Existence and formation of a contract - Intention to create ...

Learning Outcomes

This article explains the requirement of intention to create legal relations in contract law, including:

• The objective test for determining legal intent
• Presumptions in domestic/social and commercial contexts
• Rebuttal evidence and factors that negate or establish intent
• The role and effect of “subject to contract”, honour clauses, and comfort letters
• Key case authorities illustrating the principles
• The impact of intention on enforceability and privity
• The statutory presumption for collective agreements under TULRCA 1992 s 179
• Interaction with the Contracts (Rights of Third Parties) Act 1999

SQE1 Syllabus

For SQE1, you are required to understand the role of intention to create legal relations in contract formation, including the legal presumptions for different types of agreements, how those presumptions can be rebutted, and how courts objectively assess intention, with a focus on the following syllabus points:

• The requirement of intention to create legal relations as an element of contract formation.
• The legal presumptions for domestic/social and commercial agreements.
• How and when those presumptions can be rebutted.
• The objective approach courts use to determine legal intent.
• Words and devices that negative intent: “subject to contract”, “binding in honour only”, comfort letters.
• The effect of intention on enforceability and privity.
• The statutory presumption for collective agreements under TULRCA 1992 s 179.
• Key case law illustrating these principles.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. What is the legal presumption regarding intention to create legal relations in commercial agreements?
2. In which circumstances can the presumption against legal intent in domestic agreements be rebutted?
3. Which case established that a written agreement between separated spouses was legally binding?
4. What is the effect of an "honour clause" in a commercial contract?

Introduction

The intention to create legal relations is a core requirement for the formation of a contract in English law. Without this intention, an agreement—even if supported by offer, acceptance, and consideration—will not be legally enforceable. The doctrine is applied using an objective test and two core rebuttable presumptions: no legal intent in domestic/social settings; legal intent in commercial settings. The courts also give weight to explicit wording (e.g., “subject to contract” or “binding in honour only”), certainty of terms, and the context in which the agreement is made. Understanding how these elements interlock is essential for accurate analysis.

Key Term: intention to create legal relations
The requirement that parties to an agreement must intend it to be legally binding and enforceable by law.

The Requirement of Legal Intention

A contract is only enforceable if both parties intend their agreement to have legal consequences. Not every promise or arrangement is legally binding; the law distinguishes between informal social promises and those meant to be enforceable. The intention is judged objectively: what a reasonable person would infer from the parties’ words and conduct, not their private thoughts. In practice, this means that clear wording and contextual factors can be decisive.

Key Term: objective test
The legal standard that assesses intention based on how a reasonable person would interpret the parties’ actions and words, not their subjective beliefs.

Key Term: honour clause
A clause stating that a document is “binding in honour only” or similar wording, indicating the parties do not intend it to be legally enforceable.

Key Term: subject to contract
A phrase indicating negotiations are not intended to be binding until a formal contract is executed; commonly used to negative legal intent during pre-contractual dealings.

Presumptions in Different Contexts

Courts use legal presumptions to assess whether parties intended to create legal relations, depending on the context of the agreement. These presumptions may be rebutted by clear evidence to the contrary.

Domestic and Social Agreements

Agreements between family members or friends are presumed not to be legally binding. This reflects the expectation that such arrangements are informal and not meant for court enforcement.

Classic authority is Balfour v Balfour (agreement between spouses living in amity), where the court held there was no intention to create legal relations. By contrast, when spouses are separated or about to separate, courts commonly find legal intent due to the seriousness and formality of arrangements; Merritt v Merritt demonstrates that agreements made after separation, particularly in writing, are binding.

In broader social contexts, the presumption may be rebutted where the arrangement resembles a syndicate or business-like venture and parties contribute money or rely on the arrangement to their detriment. Simpkins v Pays (family members and a lodger sharing costs and agreeing to share competition winnings) indicates a binding arrangement. Wilson v Burnett shows the other side: casual chat about sharing gambling winnings at a racetrack was insufficient to rebut the presumption.

Key Term: domestic agreement
An agreement made in a family or social context, presumed not to be legally binding unless proven otherwise.

Commercial Agreements

In business or commercial contexts, the law presumes that parties do intend to create legal relations. The presumption is strong: even ex gratia promises can be binding where the overall context is commercial (Edwards v Skyways). Promotional arrangements can be binding despite low monetary value if commercial intent is evident; Esso Petroleum v Customs & Excise illustrates that advertising a “free” item tied to purchases can show intent.

The commercial presumption can be displaced by clear wording that the arrangement is not legally binding (e.g., “binding in honour only”) or “subject to contract” where parties have reserved the right not to be bound until formal execution.

