they should not be taken for granted by the courts. It is advised that the courts should not entirely dismiss the underlying fact of these relationships in the minds of the judges as they retire to make their determinations.

References

Books

Coleman Andrew, ‘Law in Commerce’, 5th Ed., (LexisNexis 2013)

Seddon Nicholus and Ellinghaus Manfred ,’Cheshire and Fifoot’s Law of Contract (Lexis Nexis 2008)

Harris Jason, Hargovan Anil,  Adams Michael, ‘Australian Corporate Law ‘, (LexisNexis Butterworths 2015)

Articles& Journals

Cohen Morris,  ‘The  Basis  of  Contract,’ (1933) Harvard  Law  Review, Vol. 46

Millad Chen-Wishart, 'Objectivity and Mistake: The Oxymoron of Smith v Hughes' in Jason Neyers, Richard Bronough, and Pitel Stepshen (eds), Exploring Contract Law (Hart, 2009).

Bhawna Gulati ‘Intention to Create Legal Relations’: A Contractual Necessity or an Illusory (2011) Concept Beijing Law Review

Courmadias, Nadine ‘Intention to create legal relations: The end of presumptions?’(2006) Australia Business Law Review.

Cases

Ashton v Pratt [2012] NSWSC 3

Balfour v Balfour [1919] 2 KB 571

Edwards v Skyway ltd [1964] 1 WLR 349

Ermogenous v Greek Orthodox Community of SA Inc (Ermogenous) (2002) HCA 8

Evans v Secretary, Department of Families, Housing, Community Services and Indigenous Affairs (Evans) (2012) FCAFC 81

Gray v Gray [2004] NSWCA 408

Jones v Padavatton [1969] 2 All ER 616

Rose&Frank Co v J R Crompton & Bro Ltd [1925] AC 445

Smith v Hughes (1871) LR 6 QB 597

Tadrous v Tadrous [2010] NSWSC 1388

Merritt V Merritt [1970] 1 WLR 1211

Wakeling v Ripley (1951) 51 SR (NSW) 183,