Chapter 5
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Intention to be bound
[5.10]
[5.10]
[5.20]
[5.50]
[5.70]
[5.70]
[5.80]
[5.110]
[5.140]
[5.210]
[5.230]
[5.260]
[5.280]
[5.280]
[5.290]
[5.330]
[5.330]
[5.370]
[5.380]
5.1 THE NEED TO SHOW AN INTENTION TO BE BOUND.......................... 119
Mere agreement does not constitute a contract................................................... 119
The test of intention................................................................................................. 120
The ‘objective test’.................................................................................................... 122
5.2 FAMILY, DOMESTIC AND SOCIAL AGREEMENTS.................................. 124
An intention to be bound is less likely –​but not impossible............................. 124
Agreements lacking the required contractual intention –​spouses................... 124
Other family agreements......................................................................................... 125
Purely social agreements......................................................................................... 126
Agreements with the required contractual intention –​spouses....................... 128
Agreements with the required contractual intention –​family agreements .... 129
Agreements with the required contractual intention –​social agreements ..... 131
5.3 BUSINESS OR COMMERCIAL AGREEMENTS........................................... 131
Contractual intention is more likely...................................................................... 131
Contractual intention can be disproved............................................................... 132
5.4 EXPRESSLY EXCLUDING INTENTION........................................................ 133
Honour clauses......................................................................................................... 133
Excluding the jurisdiction of the court.................................................................. 134
Ambiguous language.............................................................................................. 134
5.5 QUESTIONS......................................................................................................... 136
5.1 THE NEED TO SHOW AN INTENTION TO BE BOUND
Mere agreement does not constitute a contract
[5.10] The essence of a contract is the promise or promises made by the
parties and the resulting creation of a legally enforceable obligation. As
the High Court put it in Australian Woollen Mills Pty Ltd v Commonwealth
(see [3.50]) at 457 and, again, in Ermogenous v Greek Orthodox Community of
SA Inc (see [5.200]) at 105: ‘It is of the essence of contract, regarded as a class
of obligations, that there is a voluntary assumption of a legally enforceable
duty’.
Therefore, an agreement (an offer and a corresponding acceptance) is not
sufficient by itself to constitute a contract. The additional element of ‘legal
obligation’ is required, and legal obligation will only be present if the parties
intended their agreement to have legal significance. If they did not intend
their agreement to be legally enforceable, and to have legal consequences,
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there can be no contract and the courts will not intervene in any dispute. It
is for that reason, for example, that ‘political’ promises by governments are
not legally enforceable –​because they were never intended to be. See, for
example, Australian Woollen Mills Pty Ltd v Commonwealth (see [3.50]) and
South Australia v Commonwealth (1962) 108 CLR 130, 154.
The test of intention
[5.20] What the parties intended will often be clear from the nature of
their agreement and, therefore, the question of intention will not arise.
Agreements that are obviously social in nature are not normally intended to
be contractual and, therefore, should not attract legal consequences (that is,
no right to sue should arise upon a breach). On the other hand, contracts that
have an obvious business nature usually do involve the requisite intention
and, if one of the parties fails to perform, the other (innocent) party should
be entitled to seek recourse through the courts.
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Where the parties’ intention is not immediately obvious, the court must
determine whether they intended their agreement to have contractual force
before it can adjudicate in any dispute. The test the courts use is objective
(see [5.50]). That is, they look at both the agreement and the circumstances
that surrounded it to determine, as objectively as possible, whether the
parties all believed, at the time they agreed, that their agreement was legally
binding. See, for example:
Shahid v Australasian College of Dermatologists (2008)
168 FCR 46
[5.30]
Facts: Over a number of years, the appellant, a doctor,
applied unsuccessfully to be selected for the only trainee registrar
in dermatology position in Western Australia. She also appealed,
unsuccessfully, against her non-​selection. She sued, arguing that the
College had not adhered to its own published appeals procedure, a
failure which, she said, breached several implied terms of a contract
between her and it (including that ‘the appeal process was genuine
and effective’, ‘the appeal would be heard in a timely manner’ and that
the College ‘would not finalise its decision on selection until the time
for lodgment or determination of an appeal had passed’). The College
responded by denying that there was any such contract, arguing that
the parties’ dealings ‘were not accompanied by an intention to create
legal relations’ (at [209]).
Held: Looking objectively at all the circumstances (including the
fact that the selection process ‘was clearly a subject of the greatest
importance’ to both the College and those seeking selection; the fact
that the handbooks detailing the appeal process were ‘comprehensive,
and left the reader in no doubt as to importance of the matters covered
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… or as to the significance of the obligations undertaken’; the fact that
‘the context was a businesslike one’; and the fact that a not insignificant
fee was charged to appeal –​in exchange for which it was likely that a
‘disinterested bystander’ would think that the College would be obliged
to follow its own processes (the detailed nature of which also ‘strongly
bespoke an intention to create legal relations’), the Court held that the
requisite ‘mutual intention to create legal relations’ was present. There
was a contract. [See also, Sklavos v Australasian College of Dermatologists
[2016] FCA 179 [267].]
[5.40] Whenever the courts had to determine the question of intention,
the traditional starting point was to try to classify the agreement as either
‘social or domestic’ or ‘business or commercial’. That was because the courts
presumed (in the absence of evidence to the contrary) that the parties did not
intend their social or domestic agreements to have legal consequences –​so
they would not be legally enforceable –​but that they did intend (again, in
the absence of evidence to the contrary) that their business or commercial
agreements would be.
