intention to create legal relations, consideration, privty and capacity

7/28/2019 Intention to Create Legal Relations, Consideration, Privty and Capacity

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Intention to create legal relations

This is an important component involved in the formation of a contract, if the

intention to create legal relations is not present then a valid contract is said to

have not been formed. In other words an acceptance of an offer will only create a

contract if the offeror and offeree appeared to intend to create a legally binding

agreement. In deciding whether or not there was an intention to create legal

relations the court takes into account the objective views of the parties

intentions. The court does not ask what the parties actually intended, but looks at

what they appeared to the reasonable person to intend.

As far as intent to be legally bound is concerned, contracts can be divided into

domestic and social agreements on one hand and commercial contracts on theother hand. Where contracts fall into the previous category there is a rebuttable

presumption that the parties do not intend to be bound by it and therefore there

is no intention to create legal relations. The reverse applies in commercial

agreements, where it is presumed that the parties do intend such agreements to

be legally binding. Again, this principal can be rebutted if there is evidence that

the parties did not intend their agreement to be legally enforceable.

Social and domestic agreements

Social agreements are made between either commonly among husband and wife,

parent and child or in general among friends. Parties in these cases need to

provide evidence to prove that both parties intended to be bound by the contract.

Balfour v Balfourin this case the courts held that the agreement between the

husband and wife that the husband would provide the wife with an allowance was

not held to be binding as there was no intention to create legal relations

Merrit v Merritthis is the contrasting case where the courts held that the

agreement between the husband and wife regarding the mortgage paymentconcerning the ownership of house was legally binding, as the husband signing the

agreement made it more formal, and the keen bargaining of the parties without

acting in honourable understanding indicates an intention to create legal relations.

Jones v Padavatton in this case the agreement between the mother and

daughter that the mother gave a house to her daughter for her to habit and rent it

out for her expenditure in return that she became a barrister in UK, was held to be

not legally binding as the parties happily trusted each other at the time the family

arrangement was made, thus there was no intention to create legal relations.


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Simpkins v Pays here the courts held that the agreement of sharing the prize

money from the Sunday paper competition was legally binding, as all the parties

had shared the cost of entry which indicated a clear intention to create legal

relations.

Peck v Lateau Similarly in this case it was held that there was an intention to

create legal relations between two women who had agreed to share any money

won by either of them at bingo.

Commercial agreements

If an agreement is made in a business or commercial context there is a

presumption that the parties did not intend to make a contract. As this is only a

presumption, it is not a cast iron rule but only a starting point. It will therefore be

up to the party who is claiming that there was no intention to create legal

relations to introduce evidence to rebut the presumption.

Esso Petroleum Ltd. V Commissioners of Customs and Excise In thiscase coins showing footballers pictures were given with 4 gallons of petrol,

the HOL held that there was an intention to create legal relations, as

promises made in advertisements must be kept. Moreover Esso benefits from

the promotion by earning higher sales revenue.

J.Evans and Sons v Andrea Merzario Ltd. in this case the courts held thatthere was an intention to create legal relations as the company agreed to

changing the mode of transportation to below deck.

However, claims made in advertisements such as the best buy are held to be

mere puffs and are not intended to be a definite binding promise.

Weeks v Tybaldhere the defendant promised to pay 100 to anyone whomarried his daughter; this was held to be too vague and was not legally

binding.

Carlill v Carbolichere the defendant deposited 1000 into a bank account,thereby making their promise to compensate if a person caught the flu while

using the smoke ball, legally binding.

NOTE : The amount of money involved may be a significant factor in considering

the intention to create legal relations, the greater the amount of money at stale

the more likely is it that the parties intended their agreement to be legally

enforceable. Further, how amicable the parties are and the degree of certainty /

formality involved is factors to be considered.


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Consideration

In English Law for an agreement to be binding there must be consideration.

