Indian Contract Act, 1872 lays the essentials and pre-requisites of the Contracts made in India. Contract is an agreement which is enforceable in the courts of law. Under Indian Contract Act, there is no such provision which speaks about the intention to create legal relationships while accepting a contract. But, under English Laws it is necessary for the contracting parties to have a common intention of entering into a legal obligation. Even if the parties agree on the same terms, then also, every loose conversation cannot be turned into a contract in social relations.
In India, the courts have the responsibility to access whether the contracting parties intended to enter into legal relations or not. Intention is determined by the courts with the help of the terms of the contract and the surrounding circumstances. In cases of agreements regulating social relation, parties usually do not intend legal consequences to follow. But, in business, the parties intend for legal consequences.
The test for examining the intention to create legal relationships is objective in nature. Here ,the importance is not given to what is going in the minds of contracting parties, but to what a reasonable man would think in that particular situation.
- What is the importance of intention in a contract? 2Who is a reasonable man?
- What is the importance of intention in a contract?
- Intention plays a vital role in the contracts as it shows the readiness of the parties to accept the legal consequences of having entered into an agreement. In other words, it also means the seriousness to enter into an agreement.
- A non-intended contract can be assumed as not legal. If there is no intention to create a legal relationship, then the contract may not be enforceable, legal and binding.
- With lack of intention to create a contract, the parties may lose their ability to sue each other for the fulfilment of a contract or agreement.
- An agreement or a contract loses its power due to lack of binding effect on the contracting parties as there would be no legal consequences on the breach of the terms of the contract.
Who is a reasonable man?
- Reasonability of a person appears in the laws of the United States, United Kingdom, Russia, India, Singapore, China, Hongkong, Australia etc.
- A reasonable man is an individual whose actions are backed with cautions, and who acts sensibly in a particular situation. It is a standard created by the courts, to objectively test the actions of a person.
- Children are exceptions to the standard of reasonable man as they cannot be expected to act like a mature adult. But, the actions of children are compared with the actions of the other children of the same age group and alike in their amount of experience and skills.
- According to, constitutional courts, a reasonable man is “an ordinary man of common sense and prudence and not an out-of-ordinary or hypersensitive man.”
- Supreme court of India upheld that 1“An agreement, even though it is supported by consideration, is not binding as a contract if it was made without any intention of creating legal relations.”
DETERMINATION OF INTENTION
There are two ways of determine the existence of intention to create legal relationships in an agreement-
- Until and unless it is proven that there was an intention in situations of social and domestic arenas, it would be presumed that intention to bring effect to the agreement never existed.
- In Cases which include commercial and business agreements, by default it is presumed that there would be a presence of intention to create legal relationship between the parties, until and unless the opposite is proven.
INTENTION IN SOCIAL RELATIONS
We all regularly make arrangements with each other, and we may even be doing things in return for something, and this seems as though there is consideration too and that the agreement may therefore be binding. However, not every agreement has an intention to create a legal relation that if we fail to keep that agreement, someone would have the power to sue us in the court of justice.
For instance, a husband promises or agrees to take his wife for a movie. But, due to certain reasons he could not. In this situation the husband broke his promise. Yet, his wife does not have the power to sue him in the civil court either for the fulfillment of the promise or for the breach for an agreement.
The law makes a sensible compromise by enforcing a rule of implementing the intentions in certain cases and by excluding it in others. The decision is taken in the wake of the fact that it would overburden the judiciary and it would be hardly sensible in each broken promise of this type to be able to sue even if it is upsetting and morally blameworthy when they are broken.
2Justice Atkin LJ explained the basic principle: ‘It is important to keep in mind that there are some agreements between the parties which do not result in contracts within the meaning of that term. In the law, arrangements that are made between a husband and wife cannot be claimed as contracts because the two parties did not intend that they should be held responsible by to legal consequences. The lower courts of the country would be overflowed with such cases involving social relations. However, where husband and wife are already estranged then an agreement between them may be taken as intended to be legally binding because the couple are at arm’s length.
INTENTION IN BUSINESS MATTERS
The motive of almost all the activities of a business is to earn profit. Businesses in any case operate within a legal framework and therefore it is presumed that agreements are contractual unless the facts involved prove otherwise. An arrangement made in the business context, is generally presumed to have the existence of intention to be legally bonded, unless contrary is proven.
In a business, it is common to make offers for free gifts, which actually promote the business. Such agreements are legally binding as it clearly depicts the intention Similarly, in situations where prices are offered in a competition, which promotes the organization offering the prizes, there is an intention to create legally a legal relationship which is binding on both the parties.
It is even possible that in an agreement there is absence of intention, even if it is clearly stated in the agreement itself. 5Sometimes, it is possible that the court sees some part of the contract to be legally bound whereas others are not.
Intention to create legal relationships is the third component for the formation of a contract. Other two are- agreement and consideration. Court needs to examine the real purpose of the arrangement and it is this purpose which will determine the existence of intention in a particular case. Whether or not the parties to a contract have the requisite contractual intention is a question of fact, to be decided by reference to the particular circumstances of each case. However, the cases recognize that, in certain situations, there is a presumption that such intention will be lacking.
In its simplest form, intention to create legal relations means that the parties must intend to enter into a legally binding arrangement in which the rights and obligations of the agreement are enforceable. It is relatively certain that in a business, there is the existence of intention to create legal relationships.
In addition, sometimes the courts would determine the presence of intention to create legal relations despite the existence of valid offer, acceptance and consideration. Courts would presume an agreement to be legally bound only if the parties themselves entered into a contract.