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In Ermogenous v Greek Orthodox Community of SA Inc (see [5.200]), the High
Court discussed the usefulness of this traditional ‘presumptions’ approach
to determining legal intention, and doubted its validity, Gaudron, McHugh,
Hayne and Callinan JJ saying (at [25]–​[26]):
Because the inquiry about [legal intention] may take account of the subject matter
of the agreement, the status of the parties to it, their relationship to one another,
and other surrounding circumstances, not only is there obvious difficulty in
formulating rules intended to prescribe the kinds of cases in which an intention
to create contractual relations should, or should not, be found to exist, it would be
wrong to do so. … In this context … there is frequent reference to ‘presumptions’
… For our part, we doubt the utility of using the language of presumptions in this
context. At best, the use of that language does no more that invite attention to
identifying the party who bears the onus of proof (emphasis added).
It is now generally accepted that this means that the old ‘presumptions’ no
longer have any place in determining whether the parties intended their
agreement to be legally enforceable –​especially in family or domestic
situations. As Bathurst CJ said in Ashton v Pratt (2015) 88 NSWLR 281 [73]: ‘the
effect of the decision of the High Court in Ermogenous was that in considering
the issue recourse should not be had to any presumption concerning the
contractual or non-​contractual effects of family arrangements’. In Evans v
Secretary, Department of Families, Housing, Community Services and Indigenous
Affairs (2012) 289 ALR 237 [12], the Full Court of the Federal Court held, even
more broadly, that Ermogenous ‘rejected the use of presumptions as a basis
for ascertaining whether parties intended to enter into contractual relations’.
There have been some cases that have still referred to the old presumptions
(see, for example, Bovaird v Frost [2009] NSWSC 337 [52], Darmanin v Cowan
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[2010] NSWSC 1118 [206] and [213] and Sion v NSW Trustee & Guardian
[2013] NSWCA 337 [40]) but they are rare and the more recent decisions
do not refer to the ‘presumptions’ at all, determining the question of
intention by using the ‘objective test’ instead (see, for example, Ashton v
Pratt (2015) 88 NSWLR 281 [73], MacPhail v MacPhail [2017] NSWSC 942
[69]–​[72], Levingston v Levingston [2017] WASCA 91 [24], Wakim v Wakim
[2017] NSWSC 1283 [58]–​[59], Webster v Strang [2018] NSWSC 495 [203] and
Nadilo v Souris [2019] NSWSC 108 [81]).
The ‘objective test’
[5.50] While the parties can always expressly state whether they intended
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their agreement to be (or not to be) contractually binding (see the discussion
of ‘honour clauses’ at 5.4), such statements are very rare. Consequently, if
contractual intention is in dispute it is normally left to the courts to determine
whether the parties did have the requisite intent. They do that by making,
as the High Court put it in Ermogenous (at [25]), ‘an objective assessment of
the state of affairs between the parties (as distinct from the identification
of any uncommunicated subjective reservation or intention that either may
harbour)’ to determine, as a matter of fact, whether the parties intended to
create legal relations.
When they make that assessment, what the courts are looking for is ‘a
manifestation of mutual assent, which … must positively indicate that both
parties considered themselves bound by [the] agreement’ (see Ying Mui
Pty Ltd v Amore Corporation Pty Ltd [2017] VSC 29 [157]) –​and they do it
by looking at ‘what a reasonable person would take to be the intent of the
parties as evidenced by their actions in the circumstances of the case, and
not according to the subjective interpretations of the parties’: ATCO Controls
Pty Ltd v Newtronics Pty Ltd (2009) 25 VR 411, 424 (or, as Campbell JA put
it in Ryledar Pty Ltd v Euphoric Pty Ltd (2007) 69 NSWLR 603 [262], at what
‘a reasonable person, with the knowledge of the words and actions of the
parties … and the knowledge that the parties have of the surrounding
circumstances, would conclude that the parties had [intended]’).
The matters that they can take into account are, as the High Court said in
Ermogenous (at [25]), ‘so varied as to preclude any prescriptive rules’ –​but
they would include what the parties said to one another (in both their written
correspondence and their oral conversations), the language they used –​
especially if, as in Masters v Cameron ([4.100]), it indicated a lack of intent
to be immediately bound, the context in which their communications took
place, any relationship that existed between them when the agreement was
reached, the circumstances in which it was made, its purpose and object, its
subject matter and the nature of any ‘obligations’ that were undertaken as a
result of it (see Ashton v Pratt at [73]–​[91]).
The level of ‘agreed detail’ might also be relevant because the courts have
consistently held that ‘the vaguer the language of an arrangement and the
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123
greater its informality, the more difficult it will be [to prove the requisite
intention]’: Sion v NSW Trustee & Guardian [2013] NSWCA 337 [41] (see also
Wakim v Wakim [2017] NSWSC 1283 [59]).
Similarly, if the parties have not reached agreement on what might be
regarded as important terms, that could also indicate that they had not
intended to be bound –​at least at that point in time. As Gleeson CJ put it
in Australian Broadcasting Corporation v XIV Commonwealth Games Ltd (1998)
18 NSWLR 540 at 548, ‘as a matter of fact and commonsense … the more
numerous and significant the areas in respect of which the parties had failed
to reach agreement, the slower a court will be to conclude that they had the
requisite contractual intention’.
