Contracts in family situations: do we have a deal?

11 Oct Contracts in family situations: do we have a deal?

A contract will not be enforceable unless the parties intend to create ‘legal relations’. If no such intention exists, the agreement will be no more than an unenforceable promise.

The recent high profile Supreme Court of New South Wales decision of Ashton v Pratt (No 2) [2012] NSWSC 3 examined this concept. In his Honour’s reasons, Brereton J summarises the state of the law relating to promises made in the context of ‘family, social or domestic’ arrangements.

In this case, Ms Ashton sought to enforce an alleged agreement between her and the now deceased entrepreneur Richard Pratt. According to Ms Ashton, the agreement included the establishment of a trust benefitting her children and financial assistance for her business, in return for domestic services and companionship.

There is a presumption that agreements made in family, social or domestic contexts are not intended to be legally binding. This is because it is generally unusual for an arrangement between family members to be thought of in terms of legal consequences. It is more likely that both parties consider the promises made amount to nothing more than unenforceable obligations.

Brereton J held that the presumption applied in this case. His Honour did however note that there can be agreements made in family or social relationships that are legally binding. Each case will depend on its merits; in situations where one of the parties gives up significant resources (for example, leaving a well paid job or selling valuable real estate) in reliance on the other party’s promise, the presumption may well be rebutted.

To determine whether the parties hold the required intention, the court does not attempt to step into each party’s shoes. Instead, the court looks to the conduct of the parties and decides whether an ‘ordinary’ person, in the same circumstances, would have intended to enter into an enforceable contract. Brereton J summed up this principle by asking whether ordinary people in the position of the parties would have intended that if one party did not fulfil their promise, the other could enforce the agreement in court.

In Ashton v Pratt, two factors suggesting that the parties did not intend to create legal relations where that despite substantial payments being promised neither party sought legal advice nor recorded the agreement in writing. While these factors are not decisive in all cases, it was held that Ms Ashton could not overcome these matters to rebut the presumption.

If you would like more information on this or other contractual issues, please contact Harris & Company.