This article has been written by Rebant Basak pursuing a Diploma in US Contract Drafting and Paralegal Studies course from LawSikho.

This article has been edited and published by Shashwat Kaushik.

Introduction

The contract is the foundation of all economic dealings, legal exchanges, and social interactions. Fundamentally, the basis of contracts is the mutual understanding and consent of the parties. All contracts are agreements but not all agreements are contracts. Only legally binding agreements are termed as contracts and the intention of the parties entering into the agreement is one of the fundamental components that support the legitimacy and efficacy of any contract. Both parties must have a clear, mutual understanding that they intend to enter into a legally enforceable agreement. The party’s clear intention is seen in the simple and understandable language he/she uses.

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Intention of parties to create a legal relationship

The concept is integral to contract law as it highlights the seriousness and legal consequences of entering into a contract. An important precedent that illustrates the importance of intention is the case of Balfour vs. Balfour (1919), where the Court held that this agreement was purely domestic and social and neither of the parties was legally bound as there were no express terms to create a legal relationship between the parties.

Intention in a contract means the legal intent that the contracting party must have to form a legally binding agreement. The intentions should be of such nature that if one party breaches the obligations of the contract, then the other party has the right to bring legal proceedings against the other party. The

Key elements of intention of parties to a contract

The following elements should be considered while determining the intention of the parties in a contract-

Offer and acceptance

There should be an offer by one party and that offer should be accepted by the other party without any coercion.

Consideration

There should be consideration between the parties, and that consideration should be something of value that must be exchanged between the parties. That thing must be of valuable benefit, which one party receives from the other in exchange. Consideration could be in the form of a promise to do or abstain from doing something or it may be in the form of some goods or services.

Capacity

Both parties entering into the contract must be competent enough and have the legal capacity to enter into a binding agreement. This means that they must be of legal age, of sound mind, and not under any legal disabilities that would prevent them from entering into a legally binding agreement.

The legal age of majority varies from jurisdiction to jurisdiction, but it is typically 18 years of age. Persons under the age of majority are generally considered to be minors and lack the legal capacity to enter into binding contracts.

Consent

The parties should enter into an agreement with their full consent, which has been given by themselves, without any pressure or coercion.

Formalities

There are some specific formalities attached to some contracts. These formalities may vary from one contract to the next. For example, some contracts may require that they be written and witnessed by a third party.

Who are parties to a contract

In a contractual agreement, parties are the individuals, entities, or legal persons entering into mutual obligations and responsibilities. These parties could be individuals, businesses, governments, or any combination thereof. Each party brings its unique interests, rights, and expectations to the contract, setting the stage for a collaborative and mutually beneficial relationship.

Responsibilities of parties to a contract

There are a few responsibilities for the parties, which are as follows:

Obligation and performance

In the contract, the parties specify their respective roles and duties. These responsibilities could relate to any agreed-upon activities, payment terms, or the delivery of products or services. By making these expectations clear, the likelihood of miscommunications and conflicts is reduced.

Communication and cooperation

A contract’s success depends on the parties’ ability to effectively communicate and work together. Continual communication, prompt notice of modifications, and a cooperative approach guarantee that all sides remain in agreement during the term of the contract.

Dispute resolution

Contracts frequently contain clauses aimed at settling disagreements between parties. These procedures, which include clauses pertaining to arbitration or mediation, offer the parties an organised and frequently more effective substitute for litigation while also protecting their working relationship.

Importance of intention of parties in a contract

Understanding the intentions of the parties is essential for several reasons:

  1. Mutual assent: The intention of the parties establishes mutual assent, which is a fundamental requirement for the formation of a valid contract. Both parties must have a shared understanding of the terms and conditions of the contract, ensuring that they are in agreement regarding their rights and obligations.
  2. Interpretation of contract terms: The intention of the parties serves as a guiding principle in interpreting the terms of the contract. When disputes arise, courts and tribunals often rely on the subjective intentions of the parties to determine the meaning and scope of the contractual provisions. This approach helps to ensure that the contract is interpreted in a manner that reflects the parties’ true understanding.
  3. Implied terms: In certain circumstances, the intention of the parties can give rise to implied terms that are not explicitly stated in the written contract. These implied terms are derived from the parties’ presumed intentions and are considered to be part of the contractual agreement.
  4. Estoppel: The principle of estoppel may apply in situations where one party’s conduct or representations lead the other party to believe that a certain intention exists. If the relying party acts in reliance on this belief, the party making the representation may be stopped from denying their intention.
  5. Frustration of contract: In cases where unforeseen events make it impossible or impractical to fulfil the contractual obligations, the intention of the parties at the time of contracting becomes relevant. Courts may consider whether the parties intended to assume the risk of such events or whether the contract should be frustrated and discharged.
  6. Mistake: If a party enters into a contract under a mistake of fact or law, the intention of the parties may be taken into account in determining whether the contract is void or voidable.

Legitimacy of a contract

There are two terms, namely express and implied, that play a crucial role in the contract. The legitimacy of the contract is based on expressed and implied consent. These terms help to make a contract effective and enforceable without any errors or ambiguities.

Express terms

These are the specific terms that are explicitly agreed upon by the parties to a contract. These can be in written form, oral form or electronic form which basically sets out the primary obligations, rights and expectations of each party.

