10.01  For an agreement to be legally enforceable it must be supported by valuable consideration and there must be an intention to contract. This chapter is concerned with this requirement of an intention to contract which must exist in all the parties.¹ As this book is principally concerned with commercial contracts and has an emphasis on preliminary agreements, no detailed treatment of such matters as collective agreements, government schemes, or voluntary and non-profit associations is provided. These are dealt with in standard works on contract law.² However, family and social situations are discussed for three reasons. First, along with commercial transactions, they are the other area where presumptions are applied. Second, the approach to family and social situations provides a contrast with the approach to commercial settings. Third, it is in family and social situations that the modern requirement of an intention to contract was first adopted.

10.02  The courts have made use of presumptions in this area. Generally, in a family or social setting, there is a presumption that the parties do not intend to contract.³ In a commercial setting, there is a strong presumption that the parties intend to contract.⁴ When the presumptions (p. 255) apply, the onus of proof shifts, and the party who wishes to challenge the legal efficacy of the agreement must bring into evidence facts that rebut the presumption.

10.03  The High Court of Australia, in Ermogenous v Greek Orthodox Community of SA Inc,⁵ made some important remarks about the extent to which use can be made of presumptions in this area and the dangers which can follow if they become too entrenched. The issue in that case concerned whether a contract of employment existed between an archbishop and the respondent, an incorporated association. In coming to its conclusions, the court reviewed many of the cases that had dealt with the nature of relations between a member of the clergy and the church or an unincorporated association of church members.⁶ The court was of the view that aspects of that relationship may be contractual.⁷ In an important passage, Gaudron, McHugh, Hayne, and Callinan JJ made the following comments about the use of presumptions:⁸

10.04  It may be questioned whether the High Court intended to rule out the use of presumptions in all areas where they have been used for a long time. The court referred to the use of presumptions in family and social areas; it did not comment on commercial transactions, and the discussion that followed constantly referred back to the specific facts of the case at hand and the use of presumptions in that context; arguably, these comments were intended to be restricted to that context and not extend to prevent the continued use of presumptions in family, social, and commercial contexts.⁹ Nevertheless, since the decision was handed down, there have been a growing number of cases that have taken the view that the High Court did reject the use of presumptions or at least their use in family and social situations.¹⁰ It is difficult to understand this development. The presumptions are evidential presumptions of fact that are grounded in human experience and expectation. To deny one is applying them merely results in legal fictions. For example, in Evans v Secretary, Department of Families, Housing, Community Services and Indigenous Affairs,¹¹ the Full Federal Court of Australia in applying the decision in Ermogenous stated:¹²

With respect, that is a very clear statement of the presumption and all that the presumption is intended to achieve.

10.05  The imputed intention that the presumptions give effect to deal with the legal effect of the words and conduct of the parties. Although the determination of this intention is an issue of fact, the legal effect of the words or conduct of the parties is a matter that they rarely turn their minds to, and the presumptions help deal with what might otherwise be a black hole in contract formation.¹³ As has been noted, ‘businessmen may adopt language of deliberate equivocation in the hope that all will go well. It may, therefore, be artificial to try to ascertain the common intention of the parties as to the legal effect of … a claim if in fact their common intention was that the claim should have such effect as a judge or arbitrator should decide.’¹⁴

10.06  If the law always required a positive intention to contract then there would be many cases where that would not be made out.¹⁵ In Air Great Lakes Pty Ltd v KS Easter (Holdings) Pty Ltd,¹⁶ Mahoney JA explained this point in the following terms:¹⁷

10.07  The legitimacy of Mahoney JA’s conclusion and the legitimacy of the presumptions lie in the objective theory of contract. Under this theory, intention is imputed by reference to a reasonable person in the position of the parties.¹⁸ That is, in determining whether an intention to contract exists, the correct perspective is with how a reasonable person in the position of the promisee would interpret the statement of the promisor. It follows that (p. 258) it is not necessary to prove a positive subjective intention to contract.¹⁹ The intention is inferred as a matter of fact.²⁰ Of course, evidence to rebut the presumption is allowed, and this may take into account evidence of one party’s subjective state of mind. For example, if the party arguing that a contract exists admits that they did not intend the term, that they now allege to have been breached, was to have legal effect, then the presumption will be rebutted.²¹ However, generally, the promisor’s subjective state of mind is irrelevant unless the promisee is aware of the promisor’s state of mind.²² Moreover, if an alleged agreement does not contain a promise, then clearly there can be no intention to contract as one of the basal requirements for the presumption to operate, and for a contract, is missing.²³ This is an obvious statement of principle, and where it tends to arise is where one party has a complete discretion as to whether or not they will perform. Often such cases are reasoned on the basis of an absence of consideration or uncertainty.²⁴ But, in addition, there is a lack of an intention to contract.

10.08  The concern of this chapter is with the presumption operating in commercial contracts. The use of the presumption might suggest that the issue of intention is rarely litigated or, if it is, the issue before the court is one of rebutting the presumption. However, as noted elsewhere, issues surrounding the formation of contracts, particularly uncertainty, incompleteness, and conditional contracts, are some of the most litigated areas of contract law.²⁵ Often, where these issues arise, a court will conclude there is no intention to contract (p. 259) because of some uncertainty or incompleteness or because the contract is made ‘subject to contract’.²⁶ In these cases, there is usually no discussion of the presumption or its rebuttal.²⁷ However, where it is necessary to prove intention, it must be proved using the objective standard.²⁸ However, it is first necessary to attempt to identify the field of operation of the presumptions.

10.09  Perhaps those cases of uncertainty and incompleteness referred to suggest that the presumption only applies where there is agreement on all the essential terms.²⁹ Where that is not the case, then intention must be proved. If this were the only explanation, it would follow that a complete agreement made ‘subject to contract’ would usually attract the presumption.³⁰ Perhaps there is some support for this proposition to be found in the cases where, today, outside of contracts for the sale of land, an agreement made ‘subject to contract’ usually suspends performance and not formation. It would follow that in cases of uncertainty and incompleteness, intention must be positively proven. The difficulty with this explanation is that the usual starting point for a court is to assume a contract is complete and certain and leave it to the party who wishes to argue otherwise to prove their case. That approach would necessarily attract the presumption to such cases.³¹

10.10  Another way to look at the issue is to recognize a subtle difference between determining whether or not the parties voluntarily assumed legal obligations in any given case and whether they intended to contract.³² The distinction appears to have been recognized by Windeyer J in The State of South Australia v The Commonwealth,³³ where he said:³⁴

10.11  For there to be an offer, it must be informed by an intention to contract, so too any acceptance. It follows that the existence of an intention to contract may exist throughout the negotiation process. The presumption can then attach to that expectation of a contract. In most commercial negotiations, a reasonable person in the position of the parties will conclude that the parties were negotiating with the expectation of entering into a contract; why else negotiate in the first place? Even where a head contractor is negotiating with several subcontractors and all the parties know that only one contract with one subcontractor will eventuate, it is possible to presume that all intend to contract and are negotiating with the expectation that they will be awarded the contract. Arguably, this is all the ‘intention’ that the presumption assumes and applies.³⁵ But this is a different issue from whether or not the parties intended to assume legal obligations at any point in time.³⁶