The courts can also consider the parties’ subsequent conduct. While
subsequent conduct cannot be used to determine what the parties agreed,
(that is, it cannot be used to ‘construe a contract’: see [9.190]), it can be
considered to determine whether a contract ever came into being: see Heydon
JA in Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153 [25]
and Gleeson CJ in Australian Broadcasting Corporation v XIV Commonwealth
Games Ltd at 547–​48. That would obviously include determining whether
the parties had intended their agreement to be legally enforceable –​because
the conduct could be ‘probative of the parties’ contractual intention: see
Queensland Phosphate Pty Ltd v Korda [2017] VSCA 269 [37].
[5.60] Therefore, the real question now is simply the question of ‘proof’ –​
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with the party who asserts that there is a legally binding contract generally
bearing the onus of proving that that was what the parties really intended.
Satisfying that onus will, of course, normally be easier where the agreement
is of a business or commercial nature (where the circumstances are more
likely to point to that conclusion and, despite Ermogenous, the courts are still
more likely to presume the requisite intention) and more difficult where
the agreement is of a purely social or domestic nature: see for example,
Slattery J’s comments in Smilevska v Smilevska (No 2) [2016] NSWSC 397 [151]
(‘The Courts do not generally recognize as enforceable agreements reached
between relatives, on the basis that the parties to domestic agreements do
not intend them to be contracts’). In both cases, however, the other party
will, of course, still have an opportunity to present evidence to negate any
such conclusion.
Consequently, it seems that, while the courts no longer apply the old
presumptions, they may still take notice of what Austin J referred to as the
‘usual expectation’ that family agreements are not normally intended to be
enforceable (see Selen v Selen [2011] FamCA 310 [50]) and of the fact that
‘significant commercial characteristics of … arrangements [can] … strongly
support an inference that [the parties] intended those arrangements to be
enforceable’ (Ailakis v Olivero (No 2) (2014) 100 ACSR 524 [91]). To that extent
many of the old cases, particularly those dealing with rebuttal of the former
presumptions, are still likely to be relevant, and they are in fact still cited
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(see, for example, the citation of the old High Court decision in Cohen v Cohen
(see [5.90]) as a relevant precedent in Nadilo v Souris [2019] NSWSC 108 [83]).
5.2 FAMILY, DOMESTIC AND SOCIAL AGREEMENTS
An intention to be bound is less likely –​but not impossible
[5.70] Family, domestic and social agreements encompass the following:
(a) agreements between spouses;
(b) agreements between family members more generally; and
(c) purely social agreements.
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As we have already seen, the traditional approach to all such agreements
was to presume that the parties did not intend to create legal relations but,
following Ermogenous, that presumption no longer applies. Instead the courts
apply an objective test to determine, from all the surrounding circumstances,
whether the parties did or did not intend legal relations. In many cases
though, an examination of those circumstances might still indicate a lack of
contractual intention because, as Emmett JA put it in Sion v NSW Trustee &
Guardian [2013] NSWCA 337 [40], ‘as a matter of human experience, when
family members make a promise to each other it is unlikely that they intend
it to be legally binding’.
That applies particularly to agreements between spouses or between parents
and their children when it is more likely that what the parties intended was
not an enforceable contract but some far more informal arrangement based
on ‘family ties of mutual trust and affection’: see Jones v Padavatton [1969] 2
All ER 616, 621.
That is, if the question suggested in Nadilo v Souris (at [80]) was put (‘Just
to be clear, what we’re doing now binds us all contractually and if anyone
doesn’t comply with their obligations they can be sued in a court of law’),
the response from the other party would in all probability be, ‘No, that is
not what we intend at all’. That reality underpinned the old ‘presumptions’
and it can still (but need not always) apply when using the objective test –​
depending on the particular circumstances of each case.
Agreements lacking the required contractual intention –​
spouses
[5.80] With many ‘intra-​family’ agreements, the parties simply intend to
have an agreed understanding about how particular arrangements between
them are to work, not a contract enforceable at law. That applies, especially,
when spouses reach agreement about their normal day-​to-​day domestic
arrangements. The courts have therefore always been reluctant to get
involved in any subsequent dispute. See, for example:
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Chapter 5 Intention to be bound
125
Cohen v Cohen (1929) 42 CLR 91
[5.90]
Facts: Before they married, Mr Cohen promised his future wife
an annual dress allowance of £100, payable in quarterly instalments.
The payments fell £275 into arrears and, when the couple finally
separated, Mrs Cohen sued for (inter alia) that sum, alleging that it was
contractually due and owing.
Held: There was no contract to pay her the money. The parties had
done no more than discuss and agree upon a proposal for a regular
allowance to the wife which the parties considered appropriate to their
circumstances at that time. They had never intended to create legal
relations. Her action failed.
[5.100] That case, which was cited with approval in Nadilo v Souris [2019]
NSWSC 108 [83], demonstrates that ‘normal’ domestic arrangements,
especially between spouses, will rarely be held to be contractually binding –​
because they were never intended to be.
