Chapter 4 Outline answers to end-of-chapter questions

Certainty and the intention to enter a legal relationship

1. Dave and Ahmed have been in a long-term relationship for ten years and rent a house together. Dave is the tenant on the rental agreement but Ahmed has always paid towards the rent. Their relationship started to fall apart when Ahmed decided to accept a temporary job as an architect in Bulgaria. To stop the arguing, Ahmed agreed to pay all of Dave’s rent while he was away as long as Dave continued to stay in the property and did not move. Months after Ahmed moved to Bulgaria, he met someone else and stopped the making the rental payments for Dave. Can Dave enforce the agreement for the rent to be paid?

Start with an introduction that identifies the legal issue and the approach to be adopted. Dave can only enforce his agreement with Ahmed if it is a contract. The main issue is whether there was an intention to enter a legal relationship which is a requirement for a contract to exist.

The main body should explain the presumption that applies to domestic and social relationships. To explain the basis of this, provide the basic facts and reasoning from the key cases of Balfour v Balfour [1919] and Merritt v Merritt [1970].

Apply the principles and reasoning to Dave’s circumstances on the basis that they had been living as a couple for ten years before the agreement was made. Dave would rely on the fact that their relationship was falling apart and they had been arguing at the time of the agreement as a basis to rely on Merritt v Merritt. However, it could be said that couples do indeed argue and also relationships can begin to fall apart, but that is very different to the ending of a relationship.

Turn to the issues of certainty and reliance and their significance from the case law. Cases such as Coward v Motor Insurers’ Bureau [1963] and Jones v Padavatton [1969] are useful here.

Apply the reasoning represented by these cases, in particular Jones v Padavatton. Dave could argue that he acted in reliance on the agreement and remained at the property. However, such reliance falls significantly short of the reliance in Jones, and the reliance in that case was not sufficient to show an intention for a legal relationship.

Likewise, the uncertainty associated with the agreements in the cases also indicated an absence of the intention required. Consider Dave’s agreement and the potential uncertainties. What if Ahmed suffered a fall in earnings or even lost his job? For how long would Ahmed have to pay? Was it implied that the payments were based on Dave and Ahmed being in a relationship? What if the rent increased? Likewise, what if the property was no longer fit for Dave to remain there?

Mention that the presumption on social agreements has been rebutted when the agreement has had a commercial flavour (Simpkin v Pays [1955]) but it is not easy to rebut given the commercial flavour of the agreement in Hadley v Kemp [1999] which was still treated as a social one.

Apply the point - the agreement between Dave and Ahmed lacks a commercial flavour and that suggests the presumption will not be rebutted.

Conclude on the likely position. The uncertainties and fact that they were technically a couple at the time of the agreement suggests the absence of an objective intention to enter a legal relationship. While every case is a question of fact, based on the cases it seems highly unlikely that Dave would be able to show that the agreement was contract.

2. Evaluate the law relating to agreements used to facilitate negotiations. Should a duty to negotiate in good faith never be implied?

Your introduction should explain the context of agreements to negotiate along with your approach of addressing the relevant cases to evaluate the statement.

Start with the general legal status of agreements to negotiate with reference to Courtney & Fairbairn v Tolaini Brothers [1975] and summarise the reasons provided by Lord Denning MR.

Now turn Walford v Miles [1992] as the leading case on implying a term of good faith into agreements to negotiate. Explain it and detail the reasoning of Lord Ackner.

Explain Lord Ackner’s position on ‘lock out’ agreements and the reasons underpinning it. Certainty is clearly an issue as it was in the case with the absence of a time limit. Acknowledge the application of this by the Court of Appeal in Pitt v PHH Asset Management Ltd [1994].

In contrast, Where the parties expressly agree to negotiate in good faith, the courts will try to uphold that obligation where it is possible to do so. Use Petromec Inc v Petroleo Brasileiro [2005] to support the point.