10.12  As already noted, often the parties have the point at which legal obligations are to be assumed at the forefront of their minds. A ‘subject to contract’ clause may evidence this. That is, the parties express a clear intention as to whether they intend their agreement to be subject to ‘the adjudication of the courts’.³⁷ Thus, every time an agreement is made ‘subject to contract’, it is necessary to positively determine the intention of the parties as to whether they intended the agreement to have immediate effect. As noted, very often in these cases the courts will use the language of intention and may conclude the parties did not intend to contract and this may be so. But whether the parties can be said to have voluntarily assumed legal obligations at any point in time, such as at a particular stage of negotiations or on any particular terms or upon the execution of a document, is arguably a different question. Perhaps there are many cases where a contract has failed for a lack of a voluntary assumption of legal obligation which commentators have interpreted as failing for lack of an intention to contract.³⁸ The latter finding may flow from the former. For example, take the case where the parties agree all the terms of a contract and make the contract ‘subject to contract’ in the sense that no enforceable contract is to come into being until execution of a formal contract.³⁹ If the (p. 261) negotiations were always carried out ‘subject to contract’ then there would be an argument that the parties would have evidenced that they do not intend to contract and have no intention to voluntarily assume any legal obligations until execution.⁴⁰ However, if the ‘subject to contract’ clause was introduced at the end of negotiations, it may be that during negotiations the expectation of a contract would have been sufficient to attract the presumption but the introduction of the clause at the end of negotiations showed a lack of willingness to voluntarily assume legal obligations and this rebutted the presumption.

10.13  There are other situations where the presumptions are not applied. Indeed, as evidenced by the decision Ermogenous v Greek Orthodox Community of SA Inc,⁴¹ it can be difficult to determine when a presumption applies. That case also highlighted the problem of categorization for the purposes of the presumptions. That is, what constitutes a family or social agreement for the purposes of the presumptions? No list of appropriate settings exists and it can be difficult to determine when a family or social setting transcends into a commercial setting.⁴²

10.14  Even within a commercial setting, there will be cases where the presumption does not apply because the statements made were not intended to be taken seriously. That is, unless there can be a reasonably held expectation of a contract, the presumption does not apply.⁴³ In such cases, there is no need to rebut the presumption. In short, there is a threshold which must be met in order for the presumption to apply. This is an issue that is more likely to arise where the transaction involves a consumer. Typical situations involve conditional gifts, and here an intention to contract as well as the bargain theory of consideration help distinguish contracts from such gifts. The standard example is a promise of an outrageous sum of money in return for a mundane act. In a social setting, this may take the form of, ‘I promise to pay you £1,000 if you change the television channel’.⁴⁴ One can put such a statement into a more commercial type arrangement. A practical example is the promotional puff. It is a general principle of contract law that a puff is not to be taken seriously and does not become a term of the contract.⁴⁵ This applies even in a commercial context. Thus, the advertising ‘speak’ of a car salesperson who says ‘the fuel consumption on this car is so efficient, if you fill it up once you will never have to fill it up again’, is not intended to be taken seriously and does (p. 262) not of itself attract the presumption of an intention to contract nor would it be understood that the maker of the statement was voluntarily undertaking legal obligations in respect of such a statement.

10.15  However, whether or not a statement is intended to operate as a puff or not is a question that opinions can differ on.⁴⁶ Perhaps the most famous example is the decision of the House of Lords in Esso Petroleum Co Ltd v Customs and Excise Commissioners.⁴⁷ In this case, Esso, which was in the business of supplying petrol, commissioned the production of certain ‘World Cup coins’. Each coin bore the image of one member of the English football team. The coins were sold to their garage proprietors and were then advertised as free gifts to be given by Esso service station proprietors to consumers with every four gallons of petrol purchased. The question that went to the House of Lords was whether these coins were produced for sale. If they were then they attracted a purchase tax. The Court of Appeal held that no tax was payable. The House of Lords dismissed the appeal. Some members of the House of Lords concluded there was a contract taking effect as a collateral contract: the consideration for the coins was entry into the contract to buy petrol. They found an intention to contract between the consumers and proprietors for the supply of the coins. The basis for that conclusion was the commercial advantage Esso was seeking under the promotion: namely, to sell more fuel than they might otherwise have by tempting customers to buy sufficient fuel to obtain a full set of coins. The whole promotion was set up to tempt customers in this way.⁴⁸ The transaction was said to take place in a business setting, despite involving a consumer sale, that is, it was seeking a commercial advantage.⁴⁹ The view was expressed that commercial promoters should not be allowed to argue that the statements made were mere puffs, that is, the presumption should apply.⁵⁰ Other members (Viscount Dilhorne and Lord Russell) focused on the language of the advertisement which expressed the coin as a free gift—the lack of value in the coins and the fact that no legal proceedings were ever likely to be taken for refusal to supply a coin—and held that no contract was intended between the customer and the individual garage proprietors in respect of the coins. Viscount Dilhorne expressed the view that on the facts of this case the onus did not lie on the person who was asserting that no contractual intention existed, that is, the presumption did not apply to the transaction. This appears to flow from his view that it was not a sufficient ‘business’ transaction to attract the presumption due to it being a consumer sale.⁵¹ Although deciding there was no intention to contract, both Viscount Dilhorne and Lord Russell expressed the view that if there was a contract in respect of the coins, it was a collateral contract and not a contract by way of sale for a cash consideration.⁵² Lord Fraser dissented, he was of the view that there was only one transaction, and it was by way of sale. In the result, a majority held Esso and the dealers were under a binding obligation to deliver coins to purchasers; but this majority was divided on whether there was one or two contracts. A further majority held that to the extent there was a contract, it was collateral to the contract for the sale of petrol and was therefore not caught by the legislation as it was not a contract by way of sale for a cash consideration.

(p. 263) 10.16  Although opinions may always differ in determining an issue of fact, it is always necessary to make such decisions by reference to contract doctrine. Where that doctrine intrudes here is in the application of the objective theory which may dictate what evidence is and is not relevant in making a decision. It is here that the case has been criticized on the basis that it is a finding as to the intention of Esso rather than that of the parties to the contract and that on a proper application of the objective test, ‘the more realistic view is that contractual intention was negatived by the language of the advertisements (in which the coins were said to be “going free”), and by the minimal value of the coins’.⁵³ Despite this, it is suggested that if a football fan purchased petrol in the circumstances of this case and was told there were no coins, he or she would have a legitimate grievance based on the expectation of a reasonable person in their position.

