Contract Law: Intention to Create Legal Relations

• Contract law forms the bedrock of commercial transactions, establishing the rules for legally binding agreements.
• It ensures agreements are honored and provides remedies if one party fails to fulfill their promises.

Intention to Create Legal Relations

• Intention to create legal relations is a fundamental requirement for a contract to be enforceable.
• It means that the parties must have intended their agreement to be legally binding.
• The test for intention is objective: would a reasonable person consider that the parties intended to create a legally binding agreement?
• In commercial agreements, there is a strong presumption that the parties intended to create legal relations.
• This presumption can be rebutted by clear evidence to the contrary, such as an express statement that the agreement is not legally binding.
• In social or domestic agreements, the presumption is that the parties did not intend to create legal relations.
• This presumption can be rebutted by evidence of serious intent, such as significant financial investment or reliance on the agreement.
• Letters of comfort are often used in commercial contexts to provide reassurance without creating a binding obligation.
• The courts will examine the wording of a letter of comfort to determine whether it demonstrates an intention to be legally bound.

Consideration

• Consideration is something of value that is exchanged by the parties to a contract.
• It can be a benefit to the promisor or a detriment to the promisee.
• Consideration must be sufficient, meaning it has some value in the eyes of the law, but it need not be adequate, meaning it need not be equal in value to the promise.
• Past consideration is not good consideration, meaning an act that has already been performed before a promise is made cannot be used as consideration for that promise.
• An exception to the past consideration rule exists where the act was performed at the promisor's request and it was understood that payment would be made.
• Performance of an existing contractual duty owed to the promisor is not good consideration for a new promise.
• However, if a party does something more than their existing duty, that can be good consideration.
• Performance of an existing duty owed to a third party can be good consideration for a promise.
• Part payment of a debt is not good consideration for a promise to forgo the balance, unless there is some fresh consideration or an exception applies.
• Promissory estoppel is an equitable doctrine that can prevent a party from going back on a promise, even if it is not supported by consideration.
• For promissory estoppel to apply, there must be a clear and unambiguous promise, reliance on the promise by the promisee, and it must be inequitable for the promisor to go back on the promise.
• Promissory estoppel can only be used as a shield, not a sword, meaning it can only be used as a defense to a claim, not to create a new cause of action.

Privity

• Privity of contract means that only the parties to a contract can enforce its terms or be bound by them.
• A third party cannot sue on a contract, even if the contract was made for their benefit.
• The Contracts (Rights of Third Parties) Act 1999 provides an exception to the privity rule.
• Under the Act, a third party can enforce a term of a contract if the contract expressly provides that they may or the term purports to confer a benefit on them.
• The third party must be expressly identified in the contract by name, class, or description.
• The Act does not apply if the parties did not intend the term to be enforceable by the third party.
• Other exceptions to the privity rule exist under common law, such as agency, trusts, and collateral contracts.

Exclusion Clauses

• Exclusion clauses are terms in a contract that attempt to limit or exclude one party's liability for breach of contract or negligence.
• Exclusion clauses are generally enforceable, but they are subject to certain restrictions.
• The clause must be properly incorporated into the contract, meaning it must be brought to the attention of the other party before or at the time the contract is made.
• The clause must be clear and unambiguous in its wording.
• If the clause is ambiguous, it will be construed contra proferentem, meaning against the party seeking to rely on it.
• The clause must not be rendered unenforceable by the Unfair Contract Terms Act 1977 (UCTA).
• UCTA applies to business liability, which is liability for breach of obligations or duties arising from things done or to be done by a person in the course of a business.
• UCTA renders certain exclusion clauses automatically void, such as those excluding liability for death or personal injury resulting from negligence.
• Other exclusion clauses are subject to a reasonableness test under UCTA.
• The reasonableness test considers factors such as the relative bargaining power of the parties, the availability of insurance, and the knowledge of the parties.

Performance

• Performance of a contract means fulfilling the obligations agreed upon by the parties.
• A contract must be performed exactly according to its terms, unless the parties agree otherwise.
• The doctrine of substantial performance provides that if a party has substantially performed their obligations, they are entitled to recover the contract price, less the cost of remedying any defects.
• The doctrine of frustration applies when an unforeseen event occurs that makes performance of the contract impossible, illegal, or radically different from what was originally contemplated.
• For frustration to apply, the event must not have been foreseeable, must not have been caused by either party, and must render performance impossible, illegal, or radically different.
• Common examples of frustrating events include natural disasters, war, and changes in the law.
• The consequences of frustration are that the contract is automatically terminated and the parties are discharged from further obligations.
• The Law Reform (Frustrated Contracts) Act 1943 provides for the apportionment of losses in cases of frustration.

Economic Duress

• Economic duress occurs when one party uses illegitimate pressure to coerce another party into entering or varying a contract.
• The pressure must be significant and must leave the victim with no reasonable alternative but to agree.
• Illegitimate pressure can take various forms, such as threats to breach a contract, threats to withhold goods or services, or threats to damage a party's reputation.
• To establish economic duress, the victim must demonstrate that they protested at the time, that they had no reasonable alternative, and that they affirmed the contract if applicable.
• If economic duress is established, the contract or variation may be set aside.
• The doctrine of undue influence is similar to economic duress, but it applies where there is a pre-existing relationship of trust and confidence between the parties.
• In cases of undue influence, the dominant party must not abuse their position to gain an unfair advantage.

Explore the 'Intention to Create Legal Relations' in contract law, a key factor for legally binding agreements. Learn about the objective test and presumptions in commercial, social, and domestic contexts. Essential for understanding contract enforceability.