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Contract Law I - Week 3 – 7 (II)

By: Nitin Gomber Esq.

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Intention to Create Legal Relations: Cases

(See “Week 1 Slide #2” for conceptual clarity.)
+ Not yet OFFER
clearly Recognized
recognized by SC
by SC

FAMILY /
SOCIAL COMMERCIAL
AGREEMENTS AGREEMENTS

NO
PRESUMPTION
PRESUMPTION
OF
OF
CONTRACTUAL
CONTRACTUAL
INTENT
INTENT

UNLESS EVIDENCE TO UNLESS EVIDENCE TO

V. HEAVY
THE CONTRARY THE CONTRARY
BURDEN
AVAILABLE AVAILABLE
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Banwari Lal v. Sukhdarshan Dayal (1973) 1 SCC 294

Facts:

q Two co-owners (neither party here) owned one big plot of

land. They divided the said plot into small plots as part of a
housing scheme called “Chandrapuri Colony”.

q Plaintiff are representing the various purchasers of sub-plots.

q Defendant is the owner of sub plot Plot #19.

q The Plaintiffs claim that at the time of advertising the housing

scheme, it was announced over a loudspeaker that a plot will
be reserved for a Dharamshala.
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q The Plaintiffs have been unable to produce evidence as to ‘who

made the announcement’ and ‘under whose authority the said
announcement was made’

q Nonetheless, the Plaintiffs claim that it was based on the

representation of the co-owners that they bought expensive
plots in the housing colony.

q In some of the maps which were annexed to some of the sale-

deeds, Plot #19 was described as “Dharamshala”. In fact, some
of the sale-deeds subsequent to the sale of Plot #19 also showed
in maps that the said plot was for a Dharamshala.

q None of the sale deeds refer to the maps by incorporation in the

context of use of Plot #19. None of the sale deeds contains a
stipulation that Plot #19 was to be for common use even.
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q Now, the co-owners (neither party here) have sold Plot #19 to
one Manohari Devi and she has in turn sold it to the Defendant,
who has now constructed a boundary wall around his plot
rendering it impossible for the owners of sub-plots to use that
land for common benefit.

q The Plaintiffs take up the argument of Promissory Estoppel. The

Defendants say that advertising over the loudspeaker was
merely puffery. Plus, the co-owners never lost their right to re-
sell Plot #19.

Issue:

Whether or not the Defendant made a legally binding

representation by way of loud speakers?

Decision:

The Court held in favour of the Defendants.

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Rationale:

q No evidence with the Plaintiffs as to “who” made the

announcement over loudspeakers and “under whose
authority”. Therefore, the argument lacks basis.

q Microphones / loudspeakers are definitely useful aids in

propagation of views, but they have not yet acquired notoriety
as carriers of binding representations. In the instant case, it
was merely puffery.

q Most sale-deeds will contain an express recital that the co-

owners will lay down roads / drains etc. If plot #19 was truly
earmarked for a specific purpose, it is impossible that a
suitable term in that behalf would not be included in the
various sale-deeds.
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q No promissory estoppel made out. Why? Because evidence

regarding the representation made itself is vague and true
facts were known to those who purchased the sub-plots after
Plot #19 was sold off.

q Estoppel as a general rule does not operate to create interest

in property regarding which the representation is made.
(Section 43 of the Transfer of Property Act is an exception.)
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CWT v. Abdul Hussain (1988) 3 SCC 562

Facts:

q Plaintiff in the case is the Commissioner of Wealth Tax, Bhopal.

q Defendant in the case is the Assessee of wealth tax.

q The issue revolves around the assessment for four assessment

years starting from 1957-58 to 1969-61.

q The original returns filed by the Defendant for the assessment

years 1957-58 was based on a net wealth of Rs. 8,57,910.

q The Defendant in his revised return sought to have Rs. 4,00,000

excluded from the original amount.
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q The reason for the foregoing, the Defendant states is that he

advanced a loan amounting to Rs. 4 lakhs to one Faizullabhai
Mandlawala, who is also his partner in a partnership firm. The
borrower had in fact employed this sum as part of his capital in the
partnership firm.

q The argument of the Defendant is that the loan advanced to his

partner is “Quaraza-e-Hasana” a debt of good faith and goodwill
carrying with it no legal obligation on the part of the debtor to
repay and correspondingly, no right on the part of the assessee to
expect, much less enforce a repayment. The Court did not find any
material to support this argument of the Defendant. In fact, it did
not find any mention of this concept in Muslim Law.