10.17  A further example of where the courts appear to require some threshold level of intention to exist before the presumption can apply is with letters of comfort. Given the importance of these documents, they are given separate treatment below.⁵⁴

10.18  There is a relationship between the presence of valuable consideration and intention to contract in that both issues go to the legal enforceability of an agreement. Moreover, they overlap as the presence of consideration tends ‘to suggest the presence of’ an intention to contract.⁵⁵ Williston went further, taking the view that the provision of valuable consideration necessarily proved an intention to contract.⁵⁶ The basis of this view is that under the bargain theory of consideration, once the presence of valuable consideration is made out, then the parties have put a price on each other’s promise and that is sufficient to prove intention. Thus, it is argued that many of the cases that fail for lack of intention, such as those between family members, should be seen as failing because neither party has given a promise as the price for a counter-promise; in short, there is no bargain.⁵⁷ However, before one adopts Williston’s view, it is necessary to take a position on whether the concept of a ‘price’ for a promise, and hence a bargain, is determined by reference to intention or whether it is a legal determination based on whether the transaction is one that the courts believe should be given effect to in the marketplace. If it is the former, then Williston’s view carries much weight as there would be circularity in assessing intention twice. Indeed, one can reasonably argue that many exchanges of promises given in family situations are not given in order to purchase some other promise as they are given gratuitously as ‘gratuitous services’ and would be given in any case.⁵⁸ They are therefore not referable to some counter-promise. But at the same time one cannot simply adopt the view that when one promise is given in return for another promise or act there is a bargain. Indeed, it has been in such circumstances that the courts have used a legal concept of a bargain in addition to intention in order to (p. 264) distinguish a contract from a conditional gift.⁵⁹ The example given above is typical.⁶⁰ If A and B are sitting at home one night and A promises to pay B £1,000 if B changes the television channel, then if B does change the channel and the only reason B did that was because of A’s promise then that act is referable to the promise and given in exchange for the promise. However, a court will not enforce that ‘agreement’ on the basis that it was not a bargain and there was no intention to contract. Here the notion of a ‘price’ is determined as a matter of law. Much of course will depend on the relations between the parties and the setting they are in.

10.19  None of this results in there being no need for an intention to contract; and if this legal concept of a bargain is rejected, then the only way to prevent enforcement of the type of exchange referred to above is by reference to intention. Moreover, the fact remains that members of a family may contract with one another and depending on the context the exact same exchange of promises in one instance may give rise to a contract and in another instance it may be held that there is no contract. What distinguishes them is intention. Finally, the legal position is that under English law an intention to contract and consideration are separate legal requirements for a contract.⁶¹

10.20  In family and social situations, there is a presumption that the parties do not intend to contract.⁶² This is a presumption of fact.⁶³ It follows that an intention to contract must be proved. It has been suggested that this requirement of an intention to contract is no more than a policy position adopted by the courts to give effect to what agreements the courts think ought and ought not to be enforced.⁶⁴ Whether or not that view properly captures the initial reason for the adoption of this requirement, there can be little doubt that today the requirement of an intention to contract is a necessary aspect of contract formation and that it is said to be grounded in the presumed intention of the parties.⁶⁵ Thus, the presumption as regards family and social agreements is said to be based on ‘experience of life and human nature which shows that in such circumstances men and women usually do not intend to create legal rights and obligations’.⁶⁶ What life experience dictates will depend on the relationship in question. It is also important to keep in mind that people in close relationships (p. 265) use ‘unguarded speech’ that might suggest an intention to contract in another context.⁶⁷ The social customs of the parties involved may also be important.⁶⁸ In the typical case of a marriage, many arrangements made between a husband and wife are made out of the natural love and affection that underpins the relationship, and it is this love and affection that, through life experience, gives rise to a presumption that the parties did not intend the arrangement to give rise to legal relations.⁶⁹ Finally, although human nature may not change (at least not in the short term), life experience, community attitudes and expectations do vary with the times. This is important because many of the leading cases in this area are now quite dated and some may not necessarily be acceptable to a modern court if re-argued.

10.21  Perhaps the leading case dealing with arrangements between husbands and wives is still Balfour v Balfour.⁷⁰ In this case, a husband, stationed in Ceylon, took leave and returned to England with his wife. When it came time for him to return to Ceylon, she was not able to accompany him because of her poor health. The husband promised to pay his wife £30 a month as maintenance during this period. The wife later sued for breach of this agreement. The Court of Appeal held that no legal relations had been contemplated. The plaintiff carried the onus of proving the transaction was intended to operate as a contract.⁷¹ Atkin LJ focused on the fact that this was an arrangement between a husband and wife and reasoned that, although it was in the nature of such a relationship to make arrangements on many matters, there was no intention to contract in respect of those arrangements.⁷² Atkin LJ gave two further reasons for not enforcing such contracts:⁷³ first because it would multiply suits and, second, because the consideration for most promises is that of natural love and affection which counts for little in the courts.⁷⁴ Warrington LJ emphasized some practical points saying:⁷⁵

10.22  A similar sentiment can be found in the leading Australian decision of the time, Cohen v Cohen.⁷⁶ Here a husband reneged on his promise to provide his wife with a dress allowance. These cases suggest that the presumption, at least in the early 1900s, was quite strong in respect of arrangements between a husband and wife.

10.23  Perhaps the presumption may still be strong in situations like Cohen v Cohen to the extent that the promise is directed towards enjoyment rather than maintenance or subsistence and is thus more a gift promise. However, one could imagine where such an arrangement may be important to some affluent or influential members of society in the social, professional, or political settings which they inhabit. However, it is difficult to see the present influence of Balfour v Balfour and, assuming the presence of valuable consideration, today one would expect that arrangement, on those facts, to be upheld insofar as intention is concerned.⁷⁷ It is relevant to note that as far back as 1970 the House of Lords suggested that Balfour v Balfour ‘stretched [the] doctrine to its limits’.⁷⁸

10.24  The presumption is most easily rebutted in respect of arrangements made upon the breakdown of a marriage.⁷⁹ In the view of some judges, the presumption does not apply in such a case. For example, in Merritt v Merritt,⁸⁰ following the breakdown of their marriage, the husband signed a written note agreeing that he would transfer title to the former matrimonial home, then in their joint names, into his wife’s sole name. This was given in return for her paying all charges connected with the house until the mortgage was repaid. The wife (p. 267) abided by these terms and paid off the mortgage partly out of the £40 a month her husband paid her as maintenance following the breakdown of their marriage and partly out of her own earnings. However, the husband refused to transfer the house to her, although he did reduce the maintenance payment to £25 once the mortgage had been paid off. The Court of Appeal held that the parties had intended to create legal relations. In coming to this conclusion the court was heavily influenced by the fact that the husband and wife were no longer living together when they made this arrangement. It was on this basis that the court distinguished this case from the Balfour v Balfour line of cases. The presumption is rebutted because the natural love and affection that underpins the marriage also underpins the presumption and is gone when the marriage breaks up.⁸¹ Widgery LJ said that it was ‘unnecessary to go so far as to say that there is a presumption in favour of the creation of legal relationships when the marriage is breaking up, but certainly there is no presumption against the creation of such legal relations as there is when the parties are living happily together’.⁸²

10.25  The leading decision dealing with family arrangements outside of husband and wife arrangements is Jones v Padavatton.⁸³ In this case, a mother invited her daughter to come to England and read for the bar for the purpose of practising law in Trinidad where the mother lived. The mother promised to pay her a certain sum of money (being $200 per month) by way of maintenance. There was confusion from the start as the mother intended by this to mean West Indian dollars and daughter took it to mean US dollars. Nevertheless, in reliance on this promise, the daughter, who was in her mid-thirties at the time and lived and worked in Washington, came to England with her son and commenced reading for the bar. In order to do this, the daughter had to take her son out of school and give up both a good job and her flat. The mother initially paid her daughter’s fees and provided a sum by way of maintenance. That sum was £42 per month and the daughter made no complaint that it did not equate to $200 US. However, it did equate to $200 West Indian. Later the mother purchased a large home and allowed her daughter to live there and sub-let the other rooms and keep the moneys obtained to pay outgoings and maintenance and remit the remainder to her mother; during the entire period no sum was ever remitted back to the mother. A couple of years later the mother indicated that she wanted to retake possession of the property. However, on her initial arrival from Trinidad, the daughter refused to let her into the property. The daughter claimed she was entitled to a sum to compensate her for the money she had spent on the property. At the time of the dispute, the daughter had been studying for the bar for six years and had yet to pass Part I of the Bar examination.

