Formation III: Certainty and Intention to create a legal relation Flashcards
Understand certainty and intention to create legal relation in relation to Contract Law in NZ
Goals
The requirement of intention to create a legal relation
· Understanding the principle
· The requirement of certainty (vagueness, incompleteness)
Additional Requirement → intention to be bound
Intention to create a legal relationship → understanding the principle
More likely to found an intention to be bound → and understanding the principle.
Certainty → for contract to be formed has to be certain enough → there are cases where it is found not to be certain enough
Jones v Padavatton [1969] 1 WLR 328
The main disputes
· No contract if there is no intention to be bound.
· The presumption in the case of domestic agreements
Case between a mother and daughter → Jones v Padavatton. limit case → case that stands for an old rule.
Rose and Frank v Crompton.
Concorde Enterprises v Anthony Motors.
JONES V PADAVATTON:
Mother and daughter → Jones asked daughter to give up job yo study in England → going to study law → in exchange received compensation for maintenance → arrangement changes
First agreement → Mother supports her for $200 a month while studying law in England → actually west indian dollars → not US dollars.
Then → mother buys house in london and says get money from tenants for her upkeep.
Parties arguments →
WHAT ARE THE MAIN POINTS IN DISPUTE? (Jones v Padavatton)
The first disagreement → Was there intention to create legal arrangement?
There is a claim → that the first agreement amounts to contract → that Mother is bound to support her for $200 a month → and this was valid between the parties.
Second → Were the terms certain enough? → Issue of certainty because it was too vague → not clear what the agreement involved.
If not intending to make a legally binding agreement → make agreements → when you just make arrangements you are more relaxed about the terms, (you come and i will support you) → these two claims come out together.
Does it make make sense to think that this contract if it was concluded → is it still valid till 1968? → what are the terms of the initial agreement (duration).
The daughter went to London → She studies all papers but does not pass one of them → she is studying towards the bar → and keeps expecting Mother to pay.
Would a reasonable objective be seen as being terminated?
ENGLISH → NO CONTRACT IF N INTENTION TO BE BOUND
Objective test → not if they intended subjectively in their heads → external indication
WAS THERE INTENTION TO BE BOUND IN THIS CASE? (Padavatton)
SALMON LJ → when arrangements made between close relations (mother and daughter), for an allowance for ex. → there is a presumption against an intention to create any legal relationship → this is not a presumption of law → but of fact.
When we have a presumption → our first reading of the facts is that there is no intention to create legal relations → when you make agreements with parents or siblings, or children → our normal way of understanding this → IS AS NOT EMBODYING CREATING LEGAL RELATIONS. → Balfour v balfour
o Cf. Balfour v Balfour [1919] 2 KB 571
Husband and Wife → agrees that he would support her for a certain sum of money after they leave each other → on an annual basis → Court said this is not a contract.
Presumption exists but not rebuttable. → for example criminal → beyond reasonable doubt → Contract → balance
Party who has to show burden of proof → is party bringing forward the facts.
A PRESUMPTION AGAINST INTENTION IN DOMESTIC AGREEMENTS
· Factors to rebut the presumption?
· Salmon LJ on the first agreement
· Salmon LJ on the second agreement
· Analysis: Why should domestic relationships be treated differently?
SALMON J’s APPLICATION
First agreement → contract or not?
What were special features here? → Court sees special facts that distinguish this from Balfour and Balfour → the daughter is not 16 she is 34 and has a son → Has her own interests → daughter reluctant → gives up a lucrative position in reliance of mothers support
Not regular familiar agreement
The presumption is rebutted ( of familial agreements not being a contract) →
A REBUTTABLE PRESUMPTION OF FACT
SECOND AGREEMENT?
Intention to create legal relations → certainty
Evidence shows → that all arrangements were very vague → vague is when things are open to different possible interpretations → contracts can be uncertain due to vagueness → words mean many different things → very vague.
Evidence shows that all arrangements were vague and potentially without any contractual intent → when they talked about it it was in vague words → so lack of intention to be legally binding
Served many purposes → no evidence to suggest that mother intended more than $200 west indian dollars.
(Link between certainty and intention to be bound)
Familial relationships, → rebuttable presumption in close domestic relationships → dont intend to create legal relationship → BUT THIS IS REBUTTABLE → in the first case it was rebutted. → Legal extraction from Balfour and Jones.
