Intention to create legal relations and capacity

Question 1

What does the expression ‘subject to contract’ imply in contract negotiations?

Answer 1

The use of the expression ‘subject to contract’ during contract negotiations creates a strong inference that the parties do not intend to be bound until the formal execution of a contract.

Question 2

What is the significance of the intention to create legal relations in contract formation?

Answer 2

The intention to create legal relations is an essential element in the formation of a contract. Without the intention to be bound, there is no contract. In commercial agreements, it is presumed that there is an intention to create legal relations, while in social/domestic agreements, it is presumed that there is not an intention to create legal relations. However, these presumptions can be rebutted.

Question 3

How do courts determine the intention of the parties in a contract?

Answer 3

The test of intention in contract law is objective, meaning that the intention of the parties is determined by their actions and the particular circumstances rather than their subjective thoughts. The courts seek to give effect to the intentions of the parties, whether expressed or presumed.

Question 4

What is the legal position when a friend accepts an offer before the parties are no longer friends?

Answer 4

As the friend accepted the man’s offer when they were friends, there is a presumption that the parties did not intend to create legal relations. However, this presumption can be rebutted by the parties’ conduct.

Question 5

Under what circumstances can a contract with a minor be enforceable?

Answer 5

A contract with a minor is generally not enforceable unless it relates to ‘necessaries’ or to a contract of employment, apprenticeship, or education. In these specific cases, the contract can be binding on the minor.

Question 6

What are ‘necessaries’ in relation to contracts with minors?

Answer 6

‘Necessaries’ refer to goods or services that are suitable to a person’s condition of life and their actual requirements at the time of the sale and delivery. A minor must pay a reasonable price for necessaries rather than the actual cost.

Question 7

What is the general rule regarding contracts with persons lacking mental capacity?

Answer 7

A person lacking mental capacity is not bound by a contract unless they did not understand what they were doing, and the other party knew that to be the case. However, a person without capacity remains liable to pay a reasonable price for ‘necessaries’.

Question 8

What is the effect of entering into a contract with a person lacking capacity?

Answer 8

If a person lacks capacity, the contract cannot be enforced against them unless it relates to ‘necessaries’. In any other case, the contract is binding unless the person claiming incapacity can establish that they did not understand what they were doing and that the other party knew that to be the case.

Question 9

What is the legal position when a minor repudiates a contract after reaching the age of 18?

Answer 9

If a minor ratifies a contract once they reach the age of 18, then the contract will be binding on them. However, there are exceptions to this general rule, and certain contracts of exceptional types may be enforceable against the minor unless the minor specifically repudiates them.

Question 10

What is the legal position when a person lacks mental capacity or is intoxicated?

Answer 10

A person lacking mental capacity or who is intoxicated remains liable to pay a reasonable price for ‘necessaries’. In other cases, the contract is binding unless the person claiming incapacity can establish that they did not understand what they were doing, and the other party knew that to be the case. Similar rules apply to contracts entered into by drunken persons.

Question 11

What is the effect of intoxication on the enforceability of a contract?

Answer 11

If an individual becomes so intoxicated that they do not understand what they are doing, they will have to pay a reasonable price for necessaries but will not be bound by any other contract they make. This position should logically extend to those incapacitated by other intoxicating substances.

Question 12

What is the legal position when a 16-year-old girl hires gardening equipment but refuses to pay for it?

Answer 12

The supplier of the equipment cannot enforce the contract against the girl as she is a minor, and none of the exceptions to the general rule apply.

Question 13

What are the rules regarding capacity to contract for individuals who are weak or less capable of looking after themselves?

Answer 13

There are rules on capacity to contract for individuals who are weak or less capable of looking after themselves, such as children, those who are mentally ill, and others temporarily lacking mental capacity. Persons over the age of 18 have full contractual capacity if they are of sound mind and not suffering from a factor ruling out capacity, such as drunkenness.

Question 14

Which of the following statements is correct in relation to intention to create legal relations (ICLR)?

