Collective agreements

4. Is a requirement of intention necessary?

In addition to the tests of the existence of a contract the courts will also sometimes inquire whether, despite the fact that offer, acceptance and consideration can be identified, the parties did really intend to create a legally binding relationship. In line with the traditional approach that the courts regard themselves simply as “referees” or “umpires” giving effect to the parties’ intentions, it is only where the parties themselves have entered into an agreement which they intend to be legally binding that the courts will treat it as a contract. As with other tests of the parties’ intentions, the courts take an objective approach, looking at what they have said and done and the context in which they have been dealing with each other.

Whether the parties intended to enter into legally binding relations is an issue to be determined objectively and not by inquiring into their respective states of mind.

In cases where the issue is litigated, it seems likely that one party intended a legal agreement and the other wanted the agreement to be merely morally binding. This contradiction removes any possibility of justifying the limits of contracts on the basis of the joint intent of the parties. We are forced to the conclusion that the courts must rely upon hidden policy considerations when determining the intentions of the parties.

In many cases, rather than the parties having different intentions, they may not, at the time of entering into their agreement, have thought about the issue at all. In such a situation, the courts will adopt the approach, which they also adopt in other areas where there is later disagreement as to the parties’ intentions at the time of contracting, of asking what the reasonable person in the position of the parties would have been likely to intend. This is the way in which the issue is dealt with in the proposed Principles of European Contract Law, of which simply states that

the intention of a party to be legally bound by contract is to be determined from the party's statements or conduct as they were reasonably to be understood by the other party.

Another way of approaching the issue of “intention” would be through formal requirements. It would be possible to require, for example, that an agreement, to be legally binding, must be in writing, and have within it a clause confirming that it is intended to be legally binding. In one particular situation, relating to the enforceability of collective agreements between trade unions and employers, this is precisely what has been required. As has been explained earlier, however, generally the English law of contract does not require formalities. Verbal agreements are enforceable, and no particular forms of words are required. It can be argued, however, the requirements of offer, acceptance and consideration, discussed earlier, may be regarded in themselves as indications of an intention to enter into a legally binding contract. If the parties have taken the trouble to specify their obligations in a way which makes them clear and unambiguous (as required by “offer and acceptance”), and the agreement has the element of mutuality required by the doctrine of consideration, this may reassure a court that legal enforceability was intended. If, for example, a transaction which would otherwise appear as a gift has consideration introduced artificially, this may well be strong evidence of an intention to make a contract. The transfer of the ownership of a valuable painting, worth £50,000, which involves the recipient giving the supplier £1 in exchange, would fall into this category. There would be no point in the recipient giving the money unless the intention is to make the transaction of transfer into a contract, and the parties into “seller” and “buyer”. The introduction of consideration is in this case therefore evidence of an intention to create legal relations. Taking this approach to its logical conclusion, some have argued that there is no need for a separate heading of intention, and this point will be discussed below. The generally accepted view, however, is that although this analysis has some force, there are nevertheless some agreements which may have all the other characteristics of a contract, but which are clearly not meant to be treated as legally binding. If the parties to an apparently binding commercial agreement specifically state that it is not to have legal consequences, surely the courts should pay attention to this? Certain domestic arrangements may also raise difficulties. If, for example, there is an agreement between a man and a woman that he will cook a meal for them both, in return for her providing the wine to go with it, this may involve an offer, acceptance and consideration, but no one would expect it to be regarded as legally binding. If she failed to turn up, he would not be able to sue for the cost of preparing the meal. Given, however, that no formalities are required, and that offer, acceptance and consideration can be identified, how are those agreements which are intended to be binding to be distinguished from those which are not? The evidence of the parties themselves is likely to be unreliable, so some other means of determining the issue must be found.

In fact, as it has been noted above, English law operates on the basis of an “objective” approach, based on what a reasonable person in the position of the parties would have been likely to have intended. This approach is assisted by the of “presumptions” as to intention, which differ according to whether the agreement is to be regarded as “domestic” or “commercial”. These two categories of agreement must therefore be looked at separately.

It is considered that domestic arrangements are clearly not intended by the parties to be legally binding. As regards this possibility, Lord Atkin commented:

All I can say is that the small courts of this country would have to be multiplied one hundredfold if these arrangements were held to result in legal obligations. They are not sued upon, not because the parties are reluctant to enforce their legal rights when the agreement is broken, but because the parties, in the inception never intended that they should be sued upon. Agreements such as these are outside the realm of contracts altogether.[2]

Lord Atkin’s judgment is the one which has received most attention in subsequent case law, and has been taken as establishing the position that in relation to domestic agreements there is a presumption that they are not intended to be legally binding.

There are two points to be noted here. First, the notion of the “domestic” agreement should be taken as relating more to the subject matter than the relationship between the parties. If, for example, a woman agrees to sell her brother her car for £1,500, there seems little reason to deny this agreement the status of a contract, and it should be presumed to be binding, unless there is evidence to the contrary. On the other hand, social arrangements between friends who are not related, or household agreements between a couple living together, but not married, should come into the category of “domestic”, and will therefore be presumed not to be binding.

Secondly, the rule is simply based on a presumption, and it will be possible for that presumption to be rebutted.

Arrangement between husband and wife made in the context of the break-up of the marriage, are held to be legally binding. Lord Denning distinguished this assertion in the following terms:

In cases where the parties are living together in amity. their domestic arrangements are ordinarily not intended to create legal relations. It is altogether different when the parties are not living in amity but are separated, or about to separate. They then bargain keenly. They do not rely on honourable understandings. They want everything cut and dried. It may safely be presumed that they intend to create legal relations[3].