10.26  The question for the court was whether there was a contractual arrangement made between the parties in respect of the property. For Danckwerts LJ, the arrangement in respect of the property replaced the earlier maintenance arrangement and so depended on the enforcement of that earlier arrangement. He held that there was no intention to contract in respect of the early maintenance arrangement. There was, in his view, no evidence to (p. 268) rebut the presumption the mother was merely acting in a way she hoped would further her daughter’s career.

10.27  Salmon LJ said it was up to the daughter to prove a variation of the original agreement, which she had not done, and so the two arrangements had to be evaluated separately. The daughter carried the onus of rebutting the presumption and proving an intention to contract. He thought that in the special circumstances of this case the initial arrangement would give rise to contractual relations if the daughter came to England and stayed for a minimum period of six months.⁸⁴ This reasoning may suggest he was of the view that the contract formed over a period of time with no distinct point of acceptance of an offer. It may suggest that reliance plays an important factor in rebutting the presumption. It also suggests that estoppel may be relevant on the facts of any given case.⁸⁵ Salmon LJ was not impressed with the submission that it was unthinkable that the daughter would sue her mother if her mother fell on hard times and could not pay. He thought that the fact the daughter was unlikely to sue in such a situation did not shed any light on the issue of whether or not there was an intention to contract.⁸⁶ This is an important point because occasionally this factor is raised in order to help determine whether there was an intention to contract.⁸⁷ However, many commercial parties enter into contracts with the view that they will not involve the courts or any third parties in any dispute resolution process.⁸⁸ This is often based on firm commercial beliefs that it is better to deal with such issues between the parties; this belief might be based on concerns about market reputation or because the sums involved are too large to be left to chance. Moreover, it is suggested that the place for this consideration is when the voluntary assumption of legal obligations is a matter in the mind of the parties and this is distinct from that of an intention to contract.⁸⁹

10.28  Salmon LJ also did not think there was an uncertainty about the arrangements that would render the agreement void. In particular, in dealing with the term of the arrangement which was not expressed, he said that it would exist for a reasonable period of time which he thought would be five years from the commencement of studies. That time had lapsed and so the daughter could make no further claim under the agreement. As regards the property, he thought there was no evidence to suggest that the mother had given up any of her proprietary rights in the property. The daughter was a mere licensee and could be evicted by her mother. In his view, this arrangement was not made with any contractual intent, the mother was simply trying to help her daughter. He was clearly of the view that the daughter was trying to take advantage of her mother and her mother’s patience with her daughter was at an end.

10.29  Fenton Atkinson LJ thought the presumption applied to a case like this and then looked to see if there was any evidence to rebut it. He recognized that the daughter had given up a great (p. 269) deal but thought the subsequent conduct of the parties was the ‘best guide’ to their intentions. It is well accepted that such evidence may be resorted to in order to determine whether a contract was formed.⁹⁰ However, in any given case, such conduct may not evidence an intention to contract at the alleged point of formation but rather, as Salmon LJ appeared to suggest, an intention that evolved over time with the contract being formed by conduct.⁹¹ Nevertheless, Fenton Atkinson LJ focused on three points. First, the daughter made no protest that she only received the equivalent of $200 West Indian. She never suggested to her mother that she was legally obliged to pay more. Second, many material matters in relation to dealing with the property were left open so that the arrangement was too vague to give rise to a contract.⁹² There was no discussion by the daughter about how her alleged legal right to £42 per month was affected by this new arrangement. Third, and in conclusion, he said:⁹³

It is perhaps not without relevance to look at the daughter’s evidence in cross-examination. She was asked about the occasion when her mother visited the house, and she, knowing perfectly well that her mother was there, refused for some hours to open the door. She said: ‘I didn’t open the door because a normal mother doesn’t sue her daughter in court. Anybody with normal feelings would feel upset by what was happening.’ Those answers and the daughter’s conduct on that occasion provide a strong indication that she had never for a moment contemplated the possibility of her mother or herself going to court to enforce legal obligations, and that she felt it quite intolerable that a purely family arrangement should become the subject of proceedings in a court of law.

At the time when the first arrangement was made, mother and daughter were, and always had been, to use the daughter’s own words, ‘very close’. I am satisfied that neither party at that time intended to enter into a legally binding contract, either then or later when the house was bought. The daughter was prepared to trust her mother to honour her promise of support, just as the mother no doubt trusted her daughter to study for the Bar with diligence, and to get through her examinations as early as she could.

It follows that in my view the mother’s claim for possession succeeds.

10.30  Today, it may be that the judgment of Salmon LJ better reflects the times. This of course includes his conclusion that the contract period had lapsed. The case can be contrasted with the Australian case of Raffaele v Raffaele.⁹⁴ Here parents wishing that their son would live (p. 270) closer to them promised to subdivide certain land they owned and transfer to him an interest in one of the subdivided blocks if he built a house on the land. The land in question was adjacent to where the parents lived. In reliance on that promise, the son ceased construction of a home on a piece of land he owned and sold that land. He then built a house on the subject property and lived there until his death. The parents never transferred an interest in the property to him, and his widow, as his administratix, commenced an action against them. The court held that there was an intention to contract.

10.31  In addition to the above case, there have been a number of agreements between family members involving promises of rewards if a family member took care of another family member—usually an older or unwell family member—and which have been upheld as contracts. Many of these have involved significant detriment to the promisee, including having to cross international borders in order to tend to the promisor.⁹⁵ One important factor in determining the intention of the parties as inferred by the language of the agreement is how serious the consequences are for the promisee in taking any steps required under the contract.⁹⁶ In these cases, the fact the acceptance of the offer involved such a move was important in evidencing how serious the promise was to be taken.⁹⁷

10.32  In the result, today, to the extent the presumption exists in family situations, it is a weak presumption. Clearly, the presumption will be rebutted where the family members are involved in commercial dealings with each other.⁹⁸ Moreover, like arrangements made in the context of a marriage breakdown, agreements entered into between members of a family when relations are strained or non-existent are likely to be intended to have legal effect.⁹⁹

(p. 271) 10.33  Agreements derived from more social settings are not often litigated and usually are not intended to be legally binding nor attract legal consequences. The reason for this is that in most such cases the alleged promisor merely expresses an intention to do something and this falls short of a promise or undertaking.¹⁰⁰ The typical example is of an agreement to meet to have a meal at a restaurant and see a show.¹⁰¹ It is assumed by the parties that these arrangements may be varied by either party without suffering any legal consequences. Similarly, if such an agreement went ahead and the friends agreed to divide up responsibilities for the evening, such as one drives, one buys the tickets to the show, and one pays for a meal, no legal responsibility is likely to be intended to follow if one party reneges on this arrangement, although it might cause some friction between the friends as there would have been a contravention of social custom.¹⁰² There have been a number of cases dealing with the sharing of prizes. If the parties pool funds to buy a lottery ticket, then any prize would have to be shared between the parties despite only one party having possession of the ticket. The result would be the same if they individually took responsibility each week to use their own funds to buy a ticket for the group.¹⁰³

