The next requirement of forming a valid contract is intention. This means that the parties must have intended for an agreement to be legally binding between them. To determine if this element has been satisfied, an objective approach must be taken (see Ermogenous v Greek Orthodoc Community of SA Inc [2002] HCA 8).

It does not matter if a party to an agreement secretly did not intend to be legally bound. It also does not matter if a party denies an intention by simply saying that he or she did not intend to be legally bound by an agreement. What matters here is what the parties have said and done. You must ask, would a reasonable person regard the agreement as intended to be binding on the parties? (see Merritt v Merritt [1970] 1 WLR 1211).

Generally, the Court will consider the following factors when determining this issue:

  1. Content of an agreement;
  2. Language and conduct of the parties to an agreement;
  3. The relationship between parties and the presumption arising out of that relationship;
  4. The context in which the agreement was made; and
  5. Other relevant surrounding circumstances.

The traditional approach taken by the Courts was to apply various presumptions to different situations. For example, there was presumed to be an intention in a commercial context and presumed not to be intention in a family or social context. However recently, the High Court of Australia has proposed that these presumptions should simply indicate which party has the onus of proving the intention.

Commercial Transactions

Where a party denies that they are legally bound by an agreement in a commercial context, that party has the onus of proving that all parties have manifested an intention not to create a legally binding agreement.

A party will often rely on an express or ‘honour’ clause in an agreement. In the English case of Rose & Frank Co v J R Cromption & Bros Ltd [1925] AC 445, the Court considered such a clause in an agreement between a manufacturer and a distributer. The clause provided that the agreement was not a legal agreement between the parties but was simply a record of the parties’ purpose and intention to ‘which they honourably pledge themselves’. The Court held that the agreement was not legally binding, however the Court also held that each individual order made by the distributor would have created separate contract when each order was accepted by the manufacturer.

Agreement between Family Members

There have been some circumstances where the Courts has been prepared to find that there is an intention to be legal binding between family members and spouses where:

  1. The spouses have separated or are about to separate;
  2. Where a transaction between family members is essentially commercial in nature; and
  3. Agreement relates to housing.

The critical factor in these cases is the degree of reliance and the serious consequences on either party to an agreement. In the case of in Todd v Nichol [1957] SARS 72, one party promised to provide a right in real property if the other party moved from Scotland to Australia. The Court held that an intention to be legally bound ought to have been inferred because the agreement contemplated a permanent arrangement and involved valuable property rights.

While these cases provide some guidance on understanding when there may be an intention to be legally bound by an agreement, the question can only be answered by considering the specific facts of each case.

*** Assisted by: Norisha Young and Neil Bookseller ***