WHY SHOULD DOMESTIC RELATIONSHIPS BE TREATED DIFFERENTLY?
People make promises in business and other situations.
In family → it is usually based on family trust and ties.
Corrective Justice → we have contracts because people choose to live a private life → pursue their own ends their own projects → ordinary when we are in the family → that is not what we are doing → we do not choose to create legal relationships which would allow courts to come in and arbitrate disputes in the family.
If we had the opposite rule →
The state → the public → would come into our family lives → it would radically change our family relationships → this place that was private and passionate and loving → will be as business people and as strangers are.
But that does not mean there should not be contracts between family members → Jones → can make contracts with family members →
Have to be clear –. That they want to treat each other like legal subjects → not like brothers sisters, mothers etc.
ECONOMIC EFFICIENCY:
Parties to a contract → are in it for themselves → they are both taking care of their own interests → has to be good for both of them and generate surplus → but that is not the case → when people are bound.
At times we want to create efficiency between the family → We want to allow people to harness this tool → Contracts.
Only if they really want to. → in terms of familial relationships.
Rose and Frank Co v J R Crompton & Bros Ltd [1923] 2 KB 261
The clause: “This arrangement is not entered into, nor is this memorandum written, as a formal or legal agreement, and shall not be subject to legal jurisdiction in the Law Courts either of the United States or England, but it is only a definite expression and record of the purpose and intention of the three parties concerned to which they each honourably pledge themselves with the fullest confidence, based on past business with each other, that it will be carried through by each of the three parties with mutual loyalty and friendly co-operation.”
Clause that states I AM NOT A CONTRACT → do not attach legal consequences to me.
Possible for parties →
· Scrutton LJ: different presumptions for different factual circumstances.
A presumption of intention to be bound in agreements on business matters
Scrutton LJ → the particular clause in question shows a clear intention that the rest of the agreement should not affect the legal relations.
A REBUTTABLE PRESUMPTION OF INTENTION TO BE BOUND IN AGREEMENTS ON BUSINESS MATTERS.·
WHY WOULD SOME COMMERCIAL PARTIES NOT WANT THEIR AGREEMENTS TO BE BINDING?
Scrutton LJ: intention not to be bound can displace the presumption for business people.
· Analysis: Why would some commercial parties NOT want their agreements to be binding?
Concorde Enterprises Ltd v Anthony Motors (Hutt) Ltd [1981] 2 NZLR 385
Complex facts: Contract of manufacturing and supply by Concord to Anthony.
· Timeline
· Cooke J citing Richmond J in Carruthers v Whitaker [1975] 2 NZLR 667, 671: The natural inference in the case of sale of land. + Applied to commercial contracts.
· Analysis: Why presume that unsigned contracts are not binding?
W N Hillas and Co Ltd v Arcos Ltd (1932) 38 Com Cas 23 (HL)
as and Co Ltd v Arcos Ltd (1932) 38 Com Cas 23 (HL)
· Clause 9: “Buyers shall also have the option of entering into a Contract with sellers for the purchase of 100,000 Stds. for delivery during 1931. Such contract to stipulate that whatever the conditions are, buyers shall obtain the goods on conditions and at prices which show to them a reduction of 5 per cent. on the f.o.b. value of the official price list at any time ruling during 1931. Such option to be declared before the 1st January, 1931.”
Writing and signature are not elements of formation → generally → when parties accept that they will be bound only due to signature then it is necessary.
Doctrine of certainty → How we should approach certainty (Hillas) → did the parties really intend to make the contract between them? → even if they do it in crude and summary fashion → COURT MUST DO BEST TO GIVE EFFECT TO THIS INTENTION TO BE BOUND. → based on standards, definitions, and matters that were considered by parties, mechanisms and standards that party took.
· Was this only an agreement to agree?
o Wright L: “In my judgment the parties here did intend to enter into, and did enter into, a complete and binding agreement, not dependent on any future agreement for its validity.”
· Certainty as a condition to enforcement.