That is each party mustget something in return for what is gained from the

other party. Consideration is usually described as being something which

represents either some benefit to the person making the promise (the promisor)

or some detriment to the person to whom the promise is made or both.

Consideration can be either a thing or service. A promise not supported by

consideration is known as a gratuitous promise. A promise of a gifttherefore is

not enforceable unless it is made by deed.

It must be noted that itunilateral contracts, one partys consideration would be

a promise to do something. The other partys consideration consists of actuallyperforming the act requested by the promisor. (E.g. Carlill v Carbolic Smoke Ball

Co.)

General rules concerning consideration

1. Consideration must not be pastConsideration must be given in return for the promise or act of the other party.

Something done, given or promised for another reason will not amount to a

consideration. If one party has completed performance before the other offered

consideration, then it is unlikely that the earlier performance was done in

return for that consideration.

Roscorla v Thomas in this case, the defendant sold a horse to theplaintiff after the sale was completed the defendant told the plaintiff

that the horse was sound and free from vice, which turned out to be

untrue. However, the courts held that the defendants promise was not

enforceable as it was made after the sale.

Re Mc Ardle case: here the claimant lived in a house which she didnot own, and spent a considerable amount of money on having the

house repaired. The owners did not ask her to do this. After the

claimant had done this, the owners of the house signed an agreement

to pay the claimant 488 in consideration of her having had the

repairs done. The owners did not have to pay as when the promise to

pay was made the claimant had already had the repairs done.


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This past consideration is quite harsh as illustrated in the case ofEastwood v

Kenyan { guardian couldnt recover money from the girls husband to pay off the

loan on her education, as though there was a moral obligation there was no legal

obligation}. Thus, the courts attempted to mitigate the harshness of the past

consideration rule to some extent by the doctrine ofimplied assumpsit, wherethe act of the promise was performed at the request of the promisor past

consideration becomes good consideration.

To elaborate further on the doctrine, the narrow confines on which it operates

are explained in the case ofPau on v Lau Yiu Long, according to which three

conditions must be satisfied if one relies on the doctrine.

1. Promisee must have performed the original act at the request of thepromisor

2. It must have been clearly understood / implied between the parties(promisee would be rewarded when act is performed)

3. Eventual promise of payment after the act was completed must be one thatcan be enforced.

Lampleigh v Brathwaithere the defendant was under the deathsentence, and requested the plaintiff to write to Newark to obtain a

pardon for him from King James the 1st, the claimant did so, and the

defendant promised to pay 100, it was held that the claimant could

enforce the contract as both conditions were satisfied, the promisor

had asked the promisee to act, and both parties had contemplated

that the claimant would be paid for his services.

Re Caseys Patents here the defendants promised to pay theclaimant one third of the interest on the patents owned in return forthe services done, the courts held that though the promise of

paymentwas in relation to work already done, the plaintiffs

services were always expected to be paid for and the promise

merely put this expectation into a form of a specified amount.


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2. Consideration must be sufficientThis means that what is being put forward must be something which the

courts will recognise as legally capable of constituting to consideration. The

fact that it need not be adequate indicates that courts are not interested in

whether there is match in value between what is being offered by each party.

Thomas v Thomas the promise to pay 1 per annum as rent wasclearly sufficient to support the promise of a right to live in a house.

The fact that 1 per annum was not commercial rent was irrelevant,

because the issue is not on adequacy.

The maxim that consideration must be sufficient but not adequate has resulted

in very trivial acts to constitute to consideration as demonstrated in the foll.

Cases.

Chappell & Co. v Nestle Nestle offered for sale gramophone recordsin return for 1s 6d and 3 wrappers from their chocolate bars. The HOL

held that though the wrappers themselves were of little trivial value,

and regardless of the fact that Nestle threw them away, it amounted

to a part of consideration.

3.Consideration must be of economic valueThe idea that consideration must be of economic value means that there must

be some physical value rather than just an emotional or sentimental value.

