Intention to Create Legal Relations in Contract Law: Meaning, Tests, and Legal Effect

INTENTION TO CREATE LEGAL RELATIONS IN CONTRACT LAW

1. Introduction

Contract law is concerned with enforcing promises that parties intend to be legally binding. Not every promise, agreement, or arrangement made between persons is meant to attract legal consequences. Many agreements are made daily in homes, among friends, and within families based on trust, affection, moral duty, or social convenience. The law does not interfere with such arrangements unless the parties clearly intended that their agreement should be enforceable in court.

The doctrine of intention to create legal relations exists to separate legally enforceable contracts from non-binding social and moral promises. Even where offer, acceptance, and consideration are present, the absence of intention to create legal relations will prevent the formation of a valid contract.

This principle is firmly established in common law and is applied consistently by courts in Ghana.

2. Meaning and Nature of Intention to Create Legal Relations

Intention to create legal relations refers to the intention of the parties, particularly the party seeking to enforce the agreement, that the agreement should be legally binding and capable of enforcement through court action.

In practical terms, it means that the parties contemplated that if one party failed to perform his or her obligations, the other party could bring an action in court for remedies such as damages, specific performance, or injunction.

The court does not rely on the secret or subjective thoughts of the parties. Instead, it adopts an objective approach by examining what reasonable persons in the position of the parties would have understood from their words, conduct, and surrounding circumstances.

3. Importance of Intention to Create Legal Relations

The requirement of intention to create legal relations serves several important purposes.

First, it prevents the courts from being flooded with disputes arising from family misunderstandings and social disagreements.

Second, it protects personal relationships by ensuring that informal domestic arrangements are not automatically turned into legal battles.

Third, it promotes certainty in commercial transactions by presuming that business arrangements are meant to be enforceable.

Fourth, it ensures that contractual liability arises only where parties deliberately choose to assume legal obligations.

4. Presumptions Governing Intention to Create Legal Relations

The common law has developed two major presumptions which guide the courts.

4.1 Social and Domestic Agreements

In agreements made within a social or domestic setting, the law presumes that the parties do not intend to create legal relations.

This includes agreements between:

• Husband and wife
• Parents and children
• Brothers and sisters
• Extended family members
• Close friends and social companions

The basis of this presumption is that such agreements are normally founded on love, affection, mutual trust, moral obligation, and family harmony rather than legal enforceability.

Such arrangements are expected to be performed voluntarily and not under the threat of litigation.

4.2 Commercial and Business Agreements

In commercial and business transactions, the law presumes that the parties intend their agreements to be legally binding.

This includes agreements between:

• Employers and employees
• Traders and customers
• Manufacturers and distributors
• Contractors and suppliers
• Corporate entities and government institutions

Commercial relationships are profit oriented and often form the economic foundation of the parties. It is therefore assumed that parties expect legal remedies if obligations are breached.

4.3 Rebuttable Nature of the Presumptions

Both presumptions are rebuttable. This means that either party may introduce evidence to displace the presumption.

A party may prove that:

• A social agreement was intended to be legally binding, or
• A commercial agreement was not intended to have legal effect

The court will then examine the totality of the circumstances to determine the true legal position.

5. Intention to Create Legal Relations in Commercial Agreements

5.1 General Principle

Where an agreement arises in a commercial context, the presumption is that the parties intended to create legal relations. A party who wishes to deny legal intention bears the burden of proof.

To rebut the presumption, there must be clear and convincing evidence that the parties intended the agreement to operate on trust, honor, or goodwill only.

5.2 Rose and Frank Co Ltd v Crompton Bros Ltd

Facts

Rose and Frank Co Ltd was an American company engaged in the distribution of paper products. Crompton Bros Ltd was a British manufacturer of tissue paper. The parties entered into a long-term commercial arrangement under which Rose and Frank would act as the exclusive distributor of Crompton’s products in the United States.

The written agreement contained a clause stating that the arrangement was not a formal or legal agreement. It further stated that the document was only a record of the intentions of the parties and that the parties bound themselves in honor only.

Subsequently, a dispute arose when Crompton refused to supply further goods. Rose and Frank sued for breach of contract.

Legal Issue

Whether the commercial agreement was intended to create legal relations despite the express wording of the honor clause.

Court’s Reasoning

The House of Lords acknowledged that commercial agreements are normally presumed to be legally binding. However, the court emphasized that parties are free to choose whether or not to create legal obligations.

The presence of the honor clause was decisive. It clearly showed that the parties deliberately opted out of legal enforceability and intended their relationship to be governed by mutual trust and good faith rather than legal sanctions.

Decision

The court held that the main agreement was not legally enforceable.

