The Need for Intention to Create Legal Relations in Contract Law

Under UK law, an agreement supported by consideration is not enough to create a legally binding contract, the parties must also have an intention to create legal relations. Often, the intention to create legal relations is expressly stated by the contracting parties. In other situations, the law will readily imply the intention, because of the nature of the commercial dealings between the parties.

The presence of consideration is often indicative of the intention to create legal relations, though there are situations where the presumption of the intention can be rebutted, thus determining that there is no contract and no legal liability.

In many domestic agreements, for example those made between husbands and wives and parents and children, there is no intention to create legal relations and no intention that the agreement should be subject to litigation. Familial relationships do not preclude the formation of a binding contract, though to create contractual relations, there must be a clear intention on either party to be bound.

While there are conflicting legal authorities on whether specific facts involving familial relations result in binding and enforceable agreements, it seems settled that in domestic agreements there is a rebuttable presumption that the parties do not have intention to create legal relations.

In commercial agreements, there is a rebuttable presumption that parties intend to create legal relations and conclude a contract. In determining whether parties have created legal relations, courts will look at the intentions of the parties. If in the course of business transactions, the parties clearly and expressly make an agreement stating that it ought not be binding in law, then a court will uphold those wishes. However, if a court is of the view that there is any ambiguity of intention, or that such intention is unilateral, such contract will be voided. The burden of rebutting the presumption of legal relations in commercial agreements lies on the party seeking to deny the contract. In terms of commercial contracts involving large sums of money, case law has determined that it is a heavy burden.

It has been decided in the UK, that so called “Letters of Comfort”, which express a parties intention on business dealings can amount to an intention to create legal relations and so bind a party in contract, but that it will depend on the nature of the specific wording used.

Agreements between companies and trade unions have also raised the question of the intention to create legal relations. Collective agreements are generally not intended to be legally binding. It has been held that specific provisions of collective agreements can be incorporated into individual contracts of employment and thus legally binding.

The intention to create legal relations is an essential feature of contract law in the UK, and the existence of the intention will depend on the nature and form of the contract and the contracting parties.