Capacity and Intention to Create Legal Relations Flashcards
What is an intention to create legal relations?
Is an intention to enter into an agreement that has legal ramifications. It is one of the necessary requirements of a binding contract.
The test of intention is objective, by which we mean that the intention of the parties is to be determined more by what the actions of the parties in the particular circumstances suggest, rather than by taking evidence from the parties of what was actually in their minds.
It looks at the situation in which they were placed and asks itself: would reasonable people regard the agreement as intended to be binding? The courts seek to give effect to the intentions of the parties, whether expressed or presumed. Although it can be difficult at times to make such distinctions it seems logical, for present purposes, to make a broad distinction between agreements of the commercial kind and agreements of the domestic kind.
What is the presumption for commercial agreements?
The ordinary presumption is that in a commercial agreement, the parties intend that it should be legally binding. The courts will readily imply this. Commercial agreements are not limited to
agreements between two businesses. Commercial agreements would include agreements between individuals and businesses and agreements between individuals, eg if you bought a car through
an online advert. If a party to a commercial agreement wishes to assert that legal relations were not intended when the agreement was entered, the onus is on them to rebut the presumption and the burden of doing so is a heavy one.
It is open to the parties to include wording within the agreement that indicates that the parties do not intend to create legal relations. However, clear words will need to be used, as the language is likely to come under scrutiny, and ambiguous wording is unlikely to rebut the presumption that
parties to commercial/business agreements intend those agreements to be binding.
In the case of advertisements, as you will be aware, alongside an intention to create legal relations, offer and acceptance and consideration are needed to form a binding contract. The first two of these requirements (an intention to create legal relations, and an offer and
acceptance) can be very closely linked in the case of adverts.
In Carlill v Carbolic Smoke Ball Co Ltd (1893), the company argued that the advertisement was not binding because it was simply ‘spin’ or a ‘mere puff’. The court, however, rejected this line of defence, holding that the assurance that the company had deposited £1,000 in a named bank was a demonstration of its intention to be bound and would be understood by a reasonable person to have that effect. The same reason justified holding that the advert was a unilateral offer to contract, not simply an invitation to treat. In some circumstances, it is difficult to ascertain whether a particular promise is intended to have legal effect. In Esso Petroleum Co. v Commissioners of Customs and Excise [1976] 1 WLR 1, specially produced ‘World Cup coins’ were distributed by Esso to their dealers, who offered their customers a free coin with the purchase of four gallons of petrol. The House of Lords were divided
in their opinion as to whether the offer of the free coin could amount to a ‘sale’ and, if so, whether there was any contract with regard to the coins. One argument put forward was that the coins could only be for sale if there was an intention to create legal relations in respect of the transfer of
the coins between garage proprietors and motorists. The majority felt that there was such an intention, relying on the business context and the large commercial advantage Esso expected to derive from the promotion by attracting extra customers. This is not a completely satisfactory
analysis as, although it could justify attributing an intention to create legal relations to Esso, it could not be applied equally to the other contracting parties. Conversely, the minority found no
intention to create legal relations relying on the language used in the offer, the trivial value of the coins and the unlikelihood that any motorist denied a coin would believe that a legal remedy was available to rectify the default.
The expression ‘subject to contract’ creates a strong inference that the parties do not intend to be bound until the formal execution of a contract. An agreement ‘subject to contract’, prima facie, is
not binding. In a sale of land, it is usual to express tentative preliminary agreement to be ‘subject to contract’, so as to give the parties an opportunity to reflect/seek legal or other advice before entering a binding contract. The expression ‘subject to contract’ has received judicial recognition
for this purpose.
What is the presumption for social and domestic agreements?
In cases of social, family or other domestic agreements, the usual presumption is that there is no intention to create legal relations. It is common sense that these types of agreements (eg in relation to family agreements as to the allocation of domestic chores or social arrangements to
meet friends for a drink or a meal) do not amount to legally enforceable agreements. Such a conclusion is derived from the fact that none of the parties would reasonably envisage the right to sue the other for failure to honour the commitment. An example from the case law includes
agreements made between spouses. If the parties reach the agreement before any breakdown in the relationship occurs, the courts have shown an unwillingness to find an intention to create legal relations (Balfour v Balfour [1919] 2 KB 571).