10.34  In commercial or business agreements, the intention to create legal relations is presumed and must be rebutted by the party seeking to deny it.¹⁰⁴ The onus of rebutting the presumption is a heavy one.¹⁰⁵ The clearest way to rebut the presumption is by reference to an express provision.¹⁰⁶ But it is necessary that the words be clear.¹⁰⁷ In Rose & Frank Co v J R Crompton & Bros Ltd,¹⁰⁸ Scrutton LJ refers to the necessity of the parties ‘expressing themselves so precisely that outsiders may have no difficulty in understanding what they mean’.¹⁰⁹ However, even where such words are missing, because the issue is one of determining whether a contract exists, it is possible to have regard to extrinsic evidence, including where relevant, subjective knowledge, to prove that what on its face looks like a contract was not in fact intended to operate as a contract.¹¹⁰

(p. 272) 10.35  One technique used to prevent an agreement taking effect as a contract is the honour clause which states that the agreement is to be binding in honour only.¹¹¹ At times, an argument has been put to the court that there is a commercial expectation that such agreements should attract some legal support.¹¹² So far the courts have not accepted that in between there being a contract and there being no contract, there can exist in law the agreement that is binding in honour only.¹¹³ It necessarily follows that there is no magic in these words and where a contract is expressed to be binding in honour, the court must still determine the intention of the parties and not every agreement expressed to be binding in honour will be held to be ineffective. For example, in Home Insurance Co v Administratia Asigurarilor de Stat,¹¹⁴ a contract was upheld which contained an arbitration clause that stated:

10.36  It was held that this did not evince an intention not to contract when read in context. In particular, the clause required disputes to go to arbitration and the award was expressed to be final and binding. The intention behind the clause was simply to excuse the arbitrators from the strict rules of construction.¹¹⁵

10.37  Perhaps the best known case where an express provision was used to rebut the presumption is Rose & Frank Co v J R Crompton & Bros Ltd.¹¹⁶ Here a written agreement was entered into whereby the plaintiffs were appointed as sole US agents for the English defendants. Later, the defendants terminated this agreement without giving the required notice and refused to deal with orders which had been received and accepted before termination. The plaintiffs claimed that the defendants had breached the contract. The action failed because the Court of Appeal held that the agreement was not legally binding or enforceable since it contained the following clause:¹¹⁷

10.38  Bankes LJ, having pointed out that the opening clause of the document was worded ‘to avoid the usual appearance of a contract’, said that the language adopted ‘at times is strongly suggestive of a contract, and at times indicates something other than a contract’.¹¹⁸ He concluded that the honourable pledge clause was ‘a genuine attempt by some one not a skilled draftsman to go much further than merely providing a means for ousting the jurisdiction of the Courts of law … [and] it appears … to admit of but one construction, which applies to and dominates the entire agreement’.¹¹⁹

10.39  Scrutton LJ described the whole agreement as being ‘of great vagueness’.¹²⁰ In particular, he stated that an agreement that the defendants ‘will, subject to unforeseen circumstances and contingencies do their best, as in the past, to respond efficiently and satisfactorily to the calls of Messrs Rose & Frank Co for deliveries both in quantity and quality’ is ‘not very helpful or precise’.¹²¹ He disagreed with the reasoning of the trial judge who rejected the clause on the basis that it was repugnant to the rest of the agreement and to the extent that it excluded recourse to the courts was contrary to public policy. He concluded:¹²²

In my view the learned judge adopts a wrong canon of construction. He should not seek the intention of the parties as shown by the language they use in part of that language only, but in the whole of that language. It is true that in deeds and wills where it is impossible from the whole of the contradictory language used to ascertain the true intention of the framers, resort may be had … [to] … rejecting clauses as repugnant according to their place in the document … . But before this heroic method is adopted of finding out what the parties meant by assuming that they did not mean part of what they have said, it must be clearly impossible to harmonize the whole of the language they have used … .

… I can see no reason why, even in business matters, the parties should not intend to rely on each other’s good faith and honour, and to exclude all idea of settling disputes by any outside intervention, with the accompanying necessity of expressing themselves so precisely that outsiders may have no difficulty in understanding what they mean. If they clearly express such an intention I can see no reason in public policy why effect should not be given to their intention … .

… I come to the same conclusion as the learned judge, that the particular clause in question shows a clear intention by the parties that the rest of their arrangement or agreement shall not affect their legal relations, or be enforceable in a Court of law, but in the words of the clause, shall be ‘only a definite expression and record of the purpose and intention of the three parties concerned to which they each honourably pledge themselves’, ‘and shall not be subject to legal (p. 274) jurisdiction’. If the clause stood first in the document, the intention of the parties would be exceedingly plain … .

… I think the parties, in expressing their vague and loosely worded agreement or arrangement, have expressly stated their intention that it shall not give rise to legal relations, but shall depend only on mutual honourable trust.

10.40  Atkin LJ agreed, concluding:¹²³

In this document, construed as a whole, I find myself driven to the conclusion that the clause in question expresses in clear terms the mutual intention of the parties not to enter into legal obligations in respect to the matters upon which they are recording their agreement. I have never seen such a clause before, but I see nothing necessarily absurd in business men seeking to regulate their business relations by mutual promises which fall short of legal obligations, and rest on obligations of either honour or self-interest, or perhaps both. In this agreement I consider the clause a dominant clause, and not to be rejected, as the learned judge thought, on the ground of repugnancy.

I might add that a common instance of effect being given in law to the express intention of the parties not to be bound in law is to be found in cases where parties agree to all the necessary terms of an agreement for purchase and sale, but subject to a contract being drawn up. The words of the preliminary agreement in other respects may be apt and sufficient to constitute an open contract, but if the parties in so agreeing make it plain that they do not intend to be bound except by some subsequent document, they remain unbound though no further negotiation be contemplated. Either side is free to abandon the agreement and to refuse to assent to any legal obligation; when the parties are bound they are bound by virtue only of the subsequent document.

10.41  Another example is the American case of Dunhill Securities Corporation v Microthermal Applications Inc.¹²⁴ Here the parties had come together in relation to a public offering of stock of the defendant. The plaintiff underwriter was attempting to recover for his services under the terms of a letter of intent which had been executed by the parties and which provided in paragraph 11:

10.42  The plaintiff contended that the letter either constituted a binding agreement upon its execution, or was transformed into one by the subsequent action of the parties. In the alternative, the plaintiff sought recovery on a quantum meruit basis for services actually performed and expenses sustained pursuant to the letter. Lasker J held that the terms of the letter prevented (p. 275) the plaintiff from succeeding on either argument. The letter clearly expressed an intention that no legal obligation was to arise from its execution but only when an underwriting agreement was executed. One difficulty with the above reasoning is that if the letter of intent gave rise to no contractual rights and obligations, then how did it operate against the plaintiff as a contracting out of his restitutionary rights? Presumably, it evidenced an intention that each party accepted the risk that a contract would not eventuate and they would not be remunerated. The reliance on this representation may then raise an estoppel preventing the plaintiff from pursuing a restitutionary claim.