However, the court also clarified that individual orders placed and accepted under the arrangement constituted separate contracts which were legally binding.

Illustration

If two companies sign a memorandum stating that their business collaboration is “binding in honor only and not intended to create legal obligations,” the courts may treat the agreement as non-binding despite its commercial nature.

5.3 Edwards v Skyways Ltd

Facts

Skyways Ltd was an airline company that employed a number of pilots. Due to restructuring and redundancy, the company entered into negotiations with the British Pilots Association. During these negotiations, the company promised to pay redundancy compensation to affected pilots.

The pilots relied on this promise and accepted redundancy. The company later refused to pay, claiming that the payments were ex gratia and therefore not legally binding.

Legal Issue

Whether the promise made in the context of employment and industrial negotiations was intended to create legal relations.

Court’s Reasoning

The court held that the agreement arose within a commercial employment relationship. In such circumstances, there is a strong presumption of legal intention.

The mere use of the phrase “ex gratia” did not displace the presumption. There was no evidence that the parties intended the promise to be based on honor or goodwill alone.

Decision

The court held that the airline was legally bound to make the redundancy payments.

Illustration

If an employer promises to pay workers a severance package as part of redundancy negotiations, the promise is presumed to be legally enforceable unless clearly stated otherwise.

Under Ghanaian Jurisprudence

NDK Financial Ltd v Ahaman Enterprise Ltd (2013)

The appellant, a financial services company, advanced money to the respondents under a business arrangement, but the respondents later denied liability on the basis that there was no intention to create legal relations. 

The trial court accepted this argument and held that the arrangement was not legally binding. On appeal, the Court of Appeal reversed that decision, holding that because the transaction was commercial in nature, there was a strong presumption that the parties intended to create legal relations. 

The court applied an objective test, focusing on the parties’ conduct and the surrounding circumstances, and concluded that a reasonable person would view the agreement as intended to have legal consequences. Accordingly, the court held that the parties did intend to create legal relations and that the agreement was enforceable.

Hammond v Ainsooson

The defendant was an owner of a fishing boat which had become unserviceable. He contracted the services of the plaintiff to supervise the repairs for a fee and that the plaintiff would then be responsible for the sale of the fish caught by the boat. This agreement was verbal and the defendant promised to abide by the terms, whether reduced into writing or otherwise.

Subsequently, the defendant employed another person to sell the fish, in breach of the agreement between the parties. The defendant denied the existence of a binding contract citing that nothing had been reduced into writing and the parties had not intended to create a binding legal relation. 

The court considered all the circumstances, holding therefore that there was a contract between the parties resulting in a legal obligation. 

6. Intention to Create Legal Relations in Social and Domestic Agreements

6.1 General Principle

Agreements made within family and social relationships are presumed not to be legally binding. This presumption reflects the social reality that people do not normally expect to sue their relatives or friends for breach of domestic promises.

To rebut this presumption, there must be clear evidence of seriousness, formality, and separation of personal affection from legal obligation.

6.2 Coward v Motor Insurance Bureau

Facts

Two friends regularly travelled together to work. One owned a motorcycle and gave the other friend lifts. The passenger occasionally contributed small sums towards petrol. There was no written agreement or fixed payment arrangement.

An accident occurred and the passenger was killed. His widow claimed compensation from the motor insurer on the basis that her husband was being carried under a contract for hire or reward.

Legal Issue

Whether the arrangement between the friends amounted to a legally binding contract.

Court’s Reasoning

The court held that the arrangement was purely social. The occasional contributions towards fuel did not amount to payment for transport services.

There was no intention to create legal relations. The arrangement was based on friendship and mutual convenience.

Decision

The insurance company was not liable.

Illustration

If friends agree to share fuel costs when travelling together, the arrangement is presumed social and not legally enforceable.

7. Husband and Wife Agreements

7.1 Balfour v Balfour

Facts

A husband working overseas promised to pay his wife a monthly allowance while she remained in England. The marriage later broke down and the wife sued to enforce the promise.

Court’s Reasoning

The court held that agreements between spouses living together in marital harmony are presumed not to be legally binding. Such arrangements are made in the ordinary course of domestic life.

Decision

The wife’s claim failed.

7.2 Merritt v Merritt

Facts

The husband left the matrimonial home after the relationship deteriorated. The parties reached a written agreement under which the husband promised to transfer the house to the wife if she completed the mortgage payments.

Court’s Reasoning

The court distinguished this case from Balfour v Balfour. The parties were no longer living in marital amity. The agreement was formal, written, and concerned property rights.

Decision

The presumption against legal intention was rebutted and the agreement was enforced.

