- Intention is judged objectively, not by what you privately meant
- Commercial deals and personal arrangements start from different places
- What courts weigh: words, conduct and context
- Worked example: the fit-out that started over coffee
- Common misconceptions about intention
- Where a contract lawyer helps make intention safe
- The question to ask before you act on a deal
Two businesses can agree on price, scope and deadlines and still not have a contract. The missing piece is often intention to create legal relations, the element of contract law that asks whether the parties meant their agreement to carry legal consequences. It sits alongside offer and acceptance and consideration as one of the core requirements of a binding contract, and it decides whether a handshake, an email exchange or a signed document actually binds anyone.
This article explains what intention to create legal relations means under Australian law, how courts test it, and what you can do to make it easy to prove. It covers:
- the objective test courts apply to intention
- how commercial deals and personal arrangements are treated differently
- the evidence that supports or defeats intention
- a worked example from a small business
- common misconceptions, and when a lawyer should be involved
Intention is judged objectively, not by what you privately meant
The most important thing to understand about intention is that courts do not try to read minds. They ask what a reasonable person, observing everything that was said and done, would conclude about whether the parties intended to be bound.
The High Court made this clear in Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95. The search for intention, the Court said, requires an objective assessment of the state of affairs between the parties, as distinct from any uncommunicated subjective reservation either party may harbour. A party's private belief that a deal was binding does not matter if their words and conduct conveyed something else, and a private belief that it was not binding is equally irrelevant if the objective record points the other way.
That has a practical consequence for business owners. If a dispute later ends up in court, the question will not be "did you mean to be bound?" It will be "what would a reasonable person infer from your emails, your invoices, your payments and your behaviour?" The record you leave as the deal comes together is the evidence the court will use.
Commercial deals and personal arrangements start from different places
While intention is always assessed objectively, the context of the arrangement shapes the answer.
In ordinary commercial dealings, courts are generally quick to find that the parties intended to create legal relations. A customer agreement, supplier terms, a purchase order or an employment offer will usually be treated as intended to bind, because that is what a reasonable person expects of a business transaction.
The position is different for social and domestic arrangements. Promises between family members, partners or friends are commonly made without any expectation of legal consequences, so a court will be slower to find intention. The New South Wales Court of Appeal in Ashton v Pratt [2015] NSWCA 12 considered a promise made in the context of a personal relationship and held that no intention to create legal relations existed, even though significant money was involved. The surrounding context of the relationship pointed away from a commercial bargain.
Even so, the High Court in Ermogenous warned against relying too heavily on the language of presumptions. A "presumption" in this area, the Court said, does no more than identify who bears the onus of proof. That onus sits with the party asserting that a contract exists. In a business deal the onus is usually easy to discharge. In a family or social setting it can be very hard, unless the arrangement is unusually formal, for example a written and signed agreement with real commercial terms.
What courts weigh: words, conduct and context
Because the test is objective, courts look at the whole picture. Three kinds of evidence carry most of the weight.
First, the words used. Language such as "offer", "acceptance", "contract" or "legally binding" supports intention. Language such as "subject to contract", "draft only" or "without prejudice" points the other way, because it suggests the parties did not intend to be bound yet. Labels are evidence, not magic, but they matter.
Second, conduct. If both sides performed as though a binding deal existed, that behaviour is powerful evidence of intention. Delivering goods to the agreed specification, issuing an invoice that refers to the agreement, or paying part of the price all suggest that the parties treated the arrangement as a real commitment, not a casual chat.
Third, context. A typical business transaction, where enforceability is expected, looks different from an informal conversation at a family dinner. Documents such as quotes, purchase orders, emails and payment records help a court reconstruct what a reasonable person would have understood.
Verbal contracts can be binding if intention, offer and acceptance, and consideration are all present. A small number of contracts must be in writing by statute, for example contracts for the sale of land, but most everyday business deals can be made orally. The difficulty with a verbal agreement is rarely validity. It is proof. If a dispute arises, you must convince the court about what was actually agreed, which is why written records matter even for deals struck over the phone or in person.
Worked example: the fit-out that started over coffee
Consider a realistic scenario. A Brisbane sole trader runs a custom joinery business. Over coffee with the manager of a café chain, she agrees to fit out a new store for $48,000. The manager confirms the scope and timing in a WhatsApp message, she orders materials and starts work, and she later sends an invoice headed "fit-out works per our agreement of 12 June". The chain pays the first instalment. A month later a new area manager says there was never a contract, only a conversation.
