An issue that may arise when seeking to enforce contracts is whether there was an intention to create legal relations when the alleged contract was formed. This is relevant in all contracts from small contracts to commercial contracts; however, the issue most often appears as contentious in oral contracts. In the past courts applied rebuttable presumptions to determine if the parties meant for their agreement to be legally binding. Contracts in the course of business were presumed to be binding, and contracts between family members were presumed not to be binding. However, since the case of Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95, the law in Australia has evolved to take a more holistic view of the facts surrounding the contract so that evincing an intention to be bound can be a relevant factor in a wide variety of contractual disputes.

A. Legal Test for Intention to Create Legal Relations

Determining if there was no intention to create legal relations depends on ‘an objective assessment of the state of affairs between the parties’: Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95. In cases which do not hinge on the construction of a singular document, this assessment includes examining the words used by the parties in their context, the subject matter of the conversation and the parties’ dealings over time: Pavlovic v Universal Music Australia Pty Ltd (2015) 90 NSWLR 605, [15] (Bathurst CJ).

In assessing the words for intent to be binding, courts attempt to ascertain the purpose behind the words being spoken. The clearer and more concise the articulations of parties’ mutual obligations, the more likely an intent to be bound will be found by a court. Words which are stated in future tense, such as ‘he will sign’, are less likely to be considered binding because they do not indicate a party’s acceptance of an offer: Pavlovic v Universal Music Australia Pty Ltd (2015) 90 NSWLR 605. A timeframe, or the ability to incorporate a reasonable timeframe into the contract also hints towards the parties intending to be bound: Ashton v Pratt [2015] NSWCA 12.

B. Relevant Factors taken into Account by the Court

A more formal context in which the agreement was reached will further indicate the parties’ mutual intent to be bound. While the old presumption against binding contracts between family members has been eradicated, the relationship between the parties can still be relevant to determine this context: Ashton v Pratt [2015] NSWCA 12. Of course this discussion about words and context does not mean contracts must always be highly formal processes to be legally enforceable. Nevertheless, there must always be identifiable, clear words that indicate intent to delineate offer and acceptance in a context between the parties indicative of intent.

Furthermore, the subject matter can shed further light on what the parties’ intent was when they created the contract. The more valuable or quantifiable the subject of the contract, the more likely courts will find there was an intention to create legal relations between the two parties. In Ashton v Pratt [2015] NSWCA 12, the subject matter of the contract was vague and difficult to exactly determine or quantify, being her continued service as his ‘mistress’. This was a primary reason for the appellant’s failure to establish intent for the agreement to bind the parties.

C. Conclusion

Of course, many commercial contracts are relational in nature, meaning that the subject matter will not always be completely enumerated within a formal contract. In those cases the last factor, the parties’ dealings over time, may bare out the requisite intention to create legal relations. If parties have continually maintained a contractual relationship over time courts will take this into account to highlight that parties most likely intended to continue this relationship given a future agreement. Therefore, special caution to these factors should be displayed when entering into one-off agreements or contracts with close friends or relatives.

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This article was authorised by Warwick Heeson.

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