Any agreement that is enforceable by law is called a contract. This means that the contract is a legally binding agreement between two parties that outlines their obligations to perform or refrain from performing specific duties. All contracts are agreements, but not all agreements are contracts.[1] For an agreement to become a contract, certain essentials must be fulfilled. For the formation of a legally binding contract, intention is considered one of the essential elements that must be present between the parties involved.

Intention plays a vital role in the formation of a legal relationship. It is an essential element when creating a contract. It demonstrates the willingness of both parties to accept any legal consequences that can arise from entering into a contractual relationship. This article explores the importance of intention in forming a contract, the tests involved in determining the presence of intention in a legal relationship, its examination in various contexts, and the Supreme Court's perspective on the necessity of intention.

Importance Of Intention In Forming A Contract

The intention of both parties is a crucial aspect in the formation of a contract. If neither party intended to enter into a legal relationship while making an agreement, that agreement cannot be considered a contract. This is because intention is one of the necessary elements for an agreement to be legally binding. If there is no intention of parties to enter into the contract, then those lack enforceability or are considered mere promises.

English laws say that for the formation of a contract, there should be a mutual intention of the parties entering into the contract. The case of Balfour vs Balfour (1919)[2] is a well-known case law for the illustration of this principle: The defendant and his wife were on leave in England, But the defendant had to return to Ceylon, where he was employed. His wife was advised to stay there in England due to her medical conditions. The defendant agreed to send �30 every month to her for the expenses and maintenance. The defendant did send some money to his wife. But after some time, the differences arose between them, and gradually, they got separated, and the financial allowances that were once being paid regularly became outstanding arrears. The defendant's wife brought a suit against him to recover the arrears but her action was dismissed by the court.

The court said that not every mutual agreement between the parties leads to the formation of a legally binding contract. To convert a mutual agreement into a legally binding contract, the parties must have the intention for the arrangement to have a legal consequence. This observation is particularly relevant in cases when there is agreement between the spouses or between family members. In essence, the agreements in which parties had no intention to face a legal consequence do not amount to a legally enforceable contract.

The Tests Involved In Determining The Presence Of Intention In A Legal Relationship

According to the common law principle, the parties are not bound by a contract unless they have a common intention to enter into a legally binding agreement. The two tests used to determine intention in a legal relationship are the Objective Test and Rebuttable presumption.

1. Objective Test:This test is also known as the reasonable man test. This test is based on what a reasonable person would think about the intentions of the parties when they entered into a contract. It does not focus on what the parties had in mind at the time of entering the contract but rather what a reasonable person would understand about their intentions given similar circumstances.
    
2. Rebuttable Presumption:In the cases of agreement between family and social contracts, it is assumed by the court that there was an intention to enter into a legal relationship. However, this may be rebutted by providing evidence and facts that prove the contrary intentions.

Simpkins vs. Pays (1955)[3]

The defendant, her granddaughter, and third, a paying guest together, made entries into a crossword puzzle in the name of the defendant, and they shared the expenses without having any formal obligation. They won a prize, but the defendant refused to share it.

The court held that there was an outsider present in the agreement, so the presumption made by the defendant that it was a family agreement and not meant to be binding can be rebutted. A mutual agreement was made with the expectation that the prize would be shared, so the defendant was entitled to share the prize money.

Carlill v Carbolic Smoke Ball Company (1893)[4]

the defendant company had placed an advertisement in a newspaper that made extravagant claims. The advertisement stated that anyone who purchases and uses their product will not contract influenza. Moreover, if a person does get influenza even after consuming the product, then they will be entitled to a �100 reward. The plaintiff used it and caught influenza. When she demanded the reward, the company refused to grant the plaintiff any reward.

According to the judgment made by the court, the observation test was applied, and it was concluded that any reasonable person who reads the advertisement would believe that the company had the intention to form a contract. Accordingly, the plaintiff was entitled to receive the reward.

Examination of intention in various context

Family and Social Matters
In cases of family and social agreements, it is determined by the terms of the agreement or the surrounding circumstances in which the agreement was made. However, it is ultimately up to the court to determine whether the parties intended to enter into a legally binding agreement or not.

1. Agreement between husband and wife.
   Agreements between spouses are typically considered mutual agreements and not legally binding contracts. In cases like Balfour vs Balfour, as already discussed above, the court held that the agreements between husbands are considered noncontractual. However, there are also exceptions to this rule.
   