Other family agreements
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[5.110] The same reasoning can also apply to other family agreements
where the circumstances are objectively such that the parties did not intend
their agreement to be legally enforceable –​though the courts have always
accepted that that outcome is less likely ‘the more remote the familial
connection’: Bovaird v Frost [2009] NSWSC 337 [53]. They have, however,
also accepted that: ‘Intense intermittent disputes within families are not
necessarily inconsistent with families operating in a domestic fashion which
is objectively intended by family members not to be subject to external legal
enforcement’: Bkassini v Sarkis [2017] NSWSC 1487 [90]. For an example of a
‘normal’ application of the principle, see:
Murphy v Simpson [1957] VR 598
[5.120]
Facts: After Matthew Simpson (senior) died in 1935,
various members of his family occupied his home until, finally, his son
Matthew (junior) moved in. The administration of the estate was badly
neglected and his daughter, Clara Murphy, was not granted letters of
administration until 1956. When she sought possession of the house as
administratrix, Matthew (junior) refused to move out. He claimed that
he and his wife were in lawful possession as tenants because he had
agreed with Clara that he would pay the rates and all outgoings if she
allowed him to reside in the home.
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Held: There was no lease and Clara was entitled to possession.
The arrangement between her and her brother was one of mutual
convenience and was not intended to give rise to any legal relationship.
Matthew had to vacate. As Gavan Duffy J said (at 600):
the parties had no intention of creating legal rights or obligations, or of
making an agreement which was to be enforceable at law.
[5.130] The same reasoning can be seen in Arfaras v Vosnakis (2016)
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18 BPR 35,819; [2016] NSWCA 65. The Court there held that an agreement
by a mother-​in-​law to transfer a burial plot (and licence) to her son-​in-​law
so her daughter (his wife) could be buried there (as could he when he died)
was not ‘contractually’ enforceable –​because, on the evidence, that had not,
objectively, been the parties’ intention (the action arose when the mother-​in-​
law sought to revoke the agreement after her daughter had been buried). As
Robb J explained in the court below (Vosnakis v Arfaras [2015] NSWSC 625
[148]), in a passage cited by the Court of Appeal (at [58]):
… it is hardly conceivable … they thought, in the necessary objective sense, that
once the arrangement had been made, it would be contractually enforceable,
so that, if Mr Vosnakis changed his mind, and decided to bury his wife in a
completely different burial plot, Mrs Arfaras could obtain an injunction from the
Court to enforce the interment of Ms Vosnakis in the burial plot. Equally, it was
not objectively intended that Mr Vosnakis could oblige Ms Arfaras to transfer
the burial plot to him by obtaining remedies appropriate for the enforcement of
a contract. In essence, in my view, the thought that the parties were solemnly
entering into a binding legal contract could not have been further from their minds.
(Note: While the agreement was not ‘contractually’ enforceable, the Court
still ordered Mrs Arfaras to transfer the plot to Mr Vosnakis because, in the
circumstances, she was estopped from reneging on her promise to do so: see
[6.860].)
Purely social agreements
[5.140] Similar results are likely whenever a dispute arises out of a purely
social arrangement. Good examples include those Atkin LJ discussed in
Balfour v Balfour [1919] 2 KB 571, 578 ‘where two parties agree to take a walk
together, or where there is an offer and acceptance of hospitality’. However,
these are relatively insignificant examples and the principle has a much
wider application. See, for example:
Coward v Motor Insurer’s Bureau [1963] 1 QB 259
[5.150]
Facts: Mrs Coward’s husband was killed in a motor cycle
accident while riding as a pillion passenger. The accident was the direct
result of the negligent riding of the driver, Cole. He was uninsured
and had no assets so Mrs Coward sought to recover against the Motor
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127
Insurer’s Bureau, which was liable where a negligent motorist should
have been insured but was not. To succeed, she had to show that Cole
had carried her husband ‘for hire or reward’. Cole and her husband had
worked at the same factory and, for about 18 months, Cole had given
Coward a lift to and from work on his motor bike, for which Coward
had paid him a weekly amount.
Held: The arrangement between Coward and Cole was not a contract
of carriage for hire or reward. That had not been what the parties had
intended. Consequently, Cole had not been bound to insure and Mrs
Coward’s action failed. As Upjohn LJ said (at 271):
The practice whereby workmen go to their place of business in the motor
car or on the motor cycle of a fellow workman upon the terms of making a
contribution to the costs of transport is well known and widespread. In the
absence of evidence that the parties intended to be bound contractually, we
should be reluctant to conclude that the daily carriage by one of another to
work upon payment of some weekly (or it may be daily) sum involved them
in a legal contractual relationship.
[5.160] For the same reason, it has also been held that members of mere
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voluntary associations such as clubs and societies do not normally intend
to be ‘contractually’ bound by their associations’ rules. The courts generally
accept that such associations are founded on consent rather than on contract,
so, if a dispute does arise, they do not normally intervene –​at least not on
contractual grounds. See, for example:
Cameron v Hogan (1934) 51 CLR 358
[5.170]
Facts: Hogan, who had been the Labor Premier of Victoria,
was refused re-​endorsement by the party’s State executive and was
expelled from the party. He alleged that both actions contravened the
party’s rules and sought a declaration that they were wrongful and of
no effect.
Held: The party’s rules were not an enforceable contract between either
the members themselves or the members and the executive because
party membership had never been intended to confer any legally
enforceable rights or liabilities. Consequently, Hogan had no legal
right to demand that the party’s membership and pre-​selection rules be
followed. As the majority commented (at 371):
unless there was some clear positive indication that the members
contemplated the creation of legal relations inter se, the rules adapted for
their governance would not be treated as amounting to an enforceable
contract.
