There is a strong presumption in commercial agreements that the parties intend to be legally bound, and unless clear words are used this presumption will not be rebutted. In Esso Petroleum Ltd v Commissioners of Customs and Excise (1976), Lord Simon of the House of Lords held that the whole transaction took place in a setting of business relations and that it was undesirable to allow companies to make promises in advertisements that they were not bound to keep.
The presumption that parties to a commercial agreement intend to create legal relations may be rebutted where the words of a contract, or an offer, suggest that legal relations were not intended.
Wordings that suggest that legal relations are not intended
- Mere puffs: Where an offer is extremely vague, or clearly not intended to be taken seriously, the law will not give its acceptance contractual effect. This is the case of Weeks v Tybald (1604). This same principle is sometimes applied to the extravagant language used in advertising and sales promotions, but only if there is no evidence of contractual intent as illustrated in Carlill v Carbolic Smoke Ball Co (1893).
- Honour Clauses: This is in other words known as the honourable pledge clause. These clauses place neither party under any obligation to go on giving or accepting orders. As Scrutton LJ stated in Rose and Frank v Crompton Bros (1923) ‘I can see no reason why, even in business matters, the parties should not intend to rely on each other’s good faith and honour and to exclude all idea of settling disputes by an outside intervention ……….’
- Agreement ‘subject to contract’: The use of these words on an agreement is usually (though not always) taken to mean that the parties do not intend to be legally bound until formal contracts are exchanged.
Where the words of a business agreement are ambiguous, the courts will favour the interpretation which suggests that the parties did intend to create legal relations, and therefore find that there is a contract. This position was illustrated in the case of Edwards v Skyways Ltd (1964) in which the Court of Appeal interpreted the wording ‘ex gratis to mean that the employers were not admitting any pre-existing liability to make the payment; it did not mean that they were not bound by the agreement.
Collective bargaining agreements
There is one exception to the rule that the parties to a commercial agreement are presumed to intend to be legally bound. Under a collective bargaining agreement, an employer negotiates pay and conditions with the workforce as a whole (usually represented by a trade union), rather than on an individual basis.