ICLR is presumed to exist in commercial situations and it is impossible to rebut that presumption.

ICLR is presumed to exist in all situations unless one of the parties can show that there was no intention to be bound.

ICLR is presumed to exist in commercial situations but presumed not to exist in domestic or social situations.

ICLR is determined by taking evidence from the parties as to what was in their minds when entering the contract.

Answer 14

ICLR is presumed to exist in commercial situations but presumed not to exist in domestic or social situations.

Question 15

Two companies agree the sale of a house ‘subject to contract’. What does the phrase ‘subject to contract’ imply?

Answer 15

The companies do not intend to be bound until they sign a formal contract.

The phrase creates a strong inference that the companies do not intend to be bound until the execution of a formal contract.

Question 16

Which statute defines what necessaries are?

Answer 16

The Sale of Goods Act 1979.

The definition is found in section 3(3) of that Act

Question 17

What does capacity to contract mean?

Answer 17

The ability of a person to enter a binding contract.

Adults of sound mind have full contractual capacity. However, minors, the mentally incapacitated and those intoxicated have limited contractual capacity.

Question 18

Which of the following statements is correct regarding the contractual capacity of a minor?

A minor can enter into a contract for necessaries and they must pay the actual cost of the necessaries supplied.

A minor is bound by a contract of employment but only if it is for their benefit.

A minor who lies about their age is bound by a contract they entered into.

A minor is not bound by a contract which he enters into during their minority.

Answer 18

A minor is bound by a contract of employment but only if it is for their benefit.

Question 19

A 16 year old boy cycles to and from school every day. He no longer likes his bicycle as he thinks it is old. He tells his neighbour he is 19 years old and agrees to buy the neighbour’s motorbike for £199. After taking delivery of the motorbike, the boy refuses to pay for it. Which of the following statements is correct?

The neighbour can enforce the contract against the boy as the boy lied about his age.

The boy is bound by the contract as it is for necessaries and for his benefit.

The contract is voidable because the boy lied about his age.

The neighbour cannot enforce the contract against the boy as he is a minor.

Answer 19

The neighbour cannot enforce the contract against the boy as he is a minor.

Correct. The neighbour cannot enforce the contract against the boy as he is a minor and the motorbike is unlikely to fall under the exception of necessaries.

Question 20

Question 1
Which of the following statements best sums up legal principles that govern intentions to
create legal relations?
A With commercial agreements there is a non- rebuttable presumption of intention to create
legal relations; whereas with domestic agreements there is no intention to create legal
relations.
B With domestic agreements there is a strong presumption of no intention to create legal
relations that is difficult to rebut unless very clear words are used.
C With all agreements involving individuals the presumption is that they did not intend to
create legal relations; whereas in business- to- business contracts there is a very strong
presumption the parties intended legal relations.
D In a commercial context there is a strong presumption that the parties intended legal
relations but it may be rebutted if the agreement is stated to be ‘binding in honour only’.
E With domestic agreements it is irrebuttably presumed the parties did not intend legal
consequences.

Answer 20

Answer
The correct statement is D.
Commercial agreements do not just cover business- to- business contracts; they cover all
agreements that are not made between family and friends. This is why C is wrong. Both
presumptions are rebuttable hence why A and E are wrong. The commercial presumption
is very strong and difficult to rebut unless clear words are used. The presumption in relation
to domestic agreements may be rebutted by a number of factors including how close is the
parties’ relationship and the amount of money at stake – hence why B is wrong.

Question 21

Corporation capacity?

Answer 21

Corporations have different levels of contracting ability, eg a statutory corporation will
not be bound by contracts that are outside its statutory powers whilst limited liability
partnerships have unlimited capacity.