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[5.180] Cameron v Hogan has since been followed, at least as regards the
non-​contractual nature of club rules, in a number of cases including Baldwin
v Everingham [1993] 1 Qd R 10 (although Dowsett J intervened and granted
declaratory relief on other grounds, noting that the expectations of members
of political parties and the statutory recognition of such bodies had changed
since the 1930s) and, more recently, Hogan v Fraser [2019] 3 Qd R 306 (where
a challenge to the results of a postal ballot to allow women to join Tattersall’s
Club –​on the grounds that it had not been conducted in accordance with the
Club’s rules and was therefore invalid –​was dismissed because there was
nothing to indicate that the rules were intended to be contractually enforceable)
and Setka v Carroll (2019) 58 VR 657 (where an application by the plaintiff for
an injunction to prevent his expulsion from the ALP, unless it was done in
accordance with the Victorian Branch rules, failed –​for the same reasons).
The underlying principle can also be seen in Scandrett v Dowling (1992) 27
NSWLR 483, where the Constitution of the Anglican Church was held to
be simply a ‘consensual compact’ –​something binding in conscience but
lacking any contractual force.
[5.190] However, if the relationship between the association and its
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members involved property or economic entitlements (which could be
seen to be the case in groups such as quasi-​commercial organisations) the
‘consensual compact’ may well have evolved into a contract –​giving both
parties the right to seek legal enforcement. See, for example:
Ermogenous v Greek Orthodox Community of SA Inc (2002)
209 CLR 95
[5.200]
Facts: Ermogenous had been the Archbishop of the Greek
Orthodox Church in Australia. When he resigned, he asked to be paid
out for his unused annual and long service leave. The Church refused.
He sued.
Held: Although the relationship between a minister of religion and
his church is pre-​eminently spiritual (in the sense that he ‘serves God’
rather than the administrators of the church), aspects of that relationship
can give rise to legally enforceable rights. Here, there was, in reality,
an employment relationship with clear proprietary and economic
entitlements. Therefore, there was no reason to believe that there had
been no intention to enter into legal relations. The matter was therefore
to be decided solely on the parties’ intention, as demonstrated by the
facts. On that basis, Ermogenous was entitled to recover.
Agreements with the required contractual intention –​spouses
[5.210] While it is likely that spouses do not intend that agreements
affecting their ‘normal’ domestic arrangements will be legally binding,
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that will not be the case if the agreements are clearly commercial or involve
matters outside those ‘normal’ domestic arrangements. Depending on
the circumstances, the parties may have intended those agreements to be
contractually enforceable and, therefore, the courts may enforce them.
That applies, for example, where the agreement does not relate to the
parties’ ongoing relationship but to arrangements for its termination. Such
agreements include those for maintenance and property settlement on a
relationship breakdown (though both are now also governed by the ‘financial
agreement’ provisions in the Family Law Act 1975 (Cth)). Such agreements
are not regarded in the same way as the agreement in Cohen v Cohen (see
[5.90]) because the parties are no longer living ‘in amity’. See, for example:
Merritt v Merritt [1970] 1 WLR 1211
[5.220]
Facts: Mr Merritt had left his wife. She pressed him to finalise
arrangements, so they met, discussed matters and Mr Merritt finally
wrote, signed and dated a note reading:
In consideration of the fact that you will pay all charges in connection with
the house … until such time as the mortgage repayment has been completed,
when the mortgage has been completed I will agree to transfer the property
into your sole ownership.
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Relying on that undertaking, the wife paid off the mortgage. The
husband refused to transfer the home. She sued.
Held: The agreement was contractually binding and Mrs Merritt was
entitled to the house. Discussions involving matters such as separation
and maintenance do not fall within the area of ‘normal’ domestic
agreement and, therefore, the traditional view that there was no
intention to be bound did not apply.
Agreements with the required contractual intention –​family
agreements
[5.230] Again, the critical factor with any family agreements has always
been the question of the parties’ objectively determined intention. While
many agreements between members of the same family, especially close
members of the same family, may not be intended to give rise to legal
obligations, others may be, especially if they involve some form of overtly
commercial arrangement.
Examples of ‘family’ agreements that have been found to be clearly
commercial, and therefore legally enforceable, have included contracts of
partnership (Milliner v Milliner (1908) 8 SR (NSW) 471), contracts between
directors of family companies and those companies (Service v Federal
Commissioner of Taxation (2000) 171 ALR 248), contracts of tenancy (Pearce v
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An Introduction to the Law of Contract
Merriman [1904] 1 KB 80), contracts of indemnity (Re Banks; Weldon v Banks
(1912) 56 Sol Jo 362), contracts involving sale and purchase of property
(Hewison v Negus (1853) 16 Beav 594; 51 ER 909), contracts involving the use
of a vehicle to transport commercial quantities of goods (Roufos v Brewster
(1971) 2 SASR 218) and contracts of loan (Berghan v Berghan (2017) 57 Fam
LR 104 –​though it is interesting that, in Australia, a person who alleges that
‘an advance of money was by way of loan, rather than by way of a gift’ bears
the onus of proving that that was the case: Coshott v Sakic (1998) 44 NSWLR
667, 671).
In every case, the court’s job has been to look at the facts and ascertain as
objectively as possible whether the parties intended their agreements to be
legally enforceable.