However, again the presumption can be rebutted and certain social and domestic agreements may be legally enforceable. The question of whether the presumption is rebutted will be resolved by examining the circumstances of each case and the language used by the parties. One
situation where the courts have shown a willingness to rebut the usual presumption is in relation to agreements made between spouses who were in the process of separating or are separated when the agreement was reached (Merritt v Merritt [1970] 1 WLR 1211).
Similar problems of intention can arise between other family members. Jones v Padavatton [1969] 1 WLR 328 shows the difficulty of determining some such cases. The claimant and defendant were
mother and daughter respectively. There was an agreement between the parties to the effect that if the daughter gave up her very satisfactory pensionable job in the USA and came to London to read for the Bar with the intention of practising law in Trinidad (where the mother lived), the
mother would pay an allowance of 200 dollars a month to maintain the daughter and her small son while in England.
Can minors have capacity?
Generally, a person is not bound by a contract entered into under the age of 18 even if the other party contracting does not know of this fact or the minor has lied about their age.
There are two main exceptions, relating to ‘necessaries’ and to contracts of employment, apprenticeship or education.
Firstly, a minor is bound by a contract to supply necessaries to them if the contract is for their benefit. A minor must pay a ‘reasonable price’ for these rather than the actual cost of the ‘necessaries’ supplied.
Under the Sale of Goods Act 1979 s 3(3), ‘necessaries’ means goods suitable to the condition in life of the minor or other person concerned and to their actual requirements at the time of the sale
and delivery. So, in Nash v Inman (1908) 2 KB 1, 11 waistcoats supplied to a minor who was an undergraduate at Cambridge University at the time were suitable according to the minor’s station
in life (!) but not necessary as he already had sufficient clothing. Accordingly, the contract was not enforceable.
Secondly, a minor is also bound by a contract of employment, apprenticeship or education (or analogous contract), but only if it is for their benefit. So, in Aylesbury Football Club v Watford Association Football Club (QB 12 June 2000) a young footballer’s contract with the club was not beneficial and could not be enforced because the player received no extra training or experience, the terms were onerous for him, they restricted his freedom to pursue a football career and the payment of wages depended on the will of his employer.
Unless one of the exceptions applies, the contract cannot be enforced against the minor, although the minor can enforce it against the other party. By way of exception, there are a small number of
contracts of exceptional types which are enforceable against the minor unless the minor specifically repudiates them.
If a minor ratifies a contract once they reach the age of 18, then the contract will be binding on them.
What constitutes mental incapacity?
A person lacks capacity under s 2 of The Mental Capacity Act 2005 if ‘he is unable to make a decision for himself in relation to the matter’ at the time the contract is made, whether the impairment is permanent or temporary. It is important to understand that capacity is not something which a person has or has not for all purposes – whether or not someone has capacity
is a question to be asked in relation to a particular decision. For example, someone with a brain injury might have the capacity to decide where they prefer to live, but not have the capacity to manage and invest a large sum of money to provide for future expenses.
Under s 3(1) the impairment is described in terms of being unable to:
Figure 4.2: S 3(1) of the Mental Capacity Act 2005 According to s 3(4) the relevant information relates to the reasonably foreseeable consequences of:
(a) Deciding one way or another; or
(b) Failing to make a decision.
The Act also gives the Court of Protection the power to make declarations as to a person’s capacity and ability to contract in specified situations (s 15).
The statutory definition of capacity set out above is expressed (in the Act) to be for the purposes of the Act only, but it is in practical terms very similar/the same as the approach to be taken when determining capacity for the purposes of contract law issues.
What is the effect of entering into a contract with a person lacking capacity?
Under s 7, a person without capacity still remains liable to pay a reasonable price for
‘necessaries’. These are defined as goods or services ‘suitable to a person’s condition of life and to his actual requirements at the time when the goods or services are supplied’ (s 7(2)).
In any other case of incapacity, the position is that the contract is binding unless the person claiming incapacity can establish, first, that they did not understand what they were doing and, secondly, that the other party knew that to be the case: Imperial Loan Co v Stone [1892] 1 QB 599.
If this can be established, the contract will be voidable.
Similar rules apply to contracts entered into by drunken persons. The individual who becomes so intoxicated that they do not understand what they are doing will have to pay a reasonable price for necessaries but will not be bound by any other contract they make: Matthews v Baxter (1873)
LR 8 Ex 132. This position should logically extend to those incapacitated by other intoxicating substances.
