Intention to Create Legal Relations: Legal Essentials for Business Owners

As a business, you will heavily rely on your commercial agreements to protect yourself from legal risk, so it is vital to ensure that agreements are legally sound and binding. Under English law, a key element of forming a contract is the ‘intention to create legal relations.’ As a business owner, understanding this principle is vital to ensure you enter into contracts correctly. This article will explore why commercial agreements are critical for your business, provide an introduction to the intention to create legal relations and what it means, and provide key practical considerations for your business when entering into contracts. 

Why are Commercial Agreements Critical for Your Business?

Written, robust commercial agreements should form the foundation of your business’s contractual relationships. These contracts should set out key provisions that protect your business from risks, including contractual obligations, payment terms, and termination rights. Your business can use these crucial agreements to enforce its rights and prevent misunderstandings from escalating into costly disputes which could harm its finances and reputation.

What Does Intention to Create Legal Relations Mean In Practice?

The intention to create legal relations is a core component required to form a contract. 

Your business must meet several requirements to create a binding contract.

In simple terms, some of these factors include:

• one party should make a clear and specific offer, and the other accept it;
• both parties must exchange something of value, known as consideration, such as money, goods, or services; 
• each party has the legal capacity to contract, meaning they are of sound mind, of legal age, and not restricted by law; and
• the agreement contains lawful terms.

Your business should also ensure the agreement reflects an intention to create legal relations. A contract can only exist with both parties intending to create a legally binding agreement. A contract will not be formed if this intention cannot be established.

Commercial Scenarios

However, in commercial situations, there will be an assumption that businesses intend their agreements to be legally binding. This assumption can be challenged, but clear evidence is needed to prove that the parties did not intend to create legal relations. If your business does not want an agreement to be legally binding, you must make this clear to avoid misunderstandings.

When the parties are serious about forming a legally binding agreement, they should demonstrate this by putting the terms in writing and signing the document. While an oral agreement can be binding, a written contract is far more robust since it can help clarify the terms and provide strong evidence of the parties’ intentions.

Here are some practical steps which can help clarify the intention to create legal relations: 

• clearly set out whether the agreement is intended to be legally binding; and
• if some parts of the document are binding and others are not, you should clearly state this. This can get complicated in practice, and a commercial contracts lawyer can help you with this drafting where necessary. 

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What Can Go Wrong Without a Legally Binding Contract?

Without legally binding agreements, your business can face significant risks. For example, holding the other party accountable for breaching their obligations becomes harder.  So, for instance, if a supplier fails to deliver, your business may struggle to enforce a legal remedy without an enforceable agreement.

Businesses can protect themselves with binding contracts by capping liability, but only when they explicitly include such provisions and ensure they are legally enforceable. Without these protections, your business risks unlimited financial exposure – which can lead to significant losses. This risk is especially high for suppliers delivering services to multiple customers. 

Your business should, therefore, invest in clear, enforceable contracts to avoid these issues and trade with the comfort that you have robust contractual safeguards in place.

Why Does Clear Drafting Matter in Your Contracts?

Investing in clear and precise contract drafting can help ensure that your business agreements reflect your intentions, protect you from risk, and are enforceable. Ambiguities in your contractual terms can give rise to disputes and undermine the reliability of putting your contracts in place in the first place. 

Getting contracts right can be challenging for a busy business owner. Your business can work with a commercial contracts lawyer to ensure your commercial contracts are robust, enforceable, and tailored to your needs. A commercial contract lawyer will draft clear agreements that can reduce the risk of disputes and protect your business from legal risk.

Key Takeaways

Legally binding contracts are vital for your business. Ensuring your contracts reflect the intention to create legal relations is a key part. They can help you reduce the chance of disputes, give you means to enforce your rights, and protect your business from risk. Without them, your business faces various legal and financial risks, including uncapped liabilities and costly misunderstandings, which could escalate into disputes. Precise drafting and legal advice on your contracts can safeguard your business and protect it from risk. 

If you need help drafting or reviewing business contracts, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers who can answer your questions and draft and review your documents. Call us today at 0808 196 8584 or visit our membership page.

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