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What is an intention to create legal relations?

An Overview on Intention to Create Legal Relations in Australia

An intention to create legal relations is a prerequisite to the formation of a contract in Australian contract law. Originating from continental jurisprudence and adopting the latin term, animus contrahendi, the latin term is translated to “agreed intention to be legally bound by contract” (Lucke, 1967, p. 419).  Further, an intention conveys the seriousness to a promise that distinguishes mere gratuitous promises from legally binding bargains.

In examining the intention to create legal relations as an essential element in the formation of contract, this article addresses the following frequently asked questions:

It is trite that in addition to an agreement and consideration, an intention of the parties to create legal relations is also required. To contextualise, the other legal elements are briefly summarised in the table.

Legal ElementsSummary
Offer and AcceptanceThere should be Offer and Acceptance communicated between the parties.
 
An offer is made by an offeror and an acceptance of the offer is made by an offeree.
ConsiderationConsideration is something of legal value that has been exchanged for a promise.
An Intention to Create Legal RelationsAn intention to create legal relations should be present for there to be a contract.
CapacityParties must have contractual or legal capacity to enter into a contract.
CertaintyThe terms of contract should be certain and complete with regards to its essential terms.
FormalitiesParticular kinds of contracts may be required to comply with formality requirements for the contract to have legal effect.

Read More: What is an enforceable contract in Australia?“, generally explores the essential legal elements relating to formation of contract.

The legal element of an intention to create legal relation is often relatable with other element legals in the formation of contract. Judicial opinion suggests an interconnectedness between consideration and intention to create legal relations. For example, in Atco Controls Pty Ltd (in liq) v Newtronics Pty Ltd (recs & mgrs apptd) (2009) 25 VR 411, the Victorian Supreme Court (2009, para 60) canvassed the possibility that “the better view may be that the rules as to consideration supply the answer as to whether the parties intend to enter into a legally binding agreement”.

Other legal scholars claim linkages between intention to create legal relations, and certainty such that, if there is a firm intent, then the terms of an agreement are likely to be certain (Carter, 2018, para 8.12). Whereas, if the terms are vague and general, this may show absence of an intent to create legal relations (Carter, 2018, para 8.12).

Notwithstanding, an intention to create legal relations is an independent and distinct element that is separately and objectively assessed.

The Court objectively determines whether parties manifest an intention to create legal relations, based on inferences from the all the circumstances. It is not an inquiry on whether the parties subjectively intended to do so. It is “also not open to a party to escape a contract” by claiming that they did not intend to create legal relations (Robertson & Paterson, 2020, p 119). Other legal scholars generally agree with this view, that “the test of intention is objective, it is not usually open to one party to seek prove, subjectively, its unilateral intention was that legal relations should not arise” (Carter, 2018, pp. 175-176). This view is also reflected in the Australian judicial decision of Ermogenuous v Greek Orthodox Community of SA Inc(2002) 209 CLR 95:

“Although the word “intention is used in this context…It describes what it is that would objectively be conveyed by what was said or done. It is not a search for the uncommunicated subjective motives or intentions of the parties”

When uncovering the parties’ intent to create legal relations, this generally requires an assessment of the facts in each case and its state of affairs.  Relevant factors may include: the subject-matter of the agreement, the relationship between the parties, and the  surrounding circumstances. As circumstances of each assessment may be so varied, there is a preclusion of any universal prescriptive rules.

Consideration and an intention to create legal relations are interrelated but distinct legal elements. While an intent can be inferred from the presence of an agreement supported by consideration, it is not conclusive. Others suggest that it may not be conclusive or a reliable indicator that the parties did in fact intend to create legal relations (Robertson & Paterson, 2020, p. 181). Therefore, even if consideration is present, an intention to create legal relations must also be established.

For example, the parties may make express statements that they do not intend their agreement to give rise to legal rights and obligations. In this situation, it is suggested that “a common positive intention not to contract will be respected” (Carter, 2018, p.175).

Read More: What is Consideration in Australian contract law?” provides an overview on the historical and contemporary understanding on the legal element of consideration, and its relevance to Australian contract law.

Traditionally, the search for intention to create legal was supported by presumptions to distinguish different kinds of contexts: family, domestic, social, and commercial. However, the High Court Decision of Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95 (“Ermogernous”), challenged the language of presumption. Rather,  the High Court stated the presumptions identified which parties carried the burden of proof:

“For our part, we doubt the utility of using the language of presumptions in this context. At best, the use of that language does no more than invite attention to identifying the party who bears the onus of proof…References to presumption may serve only to distract attention from that more basic and important proposition.”

Legal scholars have sought to reconcile the High Court’s approach by suggesting that “the presumptive approach serves to identify who has the burden of proof” (Carters, 2018, p.182). The context becomes an “important consideration and may even be decisive” in establishing whether an intention to create legals was manifested by the parties (Robertson & Paterson, 2020, p.123).

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Traditionally, in commercial agreements, it was presumed that parties intended to create legal relations. Further, it is asserted that “it is rare for the conclusion to be drawn that the parties did not intend their agreement to be attended by legal consequences” (Carter, 2018, p.179).