· The point of the case
o Wright L: “Business men often record the most important agreements in crude and summary fashion: modes of expression sufficient and clear to them in the course of their business may appear to those unfamiliar with the business far from complete or precise. It is accordingly the duty of the Court to construe such documents fairly and broadly, without being too astute or subtle in finding defects, but, on the contrary, the Court should seek to apply the old maxim of English law, [words are to be understood so that the subject matter is preserved]. That maxim, however, does not mean that the Court is to make a contract for the parties, or to go outside the words they have used, except in so far as there are appropriate implications of law, as for instance, the implication of what is just and reasonable to be ascertained by the Court as matter of machinery where the contractual intention is clear but the contract is silent on some detail.”
· Application
o “I think that upon their true construction the words ‘of fair specification over the season, 1930,’ used in connection with the 22,000 standards, mean that the 22,000 standards are to be satisfied in goods distributed over kinds, qualities and sizes in the fair proportions having regard to the output of the season 1930, and the classifications of that output in respect of kinds, qualities and sizes. That is something which if the parties fail to agree can be ascertained just as much as the fair value of a property.” (Tomlin L)
o “In practice, under such a description, the parties will work out the necessary adjustments by a process of give and take in order to arrive at an equitable or reasonable apportionment … ; but, if they fail to do so, the law can be invoked to determine what is reasonable in the way of specification, and thus the machinery is always available to give the necessary certainty.” (Wright L)
o “It is, however, said that in the present case the contract quantity is too large, and the range of variety in descriptions, qualities, and sizes, is too complicated to admit of this being done. But I see no reason in principle to think such an operation is beyond the powers of an expert tribunal, or of a judge of fact assisted by expert witnesses. I cannot find in the Record any evidence to justify this contention of the Respondents even if such evidence be at all competent.” (Wright L)
Wellington City Council v Body Corporate 51702 (Wellington) [2002] 3 NZLR 486 (CA)
Case stands for the proposition that there are limits to the extent that which courts will go to fill a vague contract → WHERE DOCTRINE OF CERTAINTY IS DEPLOYED.
Clause → Council officers will negotiate in good faith → sales of councils leasehold interests to existing lessess at not less than the current market value of those interests
Accepted by one of the lessees. → CONTRACT OF PROCESS → negotiating in good faith towards that sale.
· A process contract to negotiate in good faith.
· Council’s letter: “Council officers will negotiate, in good faith, sales of Council’s leasehold interests to existing lessees at not less than the current market value of those interests.”
Are these words in contract enough to be enforceable in a Court of law.
Duty of good faith exists sometimes in special contracts → special duties of good faith.
Duties of good faith require → in negotiation and in the performance of contract (in most of the world) → but this DOES NOT EXIST IN NZ OR AUS, OR UK.
What does it mean? → The judges from the NZ tradition → said we have no idea what this means → because it is civil law.
· Note discussion of case law in paras. [10]-[30].
TIPPING J:
Can parties agree now → to the terms of the contract later? → usually cant → Cannot agree now to agree in the future
“The enforceability of a process contract derives from the certainty of its terms rather than those of the substantive contract which the process contract envisages. → AT 26
Cannot agree to agree on the future on terms you haven’t finalised yet → would lack certainty.
Blank check to put anything they want.
TIPPING → Essence is agreement → have to have reached consensus on all essential terms → all essential terms → DOCTRINE OF CERTAINTY → have to agree on the essential terms of contract for their to be a contract → if not → then contract is not there.
THE ESSENTIAL TERMS OF THE CONTRACT MUST BE CERTAIN ENOUGH.
OR AT LEAST A MECHANISM OR A STANDARD THAT WOULD ALLOW THEIR DETERMINATION.
If you don’t have agreement on a mechanism or standard then you don’t have a contract.
Price → in ordinary contract → if parties don’t agree on price → no consensus no agreement on standard terms → unless there is a mechanism → dont agree on price but there is an arbitrator who will determine the price for us → MECHANISM.
Something to use to fill the contract with CERTAINTY.
DOCTRINE OF CERTAINTY → MUST AGREE ON ESSENTIAL TERMS FOR THEIR TO BE A BINDING CONTRACT → IF NOT NO CONTRACT.