   In the case of Mc Gregor vs. Mc Gregor[5], the spouses withdrew their complaint by making an agreement in which the husband promised to pay her an allowance, and the wife promised to refrain from pledging his husband's credit. The court held that this was a binding agreement as it clearly showed that there was an intention of the parties to enter into a legally binding contract.
    
2. Agreement between parent and children
   The agreements between the family rely on trust and good faith of the promise. These agreements between the family members are not considered to be legally binding contracts. In the case of Jones vs Padavatton,[6] the defendant's mother asked her daughter to leave her job in Washington DC, travel to England to study law, and then return to Trinidad, where her mother lived, to practice law. The mother promised to pay for her daughter's expenses and provided her with an apartment. The daughter accepted the proposal, but later, they had a falling out, and the mother asked the daughter to return possession of the apartment. However, the daughter refused.

The court determined that the agreement was not a contract since there was no intention to enter into a contractual relationship, as it was a promise in good faith between a mother and a daughter.

Even though the agreement between the relatives is a social agreement and cannot be held legally binding, there are always exceptions, and in some cases, it can be rebutted based on facts and the surroundings. In Parker vs Clark[7], an agreement which was between the relatives to share the house was held binding by the court.

Commercial Agreements

Whenever a business transaction takes place between the parties, it is presumed that the parties intend to enter into a legally binding contract. The intent of making a commercial agreement is to build a legal relationship between the parties. But these can be rebutted based on the facts and circumstances.

In Edward Vs. Skyways,[8] the plaintiff pilot, was told by the pilot association that he would be given an ex gratia, a voluntary gift by the defendant. However, the defendant failed to do so, which caused the pilot to sue the defendant. The defendant argued in the court that as it was an ex gratia, he was not legally obliged to fulfill it. The court held that as the agreement between the parties was related to business matters, it was presumed that the agreement was legally binding.

Supreme Court's View On The Requirement Of Intention:
The Supreme Court has expressed doubt about the necessity of intention to contract as a requirement under the Contract Act. The court said that the requirement of intention is more relevant in cases where consideration is not a necessary element for the enforceability of a contract.

Earlier in the decision of Banwari Lal v Sukhdarshan Dayal [9], the Supreme Court had given a limited application of the principle of intention. During an auction sale of plots of land, an announcement was made through a loudspeaker that a certain dimension of land was reserved for building a Dharmshala. However, later on, that same land was sold for private purposes. The matter was then taken to court, where it was determined that the statement made on the loudspeaker was merely a puff and did not hold any binding value. So, the land will remain with the purchaser.

In the case of CWT vs. Abdul Hasan Mulla Mohammad Ali [10], the Supreme Court noted that the presence of intention is essential in the formation of a contract, in addition to other essential elements. The court then cited the following passage from Cheshire and Fifoot's Law OF Contract: the criticism of it made by Prof. Williston demands attention, not only as emanating from a distinguished American jurist but as illuminating the whole subject. In his opinion, the separate element of intention is foreign to the common law, imported from the Continent by academic influences in the I9th century, and useful only in systems that lack the test of consideration to enable them to determine the boundaries of contract.[11]

Conclusion
Intention is a crucial element in forming a legally binding contract. It plays an important role in determining whether or not an agreement is enforceable. This is demonstrated by two tests, which are discussed in detail in the paper. The paper also examines the role of intention in various types of agreements through case law examples. Finally, the paper explores the stance of the Supreme Court on the importance of intention in contracts. In conclusion, we can say that intention is essential for creating a legally binding agreement. Without it, an agreement is merely a mutual agreement.

References:

1. TheyDiffer.com, Difference Between Agreement and Contract, accessed [March 22, 2024], https://theydiffer.com/difference-between-agreement-and-contract/.
2. (1919) 2 KB 571
3. (1955) 1 WLR 975
4. (1893) 1 QB 256
5. (1888) LR 21 QBD 424 (CA)
6. (1969) 1 WLR 328 (CA)
7. (1960) 1 WLR 286
8. (1964) 1 WLR 349
9. (1973) 1 SCC 294
10. (1988) 3 SCC 562
11. Singh, Avtar. (1973) 12: 151

Award Winning Article Is Written By: Ms.Ishani Narayan, Student At Dr Ram Manohar Lohia National Law University.

Authentication No: JN454611132465-28-0724