10.43  A final example is I H Rubenstein & Son Inc v The Sperry & Hutchinson Company.¹²⁵ Here the plaintiffs alleged that the subject instrument contained the complete terms and conditions for the sale to the plaintiffs of a division of the defendants’ company. Nevertheless, the court concluded that the document was no more than a letter of intent. This conclusion flowed from the final paragraph of the document which stated:

10.44  If the intention to exclude legal relations is not clearly expressed, the courts are likely to interpret any ambiguous drafting as not operating to have this effect. This simply reflects that the onus of rebutting the presumption is a heavy one. This is illustrated by the decision Edwards v Skyways Ltd.¹²⁶ In this case, the defendant company, which employed the plaintiff as a pilot, gave the plaintiff three months’ notice to terminate his employment. Under the terms of the company’s pension fund, the plaintiff was entitled to choose either to withdraw his personal total contributions to the fund or to take the right to a paid-up pension payable at the age of 50. The plaintiff chose the first option because of the company’s promise to make him an ‘ex gratia’ payment equivalent to (or approximating to) the company’s contributions to the fund. However, the company later refused to make the payment and argued that the words ‘ex gratia’ showed that there was no intention to create legal relations. Megaw J said that in a commercial or business agreement there was a heavy burden on the party seeking to rebut the presumption of an intention to create legal relations and that the company had not discharged this burden by using such words as ‘ex gratia’ payment.¹²⁷ He said that the words do not ‘carry a necessary, or even a probable, implication that the agreement is to be without legal effect’.¹²⁸ He drew an analogy with a compromise of litigation which is often done on an ‘ex gratia’ or ‘without admission’ basis but which is intended to be binding.¹²⁹

(p. 276) 10.45  Other factors may also be relevant, such as whether steps must be taken to bring the existence of the clause to the notice of the other party, whether there is an industry practice, whether there have been acts of reliance and performance of the contract, and whether there are conflicting provisions.¹³⁰

10.46  The requirement of notice may form part of the more general requirement to be clear. In Rose & Frank Co v JR Crompton & Bros Ltd, Bankes LJ, in judging the legal effect of the agreement, took into consideration the position of the honourable pledge clause. He said: ‘It would no doubt have simplified matters if the clause in question had been inserted at the head of the document, or even at the end, rather than in the position it occupies. I attribute its position to the want of that skill in drafting of which the document affords plenty of evidence, rather than to any want of bona fides in the language used.’¹³¹ This suggests that if a document is drafted by one party and contains an honourable pledge clause, then that clause should appear in a position which will attract the other party’s attention. More generally, there is a link between the requirement of an intention to contract and the need for communication of offers and acceptances. It is difficult to evidence an intention to contract if a resolution to make an offer is never communicated to the offeree.¹³²

10.47  In Jones v Vernon’s Pools Ltd,¹³³ a football pools coupon drafted by the football pools company contained an honourable pledge clause and Atkinson J held that this prevented the plaintiff from bringing any action relating to his coupon. The fact that the plaintiff admitted that the conditions on the coupon were well known to him appears to have been significant. Atkinson J stated that the plaintiff ‘makes no suggestion that there is anything in those rules which misled him in any way, or that he could not understand them, or that there was anything ambiguous about them, or that he thought they meant anything different from what in fact they do’.¹³⁴ In addition, this clause appeared at the beginning of the document.

10.48  Lawyers are well versed in the requirement that to incorporate a term, where no signature exists, there must be reasonable notice of the term. It may be that where the presumption applies there must be reasonable notice of any provision expressly negating that presumption, and what is reasonable may equate to the steps required to bring a clause, such as an exclusion clause, to the notice of the other party.¹³⁵ Indeed, one commentator draws a direct analogy between these clauses and exclusion clauses.¹³⁶ What then follows if there is a signature? Generally, a party is bound by the terms in a document that he or she executes if the document is contractual in nature; in terms of notice, all the person signing can expect is to have notice of the ‘existence’ of terms which will be made out if a document is contractual in nature so long as there has been no misrepresentation as to the nature of the document being (p. 277) signed.¹³⁷ This is not an issue that usually arises with executed documents, but we can see this idea in the ticket cases where the taking of a ticket is akin to the signing of a document where the contract is in writing.¹³⁸ If a person takes a ticket knowing it has writing on it but not knowing that writing refers to terms, then they are still bound if a reasonable person in their position would know of the existence of terms in the document. Note there need not be reasonable notice of the terms, only their existence.¹³⁹ This goes to the very nature of the document; a reasonable person taking a ticket can legitimately expect to at least be on notice of the contractual nature of the document before they are bound. In the matter at hand, that is exactly the issue albeit its mirror image: the presence of terms clearly evidences its otherwise contractual nature, but the incorporation of such a clause seeks to negate what would otherwise be its nature and the party who is not responsible for its drafting may expect any such clause would be brought to their attention.

10.49  As noted above, in construing such expressions, the customs and practices of a particular industry must not be overlooked as part of the matrix of facts taken into account in construing the document. Lasker J in Dunhill Securities Corporation v Microthermal Applications Inc,¹⁴⁰ made this point in the following manner: ‘A letter of intent is a customary device used within the financial community, and it is clear that the financial community does not regard such a document as a binding agreement, but rather, an expression of tentative intentions of the parties.’¹⁴¹

10.50  It has also been emphasized in a number of cases that the court can take into account the conduct of the parties to determine whether a contract was in fact contemplated.¹⁴² Where a party acts in performance of an alleged contract it will be more difficult for the party relying on the provision ousting an intention to contract. Indeed, the presumption that the parties did intend to contract is perhaps at its highest when the contract is executed. It follows that if the terms agreed upon have been performed the courts are likely to find that a contract has been formed. For example, in Garner v Boyd,¹⁴³ negotiations were entered into between the defendant, Boyd, and the executive vice-president of the United American Industries Inc of Tucson, Arizona. These negotiations were formalized by a letter of intent, whereby it was agreed to exchange the absolute ownership of United’s American Milling & Manufacturing Co for 1,733,333 shares of the capital stock of United American Industries Inc. Although the parties subsequently entered into a letter of rescission cancelling the letter of intent, the stock of the Arizona Corporation was actually delivered to Boyd.

(p. 278) 10.51  Woodward J held as follows:¹⁴⁴

A true letter of intent is customarily employed to reduce to writing a preliminary understanding of the parties … . In this instance, the minds of the parties had met upon all the essential elements of a contract, and the acts to be performed were clear and unambiguous. So clear were they that all the contemplated acts were indeed performed.

