Intention to create legal relations.

An agreement must be characterized by intention. In its simplest form, intention to create legal
relations means that the parties must intend to enter into a legally binding arrangement in which
the rights and obligations of the agreement are enforceable. The question as to whether parties to
an agreement did intent to create legal relations is highly fact sensitive. An agreement does not
need to be worked out in meticulous detail to become a contract. However, an agreement may be
incomplete where the parties have agreed on essential matters of detail but have not agreed on
other important points. Agreements may not give rise to a binding contract if they are incomplete
or not sufficiently certain. If the agreement is a stepping stone for future contract or is an
agreement to agree, then the agreement might be void for lack to create legal relations.

The question of whether parties have a reached an agreement is normally tested by asking
whether a party has made an offer which the other has accepted. This issue was expounded in the
case of Eldo City Limited v Corn Products Kenya Ltd & another [2013] eKLR1, where the
judge ruled in favour of the plaintiff and granted him a conditional injunction citing that the
parties had an intention to create legal relations.

Facts: The parties to this suit entered into negotiations for the purchase of the suit assets known
Title Number Eldoret Municipality/Block 8/47 which belonged to the Defendant who put them
up for sale. There was an MOU executed by the parties and an irrevocable Bank Guarantee of
USD$2,000,000 by the Plaintiff in favour of the Defendant which was subjected to the approval
of the Defendant’s Bank, Citi Bank- Kenya at a cost to the Plaintiff. Further negotiations led to
the Plaintiff placing its bid of USD$3,500,000 and the Defendant’s Advocates went ahead and
forwarded a draft sale agreement for the review and consideration to the Plaintiff. There were
correspondences that followed the draft sale agreement. The Plaintiff attempted to renegotiate
certain terms in the draft agreement which were rejected and the Plaintiff agreed to execute the
draft agreement as drawn by the Defendant. Some of the clauses in the MOU were replicated in
the draft agreement and the plaintiff accepted both the MOU and Sale Agreement as drawn by
the Defendant. Any suggestion to change the terms were met with a firm No. It is when the
Plaintiff had accepted to execute the draft agreement that the Plaintiff sought to pull out of the
transaction.

It was the view of the judge that pulling out of a transaction when the parties are already at
consensus ad idem, is not be prudent in the world of commerce. That freedom is to be limited up
to a point the parties are still negotiating. Once all terms have been agreed and settled, that
freedom should dissipate. Otherwise, mischievous parties with no intention of selling their
merchandise may engage serious purchasers in a wild goose chase knowing very well that they
can pull out at any stage. The judge ruled in favour of the plaintiff.

1
Eldo City Limited v Corn Products Kenya Ltd & another [2013] Eklr
Even when a person makes a real offer which is accepted, it does not necessarily follow that a
legally enforceable contract is created. It is a further requirement of such a contract that the offer,
and the agreement resulting from its acceptance, must be intended to create legal rights and
obligations which are enforceable in the courts, and not merely moral obligations. The Case of
Storer v Manchester City Council [1974] 1 W.L.R. 14032 is instructive. In that case LORD
DENNING M.R. stated that:

“In contracts you do not look into the actual intent in a man's mind. You look at what he said
and did. A contract is formed when there is, to all outward appearances, a contract. A man
cannot get out of a contract by saying: “I did not intend to contract” if by his words he has
done so. His intention is to be found only in the outward expression which his letters convey.
If they show a concluded contract that is enough.”

Factors which may tend to show that an agreement was not intended to be legally binding
include where it is made in a social context, if it was expressed in vague language or that the
promise was made in anger or jest. Justice Leggat in the case of Blue vs Ashley said that “if two
people agree to meet for a drink at an appointed place and time and one does not turn up, no
one supposes that the other could sue to receive his wasted travel expenses.” 3There must be
the intention for a legally binding contract to be created.

In the case of ordinary commercial transactions, there is a presumption that the parties intended
to create legal relations. The onus of rebutting this presumption is on the party who asserts that
no legal effect was intended, and the onus is a heavy one.4

Harris JA in Garvey v Richards {2011} JMCA 16 stated :

“It is a well-settled rule that an agreement is not binding as a contract unless it shows an
intention by the parties to create a legal relationship. Generally, three basic rules underpin the
formation of a contract, namely, an agreement, an intention to enter into contractual relationships
and consideration. For a contract to be valid and enforceable an essential term governing the
relationship of the parties must be incorporated therein. The subject matter must be certain.
There must be positive evidence that a contractual obligation, born out of an oral or written
agreement is in existence.”

And the Supreme Court of United Kingdom in RTS Flexible Systems Ltd v Moikerei Alois
Muller GMBH & Co K. G. {2010} UKSC 14:

“The general principles are not in doubt, whether there is a binding contract between the parties
and, if so, upon what terms depends upon what they have agreed. It depends not upon them, by

2
Storer v Manchester City Council [1974] 1 W.L.R. 1403
3
Blue vs Ashley [2017] EWHC 1928,
4
Edwards v Skyways Ltd [1964] 1 WLR 349.
words or conduct, and whether that leads objectively to a conclusion that they intended to create
legal relations and had agreed upon all the terms which they regarded or the law requires as
essential for the formation of legally binding relations. Even if certain terms of economic or
other significance to the parties have not been finalized, an objective appraisal of their words and
conduct may lead to the conclusion that they did not intend agreement of such terms to be a
precaution to a concluded and legally binding agreement.”

Conclusion

Intention to create legal relations is often overlooked, but this case highlights how this principle
can sometimes be critical to the enforceability of a contract. While individuals and small
businesses in particular may be attracted to the idea of an informal agreement (based maybe
upon a handshake or a gentleman’s agreement), such an informal accord could be dangerous.

It is particularly so if the agreement was formed in an environment that wouldn’t lend itself to
normal business negotiations.  It is vitally important for parties who wish to form a binding legal
contract that they properly write out the terms so that there can be no disagreements as to the
intention of the parties.

In Investec Bank (UK) Ltd v Zulman and another [2010] EWCA Civ 536 the Court
cautioned against putting too much weight behind the phrase ‘subject to contract’ and held that it
is the parties’ intention that matters. The presence or absence of the phrase will not of itself
determine whether or not a contract exists. It is the intention of the parties that matters.

The parties must have intended to create legal relations. Intention is one of the basic elements of
a contract at common law. An agreement is unenforceable unless the parties thereto intended
such a consequence.