q In support of the foregoing argument, the Defendant produced a

declaration furnished by the debtor saying that the sum was
received by him “without any obligation and without any rate of
interest and without any consideration.” Reliance was also placed
on some excerpts from the Quran.
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q It must be noted that admittedly, Rs. 1,21,821 was in fact

repaid by the borrower to the Defendant.

q The Defendant now also argues that by entering into this

transaction, the parties did not intend to create legal
obligations between them and that, therefore, the debt
remained a debt of honour.

q The Defendant essentially argues that businessmen

sometimes seek to regulate their business relations by
mutual promises which fall short of legal obligations and rest
on obligations of either honour or self interest.

q The Plaintiff on the other hand refutes this argument.

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Issue:

q Whether or not there is a presumption to enter into

contractual relations in case of a commercial transaction?

Decision:

q The Court sided with the Plaintiff.

Rationale:

q Here, one partner has lent a large sum to the other for
utilization as capital in the partnership venture. The
transaction is in the context of a commercial venture. The
presumption is that legal obligations are intended.
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q The onus of proving that there was no such intention is on the

party who asserts that no legal effect is intended. And the
onus is a heave one. Where such evidence is adduced, the
Courts normally apply an objective test.

q In this case, the non-enforceability of debt was pleaded not

as part of what is permissible in law of contracts, but
specifically as some incident of Muslim Law. That having not
been established, the law of contract applies.
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Coward v. Motor Insurers’ Bureau [1963] 1 QB 259

Facts:

q Plaintiff is the widow of Coward.

q Defendant is the Motor Insurers’ Bureau.

q Coward was riding as a pillion passenger on a motor-cycle owned

by Cole. They both were co-workers and used to ride to work
together.

q Coward and Cole had been riding to work on Cole’s motorcycle

for over 18 months now.

q Coward and Cole had an arrangement whereby the former paid a

weekly sum to the latter for transporting him to and from his work.
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q They met with an accident and both Cole and Coward died. The
accident was caused by Cole’s negiligence.

q Coward’s widow had brought another action against Cole’s

representative and a judgment was given in her favour.

q That judgment remains unsatisfied as Cole has no estate and the

insurance policy did not cover pillion passengers.

q The Plaintiff has now filed a suit against the Motor Insurers’
Bureau, in reliance upon an agreement between the latter and
the Minister of Transport by way of which the Defendant
undertook to satisfy a judgment in respect of any liability which
was required to be covered by a policy of insurance under Part II
of the Road Traffic Act, 1980, whether or not such persons were
in fact covered by a policy of insurance, provided certain
condition precedents were met.
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q Now, one of the conditions in which the Defendants were liable to

pay was that the insurance for the pillion rider must have been
compulsory. Under the Act, the said insurance was compulsory
only where they were being carried for a legally enforceable
“reward or hire”.

Issue:

q Whether or not the daily carriage by one of another to work, upon

payment of some weekly sum involved them in a legal contractual
relationship?

Decision:

q The Court held in favour of the Defendant.

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Rationale:

q In the absence of evidence that the parties intended to be

bound contractually, we should be reluctant to conclude that
the daily carriage by one of another to work, upon payment
of some weekly sum involved them in a legal contractual
relationship.

q The hazards of everyday life, such as… the incidence of

holidays, the possibility of change of shift or different hours
or overtime, make it most unlikely that either contemplated
that the one was legally bound to carry and the other to be
carried to work.
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q The expression carrying passengers for “hire or reward”

means carrying passengers for a monetary reward legally
recoverable by the carrier under a contract.
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Kleinwort Benson v. Malaysia Mining Corporation [1989] 1 All ER 785

Letter of comfort
issued in favour of
Kleinwort Benson Ltd MMC Metals Ltd.
Malaysia Mining Corp. Berhad
(THE BANK)

MMC Metals Ltd.

Proposals
1. Joint liability
2. Guarantee
3. Comfort Letter
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Facts:

q Plaintiffs are merchant bankers.

q Defendants are the parent company of MMC Metals Ltd. to

which the Plaintiffs advanced some loan.

q Negotiations were on between the Plaintiff Bank and MMC

Metals Ltd. for loaning some funds.

q The Plaintiff Bank sought assurance from the Defendants for

the loan to be advanced to their subsidiary MMC Metals Ltd.

q A “comfort letter” was provided by the Defendants to the

Plaintiff Bank which stated:
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q Paragraph 1: “We hereby confirm that we know and approve

of these facilities and are aware of the fact that they have
been granted to MMC Metals Ltd. because we control
directly or indirectly MMC Metals Ltd.”