For instance in Thomas v Thomas though the consideration was only 1 it still

has some economic value unlike in the case below.

White v Bluetthere a father promised to not ask the son to repaythe money he had borrowed, so long as the son stopped boring him

with complaints. However it was held that the sons promise was not

sufficient consideration to make the fathers promise binding, as therewas no economic value.


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4. Consideration can be a promise not to sueA promise not to enforce a valid claim is a good consideration for a promise

given in return.

Alliance Bank Ltd. V Broom Here Mr Broom had an overdraft of22000 with the bank, for which he was asked to provide security. Mr

Broom promised to do so but failed to; as a result he was sued by the

bank. The courts held that the consideration for Mr Brooms promise to

provide security was the banks implied promise to not sue for a while.

Combe v Combe here the wifes claim that the promise of anallowance should be upheld as she provided consideration by not suing

for a maintenance order was rejected by the courts as the husband hadnot asked her to apply to the courts, therefore no promise not to sue.

Miles v New Zealand Alford Estate- here the courts held that there wasno promise not to sue with regard to payments being made for defective

land, as there was no evidence that the buyers ever really intended to

bring proceedings to rescind.

Performing an existing duty

Where a promisee already owes the promisor a legal duty then performing that

duty is not in itself consideration, if the promisee does nothing more than they

are obliged to do, they are suffering no detriment and the promisor is only

getting a benefit to which he/she was already entitled. Although this point is

clear, in recent years the courts have discovered consideration in the

performance of an existing duty can cause serious problems.

Existing duty is of three types;

1. Public duties2. Contractual duties to the promisor3. Contractual duties to a 3rd party


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1.Performance of an existing duty arising under general lawWhere a person is merely carrying out duties they are legally obliged to

perform then it does not amount to consideration as in the foll. Case.

Collins v GodefroyCollins was subpoenaed to appear as a witness at atrial on behalf of Godefroy. Godefroy promised to pay him for his trouble.

However, it was held that there was no consideration as Collins was under

public duty to attend and give evidence.

However if the promisee does more than he is legally obliged to do, this can

be adequate consideration to support a promise.

Glasbrook Brothers Ltd. V Glamorgan County Councilhere the policeperformed their public duty of protecting the coal mine during the strikeas at the request of the manager they provided a stronger guard than they

believed necessary for an agreed price. The courts held that they were

liable to pay the price as it was good consideration for the promise to

provide extra protection

Harris v Sheffield United Football Club Ltd. - here it was held that thepublic authority was entitled to payment for the police officers being

stationed inside the ground during matches.

Ward v Byham this case involves an agreement where the mother inreturn for a maintenance payment would have to ensure that the child

was happy and well looked after, and would be given the choice of which

parent to live with when old enough to understand. When the mother sued

for breach of contract as the father stopped paying maintenance when she

remarried, the courts upheld her claim that she had exceeded her

statutory duty by bringing up her child in a particular way in accordance

with the wishes of the father, this was therefore sufficient consideration.


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2.Performance of an existing duty imposed by contract with the promisorIn the past the performance of an existing contractual duty owed to the

promisor was not consideration as he is merely performing an obligation

which he was already bound by the contract to perform.

Stilk v Myrickhere, two seamen deserted a ship and a result the shipcaptain agreed to split the wages of these two workers among the rest of

the crew if they agreed to continue the voyage and ensured that the ship

would reach London safely. The ship captain then refused to uphold his

promise upon reaching London, and the courts held that there was no

consideration for the promise to pay as the remaining crew were under a

legal obligation to do all they could under emergency situations of the

voyage.

However performance of a contractual duty could indeed be good

consideration if the other party has a special need to have the contract

performed in a specific manner, i.e. an additional practical benefiton the

other party was conferred which would make itsufficientconsideration to

make a promise given in return binding.