Often, this can be achieved by looking at the nature of the transaction (as in
each of the examples given above). In others, the consequences of acting in
reliance on the agreement can be relevant –​on the basis that the more serious
the consequences, the more likely it is that the parties intended to be bound.
See, for example:
Wakeling v Ripley (1951) 51 SR (NSW) 183
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[5.240]
Facts: The defendant lived alone in Sydney. In 1946, he
wrote to his sister who lived in the United Kingdom with her husband,
a Cambridge University lecturer, to persuade them to come to live
with him. He promised he would leave them all his property upon his
death and that, in the meantime, he would provide them with a home
and a living. Considerable correspondence ensued and eventually the
plaintiffs agreed. The husband resigned his lectureship, they sold their
house and they came to live with the defendant. Just over a year later
the parties quarrelled, the defendant reneged on his promise, sold his
house and disinherited the plaintiffs. They sued. The defendant argued
(inter alia) that the agreement was a purely family arrangement and
thus unenforceable.
Held: He failed. The voluminous correspondence and the seriousness
of the move for the plaintiffs showed that the parties had intended the
agreement to be binding. Consequently, it was enforceable and the
defendant was liable. As Street CJ said (at 187):
The consequences for the plaintiffs were so serious, in taking the step that
they did, that it would seem obvious that they were anxious to get a definite
assurance and a definite agreement as to the provision that was to be made
for them, and accepting … their account of the letters … I think that the
parties did intend to enter into a binding and enforceable contract.
[5.250] Similar decisions on similar facts can be found in both Todd v Nicol
[1957] SASR 72 and Riches v Hogben [1986] 1 Qd R 315. The common thread
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Chapter 5 Intention to be bound
131
flowing through all these decisions is that whether there is an intention
to be bound depends upon the facts of each case and the answer to the
question: ‘Would reasonable people think that this agreement was intended
to be legally binding?’
Agreements with the required contractual intention –​social
agreements
[5.260] Most social agreements are just that, agreements that have little
significance for the parties and which are unlikely to have any serious
consequences. Breach of a social agreement is not usually a matter of grave
concern, and the courts have therefore been reluctant to find that such
agreements were intended to be binding. However, they are not always
without serious consequences, and something that appears to be merely a
friendly pact can go much deeper –​and, therefore, may be contractually
enforceable. Agreements to participate jointly in competitions, lotteries and
the like have traditionally been seen as good examples. See, for instance:
Simpkins v Pays [1955] 1 WLR 975
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[5.270]
Facts: The defendant, her grand-​daughter and the plaintiff
regularly entered a fashion competition run by a Sunday newspaper.
The entries were always made in the defendant’s name, but they all
contributed to the postage and other expenses, and agreed that any
prizes would be shared. They eventually won a prize, but the defendant
refused to share it, arguing that there was no contract. The agreement,
she said, was merely a friendly adventure and not something intended
to create legal relations.
Held: In the circumstances, the parties clearly contemplated that their
agreement would be enforceable in the event of a win. The plaintiff was
therefore contractually entitled to a share of the prize.
5.3 BUSINESS OR COMMERCIAL AGREEMENTS
Contractual intention is more likely
[5.280] With business or commercial agreements, the traditional
presumption was that the parties did intend to create legal relations.
Therefore, the courts normally enforced such agreements unless there was
very clear and cogent evidence that that is not what they intended.
That situation did not really change after Ermogenous because, as Young CJ
in Eq said in Helmos Enterprises Pty Ltd v Jaylor Pty Ltd [2005] NSWCA 235
[48]), ‘[g]‌enerally in commercial agreements there is a strong presumption
in favour of an intention to create legal relations, a presumption that will
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An Introduction to the Law of Contract
only be rebutted with difficulty’. See also Edwards v Skyways Ltd (in [5.390])
at 355. It can therefore be argued, as the plaintiff did in Roo Roofing Pty Ltd v
Commonwealth [2019] VSC 331 [699], ‘that the threshold question of intention
to enter into a contract does not need to be asked in commercial contracts
because there is a strong presumption that the parties do intend to create
legal relations if they have otherwise satisfied the requirements of contract
formation’ (that is, if all the other elements of a valid contract are present).
If it is alleged that the parties did not have the requisite contractual intention,
the onus of proving that falls on the party alleging it and that onus can be
quite severe. For example, in Carlill v Carbolic Smoke Ball Co (see [3.270]), one
of the defences the company raised was that it had not intended to create
legal relations. Its advertisement, it said, was ‘mere puff’, something that
no reasonable person would take seriously. That defence failed. On its face,
the offer appeared serious and it was of a type that might be expected in a
commercial context. That seriousness was enhanced by the statement that
£1000 had been deposited with the company’s bankers to cover contingent
claims, thus ‘showing our sincerity in the matter’. The company was
contractually liable.
Contractual intention can be disproved
[5.290] Despite decisions like Carlill v Carbolic Smoke Ball Co, the parties
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can show, objectively, that they did not intend to be bound by adducing
evidence that no reasonable person could have believed that the ‘promises’
made were seriously intended to be contractually binding. For an example,
see the American case:
Keller v Holderman 11 Mich 248 (1863)
[5.300]
Facts: Keller gave Holderman a cheque for $300 for an old
silver watch which was worth about $15. The cheque was not paid and
Holderman sued. At trial it appeared that the whole transaction had
been intended as mere ‘frolic and banter’ and that neither party had
intended that it would have legal consequences.