q Paragraph 2: “We confirm that we will not reduce our current

financial interest in MMC Metals Ltd. until the above facilities
have been repaid or until you have confirmed that you are
prepared to continue the facilities with new shareholders.”

q Paragraph 3: “It is our policy to ensure that the business of

MMC Metals Ltd. is at all times in a position to meet its
liabilities to you under the above arrangements.”
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q Based on this comfort letter, the loan facility granted by the

Plaintiffs to MMC Metals was to a maximum of £5 million.

q A year later, another identical comfort letter was again sent to

the Bank, after which the loan facility was increased to a
maximum of £10 million.

q In October, 1985, the tin market collapsed and MMC Metals

stopped trading and in fact went into liquidation. The Plaintiffs
went up to the Defendants to ensure payment. The Defendants
refused to pay.

q The Defendants sent a telex to the Plaintiffs which stated, “We

have been advised that the statements… were not intended by
either party to impose, and do not impose, any legally binding
obligations on us to support MMC Metals. You will appreciate…
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q … that circumstances are now materially different from those

existing at the date of that letter and that although the policy
referred to was our policy at that time and in the light of
circumstances then prevailing, no assurance was given that such
policy would not be reviewed in the light of changing
circumstances. We therefore cannot accept, as you stated in your
telex, that we have given any assurances to you that MMC Metals
Ltd would at all times be kept in a position to meet its liability to
you.”

Background

q When negotiations of granting loan began, the original offer

from the Plaintiff Bank sought a joint liability clause / guarantee
letter. This was rejected by the Defendants.

q The Bank was told, “it was the Defendant’s policy not to
guarantee their subsidiary’s borrowings.”
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q In meeting notes of the Plaintiff Bank, one of the Director of

MMC Metals is quoted, “The original offer… appears to fit in
with our requirements… with the exception of the
guarantee.”

q The Plaintiff Bank’s representative also stated at trial that by

this stage he realised that the Plaintiffs would not be able to
obtain either joint & several liability as originally proposed,
or a guarantee from the Defendants.

q Thereafter, the rate of interest chargeable by the Bank was

increased in lieu of the fact that only a letter of comfort was
being given.
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q It was also proved at trial that the Plaintiffs drafted the language
in the comfort letter. This was thereafter approved by MMC
Metals and the Defendants (by a Board approval).

q The Defendants also wrote to the Plaintiffs a letter, the essential

part of which stated, “… we are aware of the fact that [loan
facilities] have been granted to MMC Metals because we control
directly or indirectly MMC Metals…. We confirm that we will not
reduce our current financial interest in MMC Metals until the
above facilities have been repaid…”

q Now, the Defendants argue that there was no intention to

contract: (a) They expressly rejected joint liability and issuance
of guarantee letter, (b) The comfort letter was drafted by Plaintiff
Bank, (c) The language does not express legal obligation.
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q Plaintiff Bank on the other hand argues that there was intention
to enter into legally binding obligations as: (a) The Plaintiffs
relied on the comfort letters to advance loan; (b) It was of
paramount importance to the Plaintiff that the Defendants should
ensure that its subsidiary was at all times in a position to meet its
liabilities; (c) Letter of comfort was approved by a Board
resolution of the Defendants, thereby suggesting that it is not
that informal a document.

Issue:

q Whether or not there was an intention to create legal relations,

especially given the circumstances?

Decision:

q The Court held in favour of the Defendants.

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Rationale:

q Paragraph 3 contains no express words of promise. It is merely a

statement of fact. It is not a promise as to future conduct. In fact,
the wording of Paragraph 2 (We confirm that we will not…) is in
sharp contrast to the wording in Paragraph 3 (It is our policy to
ensure...).

q Had Paragraph 3 been worded, “It is and it will be our policy to

ensure”, the position would have been different. There was no
guarantee as to the future conduct of the Defendants.

q Simply because the title of the letters given is “Letter of

Comfort”, it does not imply that intention to create legal relations
could not be established by the wordings in such a letter.
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q It is clear that the concept of comfort letter (to which the

parties agreed after an arrangement could be reached on
either joint liability or guarantee), was known by both sides to
extend moral responsibility only and not a legal one.

q If Paragraph 3 was intended to be legally binding on the

Defendants, there was no need for them to waste ink on
paragraphs 1 and 2.

Note: Whenever deducing “intention to create legal relations”,

one must look at the factual background and circumstances as
well in which the agreement was made.
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Thank you!