importance of legal relations to creating contract

The Intention to Establish Legal Relations is an Important Part of Creating a Contract

| Published on February 22, 2017

The Intention to Establish Legal Relations is an Important Part of Creating a Contract

There are several key components which make up a contract: an offer, acceptance of that offer and an exchange of something of value. Whether the parties did really intend to create a legally binding relationship is also sometimes considered as an additional element.

In situations where a dispute arises over the existence of a contract, the Court tries to give effect to what the parties agreed at the time. When a contract is recorded in writing this task is made easier. However, when the terms are uncertain the Court will look at whether the parties intended to enter into legally binding relations. Leaving aside the question of proof, it can be relatively easy to create a binding oral agreement, particularly a commercial one as the parties can make a contract by straightforward exchange of promises.

There is a strong presumption that a commercial agreement is intended to be legally binding particularly when the parties expect to obtain some advantage. Arguing against this presumption can be difficult.

However, in a recent case (Mckins v Gros [2017] EWHC 46 (QB)) the Court did just that. The Court confirmed the importance of ‘certainty’ in order to determine that the parties intended to create a legally binding arrangement. The case in question concerned a meeting between the parties that took place over dinner in a restaurant. One party agreed to leave his employment with an investment bank to provide services to the other to maximise his return on the sale of his business. The parties discussed a mechanism for calculating the fee. Following the meeting, emails were exchanged describing the agreement “on headline terms”, stating the importance of the parties being “completely aligned” and of the need to make a “proper contract”.

The Court confirmed that whilst elements of a contract had been present, in an informal setting the intention of the parties should be examined. The language subsequently used in the email exchange suggested there was no intention to create legal relations. The Court held there was not sufficient certainty of terms and there was no contract.

The case provides a useful reminder, especially in a commercial environment, of the importance of using clear language when discussing a deal in an informal environment. Be sure to emphasise in any follow-up communication that such discussions were “subject to contract” or alternatively get the terms recorded in writing and signed without delay.

We at Humphries Kirk can advise in relation to contractual negotiations and promptly produce written agreements to assist you.

Matthew Hills, Associate Solicitor

For further advice please contact the commercial team at our offices in Poole on 01202 725400 or Dorchester on 01305 251007.

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