10.52  It is interesting to note that whilst the House of Lords in Rose & Frank Co v JR Crompton & Bros Ltd¹⁴⁵ agreed with the Court of Appeal concerning the effect of the honour clause on the agency agreement, the House of Lords considered that the orders which had been accepted had to be fulfilled since when each order was accepted it constituted a new separate contract. Clearly, there is a concern to hold parties to their obligations under an executed agreement even though in this case there was no contractual obligation to order or to accept orders.¹⁴⁶

10.53  As regards ambiguous provisions, Lücke, in noting that resort may be made to extrinsic evidence, points out that ‘the Courts have felt free to ignore such clauses when their meaning is hidden or obscure’.¹⁴⁷ He gives the example of Ellison v Bignold.¹⁴⁸ In this case, a clause in a deed stated that the parties ‘resolved and agreed and did by way of declaration and not of covenant, spontaneously and fully consent and agree’. Lord Eldon construed the document ‘laying aside the nonsense about agreeing and declaring without covenanting’.¹⁴⁹ Although this case involved a deed, it is necessary for each clause to be read in context and generally, where most of the agreement suggests an intention to contract and the parties have conducted themselves as if there is a contract, then an ambiguous clause which may on one reading suggest otherwise can be ignored. Either the parties intended to immediately contract all along despite the clause or have otherwise entered into a contract by conduct on those agreed terms. As the cases discussed earlier show, where the meaning of the clause is clear, then despite the rest of the transaction appearing like a fully negotiated contract, effect will be given to the clause if it is construed to represent the true intention of the parties.

10.54  Perhaps underlying many decisions on such clauses, and implicit in decisions requiring notice of such provisions and the taking into account of trade custom as well as acts in performance and reliance are a number of policy-based considerations. These may work for or against either party depending on the facts. In Jones v Vernon’s Pools Ltd,¹⁵⁰ Atkinson J upheld (p. 279) a provision negating legal intent and emphasized the practical effect of him coming to a different conclusion. He said:¹⁵¹

Holmes¹⁵² in his discussion of the decision in the Dunhill case suggests that the expressed intent was only one of the factors influencing the decision. The other factors were, first, that there had been little performance so that the relationship was executory and consequently there was not the inducement to create a contractual intent that can be said to exist in executed cases. In addition, it was clear from the use of such documents within the industry that the underwriter could not reasonably have believed there to be a binding commitment. He concluded that, given these factors, ‘the court might have reached the same result even absent the no-binding-effect clause’ because reliance on the document would be unreasonable.¹⁵³

10.55  More often policy will work against the party relying on such a clause, particularly when the document is a standard form contract drafted by one party. That this is so is reflected in the requirement that the clause be conspicuous, which was discussed above.¹⁵⁴ Waddams has suggested some doubt as to the effect of such a clause in a case where it is ‘unexpectedly lurking in the fine print of a standard form contractual document’.¹⁵⁵ Some commentators believe that at least where the parties are not of equal bargaining power, such a provision should be dealt with in the same manner that exclusion clauses are construed.¹⁵⁶ Holmes has identified a number of American cases in the employment context involving promises of pensions and death benefits with clauses much clearer than that in Edwards v Skyways Ltd negating contractual intent, where the courts have nevertheless found reasons for restricting the operation of the clause or otherwise ignoring it.¹⁵⁷ The latter contra proferentem technique being used if the contract is drawn up by the party relying on the clause to avoid contractual obligations and if the court can find conflicting clauses, some expressing an intention to contract and others negating that intention. Acceptance of that technique appears in section 21 of the Restatement (2d) Contracts. As noted earlier,¹⁵⁸ that section provides:

(p. 280) 10.56  Comment b to this section recognizes that such provisions may give rise to difficult questions of construction. The comment refers specifically to the fact that such a manifestation ‘may mean that no bargain has been reached, or that a particular manifestation of intention is not a promise’, ‘it may reserve a power to revoke or terminate a promise under certain circumstances but not others’. The comment then goes on to state: ‘In a written document prepared by one party it may raise a question of misrepresentation or mistake or overreaching; to avoid such questions it may be read against the party who prepared it.’ Lasker J also made this point in Dunhill Securities Corporation v Microthermal Applications Inc¹⁶⁰ where he stated: ‘In passing, it may be noted that the letter of intent … was drafted by the plaintiff, and if any ambiguity arises—although none does—it is to be construed against the plaintiff.’¹⁶¹

10.57  Perhaps the use of this technique in this context may be seen in England in the decision in J H Milner & Son v Percy Bilton Ltd.¹⁶² Here negotiations were in progress between the defendants and the Bombergs, for whom the plaintiff solicitors had acted for many years, concerning a joint venture between the defendants and the Bombergs involving the development and leasing of certain property. On 11 March 1959, the plaintiffs wrote a letter to the defendants confirming the basis of agreement between the defendants and the Bombergs. The letter included the following paragraph: ‘May we please take this opportunity of placing on record the understanding that all the legal work of and incidental to the completion of the development and the grant of the leases shall be carried out by us.’ The defendants’ reply included the following: ‘I see that you have tied up the legal work and, of course, it has never been agreed and I do not like tying it up unless it has been agreed. I am quite prepared, however, to accept it in relation to this particular property.’

10.58  Three years later, the defendants wrote to the plaintiffs saying that they had established their own legal department and would not be instructing the plaintiffs. The question was whether the letters of March 1959 amounted to a binding legal contract to employ the plaintiffs. Fenton Atkinson J held that they did not and construed the document against the drafter:¹⁶³

This [the plaintiffs’ letter of 11 March] is a letter being written by a solicitor to a layman, a prospective client, at a time when there is no existing agreement between them whatever for employment in legal business nor any understanding whatever between them to that effect; but the solicitor is clearly seeing the chance of some very profitable legal business for his firm and is anxious to obtain it … . If he had said in that letter:

‘We offer to enter into a binding legal contract and do all the legal work of and incidental to the completion of the development and the grant of the leases and furthermore you will appreciate that it will be a term of that contract that you cannot thereafter dispense with our services until all the work is completed, however long that may take.’

I should have thought that it was quite plain that the defendants would not have agreed and equally plain that Mr Lyon [Milner & Son] knew this, or at least had a very shrewd suspicion to that effect, and it appears to me that he quite deliberately used this somewhat vague and equivocal language in his letter and that he did so on this basis: that if that was accepted … he, Mr Lyon, reckoned that he would then have an agreement in his pocket … . If, instead of using the vague word ‘understanding’, he had said, ‘We understand it is your present intention to (p. 281) instruct us as and when matters arise’, and Mr Bilton had accepted that, clearly there would have been no legal claim arising when the defendants decided to make other arrangements, and in my judgment that was in truth the result of these letters.

10.59  Often when a bank is approached for finance by a subsidiary of a large company, any initial offer of finance will be subject to security being provided by the parent company. Where the parent company is not prepared to provide security, it may provide the bank with a letter of comfort.¹⁶⁵ Very often these letters are relied upon by banks to then finance the subsidiary.¹⁶⁶

10.60  There would appear to be three principal forms such letters may take. The first type acknowledges the subsidiary’s loan application and states that it is the policy of the parent company to ensure that its subsidiaries meet their loan obligations. The second type acknowledges the subsidiary’s loan application and states that it intends to maintain its shareholding in the subsidiary. The third type simply acknowledges the loan application.¹⁶⁷ Often a letter of comfort will contain more than one of these elements and in many cases all; today they might best be described as the three usual components of a letter of comfort.