Hartley v Ponosby- here the ship became so shorthanded as a result of theno. of people who deserted the ship, therefore it became dangerous to

continue the voyage. As a result, the Captain discharged the remaining crew

of their present contracts and offered them new contracts at higher wages if

they continued with their voyage. It was held that the consideration for the

promise of higher wages was good, and they said in agreeing to carry on the

plaintiff was taking on duties beyond those originally in the contract and

therefore promised to provide consideration.

Williams v Roffey Brothers Nicholls in this case Williams, a carpenterhad contracted to do work for Roffey to the value of 20000 to be

completed by a specific date. It later became apparent that there was little

prospect of this happening, therefore Roffey on their own initiative offered

to pay extra if the work was completed by the agreed date. It was held

that the promise constituted to good consideration, Williams could as a

result claim the extra payment. The court seems to have thought so since

Roffey would lose badly if William defaulted, therefore Roffey had gained

an advantage by having the work completed on time.


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Atlas Express Ltd. V Kaf. Co. Ltd. In this contrasting case, a small co.entered into an agreement with a national firm of carriers. The carriers

subsequently purported to impose higher charges than previously agreed.

Because this company was unable to find an alternative carrier andheavily dependent on the contract, it reluctantly agreed to the new terms

and then refused to pay. The courts refused to enforce the new contract

for higher charges as it lacked any fresh consideration from the

purchasers Atlas.

3.Performance of a contractual duty owed to a third partyPerformance of duty owed to a third party amounts to good consideration to

support the promise as the duty is not owed to the promisor / state, thepromisor can benefit by the due performance of the duty but he or she has no

rights to enforce that duty.

Shadwell v Shadwellhere the courts held that the nephewsperformance of marriage was good consideration for the promise to pay

an annuity because the marriage was beneficial to the uncle as being an

object of interest to a near a relative.

Scotson v Pegg here it was held that Scotsons delivery of coal (theperformance of an existing contractual duty to a third party X) was a

benefit to Pegg and was valid consideration. It could also be seen as a

detriment to Scotson, as they could have broken their contract with X and

paid damages.


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Contractual duties to pay debts

Where someone owes money and cannot pay the full amount, they will

sometimes offer to pay a smaller sum, on condition that the creditor promises to

accept it as full settlement of the debt, i.e. agrees not to sue later; suchagreements are only binding if the debtor provides some consideration for it

by adding some extra element.

Pinnel case in this landmark case, Pinnel sued Cole for 8 10s, which Cole

owed Pinnel on a bond. However, Cole had paid 5 2s 6d on 1stOctober for the

debt due on 11th November, which Cole had asked Pinnel to accept as full

payment of the debt owed. The courts held that Pinnel only won the case on a

technicality if not for that, the payment of a lesser sum on a date earlier than the

due date amounted to Cole providing fresh consideration for the promise thatPinnel wont sue for the full amount.

A lesser sum of money cantbe consideration for a greater sum of money owed.

However a change in time / mode of payment / giving something else in

addition to the part payment can amount to fresh consideration, i.e. if the debtor

pays early or in a more convenient place, or gives something else as well as the

part payment, the creditor is receiving some benefit and the debtor some

detriment and this can amount to fresh consideration for the creditors new

promise to accept the part payment and not insist on getting the whole amount.

Foakes v Beerhere Mrs. Beer was owed money by Dr. Foakes on ajudgement debt for which she agreed to accept part payment of 500

immediately and the rest in instalments. Mrs. Beer however brought action

for the interest owed, and it was held by the HOL that Dr. Foakes was liable

to pay the interest that generally accrues on judgement debts, as part

payment of the debt did not itself constitute to consideration for Mrs. Beers

promise to forgo the balance.

Re Selectmove Ltdhere the Inland Revenue tried to wind up Selectmovefor non-payment of debts, although it had agreed to accept payments by

instalments, the Revenue claimed that it could not be held to that agreement

because Selectmove had offered no consideration. The Court of Appeal

supported the Revenue that is they applied the ruling in Foakes v Beer. The

court went on to say thatpractical benefit being provided does not apply

to cases regarding the part payment of debt.


