“In Commercial and Business Agreements, the Presumption is That the Parties Intend to Create Legal Relations.” Comment
Introduction
For any contract to be valid and enforceable under the law, it must fulfill certain essential elements. One such crucial element is the intention to create legal relations. This means the parties must intend that the agreement should result in legal obligations and be enforceable by law. In the case of commercial and business agreements, there is a strong presumption that the parties have this intention.
What is the Intention to Create Legal Relations?
It refers to the willingness of the parties to enter into a legally binding agreement. If an agreement lacks this intention, it will not be treated as a contract, even if all other conditions like offer, acceptance, and consideration are fulfilled.
Presumption in Commercial Agreements
In business or commercial contracts, courts usually assume that both parties intend to create legal relations. This is because in business, people generally do not make casual promises. They expect accountability and legal protection.
Example:
If A signs a contract to supply goods to B for ₹1,00,000, and B refuses to pay, A can sue B. The court will assume this was a business agreement meant to be legally binding.
Why This Presumption Exists
- Businessmen usually work for profit, not out of friendship or charity.
- Written agreements, price terms, delivery timelines, etc., indicate seriousness.
- It helps promote trust and order in commercial transactions.
Exceptions to the Presumption
Even in business agreements, the presumption may be rebutted (cancelled) if there is clear evidence that the parties did not intend legal consequences.
1. Express Disclaimer
If the agreement specifically states it is not legally binding, the court will respect that.
Example: A letter marked “Subject to Contract” usually means it is not final or binding.
2. Social Agreements Disguised as Commercial
Sometimes, friends or family may enter into business-like agreements casually. If the intention was not serious, it will not be considered legally enforceable.
Case Law: Rose & Frank Co. v. J.R. Crompton Bros. Ltd.
In this case, the agreement between the parties included a clause that stated the arrangement was not a formal or legal contract. The court held that since both parties did not intend legal relations, the agreement was not enforceable.
Presumption in Social and Domestic Agreements
On the other hand, in personal or family arrangements (like between husband and wife or friends), courts usually assume no intention to create legal relations unless there is clear evidence.
Example: A promises his friend B to gift ₹5,000. This is not enforceable because there is no intention for legal consequences.
Commercial Agreements are Different
In contrast to domestic cases, business agreements are usually written, formal, and involve money, delivery, and performance clauses. Therefore, courts presume these are meant to be legally binding.
Conclusion
The intention to create legal relations is a key component of any contract. In commercial and business agreements, it is automatically assumed that parties want legal accountability unless proven otherwise. This presumption helps build trust in business dealings and provides a legal safeguard for all parties involved. Understanding this concept is essential for both legal and business professionals.