10.61  If a bank lends on the basis of a such a letter, then if the borrower defaults on the loan, the bank may wish to enforce the comfort letter against the parent company if it contains an undertaking and if that undertaking has not been complied with.¹⁶⁸ In some cases it may be the borrower who seeks to enforce the letter against the parent.¹⁶⁹ In either case, the ability to enforce the letter will depend on whether it has contractual force.¹⁷⁰

(p. 282) 10.62  The leading English authority is the decision of the Court of Appeal in Kleinwort Benson Ltd v Malaysia Mining Corp Bhd.¹⁷¹ In this case, the defendant parent company had issued a ‘Letter of Comfort’ which stated ‘it is our policy to ensure that the business of [the subsidiary company] is at all times in a position to meet its liabilities to you [under the loan agreement]’. The letter included a statement by the parent company that stated, ‘We confirm that we will not reduce our current financial interest [in the subsidiary].’ It was accepted that this latter statement was contractual in effect. Moreover, the letter contained a statement acknowledging the application for finance and approved that application. When the subsidiary became insolvent the plaintiff bank claimed that the defendant should cover the subsidiary’s indebtedness to them in accordance with the statement of ‘policy’ in the comfort letter.

10.63  Hirst J, at first instance,¹⁷² was of the view that it was crystal clear that the letter encapsulated an undertaking to ensure the debtor was able to meet its liabilities.¹⁷³ As regards intention to contract, in his view, this was a commercial transaction which attracted the presumption that the parties intend to contract and that the party wishing to rebut that presumption carried a heavy onus. He held that the presumption had not been rebutted. He noted in his reasons the reliance by the financier on the letter and the fact that the letter was authorized by a resolution of the board of the defendant.

10.64  The Court of Appeal reversed Hirst J’s decision and held that the presumption did not apply because the relevant part of the letter did not contain a promise. In the court’s view it is necessary for an agreement to first contain a promise before the presumption is attracted. Here the letter merely stated a present fact, it did not contain a promise of future conduct. That is, the words in question were a statement of current policy and did not amount to a promise to abide by this statement of policy. In reaching the decision that the letter did not contain a promise, the court did not merely rely on the words in the document but took into account the relevant factual matrix. In this case, that included statements by the parent company to the bank that it would not accept joint and several liability for the loan to its subsidiary and that it did not wish to provide a guarantee but could provide a letter of comfort. Therefore, the bank was on notice that the parent did not wish to accept liability and in response the bank said that the letter of comfort would not be a problem but the bank would charge a higher commission rate to cover for the fact that it was not receiving a guarantee; thus, the bank had taken into account the risk.¹⁷⁴ In addition, the court engaged in a very detailed contextual analysis of the subject clause concluding that if it was interpreted as a promise then that would rob the other clauses which approved the application for finance and confirmed the parent’s continued shareholding in the subsidiary of any purpose. The court also envisaged the use of the contra proferentem rule here on the basis that if the bank wanted a promise from the parent then, as experienced bankers, they should have drafted the clause in such terms. It should be (p. 283) noted that the bank drafted the letter of comfort and although the parent made some changes to it, neither the original version nor the later version ever contained the promise the bank was now arguing for.

10.65  There can be little doubt that if a document alleged to be a contract does not contain a promise, either express or implied, then it cannot be a contract and there are numerous cases concerning letters of comfort which, following Kleinwort Benson, have concluded that the letter fails because it does not contain a promise.¹⁷⁵ The leading Australian case, Banque Brussels Lambert v Australian National Industries Ltd,¹⁷⁶ while not calling that doctrinal point into question, did criticize the manner in which the English Court of Appeal went about determining whether the letter contained a promise. In this case, the financier required reassurance from the debtor’s principal shareholder before it would make a line of credit available. The final form of the letter of comfort provided stated:

10.66  In due course, the defendant did sell its shareholding without giving the appropriate notice and did not ensure that the debtor was in a position to meet it financial obligations. The plaintiff then sought damages for breach of contract by the defendant. Rogers CJ determined that this letter, when read in light of the surrounding circumstances, in particular, the negotiations that led to this final version, did contain enforceable contractual promises. He saw the issue as turning on whether there was an intention to create (p. 284) legal relations and whether the terms were sufficiently promissory in nature. He said these were independent but related issues ‘in that it is from the terms of the letter seen against the backdrop of surrounding circumstances that the parties’ intention in both respects fall to be determined’.¹⁷⁷ When determining whether there was an intention to contract, he noted that the whole reason for the financier being involved in the negotiations leading up to this letter was that it wanted some commitment and security to be given by the shareholder. The mere fact that the shareholder made it clear that it did not want to give a guarantee was not inconsistent with there being an intention to contract in respect to any promises given in the letter which would not make the shareholder liable for the debt but rather liable in damages.¹⁷⁸ When turning to discussing the presumption, Rogers CJ, at the same time, commenced his discussion as to whether the letter contained a promise. It is at this point his criticism of the reasoning in Kleinwort Benson began. In an important passage he said:¹⁷⁹

10.67  After this statement, Rogers CJ carried out, with respect, a very detailed contextual analysis of the letter and determined that it did contain contractual promises, one in relation to the maintaining of the shareholding, one as regards the notice provision and another as regards the shareholder’s practice to ensure the debtor is in a position to meet its financial commitments.

10.68  A couple of points can be made about the supposed difference of approach in these cases. First, if an alleged agreement does not contain a promise, then it cannot be a contract. Any discussion as to whether the presumption of an intention to contract applies in such a case because the parties are commercial parties is pointless and misplaced. Second, once it is determined the agreement contains a promise and it involves a commercial deal then it is suggested the presumption does apply. The decisions in Kleinwort Benson and Banque Brussels are ad idem on these two points. Third, whether or not a document does or does not contain a promise is a matter that opinions can and will legitimately differ on when the position is not clear. In deciding that issue courts will inevitably be compelled to look at the subject clause in context and both judgments engage in that contextual analysis. Moreover, both judgments, in deciding this issue, took into account what they thought was the appropriate factual matrix. All this is in line with general principles of construction.

10.69  There is therefore not much of a difference in approach in the judgments in these two cases when it comes to the actual decision-making process.¹⁸⁰ There are, however, two further points to note. First, the court in Kleinwort Benson did suggest that in an appropriate case the document might be construed against the party drafting it. Rogers CJ does not directly comment on that point but one needs to try and make some sense of his criticism of the decision in Kleinwort Benson. As noted above, he was of the view that one must keep in mind that a court should strive to give effect to commercial transactions and recognize that these letters form an important part of financing transactions. That comment itself may suggest that he was against an application of the contra proferentem rule in this context. But strictly those comments were aimed at addressing the issue of intention to contract which, as he noted, was a separate issue from that of determining whether the letter contained a promise. But in that same passage he criticized the Court of Appeal in Kleinwort Benson for its minute contextual approach. So perhaps here he did merge the two issues and arguably this does, in the end, suggest that he would not be in favour of applying that rule of construction. But it still remains to determine whether this criticism was well founded. As noted, in the result, both courts carried out a contextual construction of the document in question and both looked at the factual matrix. Indeed, the differences in the results of the cases seem entirely correct given the different factual contexts. With respect, there is nothing to suggest the English Court of Appeal was in any way ignoring the factual (p. 286) realities of the case before them, but they were dealing only with the facts before the court and this was entirely appropriate.¹⁸¹ They were not dealing with a standard contract that is uniform within an industry where it may be relevant to take evidence of how the industry approaches those documents.¹⁸² Therefore, it is suggested the criticism levelled at the decision by Rogers CJ was, with respect, misplaced.¹⁸³