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Exceptions to the rule in the Pinnels case:

1. If the creditor agrees to take anything else instead of, or as well as, a lessersum of money then the debt is extinguished.

2.

If the creditor asks for a lesser sum to be paid before the debt is actuallydue then the debtors paying the lesser sum early can amount to good

consideration.

3. If the creditor requests that a lesser sum be paid in a different place,perhaps a different country, and then the debtors agreeing to this could

possibly amount to good consideration.

4. If there is a dispute as to the amount owed, and the creditor agrees tosettle for less than he thinks he is owed, this agreement will be binding

(Cooper v Parker)

5. Payment by a third party Hirachand Punamchand v Temple6. Composition agreements7. Unliquidated claims (reasonable remuneration)8. Promissory estoppel.

Promissory Estoppel

This is an exception to the rule in the Pinnel case, this doctrine has developed

from equity to reduce the harshness of the Pinnel rule, therefore also often

referred to as equitable estoppel.

Hughes v Metropolitan Railway Co. in this case the lease negotiationstaking place was an implied promise that the lease would not be forfeited of

repairs were not done.

Central London Trust Ltd. V High Trees House Ltd. here the Land Lordsright to rent was suspended for the World War Period, but once the war was

over or the flats were full whatever first happened, the landlord could

assume his rights to future rent, but he cannot claim for the amount in

arrears.

As established in the High Trees case, a contracting party who promises not to

enforce a contractual rightwill not be able to enforce that right later, if it

would be inequitable to do so, and the promise has been relied upon by the

other party.


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Conditions to be fulfilled to apply promissory estoppel:

1. A pre-existing contractual relationship between the claimant anddefendant

2. The claimant must have made an unambiguous promise not to insist on hisstrict legal rights

China Pacific SA v Food Corp India here, it was held that therewas no unambiguous promise therefore the claim was rejected.

3. The defendant must have acted in reliance on the promise (i.e. conductwas influenced)

Tool Metal Manufacturing case High Trees case here the tenant didnt sell the leasehold interest

acting on reliance of the landlords promise

Hughes case relying on the landlords promise to not enforce theforfeiture

4. It would be inequitable for the claimant to go back on what he haspromised, and insist on his strict legal rights.

D&C Builders v Rees here there was no promissory estoppel as thedef. had misled about their true financial position and exploited theclaimants financial position.

Re Selectmove Ltd. here the payments were not made to the InlandRevenue even by contract therefore there was no estoppel

Further points on promissory estoppel

Promissory estoppel can only be used to prevent rights from being exercised for

a period of time, it cannot destroy them forever.

Tool Metal Manufacturing Co Ltd. v Tungsten Electric Co Ltd. in thiscase patent owners could revive their legal entitlement to receive

compensation payments after that period on giving reasonable notice to the

other party.

Promissory estoppel cannot be used to create entirely new rights or extend the

scope of existing ones, only to prevent the enforcement of rights already held; it

has been described as a shield and not a sword.

Combe v Combe here there was no contract as Mrs. Combe couldntenforce the payments her husband promised, though she acted in reliance.


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Privity of Contract

The doctrine of Privity holds that a contract is private between the parties who

made it. Anyone who did not make the contract cannot sue on the contract or be

sued. The Contracts Right of Third Parties Act 1999 has created an exception to

the privity rule.

Privity can be applied in the foll. Case according to which a third party has no

rights under a contract even if the contract was made for his benefit.

Tweddle v Atkinson Here, a couple was getting married. The father of thebride entered an agreement with the father of the groom that they would

each pay the couple a sum of money. The father of the bride died without

having paid. The father of the son also died so was unable to sue on the

agreement. The groom made a claim against the executor of the will. The

claim failed as the groom was not party to the agreement and the

consideration did not move from him. Therefore he was not entitled to

enforce the contract.

