Intention to be legally bound is an essential element of a valid, enforceable contract. It means that all parties to a contract must accept the terms of the contract with an intention of forming a legally binding relationship.

Parties Must Intend to Be Legally Bound

In order to constitute a valid contract, an offer must be made and accepted with the intention of being legally bound. However, it's not necessary to have a real or apparent intention to form a legal relationship. It's usually construed from the conduct of the parties.

If any party to the contract expresses the intention that the terms of the agreement would not affect their legal relations, it may prevent forming an enforceable contract.

Agreement Not to Be Legally Bound

Sometimes, parties may agree that they would not be legally bound. Courts usually respect such term like any other unless the agreement stands invalid due to some other reason. However, agreements of this type may make it difficult to interpret the nature of promise.

If one party has fulfilled its obligations under the agreement and the other party fails to perform its part, then not making the other party legally liable may result in unjust enrichment.

Why Intention to Create Legal Relations Is Important

Intention to create legal relations indicates the intention of parties to enter into a legally binding agreement. It shows that the parties are ready to accept the legal consequences of the agreement, which means that they are serious about it.

Significance of Intention to Create Legal Relations

  • When two contracting parties intend to enter into a legal relationship, they will try to understand the terms of the contract in all seriousness.
  • Absence of intention to create legal relations makes a contract unenforceable in law.
  • Without the intention to create legal relations, the contracting parties cannot sue for enforcement of the contract, which may lead to unfair circumstances and business crises.
  • A contract without any intention to create legal relations becomes a simple promise.
  • Absence of intention to create legal relations reduces the binding effect of a contract. It makes the contract less powerful, and the parties would be less likely to keep their promise.

Types of Intention to Create Legal Relations

An intention to create legal relations can be of three different types:

  • Commercial relations
  • Social relations
  • Domestic relations

Commercial Relations: In case of commercial relations, unless rebutted, it's usually presumed that the parties intend the agreement to be legally binding.

For example, in a case, a bank sanctioned a loan to Company A, which was a subsidiary of Company B, on the condition that the parent company stands guarantee to the loan. The parent company, instead of guaranteeing the loan, issued a letter of comfort, saying that the business of its subsidiary company is always in a position to pay off its liabilities. The bank accepted the letter and issued the loan but with a higher rate of interest.

Subsequently, Company A went into liquidation, and the bank sued Company B for the balance amount of unpaid loan. Although the court ruled in favor of the bank initially, on appeal, the judgment finally went in favor of Company B. It was ruled that the letter did not intend to act as a guarantee.

Social Relations: In case of social relations, courts do not presume the intention to create a legal relation.

In Simpkins vs. Pays, the plaintiff, a lodger, made an informal agreement with the landlady to participate in a newspaper competition in her name. Their entry was successful, and the landlady refused to share the reward with the plaintiff, who sued for his share. The court ruled that the agreement was legally binding since there was sufficient mutuality in terms of the arrangements made between the parties.

Domestic Relations: In case of domestic relations, courts do not presume the intention to be legally bound.

In a case, a man brought his wife to England from another country. He had to return whereas his wife had to stay back for medical reasons. He promised to send her a monthly payment until he came back. On his failure to pay the promised amount, his wife sued him.

The court held that the promise was not legally binding because of two main reasons:

  • There was no consideration from the wife's side.
  • There was no intention to create a legally binding agreement.

The burden of proof to prove the intention was on the plaintiff.

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