Commercial Law and Business Arrangements: The Intention to Contract


Introduction


            Commercial law provisions, particularly the establishment of binding business arrangements relies on the existence of a valid contract. A binding contract has core elements revolving around the intention of the parties to enter into a binding agreement. If the intention to engage in a contract exists, together with the other elements of a binding agreement, then the parties to the contract can enforce obligations or rights. Otherwise, there would be no basis for claims. Intention to contract constitutes a requisite to bind parties to comply with the terms of the agreement.


Facts


            In the given case, three sports enthusiasts—Chris, Jas and Pat— who were without access to satellite link agreed to form a club that would allow them to watch events together. Chris suggested that the creation of the club involves the purchase of equipment for installation in the garage of Pat to which Jas and Pat mutually agreed as a brilliant idea. However, after parting and telling their families of the club, Jas and Pat did not receive the expected support. Without knowing about this, Chris purchased the equipment using the credit card he jointly shared with his spouse. Chris later learns that the arrangement for the club is off.


Issue


            The issue is whether there is a valid contract among Chris, Jas and Pat for purposes of enforcing obligations on the part of Jas and Pat.


Short Answer


            There is no enforceable contract among Chris, Jas and Pat because there was no intention to engage in a binding contract. This means that Chris cannot legally bind Jas and Pat to comply with their obligations in the formation of the club, especially in relation to the purchase of the equipment.


Discussion


            Generally, based on the elements of valid contract, the intention to create an enforceable contract depends on the existence of three factors. According to Harvey v. Facey (1893), the first is a valid offer, which requires the intention of the party making the offer to be involved in an enforceable contract and the belief on the part of the recipient of the offer of the intention to create an enforceable contract. In the given case, there was no valid offer because even if Chris may have intended the agreement to form a club as binding, this was not the perspective of Jas and Pat. In Carlill v. Carbolic Smoke Ball Company (1893), the second factor is acceptance, which requires communication and without any conditions or counter-offers. Since Jas and Pat did not consider the agreement as an offer, the mutual agreement to the idea of forming a club does not constitute an acceptance and the intention to engage in a legally enforceable agreement. There should also be a consideration as mentioned in Australian Woollen Mills Pty Ltd v. Commonwealth (1954), which was not present in the given case and negates the existence of an enforceable contract.


            In considering the intention of the parties in engaging in a contract, there emerge two assumptions. The first assumption is that social or domestic arrangements generally involve no intention to create a binding agreement. This means that agreements falling under this category do not comprise a valid basis for enforcing contractual claims. The second assumption is that commercial or business arrangements generally involve the intention to engage in a binding agreement so that parties to these agreements can legally enforce obligations and rights relative to the other parties. The intention has to be clear or clearly deducible from the facts of the case. However, as general assumptions there are also exemptions or qualifications to these assumptions.


            The rationale for assuming domestic and social agreements as non-commercial and thus not involving binding contracts is the distinction between the private and public affairs for purposes of determining the extent of coverage of the law. According to Australian European Finance v. Sheehan (1993), courts keep out of the private affairs of people and leave them to settle emerging problems on their own in respect of liberty and privacy. There are only limited domestic aspects, such as domestic violence, with which the courts interfere.


            In conjunction with the domestic sphere and property law, Balfour v. Balfour (1919) provided that domestic agreements for the allocation of property are not contractual in nature. The promise of the husband to pay the wife a fixed amount is not enforceable in court because there was no intention to engage in a binding agreement. In Cohen v. Cohen (1929), the promise of a husband to provide a dress allowance to his wife also does not constitute an enforceable contract. This has an implication to the present case. Even if the wife of Jas and family of Pat agreed to the formation of the club and the contributions from the parties that this entails, this is not a binding agreement and Chris cannot enjoin the families to accommodate the club. In addition, even if the spouse of Chris agreed to the purchase, this is not a binding agreement that would give Chris the right to enforce obligations on the Jas and Pat and their families to pay for their contribution to the purchase price of the equipment. Whatever agreements or disagreements arising within the families do not comprise enforceable contractual terms. The agreement of Pat to make his garage the venue for the club and Jas’ agreement to help do not comprise enforceable contractual terms.            Mere promise for accommodation does not comprise an enforceable contract. In Todd v. Nicol (1957), the court held that a promise made to another person living in another country to provide accommodations when visiting the country does not constitute a basis of contractual claims in court. This means that even if Pat agreed to make his garage the venue for the club, he does not have a legal obligation to comply with this promise especially with the disagreement of his family.


            Relative to social agreements or voluntary associations, even with strong consensus among the parties, these do not necessarily comprise contractual terms. Cameron v. Hogan (1934) explained that for voluntary associations to comprise a valid contract there should be a clear intention on the part of the parties involved to create contractual rights enforceable in legal venues. In this case, the court considered the claim of the plaintiff for exclusion from the Labour Party as an internal matter and innate in the rules of a political organisation so that the rules do not comprise contractual terms enforceable in the courts absent any clear indication to the contrary. In the present case, there was no clear intention on the part of Chris, Jas and Pat to make the consensual agreement contractually binding. In fact, the agreement was merely informal and there was even no designation of responsibilities except for Pat’s garage as the site for the club. Even if Chris recommended that they club together to purchase equipment, there was no designation of the party to purchase the equipment or their respective contributions.