7.3 Pettit v Pettit

Facts

A husband carried out improvements and decorations to a house owned by his wife during marriage. After divorce, he claimed a beneficial interest in the property.

Court’s Reasoning

The court held that voluntary domestic improvements do not imply legal intention or contractual entitlement.

Decision

The husband’s claim failed.

Ghanaian Jurisprudence

Achiampong v Achiampong

Facts

The parties were husband and wife. During the marriage, the husband acquired a house from the State Housing Corporation in his sole name under a hire-purchase arrangement, and it became the matrimonial home. At the husband’s request, the wife abandoned her plan to buy her own house and instead used her savings and income to maintain the household and later took a loan to finance substantial extensions and improvements to the house. After the marriage broke down and a divorce was granted, the wife claimed a beneficial interest in the house.

Court Reasoning

The Court of Appeal made it clear that intention to create legal relations between husband and wife is not presumed in the same rigid way as between commercial strangers, but it can clearly exist and be legally enforceable depending on the circumstances. 

Not every agreement between spouses is legally binding, and therefore the court must examine all the surrounding circumstances to determine whether the parties intended their arrangement to have legal consequences. In this case, the court found that there was an actual agreement between the husband and wife that the matrimonial home, although legally in the husband’s name, was to belong beneficially to both of them. 

This intention was inferred from the husband’s request that the wife abandon plans to buy her own house, her substantial financial contributions to household expenses and improvements, and the shared understanding that the house was for their joint benefit. 

The court emphasized that once it is established that the parties intended the transaction to be binding, the court must give effect to it, even if there was no carefully drafted or formal agreement. Importantly, the court added that between husband and wife, strict contractual formalities applicable to strangers may be relaxed, and intention may be inferred from conduct. 

Decision

The parties did intend to create legal relations, giving rise to a beneficial interest in favour of the wife.

8. Parent and Child Agreements

Jones v Padavatton

Facts

A mother encouraged her daughter to study law and provided accommodation and financial support. After disagreements, the mother sought possession of the house.

The daughter claimed that the arrangement created a binding contract.

Court’s Reasoning

The court held that the arrangement was based on family support and goodwill. There was no evidence of intention to create legal relations.

Decision

The mother was entitled to recover the property.

9. Exceptional Family and Domestic Agreements

Where the agreement is made in a domestic setting but not between spouses or parent and child, the courts examine the terms of the agreement and surrounding circumstances in which it was made to determine whether or not there was an intention to create legal relations. 

Here, the courts will imply an intention to create legal relations if it is found that despite the domestic setting, the agreement possesses a commercial nature to it.

Hamer v Sidway

Facts

An uncle promised his nephew that if the nephew refrained from drinking, smoking, gambling, and swearing until the age of 21, he would pay him money. The nephew complied fully.

After the uncle’s death, the executors refused to pay.

Court’s Reasoning

The court held that the nephew’s forbearance constituted valuable consideration. The seriousness and clarity of the promise indicated legal intention.

Decision

The contract was enforceable.

Parker v Clark

Facts

An elderly couple invited a younger couple to sell their house and live with them, promising to leave them a share of the property. The younger couple sold their house and moved in. The elderly couple later withdrew from the arrangement.

Court’s Reasoning

The court found that the younger couple had made significant financial sacrifices and irreversible commitments. These factors rebutted the presumption against legal intention.

Decision

The agreement was legally enforceable.

Simpkins v Pays

Facts

A landlord, tenant, and granddaughter regularly contributed money to enter competitions. When a prize was won, the landlord refused to share.

Court’s Reasoning

The court held that the arrangement had a commercial element despite the domestic setting.

Decision

The tenant was entitled to his share.

10. Conditions That Make Social Agreements Enforceable

A social or domestic agreement may become legally enforceable where:

1. The subject matter is commercial or financial
2. The terms are clear and specific
3. The parties expressly indicate intention to be legally bound
4. The agreement is documented or witnessed
5. Valuable consideration is provided
6. One party acts to his detriment in reliance on the agreement

11. Conclusion

Intention to create legal relations remains a central pillar of contract law. By applying rebuttable presumptions and objective analysis, courts protect social harmony while ensuring commercial certainty. The doctrine ensures that only those agreements meant to have legal consequences are enforced by law.

TABULAR SUMMARY

Relationship Type	Presumption	Key Case	When Enforceable
Commercial contracts	Intention presumed	Edwards v Skyways	Only rebutted by express honor clause
Honor based commercial contracts	No intention	Rose and Frank v Crompton	Express exclusion of legal effect
Friends and social arrangements	No intention	Coward v Motor Insurance	Business formality and profit motive
Husband and wife in harmony	No intention	Balfour v B