## Introduction

“Intention to be legally bound” (often called intention to create legal relations) is a basic requirement for a valid contract. Courts are not concerned with what the parties secretly thought; they look at what a reasonable person would infer from words and conduct in context. The test is objective and sits alongside offer, acceptance and consideration. It helps separate everyday understandings from agreements that the law will enforce.

This guide explains the main presumptions, how they can be rebutted, the effect of phrases like “subject to contract”, what happens with public offers, and where informal assurances fall short. It also shows where the concept does not really fit, such as the legal status of marriage.

## What You'll Learn

- How the objective test works and why subjective beliefs do not decide the issue
- The domestic/social presumption and how it can be rebutted
- The commercial presumption and how parties can exclude legal effect
- The role of “subject to contract”, “ex gratia” and “binding in honour” wording
- When adverts and competitions create unilateral contracts
- Why comfort letters and letters of intent often fail as contracts
- How courts have handled leading cases from Balfour to Carbolic Smoke Ball
- Practical drafting and transaction tips to avoid unintended commitments
- Why marriage is regulated differently from ordinary contracts

## Core Concepts

### The Objective Test

- Courts ask: would a reasonable person, viewing the parties’ words and conduct in context, think they meant to be legally bound?
- Private, unspoken intentions do not matter. Clear language and actions do.
- Informal discussions, friendly group arrangements or vague terms usually weigh against intention.
- Example: Hadley v Kemp [1999] EMLR 589 — informal oral promises within a band were not a contract where the objective signals of legal commitment were missing.

### Presumptions: Social/Domestic and Commercial

- Social and domestic arrangements: presumed not intended to be legally binding.
  - Balfour v Balfour [1919] 2 KB 571 — a husband’s promise of maintenance to his wife was not enforceable in the ordinary domestic setting.
  - Jones v Padavatton [1969] 1 WLR 328 — mother–daughter arrangement about study and support was not contractual.
  - Rebuttal is possible if the context shows seriousness and formality, e.g. separation and written terms:
    - Merritt v Merritt [1970] 1 WLR 1211 — separated spouses; written agreement was binding.

- Commercial agreements: presumed intended to be legally binding.
  - Edwards v Skyways Ltd [1964] 1 WLR 349 — an “ex gratia” redundancy payment promise was enforceable in a business setting.
  - Parties can rebut the presumption with clear wording:
    - Rose & Frank Co v Crompton Bros Ltd [1925] AC 445 — an “honourable pledge” clause excluded legal effect.

### Express Signals: “Subject to Contract”, “Ex gratia” and “Binding in Honour”

- “Subject to contract”
  - Indicates no binding contract until formal execution.
  - Generator Developments v Lidl UK GmbH [2018] EWCA Civ 396 — no binding joint venture where dealings were marked “subject to contract”.
  - Note: performance can sometimes supersede labels if a final contract is clearly agreed, but clear “subject to contract” wording is usually decisive in pre-contract negotiations.

- “Ex gratia”
  - Means “as a favour” in everyday speech, but does not by itself negate intention in a business context (Edwards v Skyways).

- “Binding in honour only” / honour clauses
  - Explicitly negate legal effect and will generally be respected (Rose & Frank).
  - Equity will not normally step in to create a remedy where parties knowingly keep negotiations non-binding (Cobbe v Yeoman’s Row Management Ltd [2008] 1 WLR 1752).

### Unilateral Offers and Public Statements

- A unilateral contract arises where an offer is accepted by performance, not a counter-promise.
- Adverts can be offers where terms are clear and there is a clear indication of serious intent.
  - Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256 — deposit of money signalled seriousness; advert was enforceable.
  - McGowan v Radio Buxton [2001] EWCA Civ 1785 — prize competition created binding obligations; a “toy car” did not meet the promised reward.

### Soft Assurances: Comfort Letters and Letters of Intent

- Letters of comfort
  - Often express a present policy or intention, not a binding promise.
  - Kleinwort Benson Ltd v Malaysia Mining Corp [1989] 1 WLR 379 — comfort letter was not a guarantee.

- Letters of intent (LOIs)
  - Generally record a wish to contract later; often non-binding.
  - May be binding if essential terms are agreed and performance starts, or the LOI is drafted to have contractual effect.
  - Wilson Smithett & Cape Sugar Ltd v Bangladesh Sugar and Food Industries Corp [1986] 1 Lloyd’s Rep 378 — LOI and conduct supported a binding agreement on the facts.

### Why Marriage Is Different

- Marriage is regulated by statute. The parties cannot set their own “terms” like a commercial bargain.
- Consent must be real and free; lack of consent can invalidate a marriage (Scott v Sebright (1886) LR 12 PD 21).
- Historic cases such as Hyde v Hyde (1866) LR 1 P & D 130 describe marriage in terms that are no longer current. Modern law in England and Wales recognises same-sex marriage under the Marriage (Same Sex Couples) Act 2013.
- The contract-law test for intention is therefore not a good fit for the legal status of marriage.

## Key Examples or Case Studies

- Balfour v Balfour [1919] 2 KB 571
  - Context: Husband promised maintenance to wife while abroad.
  - Decision: Not enforceable; ordinary domestic arrangement.
  - Key point: Social/domestic presumption against intention.

- Jones v Padavatton [1969] 1 WLR 328
  - Context: Mother promised allowance to daughter for legal studies.
  - Decision: No contract on the facts.
  - Key point: Family support arrangements are usually not contracts unless clear formality and seriousness are shown.

- Merritt v Merritt [1970] 1 WLR 1211
  - Context: Separated spouses; written promise over house and mortgage.
  - Decision: Binding.
  - Key point: Separation and written terms can rebut the domestic presumption.