Held: No contract had arisen and there was no right to remedy. There
had been no serious intention to create legal relations and that was, or
should have been, obvious to all.
[5.310] Care has to be exercised however; practical jokes can backfire. In
Keller v Holderman, the defendant succeeded because the joke was obvious.
Where it is not so obvious and the plaintiff honestly believes that he or she
had a binding contract, the practical joker can be required to perform. See,
for instance:
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Chapter 5 Intention to be bound
133
Nyulasy v Rowan (1891) 17 VLR 663
[5.320]
Facts: The defendant verbally offered to purchase 400 shares
from the plaintiff for £8 per share, the offer to remain open for three
months. The plaintiff did not accept immediately but did so within the
allowed time. The defendant then refused to buy them, stating that it
had all been a joke. Evidence was adduced, however, to show that the
plaintiff and a number of others had taken the offer seriously.
Held: If an offer that appears serious on its face is made and, ‘while it
is open and unretracted the other party duly accepts, then there is an
agreement and both are bound’. Here, there was nothing to show that
the defendant’s offer was not serious. He was liable.
5.4 EXPRESSLY EXCLUDING INTENTION
Honour clauses
[5.330] One way the parties could (and still can) avoid contractual liability
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is to include an express stipulation in their agreement to the effect that it
is not intended to be legally binding. Such stipulations are called ‘honour
clauses’ and they make the agreement unenforceable at law. Honour clauses
are commonly inserted in competition, lottery and pools entry forms. See,
for instance:
Jones v Vernon’s Pools Ltd [1938] 2 All ER 626
[5.340]
Facts: The plaintiff sued on a football pools coupon which
he alleged he had posted and the defendants had lost. The defendants
relied on a clause in the document which stated that neither the conduct
of the pools nor any associated agreement or transaction would create
a legal relationship between the parties or be legally enforceable. It
specifically went on to say that the arrangements were ‘binding in
honour only’.
Held: The insertion of the ‘honour clause’ meant that the agreement
had not been intended to give rise to a legally binding contract.
Consequently, the plaintiff had no contract and no cause of action.
[5.350] Honour clauses are not restricted to competition entries. They
may also be inserted into straight business agreements, and if so, they have
exactly the same effect –​the agreement is not enforceable at law. See, for
example:
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An Introduction to the Law of Contract
Rose & Frank Co v Crompton (JR) & Bros Ltd [1925] AC 445
[5.360]
Facts: The plaintiffs, an American firm that had dealt
with the defendant company for some years, the defendant and the
defendant’s supplier entered into an agreement to continue dealing
with one another for three years, subject to termination on six months’
notice. The written agreement went on to provide: ‘This arrangement
is not entered into … as a formal or legal agreement, and shall not be
subject to legal jurisdiction –​in the law courts … it is only a definite
expression and record of the purpose and intention of the three parties
concerned, to which they each honourably pledge themselves … that
it will be carried through … with mutual loyalty and friendly co-​
operation.’ A dispute arose and the English companies terminated the
arrangement without notice. Were they entitled to do so or were they
legally bound to give six months’ notice?
Held: The agreement was not a legally binding contract. The ‘honourable
pledge’ clause showed that it was intended to be binding in honour only
and not intended to create legal obligations. Accordingly, the English
companies were not bound to give the notice and their termination was
valid and effective.
Excluding the jurisdiction of the court
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[5.370] While honour clauses are perfectly permissible, care must be
taken in their drafting. A clause that reads: ‘This agreement does not give
rise to any legal relationship, nor is it intended by the parties that legal
consequences shall flow from it’ is perfectly acceptable. However, it would
not be if it read: ‘No court shall have power or jurisdiction to arbitrate in
respect of any matter arising out of this agreement or any breach thereof.’
The difference between the two is that the first denies the existence of
a contract (which is permissible), while the second acknowledges the
existence of a contract but attempts to exclude the jurisdiction of the courts
to adjudicate in respect of it (which is not permissible). The second is not
permissible because considerations of public policy demand that wherever
legal relations are created, the courts must have the power to intervene if
that becomes necessary. If there is a contract, there are legal rights, duties
and obligations, and the jurisdiction of the courts cannot be denied, even by
agreement between the parties (see [14.670]).
Ambiguous language
[5.380] While it is clear that the parties may disavow intention and make
theirs an agreement in honour only if they wish to do so, they must make that
intention manifestly apparent by their words. Should there be any doubt, the
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Chapter 5 Intention to be bound
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courts can disregard the words used, look at the surrounding circumstances
and independently determine their true intention. See, for instance:
Edwards v Skyways Ltd [1964] 1 WLR 349
[5.390]
Facts: The plaintiff was employed as an aircraft pilot. He
was a member of the defendant company’s contributory pension fund,
under the rules of which he was entitled to a choice of two options
when he left the company’s service:
(a) to withdraw his contributions to the fund; or
(b) to take a pension, payable at the retirement age of 50.
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He had no right to the company’s contribution if he left before
retirement age. On 8 February 1962, the company, having decided upon
a redundancy plan, agreed that pilots who were declared redundant
would be given an ‘ex gratia’ payment, equivalent to the company’s
contribution. This was published in the pilots’ association newsletter
in March. On 1 May, Edwards accepted redundancy and elected to
withdraw his contributions and to take the ex gratia payment. He
received his contributions on 2 May. The company then rescinded its
decision to make the ex gratia payments. Edwards, who had then left
the company, sued. The company argued that there was no contractual
entitlement because the words ‘ex gratia’ excluded any intention to
be bound.