· Tipping J
o [26] “the enforceability of a process contract derives from the certainty of its terms rather than those of the substantive contract which the process contract envisages.”
o [30] “The position can be summed up in the following way. The essence of the common law theory of contract is consensus. It follows that for there to be an enforceable contract, the parties must have reached consensus on all essential terms; or at least upon objective means of sufficient certainty by which those terms may be determined. Those objective means may be expressly agreed or they may be implicit in what has been expressly agreed. Taking price as an example, for a contract to be enforceable the parties must have agreed upon the price, or at least they must have agreed upon objective means of sufficient certainty whereby the price can be determined by someone else, or by the Court. If the price is left for later subjective agreement between the parties, the contract is not enforceable.”
o [31] “Good faith in this context is essentially a subjective concept, as the House of Lords pointed out in Walford. There is thus no sufficiently certain objective criterion by means of which the Court can decide whether either party is in breach of the good faith obligation. The Court is unable in such cases to resolve the question whether a particular negotiating stance was adopted in good faith. The law regards the task of reconciling self-interest with the subjective connotation of having to act in good faith as an exercise of such inherent difficulty and uncertainty as not to be justiciable. The ostensible consensus is therefore illusory.”
CONTRACT AND COMMERCIAL LAW ACT 2017 → only applies to sale of commercial goods amongst merchants:
Sometimes cannot agree on price → and then a reasonable price can be agreed upon.
Parties can agree with an evaluator → if no valuator seeks to exist → there is no contract → because there is no MECHANISM and Contract is not certain enough.
GOOD FAITH:
Subjective concept → we don’t know what good faith is → To vague → The Court is inable to resolve whether negotiating stance was done in good faith → The parties did not agree on a real process → they said something too vague which cannot be a contract.
AN AGREEMENT TO NEGOTIATE IN GOOD FAITH IS TOO VAGUE TO BE ENFORCEABLE.
Electricity Corporation of New Zealand Ltd v Fletcher Challenge Energy Ltd [2002] 2 NZLR 433 (CA)
Doctrine of intention to be bound → and certainty → there is a connection between the two arrangements → on second agreement (Padavatton) → so vague that they didn’t intend to be bound → ECNZ → fleshes out this connection.
FACTS:
Two big companies want to do something together → long-term agreement to FCE to supply gas from ECNZ. → Want to buy the cooper field together.
They both bid in a tender → on the Cooper Field → offers are too close and hard to distinguish → so there is a new date for another tender.
ECNZ and FCE → want to collaborate in joint venture on the Cooper Field → by the 28th they have to submit the bid (tender)
Have to agree on how to buy the Cooper Field together → FCE → will extract the gas and sell it to ECNZ → Who will supply electricity.
Fletcher and ECNZ bosses meet and write up a letter → says → our managers will meet today and will sign heads of agreement by the end of the day.
By the end of the day → heads of agreement agreed it would be binding, annual quantities of gas, max,min flow rates, start date, duration, prices throughout, force majeure. → conditional on ECNZ Board approval within eight days”.
FORCE MAJEURE → for example a war or a plague, or natural disaster (determined by parties), if this term is activated, then the parties are discharged from their obligations.
WHAT IS THIS AGREEMENT?
Agreement to agree → it’s not certain enough to be in actual heads of agreement → agreement to agree on the set terms.
Heads of Agreement → no term in contract law called heads of agreement → Could be a memorandum of understanding, letter of understanding. → these documents could or could not be a contract → are at an iffy stage.e
THE EXECUTIVES MEET:
The heads of agreement they sign → the issue is → there is many clauses that say to be agreed and not agreed.
Efficiency factor → to be agreed.
Force Majeure → not agreed.
Prepaid gas relief → not agreed.
Short list of essential terms →
on the efficiency factor → in case of a breach, and no longer perform contract → how do we find out the flow rate of how the damages → if fail to deliver the gas. → they said to be agreed.
Force Majeure —> not agreed.
Prepaid Gas relief → not agreed.
They sign the heads of agreement → except for where they don’t agree.
Are these heads of agreement a contract?
FLETCHER- FROW LETTER → after HOA signed.
They bid and win the Cooper Field.
The Fletcher frow letter amended → to approve heads of agreement.\
Negotiation reach an impasse → they don’t agree on the heads of agreement above → and a lot of details that were not essential.
ECNZ does not want to sign → because something happens that makes this contract no longer worthwhile → they don’t want this gas and not at the price that the contract agrees to.