- Edwards v Skyways Ltd [1964] 1 WLR 349
  - Context: “Ex gratia” payment in redundancy discussions.
  - Decision: Binding in a commercial context.
  - Key point: “Ex gratia” label does not remove intention where business dealings are involved.

- Rose & Frank Co v Crompton Bros Ltd [1925] AC 445
  - Context: Agreement contained an “honourable pledge” clause.
  - Decision: No legal effect.
  - Key point: Clear words can displace the commercial presumption.

- Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256
  - Context: Advert promised money for influenza after product use; company deposited funds.
  - Decision: Binding unilateral offer; acceptance by performance.
  - Key point: Public adverts can create contracts where seriousness and clear terms are present.

- McGowan v Radio Buxton [2001] EWCA Civ 1785
  - Context: Radio competition promised a car; station supplied a toy car.
  - Decision: Enforceable contract; prize must match the offer.
  - Key point: Competitions can be binding unilateral offers.

- Kleinwort Benson Ltd v Malaysia Mining Corp [1989] 1 WLR 379
  - Context: Bank relied on a comfort letter.
  - Decision: Not a binding guarantee.
  - Key point: Comfort letters usually express policy, not a promise.

- Wilson Smithett & Cape Sugar Ltd v Bangladesh Sugar and Food Industries Corp [1986] 1 Lloyd’s Rep 378
  - Context: Letter of intent relied on in trading.
  - Decision: On the facts, a binding contract existed.
  - Key point: LOIs can bind if essential terms are settled and conduct confirms agreement.

- Generator Developments v Lidl UK GmbH [2018] EWCA Civ 396
  - Context: “Subject to contract” label in joint venture context.
  - Decision: No binding agreement until formal contract.
  - Key point: “Subject to contract” is a strong signal against intention.

- Cobbe v Yeoman’s Row Management Ltd [2008] 1 WLR 1752
  - Context: Commercial property deal with informal assurances and “subject to contract”.
  - Decision: No contract or proprietary estoppel rescue.
  - Key point: Equity will rarely assist where parties keep matters non-binding during negotiations.

- Hadley v Kemp [1999] EMLR 589
  - Context: Band members alleged oral agreement to share royalties.
  - Decision: No intention to create legal relations found.
  - Key point: Friendly, informal arrangements often lack contractual intention.

## Practical Applications

- Use clear labels
  - Add “subject to contract” to negotiation documents if you do not want early drafts to bind.
  - If you want an MOU or LOI to be binding, say so, define scope and term, and specify what is binding (e.g. price, scope, IP) and what is not.

- Draft to match your goal
  - To avoid legal effect: use an honour clause (e.g. “binding in honour only”) or make clear that neither party intends to be legally bound until a formal agreement is executed.
  - To ensure legal effect: avoid ambiguous phrases and record essential terms in writing with signatures.

- Treat “ex gratia” with care
  - In business, calling a payment “ex gratia” will not necessarily prevent enforceability. If you mean “no legal obligation,” say so clearly and ensure there is no consideration pointing the other way.

- Manage adverts and promotions
  - If an advert could be read as an offer, you may create a unilateral contract. Add clear conditions, time limits, and any caps or verification steps.
  - Prize promotions should spell out prize details, eligibility and conditions in full.

- Handle comfort letters and LOIs thoughtfully
  - Comfort letters: if real security is intended, give a guarantee instead.
  - LOIs: specify what is authorised (e.g. preliminary work), payment basis, liability cap and a clear expiry date.

- Evidence matters
  - Keep written records of key discussions, sign term sheets where needed, and confirm changes by email to avoid arguments about informal promises.

- Assess the setting
  - Ask: is this domestic/social or commercial? Are there express signals like “subject to contract”? Has one side started performance? Would a reasonable person think this is a legal commitment?

## Summary Checklist

- Apply the objective test: what would a reasonable person conclude from the words and conduct?
- Identify the presumption:
  - Domestic/social: usually no intention unless clear evidence to the contrary
  - Commercial: usually intention unless clear wording excludes it
- Look for express signals:
  - “Subject to contract” or “binding in honour only” → generally non-binding
  - “Ex gratia” → does not, by itself, prevent enforceability
- Treat public offers with care: clear terms + serious signals can form unilateral contracts
- Handle comfort letters and LOIs:
  - Comfort letters are rarely binding
  - LOIs can bind if essentials are agreed and work starts
- Keep the context in mind:
  - Marriage is governed by statute; contract-law intention concepts are a poor fit
- Record agreements in writing and avoid vague language

## Quick Reference

| Concept/Context       | Presumption or Rule                     | Leading Authority                      | Key Point                                      |
| --------------------- | --------------------------------------- | -------------------------------------- | ---------------------------------------------- |
| Domestic/social deals | Not intended to be binding (rebuttable) | Balfour v Balfour; Merritt v Merritt   | Informality vs written terms after separation  |
| Commercial agreements | Intended to be binding (rebuttable)     | Edwards v Skyways; Rose & Frank        | Business dealings bind unless clearly excluded |
| “Subject to contract” | No contract until formal execution      | Generator v Lidl; Cobbe v Yeoman’s Row | Strong signal against intention                |
| Unilateral offers     | Binding on performance                  | Carlill; McGowan                       | Adverts/competitions can create contracts      |
| Comfort letters       | Usually non-binding                     | Kleinwort Benson v MMC                 | Policy statement, not a guarantee              |
| Letters of intent     | Often non-binding; can bind on facts    | Wilson Smithett v Bangladesh SFI       | Essentials + conduct may create a contract     |

Intention to be Legally Bound