For an agreement to be a binding contract, three elements must be present: agreement, consideration, and an intention to create legal relations. Even with a clear consensus, the court enforces the arrangement only if the parties intended legal consequences.
The Objective Determination of Intent
The courts adopt a predominantly objective approach, examining the parties’ outward manifestation of intent from the perspective of a “reasonable person” rather than probing actual subjective states of mind.
The Framework of Rebuttable Presumptions
- Commercial agreements: a very strong presumption that the parties intended to be legally bound.
- Domestic and social agreements: an initial presumption that the parties did not intend legal relations.
Domestic and Social Agreements
The leading authority, Balfour v Balfour (1919), held that domestic arrangements between spouses are generally not intended to be sued upon — partly for the policy reason that otherwise the courts would be “inundated with claims”. The presumption is rebuttable: in Merritt v Merritt (1970), a separated couple bargaining at “arm’s length” who recorded their agreement in writing were held to have intended legal relations.
Commercial Agreements
Business promises are presumed enforceable to promote commercial certainty, and the presumption is hard to rebut. In Edwards v Skyways (1964), the term “ex gratia” was insufficient to override the presumption in a business context. To rebut it, parties must use very clear language — as in Rose and Frank Co v Crompton Bros (1925), where an express “Honourable Pledge Clause” stated the agreement was not a legal document.
Significance
The doctrine protects the social sphere from excessive legal interference while ensuring commercial security, using presumptions to provide a predictable framework for when a promise becomes a legal obligation.