It is very crucial for the parties to draft the express terms in a very careful manner to ensure that their intentions and expectations are clearly and accurately stated without any error. It ensures clarity and certainty and reduces ambiguities.

Implied terms

These terms are not explicitly stated but are always a part of the agreement by virtue of the intention of the parties. They are not specifically agreed upon by the parties but are a part of the contract. These terms are incorporated into the contract through statutes or case laws to ensure the effectiveness and fairness of the contractual agreement.

Clear language and true Intention

Language is an important factor to take into consideration while drafting contractual agreements. It is very important to be clear while communicating the intent of the parties in a contract in plain and simple language. Language ambiguities, contradicting information, or altered conditions can make it more difficult to determine the real intent. Judges must carefully consider all the evidence in order to determine what the parties really expected.

Breach of contract and its remedies

A breach of contract simply means a violation of the terms and conditions that were agreed upon by the parties while entering into a contract. The basic remedy available to the injured party is damage. Damages can be of two types-

  1. Compensatory damages: These are the damages that are given to the non breaching party due to the breach of contract to cover the loss incurred. Examples can include general damages and special damages.
  2. Punitive/Exemplary damage: These damages are intended to punish the wrongdoer who has committed the wrong or breached it maliciously, fraudulently and wilfully. Normally, these damages are not awarded in breach of contract.

Tests to determine intention to create legal relationship

Objective test

In this test, the court decides based on what a reasonable man would think at the time of entering into the contractual agreement. It does not take into consideration the intention of the parties but what a reasonable man would think while entering into the contract.

The case of Simpkins vs. Pays (1955) illustrates the application of the test of objectivity. In this case, a mother, her daughter, and a paying guest participated in crossword puzzles, with the mother’s name being used for the entry. The expenses were shared among them without any formal obligations. When they won a prize, a dispute arose about sharing the winnings. The court determined that a reasonable person in these circumstances would have believed there was an intention to share the prize. Consequently, the court upheld the existence of a binding agreement based on this objective interpretation.

In the case of Carlill vs. Carbolic Smoke Ball Company (1893), the defendant company advertised that they would pay £100 to anyone who contracted influenza after using their product as directed. Mrs. Carlill used the product as instructed but still fell ill. When she sought the reward, the company refused to pay. The Court acknowledges that in the case of vague advertisements, language regarding payment of a reward is generally a puff, which carries no enforceability.  In this case, however, the defendant noted the deposit of £1000 in their advertisement, as a show of their sincerity. Because the defendant did this, the court found their offer to reward to be a promise, backed by their own sincerity.

Rebuttable presumption

This takes place in family or societal agreements where the court presumes the intention to create a legal relationship. However, this presumption is not absolute and can be rebutted by providing the necessary facts or circumstances of contrary intention.

In McGregor vs. McGregor (1888), a husband and wife withdrew their complaints under an agreement where the husband promised to pay her an allowance, and she refrained from pledging his credit. In this case, the court deemed the agreement binding because it demonstrated the parties’ intention to create a legal relationship. The Court’s decision in McGregor vs. McGregor hinged on the principle of contractual intent. The agreement between the husband and wife was deemed legally binding because it demonstrated the parties’ clear intention to create a legal relationship. This intention was evidenced by several factors, including the specificity of the terms of the agreement, the consideration provided by both parties, and the mutual understanding of the rights and obligations created by the agreement.

The Court recognised that the agreement between the husband and wife had the hallmarks of a valid contract. There was an offer and acceptance, consideration in the form of the allowance and refraining from pledging credit, and a meeting of the minds regarding the terms of the agreement. The court also considered the fact that the agreement was in writing, which added to its weight and credibility.

Jones vs. Padavatton (1969)

Facts of the case

In this case, the plaintiff, Mrs. Jones, promised her daughter, Ms. Padavatton, financial support if she pursued legal education in England and returned to Trinidad to practice as a barrister. Ms. Padavatton accepted the offer and went to England to study law. After completing her legal studies and obtaining her call to the bar in England, Ms. Padavatton returned to Trinidad. However, conflicts arose between Mrs. Jones and Ms. Padavatton, leading to the termination of financial support by Mrs. Jones.

Court’s decision

The Court held that the promise of financial support made by Mrs. Jones to her daughter did not create a legally enforceable contract. The Court found that the arrangement between Mrs. Jones and Ms. Padavatton was a family arrangement grounded in good faith and did not exhibit the intention to create a contractual relationship. The Court emphasised the absence of essential elements of a contract, such as consideration and the intention to create legal relations.

Legal significance

The decision in Jones vs. Padavatton highlights the distinction between legally enforceable contracts and family arrangements. It demonstrates that not all promises made within a family setting are legally binding. The case underscores the need for clear and unequivocal evidence to establish the existence of a contractual relationship in such situations.

Conclusion

The intention of the parties plays a crucial role in the world of contract law. In various judicial proceedings, the court was of the view that there should be an intention of the parties to create a legal relationship. In common law, the intention of the parties is an essential part of a contract and consideration is just an evidentiary factor for the intention, whereas in Indian law, consideration is an important part of a contract and its existence proves the intention of the parties in a contract. Taking into consideration the drafting of contractual agreements, intention gives a clear way to it and also signifies the rights and obligations of the parties to a contract in a precise and clear way.

References

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