Commercial Contract or other Agreement

QUESTION What distinguishes a commercial contract from other agreements, be they family arrangements or gentlemen’s agreements? Illustrate your answer with cases. Answer: Agreements: Agreements are not legally enforceable. This consists of an offer and acceptance to that offer without intention to make the agreement legally binding. Agreement = Offer + Acceptance Contract: A contract on the other hand is similar to agreement with the sole intention to make the agreement legally binding. A contract is an agreement that the courts will protect and enforce. It is a legally enforceable agreement, which if not upheld by any of the parties involved can allow court of law to intervene and decide the matter as intermediary. Contract = Agreement + Intention + Consideration Explanation and Difference between Contracts and Agreements: Contracts can be executed through formal deeds. Contracts can be made written, verbal or partially written and partially verbal. Some contracts are bound to be written; otherwise they hold less legal grounds and are hard to prove in court of law due to lack of evidence. These include

• Real Estate or Property Contracts
• Hire ,Sale ,Purchase contacts
• Stock and Share Contracts
• Consumer Credit Contracts

There is an exception to the above principle in case a contract has not been recorded in a written form. In such a situation equitable doctrine of part performance comes into play as happened in Buckenara v Hawthorn Football Club Ltd [1988] VR 39 A contract cannot be formed unless both the parties have the intention to be legally bound. The intention of the parties involved is decided on the presumption, in which the probable outcome is presumed and implied. These presumptions can be over turned or rebutted, but in case of rebuttal “Onus” is the responsibility of the party who is rebutting the presumption. Testing the Intention using Presumption: Two types of presumptions are employed by courts when checking the intention of the parties, if they wanted to be legally bound or not. These presumptions are based on

• Domestic, Personal or Social Transaction
• Business or Commercial Transaction

Method to check presumption The method to check the presumptions is objective test. This test considers an imaginary reasonable person to decide if an intention existed to be legally bound by the parties, when provided with all the evidence. Objective test is conducted by deciding

1. The transaction being involved i.e. if it’s a domestic, personal or social transaction without the intention to be legally bound or if it is a business or commercial transaction with the intention to be legally bound.
2. Looking into the evidence present to identify if a reasonable rebuttal can be given of the presumption, with onus of proof on the party rebutting the presumption.

Some past cases of “Domestic, Personal or Social Transactions” and “Business or Commercial Transactions” along with their rebuttals are as follow. Domestic Agreements: Domestic agreements don’t show intention to make a legal binding to the arrangement being sought. They are mere agreements between close relatives or spouse. Thus they cannot be termed as a legal contract if an intention for legal binding cannot be proved in the court. Examples of this kind of agreement are Balfour v Balfour [1919] 2 KB 571 In this case Belfour committed to pay his wife maintenance money if she would stay back in England. He later changed his mind and stopped paying the maintenance money. The upset wife took a divorce and sued Belfour for breach of contract. The court decided in favour of Belfour considering that at the time of agreement, both the parties were spouse and it was more of a domestic agreement with no intention to legal binding. Cohen v Cohen (1929) 42 CLR 91 In this case, the husband promised a dress allowance to his wife. After sometime he stopped the allowance due to unhappy marriage .The wife sued the husband for breach of contract. But court held it as a domestic agreement considering no intention for legal binding was present. The presumption prevailed since no rebuttal was put forward by the wife. Rebuttal of Domestic Agreements: A presumption can be rebutted by presenting strong contrary evidence. The onus of proof is on the party trying to rebut the presumption. A few cases in which the presumption of domestic agreement was rebutted are as follow McGregor v McGregor (1888) 21 QBD 42 In this case the presumption of domestic agreement was rebutted. A husband and wife separated on terms that the husband would pay for the maintenance of the children and wife, if the wife would not incur any debts for which the husband would be liable. The husband stopped paying the maintenance money after sometime, on which he was sued by the wife .The wife was able to rebut the presumption of non intention on the grounds that the couple were separated at the time of agreement, which means that this was not a domestic agreement and both parties had intention to make the agreement legally binding. Furthermore the wife had to compromise her legal rights for this agreement, which makes it a contract. Social Arrangements: Social arrangements means that the two parties are not related to each other through blood. It may be that the plaintiff and defendant are friends, colleagues or someone known. Such agreements like domestic agreements are presumed to be not legally binding, and merely promises made on social relations. However such presumption can also be rebutted with the onus of proof borne by the party seeking to rebut the presumption. Examples of social agreements are Coward v Motor Insurers Bureau [1962] 1 All ER 531 In a motorbike accident the driver and passenger both died. The bike was being driven by the passenger’s friend. Since the driver had no insurance the wife of the deceased passenger could not claim for insurance money. But due to a relevant statute at that time, she could claim for damages after proving that there was a contract between her husband and the driver. She claimed that her husband used to share the motorbike expenses with his friend (bike owner).But the court held that, despite sharing of the expenses there was no contract between the two dead men with the intention to be legally bound. This arrangement was merely a social agreement. Rebuttal of Social Agreements: Certain cases have been decided in which the presumption of no intention in a social agreement was rebutted. Example of such a case is Parker v Clarke [1960] 1 All ER 93 In this case an elderly couple Clarkes asked their young neighbour couple Parkers to look after them and in return they would leave the Parkers their property. An agreement was reached and Parkers moved in with Clarkes. After sometime the old couple changed their mind and did not honour the agreement. The Parkers took the matter to court in breach of contract. The presumption of no intention of legal binding was rebutted by the Parkers, with a letter between the two parties explaining in detail the agreement. Plus Parkers had sold their house on reliance with the agreement which shows their intention to make a legal binding to the agreement. Commercial or Business Agreements: When two parties do not know each other domestically, socially or personally and agreements are made at an arms distance, the presumption of intention in such cases is taken to be legally binding. Such agreements are presumed to be contracts even when the subject matter is personal. The presumption in such cases can be rebutted but previous cases have shown that rebuttal is difficult in that case. Nyulasy v Rowan (1891) 17 VLR 663 In this example a party made an offer to sell shares at a specific price. This offer was later taken back by the offerer claiming that the offer was just a joke. The buyer took the offerer to court claiming a breach of contract. The court decided on the basis of presumption that since both parties are at an arms distance and the transaction was commercial, the offerer has breached the contract by taking back the offer. Since there was no reason for the offerer to joke with the buyer since they were at an arms distance from each other. Honour Clause (Gentleman’s Agreement): Sometimes in an agreement parties can wilfully include an honour clause. This means that the agreement will not give legal rights to any of the parties and would not create any legal consequences. Inclusion of honour clause only constitutes a gentleman’s agreement and not a contract. Rose & Frank Co v Crompton Bros Ltd. [1925] AC 445 In this case two parties were involved having business transaction history. One was paper product manufacturer in England, other being the Distributor in USA. The agreement taken to court by one of the parties involved an honor clause, which made it clear that none of the parties enjoyed any legal rights under the court of law, and the agreement would not have any legal consequences. The dispute revolved around one party giving six months notice of its intention to terminate the agreement. The court held that thought it was a commercial transaction by the nature of the contract. But since honor clause was included into it, this made it gentleman’s agreement. Hence, eliminating any legal rights and legal consequences. References David Parker, G. B., 2013. Business Law for Business Students. 3 ed. Sydney: Thomson Reuters Australia Limited.

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