Conclude your answer by acknowledging that the uncertainties and conflicting interests at the negotiations stage appear difficult to reconcile with a duty to negotiate in good faith. However, the courts are prepared to enforce ‘lock out’ agreements. Furthermore, they are prepared to enforce an expressed obligation of good faith because it reflects the parties’ intentions.

3. Sabrina owns a noodle bar. She enters an agreement with MJH Designs under which they will decorate Sabrina’s premises and extend the kitchen area. They leave out the price and timescale in order for them to be worked out later, because Sabrina needs the work to start immediately. Is there a contract between Sabrina and MJH?

For your introduction, identify that the question is concerned with certainty and incomplete agreements and the extent to which such agreements can be enforced as contracts. Also, mention the approach to be adopted – that each issue will be addressed in turn.

The starting point is the relationship between intention, uncertainty and incomplete agreements along with the related point from Leggatt J in Blue v Ashley [2017].

Briefly address the role of the courts in the interpretation of contracts as opposed to the rewriting of them and the fact that courts will attempt to uphold a contract if it appears intended. On this point acknowledge the guidance from Lord Wright in Hillas v Arcos and Toulson LJ in Durham Tees Valley Airport v bmibaby [2010], indicating that the courts will try to construe the terms to recognise a contract.

Identify that on the facts, the potential vagueness or uncertainty in the obligations (like those relating to the work to be done) are not the main problems here. Instead, this might be a case of an incomplete agreement i.e. an agreement to agree.

Explain the case of May and Butcher Ltd v The King [1934] and the reasoning adopted by Lord Buckmaster. Also address the criticism of the House of Lord’s failure to imply a term based on a reasonable price (Fletcher Challenge Energy v Electricity Corporation of New Zealand [2002] from the New Zealand Court of Appeal).

Apply the reasoning – that when vital factors are not agreed like the price, then it is a basis for the agreement simply being an agreement to agree rather than a contract. Here, is it the price and timeframe, two very important factors. In addition, there is no agreed mechanism to work out these factors (i.e. Foley v Classique Coaches Ltd [1934] and the distinction between the cases in relation to performance).

Provide a conclusion on the likelihood of a contract here. If there is evidence of a clear intention to enter a contract then the courts might well imply an obligation of a reasonable price based on the market price at the time. However, to expect a timeframe to be implied is likely to be too much and the absence of both factors is therefore, more likely to represent an agreement to agree rather than a contract.

4. Describe the extent to which business agreements are presumed to be made with an intention to be legally binding.

In your introduction, briefly address the presumption that applies to such agreements; the fact that the presumption can be rebutted, and, how you will address the key cases law to determine the extent of the presumption.

Start the main body of the answer with Edwards v Skyways [1964] and the opinion of Megaw J as authority for the presumption of an intention for a legal relationship. Also use Esso v Commissioners of Customs & Excise [1976] as an example of how firm the presumption is.

Acknowledge that a clear intention to not be legally bound by an agreement will rebut the presumption, using Rose & Frank Co v Crompton Bros [1925] as an example. However, even in that case, it was held that once an order had been accepted, a legal relationship existed for that order. RTS Flexible Systems v Molkerei [2010] is a further illustration of express terms rebutting the presumption.

Next explain that the application of the presumption is a question of fact, and that the surrounding facts might well be enough to indicate that a contract was not intended. A useful example here is Blue v Ashley [2017] and the approach of the influential Leggatt J as he then was. Explain Blue v Ashley and the reasoning of the judge. On the facts, because of the factors listed by the judges, it was held that no reasonable person would believe that a contract was intended. Recognise that in contrast, an informal setting will not automatically mean that a contract was not intended (the point from Coulson J in MacInnes v Gross [2017]).

Conclude on the extent to which business agreements are presumed to be made with an intention to be legally binding. The point is that between businesses, the presumption is a very strong one, and it appears quite difficult to displace. Ultimately it is a question of fact.