Key Term: commercial agreement
An agreement made in a business context, presumed to be legally binding unless clearly stated otherwise.

Rebutting the Presumptions

Presumptions are not absolute. Parties can present evidence to rebut them.

Rebutting the Domestic Presumption

The presumption against legal intent in domestic agreements can be rebutted if the facts show that the parties intended to be legally bound. Factors include:

• Written agreements, particularly with specificity.
• Parties living apart or separated (Merritt v Merritt).
• Formality or seriousness of the arrangement (e.g., property, savings, business).
• Significant subject matter (house ownership, investment).
• Reliance and detriment (moving home, giving up employment, or incurring expenses).
• Certainty and completeness of terms (e.g., specific obligations and timelines).

Jones v Padavatton illustrates the importance of certainty: a mother’s promise to support her daughter during legal studies was held non-binding where terms like duration were uncertain and the overall domestic context prevailed.

Worked Example 1.1

A husband promises to pay his wife a monthly allowance while they are living together. Later, they separate and sign a written agreement about mortgage payments. Is either agreement legally binding?

Answer:
The first agreement (while living together) is presumed not to be legally binding (Balfour v Balfour). The second, written agreement after separation is likely binding because the presumption is rebutted by the formal context and separation (Merritt v Merritt).

Rebutting the Commercial Presumption

The presumption of legal intent in commercial agreements can be rebutted if the parties expressly state that the agreement is not legally binding, for example, by including an honour clause or stating the agreement is “binding in honour only”. Explicit “subject to contract” wording also negatives intent until a formal contract is executed. Comfort letters may reflect policy or present assurances without creating enforceable obligations, depending on wording and context.

Rose & Frank v Crompton is the leading authority on honour clauses: clear language that a document is “not a formal or legal agreement” prevents enforceability. Kleinwort Benson v Malaysia Mining Corporation shows that a comfort letter stating current policy did not create a binding promise to support a subsidiary.

Key Term: comfort letter
A document (often from a parent company or bank) offering assurance without guaranteeing legal liability; enforceability turns on wording and whether a promise (rather than a mere statement of policy) is given.

Worked Example 1.2

Two companies sign a document stating, "This arrangement is not a formal or legal agreement and shall not be subject to legal jurisdiction." Is this agreement enforceable?

Answer:
No. The presumption of legal intent is rebutted by the clear wording of the clause, so the agreement is not legally binding (Rose & Frank Co v JR Crompton & Bros Ltd).

Worked Example 1.3

A property developer and a contractor exchange a detailed letter headed “Subject to Contract”, then begin work before signing a formal contract. Can either rely on the letter to enforce payment terms?

Answer:
“Subject to contract” generally negatives legal intent until execution, but the parties’ subsequent conduct can form a separate binding contract if the objective evidence shows agreement on essential terms and intention to be bound by performance (e.g., RTS Flexible Systems v Müller). The letter itself remains non-binding; enforceability will turn on the later conduct and agreed essentials.

Worked Example 1.4

A bank issues a comfort letter stating its “policy is to ensure its subsidiary remains in a position to meet liabilities” to a lender. The subsidiary later defaults. Can the lender enforce the letter?

Answer:
Not ordinarily. A comfort letter that merely describes current policy, without promising future conduct, is unlikely to be enforceable (Kleinwort Benson v Malaysia Mining Corporation). Enforceability requires wording amounting to a promise, not a statement of policy.

The Objective Test

Courts apply an objective test to determine intention. The question is whether a reasonable person would conclude, from the parties’ words and conduct, that they intended to be legally bound—not what the parties privately thought. The objective test interacts with knowledge and context: if one party actually knows the other does not intend legal relations, they cannot rely on an objective inference to the contrary.

Maple Leaf Macro Volatility Primary Fund v Rouvroy is illustrative: the court assessed communications objectively to ascertain whether parties intended a binding agreement. Conversely, Attrill v Dresdner Kleinwort emphasises that actual knowledge that the other party does not intend legal relations will prevent reliance on an objective presumption of intent.

Factors Considered by Courts

When deciding if an agreement is legally binding, courts consider:

• The context and relationship of the parties (domestic/social vs commercial).
• The language used (e.g., “subject to contract”, “binding in honour only”).
• The seriousness and formality of the arrangement.
• The conduct of the parties (e.g., commencement of performance).
• Reliance and detriment.
• The certainty and completeness of the terms (definiteness of obligations, duration, price, or mechanism for determining missing essentials).
• Whether a formal execution step was obviously required (formal signatures, board approvals).
• Industry practices and documentation (comfort letters, term sheets, letters of intent).