ECNZ → says they do not want to move forward.
What certainty-related questions arise here?
Is this agreement certain enough to be a binding contract.
What are reasonable endeavours → that might give rise to an issue of certainty.
FCE/ECNZ to use all reasonable endeavours to agree a full sale and purchase agreement within three months of the date of this agreement.” → IS THIS A MECHANISM?
You can have contract without calculating damages for non-performance.
But the parties said it is important and they cant agree on it → that is significant because.
After identifying the problems → What gives right to uncertainty → you have to identify the factual parts most pertinent to whether there is or is not a contract → is contract certain or not?
Majority → agreed it was not a contract.
Minority Justice thomas → thought it was → because already came together and acted by buying the Cooper Field → this shows the stakes of the Doctrine of Certainty.
On the one hand → you have parties that intend to create legal relations → and to say they don’t have contractual agreement screws FCE → Fletcher is stuck with the field and the gas -> dont have anyone to sell it too → and only at a reduced price → so there is an implied agreement which is conducive to a contract based on the actions of the parties.
· Making sense of the commercial arrangements.
· Part (ii) of the Fletcher-Frow Letter: “(ii) By the end of today, ECNZ and Fletcher Challenge Energy will enter into the Heads of Agreement for long term gas supply. This Heads of Agreement will specify all essential terms for it to be a binding agreement, including annual quantities, max/min flow rates, start date, duration, prices throughout, force majeure terms. This Heads of Agreement will be conditional on ECNZ Board approval within eight days.”
· Incompleteness and vagueness in the HoA
· The breakdown in negotiations
· Blanchard J
o [52]: “even where the parties are ad idem concerning all terms essential to the formation of a contract – the basic structure of a contract of the type under negotiation is found to have been present in the terms which have been agreed – they still may not have achieved formation of a contract if there are other unagreed matters which the parties themselves regard as a prerequisite to any agreement and in respect of which they have reserved to themselves alone the power of agreement. In such cases, what is missing at the end of the negotiation is the intention to contract, not a legally essential element of a bargain.”
Must be agreement on the essential terms of the contract → Wellington City Council.
The basic structure of contract is seen to be present in the terms agreed → but may not have achieved if there are other non agreed factors which
NECESSARY AGREEMENT REGARDING TERMS THAT THE PARTIES SEE AS ESSENTIAL (Bears on the intention to be bound).
(Alongside certainty regarding essential terms, without which a contract cannot be enforced).
Not essential terms of the contract → parties themselves see them as essential → if they fail to agree on these → What they lack IS AN INTENTION TO CREATE LEGAL RELATION.
Doctrine of Intention to create legal relation → Like Jones v Paravatton. (even though that is about familial relations).
o [53] “The prerequisites to formation of a contract are therefore:
(a) An intention to be immediately bound (at the point when the bargain is said to have been agreed); and
(b) An agreement, express or found by implication, or the means of achieving an agreement (e.g. an arbitration clause), on every term which
(i) was legally essential to the formation of such a bargain; or
(ii) was regarded by the parties themselves as essential to their particular bargain.
A term is to be regarded by the parties as essential if one party maintains the position that there must be agreement upon it and manifests accordingly to the other party.”
§ On “was regarded by the parties themselves as essential”: evidence from uncertainty to intention to be bound.
o [58] “The Court has an entirely neutral approach when determining whether the parties intended to enter into a contract. Having decided that they had that intention, however, the Court’s attitude will change. It will then do its best to give effect to their intention and, if at all possible, to uphold the contract despite any omissions or ambiguities.”
o [63] “if essential matters (i.e. legally essential or regarded as essential by the parties) have not been agreed upon and are not determinable by recourse to a mechanism or to a formula or agreed standard, it may be beyond the ability of the Court to fill the gap in the express terms, even with the assistance of expert evidence.”
If they intended to create legal relations → then Court will do its best to give effect to their intention → Hillas.
ECNZ → And Hillas → Whether there was an intention to create legal relations → then will do our best to find certainty. → parties that really mean to bind themselves have really clear terms →
INTENTION TO BE BOUND IS KEY
LACK OF AGREEMENT ON ESSENTIAL TERMS CAN BEAR ON INTENTION.