However this privity rule has changed when the the Contracts Right of Third

Parties Act 1999 came into force. Now the claimant can sue on a contract he

did not make if:

The contractexpressly provides the claimant may do so

the contract purports to confer a benefiton the claimant (unless A&B can

show that they did not intend to that to be enforceable by the claimant)


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Capacity

There are some categories of people whose power to make contracts is limited by

law, known as incapacity. The main categories are minors, and people

considered incapable of contracting due to mental disorders or drunkenness.

Minors

Adults have full contractual capacity, but special rules apply to minors (persons

under the age of 18), contracts made by minors may either be valid, voidable or

void, depending on the type of contract made.

Valid valid and binding on minors

Voidable binding on minor until he decides to reject itVoid minors are not bound by contracts to buy unnecessary goods and

services, contracts to borrow money.

Valid contracts

The only contracts usually binding on a minor are contracts for the supply of

necessaries. Necessaries does not only include the supply of necessary goods

and services but also contracts of service for the minors benefit.

Contracts for necessary goods and services

Under the Sale of Goods Act, s. 3(2), necessaries means goods suitable to the

condition in life of the minor or other person concerned and to his actual

requirements at the time of sale and delivery. However necessaries for a rich

person may not really be for a poor person (for example an iPhone maybe a

necessity for some but not others who cannot afford them), thus the courts will

consider the social status and the background and status of the individual.

Nash v Inman here an undergraduate at Cambridge had ordered 11 waistcoats,the COA held that the goods were suitable to his condition in life but were not

suitable to his actual requirements as his father gave uncontradicted evidence that

he had a sufficient wardrobe.

Chappell v Cooperin this case, a minor widow had to pay for the funeral services

of her husband which were considered a necessity, as the funeral was for her

private benefit and she had an obvious obligation to bury her dead husband.


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Voidable contracts

Apart from contracts for necessaries which bind the minor, the general rule at

common law is that a minors contracts are voidable, i.e. these contracts do not

bind the minor but bind the other party and can be terminated by the minor atany time before they turn 18 or a reasonable period of time afterwards.

This is usually concerned with contracts which impose a continuing liability on

a minor, which are voidable by the minor.

E.G.

Contracts for the lease of property Purchase of shares Business partnership

With regard to voidable contracts a minor would be released from any future

liabilities under the contract, but would still be bound by liabilities already

incurred.

Corpe v Overton in this case the minor could get a refund of the 100 he paid to

enter into the partnership agreement as there was a total failure of consideration.

Steinberg v Scala Ltdin this case a minor, the plaintiff purchased shares in a co.

and paid up the full amount of the cost though it was not called up, the court

rejected her wish to get the 250 back as there had been a consideration of the

shares.

Void contracts

Trading contracts are not binding even if beneficial to the minor.

Cowern v Nieldhere the courts held that the minor was not liable to pay the

price of the consignment that he failed to deliver


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Mental incapacity

This category covers people suffering from mental disability which can be a

mental illness or handicap and those who are drunk when the contract is made.

In general, contracts made with someone in either state will be valid unless atthe time when the contract is made the person is incapable of

understanding the nature of the transaction and the other party knows this.

Then the contract would be voidable, and the party suffering from mental

disability or drunkenness can choose whether or not to terminate the contract.

Where one party is unaware of the incapacity, the courts will ignore the

incapacity.

Hart v Connorhere the land sale was valid as the buyer didnt realisethat the seller had a mental incapacity

Further, poor understanding of the language in which the contract was made or

illiteracy does not render someone incapable of contracting.

Barclays Bank v Schwartzhere the Romanian signed contracts makinghim liable for the 500000 debts, which he was held liable for, as poor

understanding of the language doesnt mean incapable of making a

contract.

intention to create legal relations, consideration, privty and capacity

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