Finally, it should be noted that the question of whether or not, if the agreement is broken, the innocent party would in practice go to the courts to enforce it should not be regarded as being conclusive as to whether there was an intention to create legal relations. There are many minor commercial agreements (for example, the arrangement for newspapers to be delivered by a local newsagent) where the parties would be unlikely to consider it to be worth involving the courts to remedy a breach. Nevertheless, such agreements are clearly intended by the parties to affect their legal relations and to create binding obligations. Moreover, even in relation to substantial commercial transactions, research has shown that parties often prefer to settle disputes in ways which do not involve recourse to lawyers. This does not mean that they do not intend their agreements to be legally binding. The fact that the parties would not be expected to sue each other may be relevant if such expectation is based on the relationship between the parties (for example, mother and daughter), but even then it cannot be conclusive.

If the agreement is not a “domestic” one, then it will be regarded as “commercial”. This will mean that the presumption is that the agreement is intended to be legally binding.

It will be a heavy onus on a party to an ostensibly commercial agreement who wishes to argue that the presumption has been rebutted.

It is possible, however, by using sufficiently explicit wording to rebut the presumption even in relation to a clearly commercial agreement. This is commonly done in relation to agreements relating to the sale of land which are generally stated to be “subject to contract”, even where a price has been agreed between the parties[4]. This is intended to ensure that they are not binding until fully considered written contracts have been exchanged.

Public policy arguments may also influence a decision as to whether there is intention to create legal relations. Thus, in Robinson v HM Customs & Excise, the claimant was an informer for the Customs and Excise. He tried to bring a contractual claim for the payment of reasonable remuneration and expenses. It was held, however, that there was no intention to create legal relations in respect of the supply of information by the claimant. The payments were discretionary and dependent on results (for example, arrests, seizures of illicit goods) and there were reasons of public policy why the court could not become involved in inquiring into these matters[5].

Some problems of intention to create legal relations have arisen in the area of “collective agreements”. By this it is meant that agreements between trade unions and employers, or employers’ organisations, as to the terms and conditions of work of particular groups of employees. Each employee will have a binding contract of employment with the employer, but some of the terms of this agreement (for example, as to rates of pay) may specifically be stated to be subject to the current collective agreement between employer and trade union. What is the status of the collective agreement itself? It is clearly made in a commercial or business context, and therefore it would seem that there should a presumption of legal enforceability.

To make them legally binding would require “clear and express provisions” to that effect.

As far as collective agreements themselves are concerned, the matter is now dealt with by statute. Section 179 of the Trade Union and Labour Relations (Consolidation) Act 1992 provides that collective agreements are “conclusively presumed not to have been intended by the parties to be' legally enforceable. The only exception is where the agreement is in writing, and expressly stated to be legally enforceable. We thus have here a presumption against legal enforceability which is even stronger than that which operates in relation to domestic agreements. It cannot be rebutted by taking account of verbal statements, or by looking at the context, but only by a clear intention committed to writing. This, therefore, is one of the few occasions in which English law requires formality in the making of an agreement if it is to be legally enforceable.

At the beginning of this chapter, reference was made to the argument that the insistence on a requirement of intention in addition to the other elements of validly formed contract (offer, acceptance, consideration) is unnecessary. The concept of the bargain is central to the test of enforceability of contracts under English law and the vital elements in the identification of a bargain are offer, acceptance and consideration. These three elements should be treated together as indicating a bargain. Thus, an analysis which tries to separate out agreement (that is, offer and acceptance) from consideration is missing the point of why the courts started looking for evidence of these three elements in the first place.

As Bob Hepple said: “The separation of agreement from consideration ... has resulted in a fundamental point being overlooked. This is that the common law recognised at an early stage that usually parties do not define their intention to enter into legal relations. Consequently, the fact that they have cast their agreement into the form of bargain (offer, acceptance, consideration) provides an extremely practical test of that intention. This test of bargain renders superfluous any additional proof of intention.”[6]

The argument may be justified as according with the principle that matters of the intention of the parties must be decided objectively. In other words, can the party who claims that he or she thought that the agreement was intended to be enforceable be said to have acted reasonably in this assumption? The presumption would be that as long as offer, acceptance and consideration were present, and no specific statement had been made about enforceability, then it would be intended to be legally binding. Social and domestic agreements could still be excluded from enforceability either because no reasonable person expects them to be legally binding, and therefore an assumption that they are would be unreasonable, or because what is given in exchange in such agreements is not generally to be regarded as good consideration. In either case, no “bargain” is created.

This line of argument is in effect introducing a rule of formality into the formation of contracts. The formal requirements become not writing, or signature, but ‘offer’ ‘acceptance’ and ‘consideration’. The parties who go through the process of making an agreement which contains these elements will, in the absence of specific and explicit evidence to the contrary, be deemed to have made a ‘bargain’ and therefore a binding agreement. Although this has some attractions, it is submitted that it does not truly represent the English common law approach to contracts. This is based not only in relation to formation, but in many other areas as well, on the basis that the court is trying to give effect to the intention of the parties. This is the overriding concept, and the evidence which may go towards establishing whether any intention to create a legal relationship existed and, if so, what it was intended to be is subsidiary. For that reason, the courts legitimately remain concerned to establish the existence or absence of intention, even if other indicators of a binding agreement are present. The existence of the presumption of enforceability in commercial agreements does not contradict such an approach. It simply allows it to operate in a way which is efficient, and does not encourage the parties to an agreement to become involved in unnecessary disputes as to their supposed intentions.

Lecture 4. Capacity (2 hrs)

Date: 2015-12-18; view: 1002