Contract and the family: whither intention?

• Jurisdiction: Australia
• Author: Keyes, Mary
• Date: 01 December 2002

[Contract law discriminates between commercial and non-commercial (typically, family) agreements. According to the principles of intention to be contractually bound, family agreements are presumptively unenforceable. The justifications for impeding enforcement of such agreements are ill-founded and outdated. Modern theories suggest that the distinction between commercial and family agreements cannot be maintained In particular, we employ relational contract theory and behavioural decision theory to investigate the validity of this distinction. We discuss how other areas of law, particularly estoppel and family legislation, recognise the need to enforce family agreements in some situations. We argue that contract law should take a similar approach, and that the intention principles as presently expressed serve no rational purpose.]

I Introduction II Intention to Be Contractually Bound III A Critical Analysis of the Classical Foundations of Intention A Conventional Arguments in Support of Non-Enforcement of Family Contracts B Relational Contract Theory C Behavioural Decision Theory 1 Uncertainty and Bounded Rationality 2 Heuristics and Biases 3 The Effect of Context IV Enforcing Family Contracts? A Estoppel B Financial Agreements between Spouses V Conclusion I INTRODUCTION

Traditionally, agreements made in a family context have been seen as belonging to an extremely private sphere which is outside the realm of contract law. We can all recall classic examples of dress allowances, promises to do the washing up and other such trivialities which `demonstrate' the unsuitability of contract law to enforce family agreements. The assumption of contract law that the parties to family agreements lack an intention to be contractually bound has served a formidable gatekeeper role. (1) It is a highly effective default principle which impedes enforcement of family agreements, and performs a powerful symbolic function delineating the realm of law from the realm of the family and the feminine, privileging the former over the latter.

It must be seriously questioned whether this general assumption is sustainable in modern contract law. The last several decades have seen the breakdown of distinctions between the public and the private, and between the market and the family. In other areas of law, agreements made within the family are enforced. The High Court has recently questioned the intrinsic value of the presumptions of intention. (2) Many commentators have criticised the intention principles as they apply to family agreements. (3) This article critically scrutinises contract law's treatment of family agreements. It is argued that the central distinction between family and non-family contracts serves no legitimate purpose; it no longer reflects social conditions and is inconsistent with other areas of law.

In Part II we outline the principles governing intention to be contractually bound, including a discussion of the High Court's decision in Ermogenous v Greek Orthodox Community of SA Inc. (4) In Part III we argue that the justifications for assuming the unenforceability of family agreements are unsupportable. We particularly draw upon relational contract theory and behavioural decision theory to analyse critically this assumption. In Part IV, we discuss the enforcement of family agreements using estoppel and family legislation. These developments show that contract law's continued assumption that family contracts should not be enforced is outdated and inconsistent with other areas of law.

II INTENTION TO BE CONTRACTUALLY BOUND

The intention to create a contractually enforceable agreement is `regarded as an immovable aspect of modern [contract] doctrine.' (5) All the treatises regard it as a necessary element of contract formation. (6) Recently, in Ermogenous, the High Court affirmed that intention to create an enforceable agreement is an essential precondition to contractual liability. (7) Determining intention is a question of fact and, as for other aspects of contract law, an objective test applies. Until Ermogenous, it was very widely agreed that the determination of intention was technically to be resolved by reference to presumptions of facts. (8) Different presumptions applied depending on whether the arrangement was characterised as a commercial or non-commercial transaction. In Ermogenous, Gaudron, McHugh, Hayne and Callinan JJ, who gave a joint judgment, stated that they doubted `the utility of using the language of presumptions in this context.' (9) Whether the language of presumptions is used or not, their Honours apparently confirmed that in certain types of cases, the Court commences its determination as to the existence of intention with the view that the parties lacked intention and requires the party alleging a contract to prove the existence of intention, (10) The joint judgment recognised that the presumptions had been elevated to such an extent that they had become difficult, if not impossible, to rebut. Their Honours believed--correctly, in our view--that the presumptions of fact, which should merely signify where the onus of proof falls, had ossified into strict rules of law. (11)

Despite acknowledging that it was inappropriate to express the relevant principles in the form of presumptions, their Honours evidently endorsed the existing principles of proof of intention. As they did not clearly indicate precisely when it would be necessary to prove intention, it must be assumed that the well-established distinction between commercial and family agreements continues to apply. Ermogenous concerned the entitlement of an archbishop of the Greek Orthodox Church, under an alleged contract of employment, to a payment in respect of unused annual and long service leave upon the termination of his employment. The Church argued that he was not entitled under contract law because there was no intention to be contractually bound. The issue of intention was the focus of the appeal before the High Court. The majority held that `there could be no doubt' (12) that the onus of proving the existence of a contract fell on the appellant, who alleged the existence of a contractual relationship. It is not clear why the onus fell on him--it may have been because the dispute concerned `the engagement of a minister of religion', (13) or that `issue was joined' as to intention. (14) If the latter is the case, intention must be positively proven whenever one party puts it in issue. This interpretation seems to us unlikely as it would represent a significant change from the previous principles. We therefore assume that the High Court in Ermogenous extended the class of cases in which intention must positively be proved to include matters `concerning the engagement of a minister of religion.' (15) In the following discussion, therefore, we recast the principles of intention to take into account the criticism in the joint judgment of the language of presumptions, but not of the substance of the principles.

In commercial disputes--the vast majority of litigated disputes--the party who alleges that a commercial agreement is not contractually enforceable bears the onus of proving that the parties did not intend that the agreement would be enforceable as a contract. (16) In commercial cases, intention will seldom be in issue. (17) Rogers CJ stated that

[t]he whole thrust of the law today is to attempt to give proper effect to commercial transactions.... If the statements are appropriately promissory in character, courts should enforce them when they are uttered in the course of business and there is no clear indication that they are not intended to be legally enforceable. (18) In certain classes of non-commercial disputes, on the other hand, the party who seeks enforcement of the agreement bears the onus of proving that the agreement was intended to be contractually enforceable, (19) Non-commercial disputes are variously referred to by both courts and commentators as `family', `social' and `domestic' disputes. (20) We observe in passing that the cases support a more limited class. (21) Both Balfour v Balfour (22) and Cohen v Cohen (23) the cases which established the requirement of intention, concerned arrangements between spouses--specifically, the promise by a husband to provide an allowance to his wife. In Riches v Hogben, (24) Williams J found that in a majority of reported contract disputes between family members who are not married to each other, intention was made out. (25) This suggests that the principle is too widely cast; and that the authority for its extension to the wider class of social and domestic contracts is less than certain. Following Ermogenous, the category of non-commercial agreements now extends to arrangements concerning the `engagement' of ministers of religion.

It might be argued that the requirement that intention, or lack of it (as the case requires), be positively established should be uncontroversial since the party alleging or denying intention can always prove that allegation or denial. We argue that these principles do matter, for three reasons.

First, the parties are most unlikely to have considered the question of enforcement of their agreement at all, (26) so proof of an actual intention, or lack thereof, is impossible in almost all cases. Requiring proof of intention imposes a considerable impediment to the enforcement of non-commercial contracts, which carries with it attendant risks and costs. Although evidence of intention is likely to be non-existent, Hedley has noted that there is an irrebutable presumption `that the parties had some common intention' and has observed that `evidence that they did not consider the matter at all is treated simply as something that makes the court's enquiry more difficult.' (27) The court must, in the absence of positive proof, impute a `reasonable' intention to the parties. In doing so, the fact that the starting point is that there is no intention...