"To create a contract there must be a common intention of the parties to enter into legal obligation". Discuss

"To create a contract there must be a common intention of the parties to enter into legal obligation".

1.   Intention as an Essential Element:

The intention to create legal obligations or relations is an essential condition or element for an agreement to become a contract. "intention (to be bound by the agreement)" is one of essential element of contract formation, and that a contract does not come into existence unless the parties intend to enter into a legal relationship and be legally bound by it.

The Indian Contract Act, 1872, primarily based on English Common law, outlines the conditions for an agreement to become a contract, including the requirement that the agreement must be enforceable by law. While the Indian Contract Act does not contain an express provision requiring intention to create legal relations, it is widely accepted in Indian law, following English law, that such an intention is essential. Courts generally presume this intention unless circumstances suggest otherwise.

2.   The Objective Test of Intention:

The test for determining contractual intention is objective, not subjective. This means that what matters is not the hidden or subjective state of mind of the parties, but rather what a reasonable person would infer their intention to be based on their words and actions in the surrounding circumstances.

The intention of the parties is ascertained from the terms of the agreement and the surrounding circumstances.

3.   Presumptions Based on Context:

Courts apply rebuttable presumptions regarding intention depending on the context of the agreement.

Domestic, Social, and Family Agreements: In arrangements regulating social or family relations, there is a presumption that the parties do not intend legal consequences to follow.

The classic example is Balfour v Balfour, where a husband's promise to pay his wife a monthly allowance while she remained in England was held not to be an enforceable contract. The court found that the agreement involved matters of a domestic nature and there was no evidence to rebut the presumption that legal enforceability was not intended.

Similarly, in Jones v Padavatton, a contract between a mother and daughter was held void for lack of evidence that the parties intended to be bound, meaning the presumption against intention in family matters was not rebutted.

However, this presumption can be rebutted if the evidence shows the parties did intend legal relations. In Wakeling v Ripley, an agreement for a sister and her husband to move from England to Australia to care for the defendant in exchange for his house was found to be a binding contract because the plaintiffs took significant steps (leaving jobs, selling their home), indicating a serious intention to be legally bound. Merritt v Merritt also illustrates that a written agreement between spouses regarding property transfer, intended to create a legal relationship, is enforceable.

Commercial and Business Agreements: In agreements regulating business relations, there is a strong presumption that the parties do intend legal consequences to follow.

In Carlill v Carbolic Smoke Ball Co, despite the defendant's argument that their advertisement offering a reward was a mere puff or promise in honour only, the court applied the objective test and found that the deposit of £1000 in the bank indicated a clear intention to be legally bound, rebutting any such argument.

This presumption of intention in commercial agreements can be rebutted. The onus of proof rests with the party seeking to exclude the presumption.

In Rose and Frank Co v JR Crompton and Bros Ltd, a commercial agreement contained an express clause stating it was not a formal legal agreement and not subject to legal jurisdiction. The court gave effect to this express intention, demonstrating that parties can agree not to create legal relations even in a business context, provided the wording is clear and unambiguous.

4.               Express Statements: Parties may expressly declare whether or not they intend their agreement to be legally binding. While courts respect clear express intentions in commercial agreements, the wording must be unambiguous. The use of terms like "gentleman's understanding" may not always negate intention, especially in agreements involving significant matters like property transfer.

5.               Relationship with other elements: Intention works alongside other essential elements like offer, acceptance, and consideration. Offer and acceptance bring the parties together, but intention provides the further evidence required to show the parties contemplated the creation of a legal obligation. Consideration, being the price for a promise, often serves as evidence of this intention in India. The concept of "consensus ad idem" or "meeting of minds" is closely related, meaning parties must agree upon the same thing in the same sense, and a lack of such genuine consent can prevent the formation of a contract.

In summary, while the Indian Contract Act, 1872, does not contain a specific section requiring intention to create legal relations, the principle is considered essential in practice, largely following English law. The test for this intention is objective, determined by the parties' conduct and circumstances. Courts apply presumptions based on the nature of the agreement (domestic/social vs. commercial), which can be rebutted by clear evidence of the parties' actual intent to be legally bound.