TOPIC 2(e): Intention To Create Legal Relations
General approach to establishing intention:
Objective (Merritt v Merritt Lord Denning MR): In all these cases the court does not try to discover
the intention by looking into the minds of the parties. It looks at the situation in which they were
placed and asks itself: Would reasonable people regard the agreement as intended to be binding.
Air Great Lakes Pty Ltd v K S Easter (Holdings) Pty Ltd
o Mahoney JA: subjective intention not to contract, cannot be established, where reasonable
person would assume there was intention binding
o Mahoney JA: if however, that subjective intention is known by other party, then intention
Commercial context: yes intention, burden to DISPROVE intention
Domestic/familial context: no intention, burden to PROVE intention
Criticism of Presumption:
Ermogenous v Greek Orthodox Community of SA Inc:
o Minister of religion “employed” by Ermogenous. Upon leaving, asked for long service pay.
Argued that there was no contract as it was a spiritual relationship.
o McHugh, Hayne and Callinan JJ: concern that presumptions could “ossify into a rule of law”
circumstances etc vary from case to case.
o Suggestion: person who claims contract bears onus of establishing it. Commercial context
presumption kept but domestic/family context presumption is effectively neutral.
Exception: letters of comfort – doc written by parent company to bank for subsidiary company, just
Banque Brussels Lambert SA v Australian National Industries Ltd – letter of comfort given by ANI in
relation to loan by bank to SSL. Made strongly worded letter of comfort – consented to loan making
and provide bank with 90 days notice of any decision to dispose of interest in SHL (parent company of
SSL). ANI disposed with notification and SSL unable to repay debt to bank.
o French approach: creation of meaningless instrument in commercial world is unthinkable.
Rogers CJ adopted this and said LOC was binding.
o LOC also sounded heavy/promissory that it gave rise to liability.
Kleinwort Benson Ltd v Malaysia Mining Corp Bhd:
o English Court of Appeal held: presumption only arises when words used in doc can be treated
as contractual promise.
Parties may stipulate that agreement is not legally binding (honour clauses).
o Rose & Frank Co v J R Crompton & Bros Ltd – HOL recognised this clause.
There is no legal rule that domestic/social agreements are not intended to be binding (Ermogenous).
They must be decided on their own facts.
Financial agreements between spouses: no binding
o Balfour v Balfour: married couple living in Ceylon. Woman in holiday in England unable to
return because of health. Man promised to pay allowance of £30 per month until she could join
him. Couple remained apart and woman sued for due money. English COA held: not intended
to be enforceable.
Agreements between separating spouses: courts more willing to find legal intention.
o Merrit v Merritt: after separation, man signed doc to pay woman £40 per month and to transfer
his interest in the home to her if she paid all charged in connection with the house until
mortgage repaid. English COA held: binding.
Family Law Act 1975 (Cth):
o Agreements providing distribution of property in event of breakdown of marriage and
agreement to maintenance of one of the parties during marriage/dissolution.
o Under Pt VIIIA: binding if expressed to be made under that relevant section, signed by both
parties with certificate of independent legal advice.
Financial agreements between family members:
o Jones v Padavatton: adopted Balfour v Balfour approach. Mother promise to pay $200 per
month to daughter to allow her to go to England to read for the bar. COA found: not binding as
daughter had prepared to trust her mother to honour her promise.
o Todd v Nichol: woman invited sister/niece of deceased husband to move from Scotland to
Australia to share a house (provide company). Woman admitted that move was a big thing for
them to do and promised to alter her will so that house would be theirs until they died.
Relationship broke down and sister/niece sought to enforce.
Mayo J: binding because of weight of woman’s promise (not a whim) and anticipated
substantial reliance by sister/niece.
Commercial agreements between family members:
o Roufos v Brewster: Brewster and son in son in law, Roufos. R take B’s truck to Adelaide on
back of his semi-trailer so truck can be repaird. Agreed that R would engage a driver to drive
truck back to B and could put goods on truck if he wished. Truck damaged on return.
Bray CJ: was binding as evidence of “intermittent hostility” between parties, and had
pursued separate commercial interests.
Depends: whether transaction is part of commercial agreement or implementation of policy.
o Australian Woollen Mills Pty Ltd v Commonwealth: held to be latter
No statutory authority was sought for making of payments
Scheme announced by persons who had no power to commit C to any expenditure.
C had no commercial interest, just dealing with problem created by war.
C had discretion to vary amount of subsidy.
Privy Council held: more administrative than contractual.
o Administration of Papua New Guinea v Leahy: held to be latter
L sought held of Department of Agriculture to deal with ticks on his cattle property.
Eradication work not carried out properly, L sued.
HC held: Department was providing gratuitous assistance only, social service, which is
o Placer Developments Ltd v Commonwealth: former
C and P to form timber company. Clause 14 said C would pay timber company subsidy
if there was customs duty to be paid for importation of timber company’s products.
Menzies and Windeyer JJ (dissenting): language was that of legal obligation,
essentially commercial in character and P had approved agreement and appropriate
funds to meet obligation.
Masters v Cameron HC:
Parties have finalised all terms of bargain and intend to be bound immediately, but propose to restate
terms in fuller/precise form binding
Parties have completely agreed on all terms and do not vary those, but have made performance of one
or more conditional upon execution of formal doc bound to make formal doc.
Parties do not intend to be bound until execution of formal document not bound
Effect of PA depends on intention disclosed in language: ‘subject to contract’ and ‘subject to formal
contract’ indicate not bound.
Addition of terms does not make it unbinding so long as those terms can be settled without agreement
between parties, eg. Godecke v Kirwan.