            In the latter case of McKinnon v. Grogan (1934), the courts could interfere in matters involving members and officers of voluntary associations, particularly those associations incorporated under the law. This case distinguishes social associations between friends that are more informal and political or sporting associations that are more formal. There is a greater likelihood of creating enforceable rights in formal associations incorporated under the appropriate laws. In Baldwin v. Everingham (1993), formally created political parties can enforce their rules on officers and members pursuant to Commonwealth Electoral Act 1918. Relative to the given case there was no indication that the club that Chris, Jas and Pat would start constitutes a formal association with rules and bylaws or for incorporation or registration. As such, as an informal organisation, the club likely comprise a social agreement among sports enthusiasts without the intention of enforcing legal obligations on each other.


            Business or commercial agreements carry the assumption of intention to create enforceable agreements and comprise the exemption to domestic or social agreements. As such, even if the parties are members of the same family or form part of social groups, the consensual agreement could constitute enforceable contracts if the object is business or commercial interest. In Wakeling v. Ripley (1951), the court held that while the parties involved comprise members of the same family, the agreement is commercial in nature because of the extent of implications for the parties. In this case, the agreement between the family members is for the sale of their home to move in with an elderly couple. The extent of implications for the family members selling their home and the elderly couple who would take in the homeless members suggest a binding contract. In application to the given case, the agreement between Chris, Jas and Pat could become commercial in nature depending on the extent of the implications for the parties. Chris could assert that the cost of the purchase of the equipment was a sizable sum so that this aspect of the agreement should become legally enforceable to claim the share of Jas and Pat in paying for the equipment. Chris can also claim that the agreement of Pat for his garage to comprise the headquarters for the club has long-term implications indicating the intention to engage in an enforceable contract. However, this is subject to rebuttal by Jas and Pat.


            Distinguishing social and commercial arrangements is important because of the greater complexity of these two agreements when compared to the clarification of domestic agreements. In Roufos v. Brewster (1971), the son-in-law claimed that the agreement pertaining to the delivery truck he borrowed from the relatives of his spouse. The court held that there was a contractual agreement between the parties because of the commercial interests of the parties. Both the son-in-law and the relatives of his wife carry different business involving the delivery truck. Even if the agreement to lend the truck was informal, the owners held the interest to get back the delivery truck in the pristine condition for use in transporting products to their new restaurant and the borrower with the obligation for any damage to the delivery truck. Relative to the given case, there are no commercial interests involved because the intention of Chris, Jas and Pat was to establish a club to provide them satellite viewing for their favourite shows as a leisure activity for the group. There was not mention of making it into a business. Although, the club involves the allocation of resources, there was no strong support in claiming commercial interest. The implication is that the parties cannot be liable for claims of breach for cancelling the arrangement after Chris has already ordered and paid for the equipment using a jointly owned credit card.


            Even a commercial arrangement has its exemptions when shown that that there is no intention to create an enforceable contract. In Rose & Frank Company v. JR Crompton & Bros Ltd (1923), the agreement covered commercial interests in producing and selling carbon paper. The terms of the agreement expressly mentioned the honourable pledge of the parties. When one party made a claim for breach, the court held that the agreement although covering commercial interest is not legally binding because of the negating effect of the honourable pledge clause of the parties. In application to the given case, there was neither a clause providing for the intention or lack of intention to create a legally binding agreement. As aforementioned, the agreement was very informal and loose that apart from the designation of Pat’s garage as the headquarters and the agreement to purchase equipment, there was no specific delegation of obligations or establishment of rules.


Conclusion


            Intention to engage in an enforceable agreement is necessary to support contractual claims. There is no enforceable contract in the given case because of the lack of intention on the part on the parties, to whom obligations are likely to the enforced based on the claim of Chris, to become part of a binding agreement.


 


References


 


 


Australian European Finance Corporation Ltd v. Sheahan (1993) 60 SASR187


 


Australian Woollen Mills Pty Ltd v. Commonwealth (1954) 92 CLR 424


 


Baldwin v. Everingham (1993) 1 Qd R 10


 


Balfour v. Balfour (1919) 2 KB 571


Cameron v. Hogan (1934) 51 CLR (HH 215)


Carlill v. Carbolic Smoke Ball Company (1893) 1 QB 256


 


Cohen v. Cohen (1929) HCA 15


Harvey v. Facey (1893) AC 552


 


McKinnon v. Grogan (1974) 1 NSWLR 295 (HH 216)


 


Rose & Frank Company v. JR Crompton & Bros Ltd (1923) AC 445


 


Roufos v. Brewster (1971) 2 SASR 218f


 


Todd v. Nicol (1957) Sup Ct SA


Wakeling v. Ripley (1951) 51 SR (NSW) 183



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