Held: This was a commercial agreement and therefore, prima facie,
enforceable. If the company wanted to argue that it was not, it was up
to it (as the party making that assertion) to prove that that had not been
the parties’ intention. That onus was heavy and, in the circumstances,
the company had failed to discharge it. Edwards was entitled to the
money. As Megaw J said (at 356):
The words ‘ex gratia’ do not … carry a necessary, or even probable,
implication that the agreement is to be without legal effect … I see nothing
in the mere use of the words ‘ex gratia’ … to warrant the conclusion that
this promise, duly made and accepted, for valuable consideration, was not
intended by the parties to be enforceable at law.
[5.400] On the other hand, if the words the parties use do clearly disavow
an intention to be bound, there will be no binding contract. For example,
in Stephenson v Dwyer [2008] NSWCA 123 the parties signed a document
containing an ‘agreement’ for the release of rights of way in relation to
neighbouring residential properties. It was headed ‘Proposal’ and contained a
provision that ‘each owner signifies their in principle approval’. The document
was held not to be contractually binding because the use of the words ‘in
principle approval’ clearly indicated, and would have led reasonable people
to conclude that that was not what the parties had intended.
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136
An Introduction to the Law of Contract
5.5 QUESTIONS
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1. Why must the parties show an intention to be bound before their
agreement will be enforced?
2. What is the effect of the decision in Ermogenous v Greek Orthodox
Community of SA Inc on the question of legal intent?
3. What potential problems are involved in making an apparently serious
offer as a practical joke?
4. What are honour clauses and what is their effect?
5. Chris invites Dell to afternoon tea and Dell agrees to come. Chris spends
a lot of money buying cakes and biscuits. Dell does not come. Can Chris
sue to recover the money she spent?
6. Eric’s father agrees to pay his university fees and his living expenses
for three years if Eric promises to work hard and get good marks. Eric
spends his time drinking and playing football and fails his course. Can
his father sue him for breach of contract?
7. Before they married, Frank promised Gail a monthly allowance for her
own use. They separated and Frank stopped payment. What are Gail’s
rights? Would your answer be different if, following their separation,
Frank had agreed to continue the payment as maintenance?
8. Hal asks his father to lend him $10,000 to start a business. His father
agrees to lend him the money at 4% below bank interest rates, but later
refuses to give Hal the money. Hal has to borrow it from a bank at
commercial rates. Can he sue his father?
9. Following a dispute that looked to be heading for litigation, Irma
promised to pay Jon $500, ‘solely to avoid the uncertainty of litigation,
with a denial of liability and purely as a gratuitous gesture of good
faith’. Irma did not pay. Advise Jon.
10. Browsing through the supermarket, Kera encountered a large sign
proclaiming: ‘Wunda Tonic –​guaranteed to banish listlessness and
fatigue. Use as directed for one week and vitality and energy will be
completely restored. Purchase price will be fully refunded by the
company if you are not wholly satisfied.’ Kera had been spending many
late nights studying and was feeling listless and fatigued. She purchased
a bottle, used it as directed and felt worse than ever. She wrote to the
company and received no reply. Should she pursue the refund?
11. Lyn, her niece, and a woman who boarded with her regularly submitted
joint Lotto entries. Eventually one of their entries, which was in Lyn’s
name alone, won a prize. Lyn has refused to pay the boarder her ‘share’.
Can she be forced to do so? Would your answer differ and, if so, why, if
it was the niece who was not being paid?
12. Discuss the difference in effect of the following clauses:
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Chapter 5 Intention to be bound
137
(a) ‘This document does not give rise to any legal relationship, nor is it
intended by the parties that any legal consequences shall flow from
this agreement.’
(b) ‘No court shall have power or jurisdiction to arbitrate in respect of
any matter arising out of this agreement or any breach thereof.’
13. Moe wrote a series of letters to relatives in the United Kingdom, inviting
them to come to live with her and promising that she would provide
for them for the remainder of their lives if they did so. Eventually, the
relatives sold up, left their jobs and migrated. Following a dispute, Moe
ordered them out of her house. She wants to have nothing further to do
with them. What are their rights?
14. Neil joined the local tennis club in November. The rules provide that
annual fees of $200 are payable regardless of when a member joins. Neil
refuses to pay and has offered $20 ‘for the month I was a member’. The
secretary wants to sue. Is it worthwhile?
15. Seller Ltd ran a competition with a week’s cruise as the prize. The
entry form contained the words: ‘The judge’s decision is final and no
correspondence will be entered into … By entering this competition,
entrants agree to be bound by the rules.’ Although her entry was correct,
Olive was not awarded the prize. She wants to sue. Should she?
16. Pat, a television personality, agrees to speak at a fundraising function for
a local charity. The day before the function he tells the secretary of the
charity that he has decided to go to a party instead. As a result, many of
those who would have attended do not do so and the charity loses much
of the money it had hoped to raise. Can it sue Pat?
17. Quetta, a full-​time student, agrees to work in her father’s shop on
Thursday nights and Saturday mornings for $200 a week. After three
weeks her father has only paid her $250. What are her rights to demand
the other $350?
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