With registered companies check whether the company has capacity - but most of the time director’s powers should make capacity free of any limitation under the company’s constitution

Question 22

Question 1
A girl, aged 17 years, is keen on performing arts and decides to pursue a career in it. She
sets up a small business selling dance and stage clothing. The money she makes from the
business pays for singing and dancing lessons. After a few months the girl’s main supplier
discovers she is only 17 years of age and refuses to deal with her. This leaves the girl without
enough business to pay for this month’s lessons. Her tutor is pressing her for payment. The girl
is also in arrears with her mobile phone account.
Which of the following statements best describes the girl’s legal position in relation to one
or other of the contracts she has entered?
A The contract for the supply of the stage clothes was not binding on the girl as it was a
trading contract.
B The contract for the singing and dancing lessons would not be binding on the girl as it
was not a contract for necessaries.
C The girl can terminate the mobile phone contract and the contract for the singing and
dancing lessons.
D The girl is bound by the contracts for the clothes she sells as she needs the proceeds of
sales to pay for her lessons.
E The mobile phone contract would be deemed a contract for necessaries and as such it
would bind the girl but not the mobile phone company.

Answer 22

Answer
The correct option is A. The contract for the supply of the clothes to her and the contracts of
resale would not bind the girl as they are trading contracts. These contracts are not contracts
for necessaries. This explains why D is wrong.
B is wrong because the contract for the lessons looks like a contract for necessaries, as it is a
contract of service that is on the whole for her benefit.
C is wrong as both contracts are likely to be deemed to be contracts for necessaries.
E is wrong because although the phone contract may well be deemed a contract for
necessaries the mobile phone company would be bound by the contract in any event.

Question 23

A man owns a business which he has advertised for sale. He accepts an offer from a client which is below the asking price. The man is suffering from a mental health condition which was not evident to his family or the client at the time. The client was fair in her negotiations, but the man’s family now wish to challenge the contract for sale based on his mental incapacity.
What is the status of the contract for sale between the man and the client?
Select one alternative:

The contract for sale is void because of the man’s mental incapacity.

The contract for sale is voidable because of the man’s mental incapacity.

The contract for sale is voidable because it was sold at less than the asking price.

The contract of sale is valid and binding against the man.
Answered and correct

The contract for sale is void unless the client agrees to pay the full market rate for the business.

Answer 23

The contract of sale is valid and binding against the man.

This is a contract law question on the topic of capacity. The contract is binding and enforceable against the man. A 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. As the client was not aware of the man’s incapacity and there are no issues of fairness regarding the client’s conduct the contract will be upheld.

Question 24

A daughter agrees to pay her mother £250 per month towards the mother’s medical expenses. The daughter makes payments for six months, but the mother and daughter are now estranged and the daughter refuses to make any additional payments.
What advice would you give the mother?
Select one alternative:

As the agreement was reached before the mother and daughter were estranged, this will be treated as a family agreement and the daughter’s promise will not be legally binding as there is no intention to create legal relations.

As the mother and daughter are now estranged, this will rebut the presumption usually applied to family arrangements and this promise will be binding as there is an intention to create legal relations.

As the agreement was reached before the mother and daughter were estranged, this would ordinarily be treated as a family agreement and there would be no intention to create legal relations. However, as the daughter has made payments for six months, this would rebut the presumption and an intention to create legal relations would be found.
As the mother and daughter are now estranged this will be treated as a commercial transaction. The daughter’s promise will be binding as there is an intention to create legal relations.

A unilateral contract has been formed between the mother and daughter. Intention to create legal relations will be found by the daughter’s payment of expenses for six months.

Answer 24

As the agreement was reached before the mother and daughter were estranged, this will be treated as a family agreement and the daughter’s promise will not be legally binding as there is no intention to create legal relations.

This is a contract law question on the topic of intention to create legal relations. There is a presumption against ICLR in family arrangements if the arrangement is made when the family members are living in amity. Here the mother and daughter are estranged only after the agreement is made so the usual presumption will apply. The fact that the daughter has made payments for 6 months after the agreement was reached will not rebut the presumption. The facts provided do not indicate that a unilateral contract has been formed between the mother and daughter. This is not a commercial transaction.