Intention to create legal relations

An agreement becomes a binding contract only if it can be shown that it was made with the intention to create legal relations that is enforceable legally and would have legal consequences in the event of a breach of that intention.

As an example, if a real estate agent makes a statement to the purchaser that the vendor of the property would accept his offer of the purchase price for X amount, it does not mean the same is binding on the vendor unless the vendor agrees to the same in writing with the purchaser.

There is no denying that the intention to create legal relations is critical and essential in the formation of a contract. (See Yap Eng Thong & Anor v. Faber United Ltd [1973] 1 MLJ 191).

In the case of Prism Leisure Sdn Bhd v Lumut Marine Resort Bhd [2002] 5 CLJ 391, the defendant owned and operated a club known as the Lumut International Yacht Club (LIYC). The defendant by a letter dated 4th October 1995, offered the plaintiff a concession to operate the water base and marina facilities of LIYC. The plaintiff accepted the defendant’s offer by a letter dated 5th October 1995 and moved its employees into the premises of LIYC and commenced operations. The parties agreed that a formal agreement would be drafted and signed between the parties containing the terms set out in the letter of offer.

On 26th February 1996, the plaintiff received a draft formal agreement from the defendant which included, apart from the terms contained in the letter of offer, several new conditions which never previously raised or agreed upon. Unhappy, the plaintiff requested further time to study the draft agreement. The defendant responded by stating that it would refuse to sign a formal agreement and gave the plaintiff notice to vacate the grounds of LIYC. The issue that arose was whether there was a valid and legally binding contract.

It was held that the execution of a formal agreement would only amount to a mere formality based on the contract of the parties pursuant to the initial exchange of documents between the parties and the fact that the contract had already become executed by the conduct of the parties. The defendant was held liable to the plaintiff under the terms of the concluded contract as seen in the letter of offer and the letter of acceptance.

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