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INTENTION TO CREATE A CONTRACT: AN ANALYSIS VIS A VIS INDIAN CONTRACT ACT 1872

INTRODUCTION

We enter into tons of promises daily, like bargaining for a good with a shopkeeper, promising good grades to our parents in return for gifts we want, selling our house for a sum of money, buying various goods, calling plumbers, betting on the ongoing cricket match, and whatnot. But not all of these promises result in a contract. A contract needs a specific legal intention for the parties to enter into it so that it can be enforceable in a court of law since a proposal in itself signifies the willingness to do or abstain from doing anything.[1]

WHAT IS A CONTRACT?

A contract is a legally binding agreement.[2] It has to fulfill a number of conditions like having a lawful object or purpose to it and a lawful consideration, being entered into by two or more parties who are competent to contract, having the legal intention to enter into the contract, and so on.[3] Contracts are held enforceable on the basis of the doctrine of reasonable expectations, which is that, contracts once completed with the full intention, imbibe hope in the promise about its fulfillment, and on its breach, therefore, cause damage or injury to the promise.[4]

PROMISES BETWEEN FAMILY MEMBERS

We make dozens of promises to our family members daily, and get many from them as well as our relatives, but it must be noted that not all of these promises are contracts, since not all of them are made with the intention to make them enforceable in court. A grandfather promising his grandson a world tour in return for his good grades cannot be as such called a contract. But it also depends on the situation as well.

In the case of Balfour v Balfour, it was held that there was no wrong on the part of Mr. Balfour since the contract of Mr. Balfour giving money to Mrs. Balfour during the period she was sick and in London was a purely domestic one and not a legally enforceable one. Lord Atkin held that “When a husband and a wife enter into an agreement, they never intend to create a legal relationship.” Similarly, normal promises between family members such as mother and daughter, father and son, cannot be held to be contracts under normal circumstances.[5]

But there are cases when family promises do turn into contracts such as promises during divorce, promises made in the time of division of parental properties between the children, and so on. In the case of Merritt v Merritt, they were a husband and wife who held a matrimonial property in joint name but later, Mr. Merritt left the house to live with another woman. At the time of leaving, Mr. Merritt signed a document that declared that after Mrs. Merritt paid off the outstanding loan, the house would be transferred into her sole name. But after Mrs. Merritt successfully acquired the house by paying off the loan, Mr. Merritt contended that it was just a domestic agreement and had no legal enforceability. But the jury decided such contention to be false. As the couple was in an estranged relationship, the exception of no intention in a domestic agreement was not applicable in this case.

In another case Jones v Padmavatton, there was an agreement between a mother and a daughter that the daughter will leave her job in the United States and come back to London to study and pass the bar exam, and in return, the mother would pay her a monthly allowance and would also give her a house to live in. But after five years, sufficient time for passing the exam, there was some strife between the two, and the mother sought possession of the house. In this case, again, it was held that there was no formal relation between mother and daughter, so even though there was some consideration on the part of the daughter, the agreement cannot be held to be a legally binding one.[6]

In the case of Simpkins v Pays, there was an agreement between a grandmother, her granddaughter, and a lodger where they would have to take turns to pay the money and if anyone won the money, they would have to share it with the others. Later, when the grandmother won the money of $250, she refused to share it with the others. It was held that in this case, there was clearly an intention to contract between the parties by the theory of objective theory of contract[7], and therefore, the grandmother was bound to pay.[8]

INTENTION TO FORM A CONTRACT CLEARLY MENTIONED BY WAY OF PERFORMANCE: COMMERCIAL CONTRACT

Sometimes, when an offer is made, the intention to form a legally binding agreement or not is clearly expressed explicitly or by way of performance.

In the case of Carlil v Carbolic Smoke Ball Company, the company issued a medicine name Carbolic Smoke Ball to treat influenza and made a general offer that whoever caught influenza after taking this medicine in the prescribed way will be rewarded with hundred pounds and also deposited 1000 pounds in the Alliance Bank for that purpose. It was held that though it was only an offer, it was not a unilateral one as it was restricted to only those who used the ball. It was also held in the case that the act of depositing such an amount with the bank clearly showed the legal intention to enter into a contract.[9]

In another case Rose and Frank v JR Crompton and Bros., the contract itself contained a clause that it was not a formal or legal agreement, but rather an “honorable” one to be maintained by mutual trust and friendly relations between both companies. So, it was held that it did not constitute a legally binding contract as it was not intended to do so.[10]

In another case South Eastern Coalfields Ltd. v S. Kumar’s Associates AKM (JV), there was a letter of intent between the company and the respondent, the successful tender. It was held in the High Court that the letter of intent between the parties merely signifies an intention to enter into a contract and not a contract itself and therefore, in the present case, all that the company can do is forfeit the bid security amount and this decision was upheld by the Supreme Court.[11]

CONCLUSION

Agreements or promises made without the intention to enter into the contract do not make the parties legally bound in case of breach of the contract. These promises just turn into mere offers or informal promises to be maintained by the parties through mutual trust and cooperation.

Family promises, made with a tint of a joke, cannot be called contracts. An agreement turns into a contract when it is made with a specific intention to be legally bound by the same, and the tests of the subjective theory of intention and the objective theory of intention (also called the reasonable theory of expectations) can be used to evaluate the same.[12] Courts have given various judgments based on situations as to when and how these theories should be applied to the facts and circumstances, and many of them have the power of precedents to be followed in future cases.

Lastly, it must also be noted that besides intention, consideration is also an important part of the formation of a contract as it represents the legal intention very precisely.[13]

Author(s) Name: Anwesha Nayak (Institute of Law, Nirma University)

Reference(s):

[1] Indian Contract Act 1872, s 2(a)

[2] Indian Contract Act 1872, s 2(h)

[3] Indian Contract Act 1872, s 2

[4] Jay M. Feinman, ‘Good Faith and Reasonable Expectations’ <https://law.uark.edu/alr/PDFs/67-3/ALR-67-3-525-570Feinman.pdf> accessed on 5 July 2023

[5] Balfour v Balfour [1919] 2 KB 571

[6] Merritt v Merritt [1970] EWCA Civ. 6, 1 WLR 1211

[7] ‘Critical Analysis on the Theories of Intent’ (Lawteacher.net, July 2023) <https://www.lawteacher.net/free-law-essays/contract-law/critical-analysis-on-the-theories-of-intent-contract-law-essay.php?vref=1> accessed 7 July 2023

[8] Simpkins v Pays [1955] 1 WLR 975

[9] Carlill v Carbolic Smoke Ball Company [1892] EWCA Civ.1

[10] Rose and Frank v JR Crompton and Bros. [1924] UKHL 2 <http://www.bailii.org/uk/cases/UKHL/1924/2.html> accessed 7 July 2023

[11] South Eastern Coalfields Ltd. v S. Kumar’s Associates AKM(JV) [2021] C App 4358/2016

[12] Critical Analysis on the Theories of Intent (n 7)

[13] Indian Contract Act 1872, s 25