Contract – intention Q8

Q.
'The intention to create legal relations is an essential element in a binding contract.'
Explain this statement.

(20 marks, 2012 Q8)

A.
Please see:
MIA QE 2008/3 Q1(ii) on requirement of law as 'intention to create a legal relationship' here.
2012 Q8 Contract - Intention Q8.

As we all know, intention to create legal relations is part of elements in contract. Intention to create legal relations is defined as an intention to enter a legally binding agreement or contract. Intention to create legal relations is one of the necessary elements in formation of a contract. It is because, intention to create legal relations consists of readiness of a party to accept the legal sequences of having entered into an agreement. Intention to create legal relations is a motion of every contracting party must have the necessary intention to enter into a legally binding contract.

Property Tour - sightseeing. For the sake of discussion, Mr John is a seasoned investor. He agreed one day to come along with an Estate Agent to see a few properties. He did not specify which type or how much the price range of property he is looking for. He merely said "See see, look look."

Much of the circling around a few Taman and Estates, he was given to tour a bungalow which attracted his attention. He asked about the particulars of the property, its lease term, price, and whether anyone is putting deposit to book the bungalow. At this stage, Mr John has shown an intention. His earlier "see see look look" merely expressed his intention to look for a favourable property, but his detail investigation of this bungalow is an intention to create legal relations specific to this property. 

There are a few concept of intention to create legal relations. Intention to create legal relations also means an intention to be serious about agreement significance:

a) The contracting parties mind will be obvious to enter a serious contract.
When two parties decided to enter in the environment of a contract, their mind will understand the contents of the contracts. This is due to their ‘intention' to be consenting mind which both of the parties have to agree. If there is no agreement by both of the parties, it may make the contact being a void agreement. Thus, both of the contracting parties will enable to be serious into the contract.

b) If there is no intention to create legal relations the contract would not be enforceable, legal and binding.
Intention to create a legal relation is one of the essential elements of contract. So, if there is no intention to create a legal relation, the contract can be assumed as a not legal. Due to that, the contract may not be enforceable because there is no intention to create legal relations at the beginning. Thus, there was no contracting parties to be legally bound.

c) Without intention to create legal relations, the parties cannot sue each other.
With no intention to create legal relations, the contracting parties are not legally bound and this circumstances may cause the contract to be unenforceable. Therefore, when the contract is unenforceable, the contracting parties cannot sue each other. This will be at their business detriment and make the contracting parties hard to pursue justice.

d) Without intention to create legal relations the contract may become a mere hearsay.
In addition, with no intention to create legal relations, it will make any contract to become a mere agreement without detriment to the position of parties into a contract. 

Based on this scenario, the situation becomes a mere agreement of opinion when Mr John shows interest and told the agent to 'hold' for him, without any payment of booking fee. The agent may be approached by a serious buyer later who would pay a booking fee which makes Mr John at a losing end as 'interested' does not constitute a contract. However, if there is a certain agreement to come back with a booking fee by Mr John, he needs to stipulate the time and the quantum of the booking fee. In such situation, if the agent defaulted by taking booking fee from a third party before the expiry of the time agreed, Mr John may have ground to claim for "Promissory Estoppel". 

He has proven his desire to deposit a booking fee and specified a time, and the agent thereafter agreed upon. This is a genuine intention to create legal relations. However, if the agent did not want to accept the terms of the offer i.e. booking fee, there is still no contract. Conversely, the element of a promissory estoppel can be argued if the agent were to use it as a 'shield' saying that he did not accept a promise. When there is a consideration paid, it is already a contract. In event such consideration is not directly related as 'booking fee', for example Mr John told the agent to take down the "TO LET/FOR SALE" signage, and out of gratitude of 'making a sale' the agent treated Mr John to a feast at a nearby restaurant. The agent spent RM350 for the meal. Thereafter, Mr John turned down the agent for the sale of the bungalow. In such situation, the agent can claim Equitable Estoppel.

e) Without intention to create legal relations the contract may lack the binding effect.
Besides that, when there is no intention to create legal relations, it will make the contract or agreement become less powerful due to whether one or both of the parties does not have a consent mind. So, if the contract lack of binding effect, it will cause the difficulty to the party involved in future. Domestic and social agreements of intention to create legal relations can be broken down into three groups which are firstly commercial or business relations, secondly social friend's relations and thirdly family or domestic relations.

Ref:
With modification from:
http://www.lawteacher.net/contract-law/essays/intention-to-create-legal-relations.php