For a contract to hold legal force, the involved parties must intend to enter into a legally enforceable agreement. This intention must be conveyed mutually, whether it's stated explicitly or inferred implicitly.
PRESUMED INTENTIONS BASED ON PARTY RELATIONSHIPS
1.1 In Domestic Contexts
In domestic agreements (such as those between spouses or within a family), an underlying assumption exists that the parties do not seek legal enforceability of their arrangements. This assumption, however, can be overturned by objective evidence suggesting otherwise.
Nevertheless, suppose one party knows the other does not intend to create a legally binding agreement. In that case, the arrangement will not hold legal weight despite any objective indications of such intent.
Imagine two siblings agreeing to contribute equally to renovating their inherited family home. Under normal circumstances, this agreement wouldn't be considered legally binding. However, if they make this agreement while formalising the division of their late parent's estate, which includes the family home, this context could provide substantial objective evidence indicating their intention to create a legally enforceable contract.
1.2 Legal Aspects of Social Arrangements
Social arrangements generally carry a similar presumption against the intention for legal binding. The courts typically assume that there is only intention to create legal obligations if counter-evidence is presented.
Notably, this presumption is often overturned in scenarios where friends or relatives collectively participate in a competitive event or contest, even though the basis of their relationship is primarily social.
Imagine a group of friends who agree to purchase a lottery ticket together, each contributing an equal amount towards the purchase. They make a verbal agreement to share any winnings equally. If their ticket wins a significant prize, the law will enforce the agreement, requiring the winnings to be transferred as per their initial agreement.
This situation deviates from a typical social arrangement as it forms an informal consortium, indicating an intention to create legal relations beyond mere social interaction.
1.3 Assessing Intent in Commercial Engagements
There’s a robust assumption in commercial interactions that the parties aim to establish a legally binding contract. Overturning this presumption requires unequivocal evidence, with courts adopting an objective perspective in evaluating such evidence.
Due to this strong presumption and the frequent practice of formalising commercial agreements in writing, instances where attempts are made to challenge this assumption are rare.
Overcoming the Presumption
To challenge the presumption of legal intent in commercial agreements, parties might specify that the agreement is ‘binding in honour only’ or ‘subject to contract’. These phrases indicate ongoing negotiations and a current lack of intent to be legally bound. In the context of ‘subject to contract’, it is implied that a legally binding contract will ensue later. A statement made spontaneously or in a state of anger might also suffice to negate the presumption of legal intent.
Distinguishing Between Social and Commercial Interactions
Determining whether a discussion is social or commercial can be challenging. In such cases, courts will consider the entirety of the circumstances to ascertain whether the parties intended to establish a binding contract.
Imagine a scenario where Raj, the owner of a small tech startup, verbally agrees with Priya, a freelance developer, to pay her a bonus of £20,000 if her software development significantly increases the company's revenue. This conversation happens during a casual coffee meeting without formal agreement or written documentation.
Despite critical elements of a contract, the setting and the informal nature of the discussion, combined with the lack of proper acknowledgement or subsequent follow-up, suggest that there was no genuine intention to create a legally binding contract.
In this case, the agreement appears more akin to an informal, aspirational promise rather than a concrete commercial commitment.
LEGAL CAPACITY FOR CONTRACTUAL AGREEMENTS
A party must possess the intent to form a legal contract and the legal capacity to enter into one. The law offers protection to specific vulnerable groups, such as minors and individuals with mental incapacities, shielding them from the obligations of contracts they might not fully understand or intend to engage in. A contract becomes unenforceable if one party lacks the necessary capacity.
2.1 Legal Position of Minors (Individuals Under 18 Years)
As a general principle, contracts involving minors are voidable at the minor’s discretion (further elaborated in Chapter 8 on Vitiating Factors). While minors have the right to enforce contracts, they are not legally obligated to honour them unless they confirm ('ratify') the contract after age 18.
Notable Exceptions
‘Necessaries’
Contracts made by minors for vital goods or services, provided the cost is reasonable, are enforceable. The Sale of Goods Act 1979 defines ‘necessaries’ as goods appropriate to the minor's social and economic status and their actual requirements during the transaction. What constitutes a necessity is subjective and varies for each individual.
Employment Contracts
Minors can validly enter into employment contracts, assuming the terms are advantageous.
Property Acquisition Contracts
Minors are also bound by contracts for acquiring a long-term interest in property (such as shares in a company) unless they explicitly renounce the contract. This binding nature arises from the minor's acquisition of real ownership rights under the contract.
The Minors’ Contracts Act 1987
The general rule exempting minors from their contractual obligations can sometimes be unjust to the other contracting party. For instance, a minor may receive a car from a seller but refuse to pay. The Minors Contracts Act 1987 allows courts to intervene to address such imbalances. Under this Act, if a minor has received property from another party, the court can order the minor to return the property if deemed fair and appropriate.
2.2 Understanding Contracts with Mental Capacity Considerations
When an individual lacking mental capacity enters into a contract, such a contract is revocable by that individual, provided the other contracting party is aware of their mental incapacity. As outlined in the Mental Capacity Act 2005 (MCA), a person is deemed to lack the mental capacity for contracting if they cannot understand, retain, evaluate, or communicate the information relevant to the decision.
Ratification After Regaining Capacity
Should an individual who lacked mental capacity at the time of a contract's inception later regain this capacity, they are then allowed to ratify the contract, thereby making it valid.
Responsibility for Essential Goods and Services
In alignment with the MCA, individuals who lack mental capacity are still expected to pay a reasonable price for essential goods or services ('necessaries'). This provision mirrors the legal treatment of minors, ensuring a level of responsibility for necessary transactions despite the lack of total mental capacity.
2.3 Contractual Validity in Cases of Intoxication
In instances where an individual is so significantly intoxicated that they lose the capacity to understand their actions, paralleling mental incapacity, the legal treatment of their contracts is nuanced. These individuals must pay a reasonable amount for necessary items or services.
However, they are not legally bound to fulfil other contractual obligations if the other party is conscious of their intoxicated condition. Although there is no direct legal precedent concerning the influence of drugs or other similar substances, it's generally inferred that the legal stance would align with that of alcohol-induced intoxication.
2.4 Contractual Authority of Incorporated Companies
As a distinct legal personality, an incorporated company possesses its contractual capacity separate from its shareholders.
According to the Companies Act 2006, the legitimacy of a company's actions cannot be questioned on the grounds of lacking capacity, disregarding any contrary stipulations in the company’s constitution.
This provision reinforces that incorporated companies have an inherent legal authority to engage in contractual agreements autonomously.
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