However, since the decision in Ermogenous, the party asserting a contract must show there was an intention to create legal relations. In ordinary commercial agreements, an intention to create legal relations would not be a substantive issue because the evidence would generally establish that the parties intended to be bound by a contract. Therefore, the party seeking to dispute the intent would bear the burden to show the Court that an intention was not present notwithstanding the commercial setting.

Traditionally, the law recognised  a presumption in the context of domestic, family or social relationships, that the parties did not intend to create legal relations. From sociological lens, family members and relatives generally did not intend their domestic affairs to create legal relations and preferred relying on trust and affection (Carter, 2018, p. 178; Lucke, 1967). Legal commentors share similar views that historically, “in the domestic context, where the principle that an intention to create legal relations is not to be presumed seems to have made it difficult to establish a contract between spouses, even where the agreement…involves substantial financial matters” (Robertson & Paterson, 2020, p. 126).

However, since decision in Ermogenous with the displacement of presumptions, the onus of proof is on the person alleging the existence of a contract to establish the intention to create legal relations.

In ordinary commercial dealings, there are no special rules whether governments or government instrumentalities obtain an intention to create legal relations when dealing with the public. Others suggest that whether there is an intention also depends on whether an agreement entered by the government is a commercial agreement, or an implementation of government policy. Some relevant factors that may distinguish government policy, and commercial contract, include (Carter, 2018, p. 182):

Relevant FactorsSummary
WordsAs a matter of construction, the words communicated do not amount to either an acceptance or offer.
DiscretionWhether or not the promise is purely discretionary
Gratuitous PromiseWhether or not the claimed consideration is, in actual fact, satisfaction of a condition to a gratuitous promise, rather than a consideration that references to an offer.
IntentionWhether or not, the government dealing is administrative, rather than an offer, within the legal meaning.

The High Court decision in Australian Woollen Mills Pty Ltd v Commonwealth (1954) 92 CLR 424 illustrates that depending on the characterisation of government dealings, they may not have the requisite intention to create legal relations. The facts involved the Commonwealth Government’s policy to pay subsidies to wool manufacturers, and whether the Commonwealth Government assumed contractual obligations. Applying the objective test, the High Court stated that it as the government was implementing policy, the required intent could not be manifested (p. 462):

“There is nothing in any of these documents to support the view that the Commonwealth Government intended to assume a liability on any purchase of wool by any manufacturer… But the matter does not rest there. In the correspondence which took place during the subsidy period there is material which not merely suggests that it is impossible to formulate with precision the terms of any contract, but indicates that the payment of subsidies was regarded as entirely a matter of discretion”

Parties may negotiate on the principal terms of proposed transaction, however, intend to record the terms in a formal contractual document at a future time. Therefore, even though there may be offer and acceptance, an intention to create legal relations may not be present until a formal exchange of contracts. Terms such as “subject to contract” or “subject to preparation of a formal contract”, may be used in the context of preliminary agreements.

However, a preliminary agreement will be binding if it appears the parties intended it to be binding. Whether or not preliminary agreements was formed by an intention to create legal relations depends on its categorisation. The leading case is the High Court decision in Masters v Cameron (1954) 91 CLR 353. The High Court observed that a preliminary agreement may fall into one of three categories:

Categories of Preliminary AgreementsSummary
First CategoryThe parties reach finality with all the terms of their bargain and intend to be immediately legally bound. At the same time, the parties propose to restate the terms in a form which is fuller or more precise, but not different in effect.
 
The parties are legally bound regardless of whether the formal document is signed.
Second CategoryThe parties have completely agreed upon all the terms of their bargain, and do not intend to depart or create any additions to their agreed terms. However, the performance of one or more of the terms is conditional on the execution of a formal document.
 
The parties are legally bound to execute the formal document.
Third CategoryThe Parties may not intend to make a binding agreement at all unless and until they execute a formal agreement.
 
There is not an intention to create legal relations until a formal document is executed.

A fourth category of preliminary agreement was recognised in Baulkham Hills Private Hospital Pty Ltd v GR Securities (1986) 40 NSWLR 622. The fourth category varies the first and second categories – parties intend to be bound immediately by the terms they have agreed upon whilst expecting to make a further contract in substitution for the first contract, containing, by consent, additional terms.

Read More: When is an agreement legally binding in Australia?” provides an introduction to the relevant legal elements in the formation of contract.

Bibliography

  • Carter, J. (2018). Contract Law in Australia (7th ed). LexisNexis.
  • Lucke, H. (1967). The intention to create legal relations. Adelaide Law Review, 3(4), 419-430.
  • Robertson, A., & Paterson, J. (2020). Principles of Contract Law (6th ed). Thomson Reuters.
  • Seddon, N. & Bigwood, A. (2023). Cheshire & Fifoot Law of Contract. LexisNexis.

Implied Terms | Enforceable Contract | Frustration | Legally Binding Agreement | Termination | Express Terms | Consideration | Offer and Acceptance | Certainty | Repudiation | Privity | Classification of Terms | Contract Law (Theories) | Causation | Remoteness | Damages |

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Authored by:
Ben Franklin, Managing Partner (LIV Accredited Specialist – Property Law), &
Matthew Tran, Lawyer.

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