LAW5002 · Principles of Contract Law A
Intention to Create Legal Relations
This chapter covers intention to create legal relations - the fourth element of formation in LAW5002 Principles of Contract Law A at Monash University (Juris Doctor). Even where there is agreement, consideration and certainty, a promise is enforceable only if the parties objectively intended to be legally bound; this chapter shows how the courts apply the objective test in Ermogenous, what the commercial and domestic/social presumptions now do after that case, and how Masters v Cameron sorts 'subject to contract' preliminary agreements. It is examinable as a formation problem question in the 60% final exam.
What this chapter covers
- 01The objective test for intention - would a reasonable person regard each party as intending to be legally bound (Ermogenous v Greek Orthodox Community of SA)
- 02Why intention is judged objectively on words and conduct, not on a party's private state of mind
- 03The commercial context - a strong (rebuttable) inference of intention, with the onus on the party denying it (Shahid v Australasian College of Dermatologists)
- 04The domestic/social context - no presumption either way post-Ermogenous; the domestic character is one factor against intention (Ashton v Pratt; Todd v Nicol; Roufos v Brewster)
- 05What the presumptions now do - allocate the onus of proof rather than decide the case (Ermogenous)
- 06Government arrangements and letters of comfort - intention turns on the words (Leahy; Placer v Cth; Banque Brussels cf Kleinwort Benson)
- 07Masters v Cameron - the three classes of 'subject to contract' agreement, and only Class 3 defers the binding contract
- 08The Baulkham Hills fourth category - bound now, but expecting a further substitute contract
- 09Running intention in IRAC and arguing both sides before a reasoned conclusion
'Subject to contract' - were the parties bound before the formal agreement?
- +1Issue. Did the parties objectively intend to create legal relations - and were they bound immediately by the Letter of Intent, or only once a formal Supply Agreement was executed?
- +3Rule. Intention is decided by the objective test - would a reasonable person regard each party as intending to be legally bound (Ermogenous v Greek Orthodox Community of SA; Shahid v Australasian College of Dermatologists)? A commercial dealing carries a strong (rebuttable) inference of intention, with the onus on the party denying it. Where a formal document is contemplated, Masters v Cameron classifies the deal: Class 1 (bound now, formal document merely restates), Class 2 (bound now, performance conditional on execution) and Class 3 (not bound until the formal contract is signed). Classify by objective intention, not the label used.
- +4Application. This is a commercial arrangement, so a strong inference of intention applies and Dockside bears the onus of rebutting it (Shahid). The terms are precise (price, term, schedule), which points towards intention. But the operative words - 'subject to and conditional upon the parties executing a formal Supply Agreement' - are classic Masters v Cameron Class 3 language: they signal that neither party intends to be bound until the formal agreement is signed. Argue the other side: if the letter had said the parties were 'immediately bound' and the formal document 'merely records' the terms, it would fall in Class 1 (bound now). Here, though, the express conditional wording displaces the commercial inference.
- +2Conclusion. State a clear tentative view and note any further facts you would want (e.g. whether the parties began performing under the letter, which could evidence intention despite the wording).
Key terms
- Intention to create legal relations
- The fourth element of formation: a promise is enforceable only if the parties objectively intended to be legally (not merely morally or socially) bound. Assessed objectively from the parties' words and conduct in context.
- Objective test (Ermogenous)
- Would a reasonable person regard each party as intending to create legal relations (Ermogenous v Greek Orthodox Community of SA)? A party's private, subjective intention is irrelevant.
- Presumptions (post-Ermogenous)
- The High Court in Ermogenous questioned the utility of rigid presumptions; it did not abolish them but held that, at most, they allocate the onus of proof rather than decide the case.
- Commercial presumption
- In a commercial or business context there is a strong (rebuttable) inference that the parties intended to be legally bound; the onus is on the party denying intention (Shahid v Australasian College of Dermatologists).
- Domestic and social arrangements
- In domestic/social contexts there is no presumption either way after Ermogenous; the domestic or social character of the arrangement is one factor pointing against intention (Ashton v Pratt; Todd v Nicol; Roufos v Brewster).
- Masters v Cameron classes
- A test for 'subject to contract' preliminary agreements. Class 1 - immediately bound, the formal document merely restates the terms. Class 2 - bound now, but performance is conditional on executing a formal document. Class 3 - not bound unless and until a formal contract is signed. A fourth category (Baulkham Hills v GR Securities) is bound now but expects a further substitute contract with extra terms.
- Letter of comfort
- A statement (often to a lender) offering assurance about a related party. Whether it is binding depends on whether the words are promissory or a mere statement of present fact or policy (Banque Brussels Lambert v ANI, binding; cf Kleinwort Benson v MMC, not binding).
- Onus of proof
- The burden of proving (or disproving) intention. After Ermogenous this is the main practical work the presumptions do - for example, in a commercial case the party denying intention must displace the strong inference.
Intention to Create Legal Relations FAQ
Are 'subject to contract' agreements always unenforceable in LAW5002?
No. A 'subject to contract' or heads-of-agreement deal is not automatically unenforceable. Masters v Cameron sorts it into three classes (with a Baulkham Hills fourth category): in Class 1 the parties are immediately bound and the formal document merely restates the terms; in Class 2 they are bound now but performance is conditional on executing the formal document; only in Class 3 is the binding contract deferred until a formal contract is signed. Classify by the parties' objective intention, not the label they used, and argue the class both ways where the wording is genuinely ambiguous.
Did Ermogenous abolish the presumptions about intention?
No. In Ermogenous v Greek Orthodox Community of SA the High Court questioned the utility of rigid presumptions but did not abolish them. After Ermogenous a strong inference of intention still attaches to commercial dealings (Shahid), while domestic/social arrangements carry no presumption either way, with the domestic character as one factor against intention. The key change is that the presumptions are treated as, at most, allocating the onus of proof rather than deciding the case - so in the exam explain what the presumption does on the facts rather than reciting the old rule as if it were conclusive.
Can AI help me with intention to create legal relations in LAW5002?
Yes, as a study aid - not as an exam shortcut. Sia can explain the intention rules step by step (the objective test in Ermogenous, what the commercial and domestic/social presumptions do, and the Masters v Cameron classes), walk you through worked IRAC problems, and quiz you on which case supplies each principle so you can name your authority in the exam. It cannot and must not write your assessment for you or guarantee a mark: the final exam is a supervised electronic eExam in which generative AI is not permitted, so use Sia to build understanding beforehand and always confirm the current scope and format on Moodle.
Studying with AI? Sia — free AI law tutor works through LAW5002 step by step.
Exam move
Learn intention as a short, fixed sequence and run it on every promise in a problem: first state the objective test and name its source (Ermogenous; Shahid); then place the facts in a context (commercial, domestic/social, or government/other) and say what the presumption actually does after Ermogenous - allocate the onus of proof, not decide the case; then weigh the objective factors both ways (the nature of the relationship, whether the language is promissory or a mere expression of hope, the precision of the terms, and any significant reliance); and finally, for any 'subject to contract' or heads-of-agreement deal, classify it under Masters v Cameron and pin the operative words, remembering that only Class 3 defers the binding contract. Keep one card per authority pairing the case with a one-line holding - Ermogenous, Shahid, Ashton v Pratt, Todd v Nicol, Masters v Cameron, Baulkham Hills, Banque Brussels and Kleinwort Benson - and practise arguing each contestable step in full IRAC. The most recent past paper allowed 2.5 hours for 60 marks (about 2 minutes per mark), so rehearse timed answers before the exam period and confirm the current duration and format on Moodle.
