[Law101-Private Law] Third element of Contracts [Series 1 - Part 4]

Hi Fellow Steemains

Welcome back to another part of the Private Law series. I'm sorry for not posting yesterday, I was sick and unable to make a post. Last time we finished off the second element of Contracts, Consideration. I'll be going into the third element of Contracts, Intention, in this post.

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Intention

The key point regarding Intention in Contract Law is that: A lack of legal intention means the contract is void ab initio - it is invalid from outset, cannot seek legal remedy.

This is possibly the easiest element to establish in a contracts case.

Factors that are taken into consideration when deciding if there is intention:

• Wording
  • Language
• Written or verbal
• Setting
  • Commercial
  • Domestic
  • Other
• Subject matter
• Other actions/interactions
• Status of parties
  • Gov/charity/corporation
• Industry practice

Originally, the court had a basic presumption when it came to considering intention:

• Presumed domestic/social agreements in nature did not intent to create contractual relations- assumed there was no contract unless this could be proven by one of the parties.
• Presumed that in commercial agreements, parties did intend to create contractual relations - the party looking to disprove this held the burden of proof.

HOWEVER, this was overturned in the case of Ermogenous. The judge in this case stated that the relationship between the parties is only one factor in determining intention. He went on to also say that intention should be decided on the facts of each case i.e. 'subject-matter of agreement, the status of the parties to it, their relationship to one another, and other surrounding circumstances'.

Also following the case of Ermogenous, the position in Australia is that the party asserting the existence of a contract will always bear the burden of proving that the parties intended to enter into contractual relations.

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Letter of Comfort

A letter of comfort is a document given to a financier in a situation in which a guarantee might otherwise be given.

• Typically given when a bank is lending to a company which is a subsidiary of a larger company, bank concerned about subsidiary's financial strength and is reluctant to lend to subsidiary without some assurance that parent company will support its subsidiary
• Parent company reluctant to give guarantee because its contingent liability under the guarantee would affect its balance sheet, thus provides letter of comfort, which offers some assurance to bank without creating a clear liability
• Not uncommon for business people to act upon 'letters of comfort' containing a statement of intention as to future conduct falling short of a binding promise. Whether such a letter constitutes a contract depend on whether parties had an intention to create legal relation
• It will generally be found that a letter of comfort will be enough to establish intention to enter into a legal relation

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Preliminary Agreements

Parties who have negotiated principal terms of a proposed transaction may enter into a prelim written agreement, with intention of recording their agreement in a more formal way at some future time.

• Not uncommon in commercial transactions for example for parties to record "heads of agreement" when principal terms of a complex transaction have been agreed upon
• May be expressed subject to contract
• If one of parties wishes to withdraw from transaction, prelim agreement has been signed, necessary to determine whether binding
• Issue is whether parties intended to be bound immediately on signing of prelim or intended to defer any legal commitment until formal contract made
• Court will take into account
  • Post-agreement conduct and communications
  • Eg. fact parties continued negotiations after formation of an agreement
• Prelim agreement will be binding if appears parties intended it to be binding

Regarding preliminary agreements, the court in Masters v Cameron said that where negotiating parties reach agreement upon contractual terms but make their agreement dependent upon formal documentation, the agreement may be in one of three categories:

• Where the parties have reached finality (and intend no departure) and merely wish to reflect their agreement in a fuller and more precise form. Intend to be bound immediately. In this situation, there is a binding contract
• Where the parties have reached finality (and intend no departure) but have made performance of one or more of the terms conditional upon the execution of a formal document. In this situation, there is a binding contract.
• Where the intention of the parties is not to make a concluded bargain at all until they execute a formal contract. In this situation, there is NO BINDING CONTRACT.

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This is the end of the third element of Contracts, Intention. There are not too many rules and criteria in this one, possibly because it is the easiest to distinguish when scrutinising the parties involved in the case. However, it is still an essential element of contracts and so one must make sure to fulfill the criteria present fully. In the next post, I'll be going into the fourth and final element, Certainty.

If you have any suggestions for improvement or questions comment below!

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