Contract Law - Intention, Capacity & Privity - Week 5

Question 1

Intention to create legal relations

Answer 1

Parties must intend to be bound by the legal obligations

Difficulty is that it isn’t always stated which may lead to disagreements

What happens if there’s a dispute - how is it resolved

What role do presumptions play?

Commercial v Domestic/Social setting

Question 2

Agreement to be legally binding

Answer 2

For an agreement to be legally binding, the parties must intend the agreement should impose legal rights and obligations upon them

Parties don’t often state they intend the agreement to have legal force and sometimes the parties may disagree

One may have thought the agreement was legally enforceable, whereas the other party might have intended the opposite

Where there’s a dispute, a court will decide if the parties intended to create a legal relationship

When assessing the intention of the parties, the courts will seek to establish if the agreement was made in a commercial or domestic/social setting.

This is because each of these make a presumption about the intention of the parties

If the parties enter into a domestic or social agreement then there’s a presumption that they don’t intend to be legally bound

If the parties enter into a business agreement, there’s a presumption that they do intend to be legally bound

These are objective presumptions so they’re capable of being rebutted

Question 3

Domestic and Social Agreements

Answer 3

This presumption assumes that family members and friends don’t intend to create legally enforceable agreements

They assume these agreements are social and legal consequences aren’t anticipated in the event of a breach

For example, if you agree to meet your friend to go to the cinema at 7pm and they don’t turn up, it’s unlikely you’ll sue them for breach

Question 4

Wilson and Another v Burnett (2007)

Answer 4

An agreement to share bingo winnings was held not to be legally enforceable as although they had agreed at the beginning of the veening to share any prize money over £10.

It was just a discussion or chat → no clear agreement and no intention to create legal relations

Question 5

Balfour v Balfour (1919)

Answer 5

A husband, working abroad promised to pay his wife a sum of money while he was away

The husband didn’t pay and the wife sued

They were married at the time of the agreement

It was held to be an informal arrangement and not legally enforceable

Question 6

Merritt v Merritt (1970)

Answer 6

Another case concerning a money payment from one party to another was held to be enforceable as the couple were separated and they intended the agreement to have legal consequences

Question 7

Simpkins v Pays (1955)

Answer 7

An arrangement between friends to enter a weekly competition was held to be legally binding as they each took turns to pay the entry costs and they agreed to divide any winnings equally.

It was a joint enterprise into which each party contributed financially

Question 8

Business Agreement

Answer 8

A presumption exists that the parties intend to form a legal agreement so parties must prove a lack of intention

Question 9

Rose & Frank Co v Crompton & Bros (1925)

Answer 9

The defendant appointed the claimant as sole distributor of his paper tissues in the USA

The agreement stated that it wasn’t a formal legal agreement → not legally binding and that it shouldn’t be subject to legal jurisdiction in the courts

The defendant ended the agreement without notice and refused to accept orders made under the terms of the agreement

It was held that there was no binding legally enforceable contract between the parties

Question 10

Capacity to Contract

Answer 10

Not everyone has the capacity to enter into a contract

Parties that lack contractual capacity include those who are minors, intoxicated with drugs or alcohol , have mental incapacity and corporations

Question 11

Minors

Answer 11

Minor = person under 18

The law prevents minors entering into contracts for their own protection
Prevents them from entering into unfavourable contracts which aren’t for their benefit

Theres two exceptions:
1) necessaries
2) education

Question 12

Necessaries

Answer 12

A contract for necessaries is binding on the minor, provided it doesn’t contain detrimental terms

Necessaries in law are more than just basic essentials and include goods and services regarded as appropriate to the minor’s social standing and required by the minor at the time the contracts made

Definition of necessary goods is now in the Sale of Goods Act 1979, which defines necessaries as ‘goods suitable to the condition in the life of the minor concerned and his actual requirements at the time of the sale and delivery

Question 13

Nash v Inman (1908)

Answer 13

A minor who was a cambridge student was supplied with clothes including 11 fancy waistcoats from a Savile Row tailor
When he failed to pay for them, the tailor sued