If the joinery business sues for the balance, the court will not ask what either side privately believed. It will ask what a reasonable person would conclude from the WhatsApp exchange, the ordering of materials, the invoice that referred to an agreement, and the part payment. Every one of those steps points to an intention to be bound. The fit-out business would very likely have an enforceable contract, despite there being no signed document.
Now change one detail. Suppose the joiner's message had ended with "happy to proceed, but only once we sign a formal contract". That language engages the rule from Masters v Cameron [1954] HCA 72, (1954) 91 CLR 353. The High Court held that an agreement expressed to be "subject to contract" is prima facie not a contract at all. It is the intended basis for a future contract, and no binding deal exists until the formal document is executed. Same parties, same price, different words, different result.
Common misconceptions about intention
Several misunderstandings about intention cause real trouble for small businesses.
The first is that a verbal agreement is not legally binding. It can be. Ermogenous itself concerned an arrangement made largely orally, and the High Court found the parties did intend legal relations. What is true is that oral deals are harder to prove, because there is no document to point to. The fix is not to assume the deal is worthless, but to reduce it to writing.
The second misconception is that a signed written document always shows intention. It does not. If the document says the deal is "subject to contract", Masters v Cameron tells us the parties may well have intended not to be bound until a more formal document is executed. A document is only as good as the intention its words convey.
A third misconception is that marking an exchange "without prejudice" or "draft only" guarantees the deal is not binding. Those labels are relevant to intention, but they are not decisive. If the parties reach agreement and both act on it, a court may still find a binding contract, whatever the label said.
A fourth misconception is that intention turns on what the parties "really meant". The whole point of the objective test is that private intentions are not the question. Finally, some owners assume a deal with family or friends can never be a contract. It can, if the arrangement is sufficiently formal and commercial in character. It is simply harder to establish, as Ashton v Pratt shows.
Where a contract lawyer helps make intention safe
Intention is usually not the only thing a business needs to get right, and a lawyer can help with all of it.
A practitioner reviewing your contracts will check that the language clearly expresses an intention to be bound, and that clauses such as "subject to contract" or "subject to board approval" are only used where you genuinely want to hold off binding commitment. If work must start before a formal contract is signed, a lawyer can structure a short interim agreement that is clearly binding for the early stages, which avoids the Masters v Cameron trap of performing obligations on the strength of a deal that is not yet a contract.
A lawyer is also the person to call when it is unclear whether a contract already exists. If a relationship has soured after an exchange of emails and a course of performance, advice on whether the exchange created a binding deal determines whether you should keep performing, walk away, or sue. In commercial dealings this assessment can be made quickly, and it is far cheaper than litigating the point later.
There are also formalities to get right even when intention is clear. If a company is signing, execution should follow s 127 of the Corporations Act 2001 (Cth), which allows a company to execute a document without a common seal if it is signed by two directors, or a director and a company secretary, with special rules for sole directors. A person dealing with the company can then rely on the statutory assumptions about due execution. Electronic signatures are generally valid too: under the Electronic Transactions Act 1999 (Cth), a signature requirement is met where a method is used that identifies the person and indicates their intention in respect of the information, and the method is as reliable as appropriate in the circumstances or is proven in fact to have done the job. State and territory equivalents apply the same approach.
Finally, intention alone does not make a contract enforceable. Under s 23 of the Australian Consumer Law, which is Schedule 2 of the Competition and Consumer Act 2010 (Cth), an unfair term in a standard form consumer or small business contract is void, and proposing or relying on such a term can now attract pecuniary penalties. Misleading statements made during the deal can also breach the consumer law regardless of what the contract says. A lawyer who reviews your template agreements will catch these issues while they are still cheap to fix.
The question to ask before you act on a deal
The misstep that costs businesses the most in this area is acting as if a deal is binding, or not binding, without checking what the objective record shows. If your emails say "subject to contract" and you start work anyway, Masters v Cameron means you may have no contract to enforce. If you assume a conversation over coffee could never bind you, your own invoices and the other side's payments may prove otherwise.
So before you start performing, or before you rely on someone else's promise, read the exchange the way a stranger would. Ask yourself: if the other side walked away tomorrow, could you show a reasonable person that both of you intended a binding deal? If the answer is no, the gap can usually be closed quickly, with a short written agreement or a lawyer's review of what has already been exchanged. It is a much smaller cost than discovering, mid-dispute, that the deal you were relying on was never a contract at all.