“Subject to contract” is strong evidence that the parties do not intend to be bound yet. If parties then perform and agree on essentials, a court may find a separate binding contract from conduct, but the initial “subject to contract” document remains non-binding.

Worked Example 1.5

Two friends agree over dinner to start a business, discuss profit-sharing, and one invests money. The other later withdraws. Is there a contract?

Answer:
The court will consider the context (social setting), but the seriousness, investment, and business subject matter may rebut the domestic presumption and show intent to create legal relations. The clearer and more certain the terms, the stronger the case for enforceability.

Effect of Intention on Enforceability

If there is no intention to create legal relations, the agreement is not enforceable, regardless of other elements. If intention is present, the agreement may be enforced as a contract. Devices such as honour clauses and “subject to contract” wording are effective to negative legal intent, provided the wording is clear and the parties act consistently with it.

Key Term: enforceability
The quality of an agreement being capable of legal enforcement as a contract.

Privity and Third-Party Rights

The intention to create legal relations is also relevant where contracts purport to benefit third parties. Under the Contracts (Rights of Third Parties) Act 1999, a third party may enforce a contract if:

• The contract expressly provides that they may do so; or
• A term purports to confer a benefit on them, and on a proper construction the parties intended that the term be enforceable by the third party (s 1(1)(b), subject to s 1(2)).

Parties can exclude third-party enforcement under the Act by clear wording. The third party may have the same remedies as a party, and their rights can crystallise by assent or reliance (s 2), limiting variation without consent. The Act does not apply where parties clearly exclude it, or in certain categories such as employment contracts in specific contexts.

Key Term: privity of contract
The rule that only parties to a contract can enforce or be bound by its terms, subject to statutory exceptions.

Worked Example 1.6

A union and employer sign a collective agreement on pay. Can employees enforce it?

Answer:
Generally no. Collective agreements are conclusively presumed not intended to be legally binding unless in writing and expressly stating the parties so intend (Trade Union and Labour Relations (Consolidation) Act 1992, s 179). Without such wording, no enforceable rights arise.

Worked Example 1.7

A building contract states: “The contractor shall pay £5,000 to X (named third party) upon completion.” No exclusion of the CRTPA 1999 is included. Can X sue for the £5,000?

Answer:
Yes. X can enforce the term under CRTPA 1999 s 1(1)(a), as the contract expressly provides for a benefit to X and there is no exclusion. X will have the same remedies as if a party to the contract (s 1(5)).

Names of documents in the commercial context

When analysing certain communications, do not rely on the title alone. The court will assess wording and context to determine legal effect.

• Comfort letters: may be policy statements and not binding, unless drafted as promises.
• Letters of intent: typically signal preliminary agreement; often “subject to contract”.
• Honour clauses: effective to rebut legal intent where clear.
• “Subject to contract”: strong indicator of no legal intent until formal execution.

Worked Example 1.8

A supplier and buyer sign a “Heads of Terms” marked “Subject to Contract” with price, quantity, and delivery dates; they start trading on those terms while finalising a long-form agreement. A dispute arises about price. Is there a binding contract?

Answer:
The “Heads of Terms” itself is non-binding. However, a separate binding contract may be inferred from conduct and agreed essentials (price, quantity, delivery), applying the objective test. If, on the facts, essential terms were sufficiently certain and both parties performed to them, a court may find a contract formed by conduct, independent of the non-binding heads.

Key Point Checklist

This article has covered the following key knowledge points:

• Intention to create legal relations is essential for contract formation and is assessed objectively.
• Domestic/social agreements are presumed not to be legally binding, but this can be rebutted by factors such as separation, formal writing, reliance and detriment, seriousness and certainty.
• Commercial agreements are presumed to be legally binding, but this can be rebutted by clear wording (e.g., honour clauses) or “subject to contract”.
• Comfort letters tend to record policy rather than binding promises; enforceability depends on wording.
• Courts use an objective test to determine intention, focusing on words, conduct, context, reliance and certainty.
• The presence or absence of intention affects enforceability.
• Collective agreements are conclusively presumed non-binding unless statutory conditions are met (TULRCA 1992 s 179).
• Privity of contract limits enforcement to parties, with statutory exceptions for third parties under CRTPA 1999.

Key Terms and Concepts

• intention to create legal relations
• objective test
• domestic agreement
• commercial agreement
• honour clause
• subject to contract
• comfort letter
• enforceability
• privity of contract