It was held that the clothes were suitable for a minor in his position but he already had a sufficient wardrobe of clothes and the waistcoats weren’t needed so the contract wasn’t binding

Question 14

Education

Answer 14

A contract for training, education, apprenticeship or employment is binding on a minor provided it’s overall for his benefit

A court will examine all the terms of the contract and even if some terms are to the detriment of the minor, provided most terms are in his favour, it’ll be binding on him

Question 15

Doyle v White City Stadium (1935)

Answer 15

One of the clauses in an agreement between a minor (professional boxer) and the British Boxing Board of Control stated that the minor would lose his payment for a fight if disqualified

It was held that although the clause allowed for non payment for a fight which could be considered detrimental, the agreement was binding on the minor as it encouraged clean fighting and protected young inexperienced boxers

Question 16

Intoxication

Answer 16

Anyone who makes a contract whilst under the influence of alcohol or drugs are presumed to know the nature of the transaction he’s entering into

The other party realises this and the contract will be unenforceable, unless the contract is for necessary goods that have been sold and delivered

Question 17

Mental Disorder

Answer 17

The affairs of a person lacking mental capacity may be under the control of the court under the provisions set out in the Mental Capacity Act 2005

In these cases the court takes control of a person’s power to make contracts and any contracts purported to be made with the person personally aren’t valid

A contract made with a person who isn’t under he control of the court but has some form of mental incapacity is valid, unless it can be shown that at the time of making the contract, the mentally disordered person didn’t know the nature of the transaction and the other party knew or should have known of the mental incapacity

Question 18

Corporations

Answer 18

A corporation is a legal entity with its own legal personality

Companies have constitutions and capacity to act may be restricted by their constitution

A company or other body acting outside its powers is said to be acting ‘ultra vires’ (beyond the powers)

If a body acts ultra vires, then its actions may be invalid

Question 19

Privity

Answer 19

Privity of contract is the common law principle that states only parties to a contract can sue on that contract → only those who have provided consideration (offeree and offeror) may sue in the event of a dispute (something going wrong, goods were promised and not delivered)

Question 20

Tweddle v Atkinson (1861)

Answer 20

William Tweddle and Miss Guy were engaged.

Both fathers agreed to give the couple a sum of money when the marriage took place but Mr Guy died before making his payment
It was held that William wasn’t entitled to the money

He was a beneficiary of a promise but he hadn’t provided any consideration

There was no contract between William and Mr Guy so no privity of contract

Question 21

Exceptions - Agency

Answer 21

The privity rule can cause injustice so several exceptions have developed allowing others who aren’t a party to the original contract to benefit from it

Agency - where an agent acts on behalf of their principal, the principal is treated as though they’d made the contract themselves

For example, A creates a contract on behalf of B, then B is seen as a party to the contract

Question 22

Exception - Third Party Insurance

Answer 22

If an insurance policy has been made for another’s benefit, they can claim even if they didn’t pay the premiums

For example, under the Road Traffic Act 1988 - motorists are required to have insurance against damage and injury to other road users

In certain circumstances, an injured road user can claim compensation directly from the other party’s insurance company

Question 23

Exception - Trusts

Answer 23

A trustee will hold property on behalf of another

A trust is where property is passed by one party to a second party (trustee), stating that it’s to be held by the trustee for the benefit of third parties (beneficiaries)

If the trustee doesn’t comply with conditions set out in the trust then the beneficiary can apply to the court to enforce the terms of the trust

Question 24

Exception - Contracts for the Benefit of a Group

Answer 24

Where a contract is made in one person’s name but the contract benefits a group

E.g. Jackson v Horizon Holidays (1975)
Mr Jackson booked a holiday for his family

Holiday was so poor that Mr Jackson decided to sue

Mr Jackson could sue as the party to the contract, but damages were awarded to the whole family → only the person who made the contract is entitled to sue on it

However that person will be able to sue for his own losses and those of the group