Part B The law of obligations 4: Formation of contract II 65
Rose and Frank v Crompton 1923
The facts: A commercial agreement by which the defendants appointed the claimant to be its distributor in
the USA contained a clause described as 'the Honourable Pledge Clause' which expressly stated that the
arrangement was 'not subject to legal jurisdiction' in either country. The defendants terminated the
agreement without giving notice as required, and refused to deliver goods ordered by the claimants
although they had accepted these orders when placed.
Decision: The general agreement was not legally binding as there was no obligation to stand by any clause
in it. However the orders for goods were separate and binding contracts. The claim for damages for
breach of the agreement failed, but the claim for damages for non-delivery of goods ordered succeeded.
The words relied on by a party to a commercial agreement to show that legal relations are not intended are
not always clear. In such cases, the burden of proof is on the party seeking to escape liability.
Edwards v Skyways Ltd 1964
The facts: In negotiations over the terms for making the claimant redundant, the defendants gave him the
choice either of withdrawing his total contributions from their contributory pension fund or of receiving a
paid-up pension. It was agreed that if he chose the first option, the defendants would make an ex gratia
payment to him. He chose the first option; his contributions were refunded but the ex gratia payment was
not made. He sued for breach of contract.
Decision: Although the defendants argued that the use of the phrase ex gratia showed no intention to
create legal relations, this was a commercial arrangement and the burden of rebutting the presumption of
legal relations had not been discharged by the defendants.
4.3 Statutory provisions
Procedural agreements between employers and trade unions for the settlement of disputes are not
intended to give rise to legal relations in spite of their elaborate content under the Trade Union and
Labour Relations (Consolidation) Act 1992.
4.4 Letters of comfort
For many years, holding companies have given 'letters of comfort' to creditors of subsidiaries which
purport to give some comfort as to the ability of the subsidiary to pay its debts. Such letters have always
been presumed in the past not to be legally binding.
Kleinwort Benson Ltd v Malaysia Mining Corpn Bhd 1989
The facts: The claimants lent money to the defendant's subsidiary, having received a letter from the
defendant stating 'it is our policy to ensure that the business is at all times in a position to meet its
liabilities to you.' The subsidiary went into liquidation, and the bank claimed against the holding company
for the outstanding indebtedness.
Decision: The letter of comfort was a statement of existing policy and not a promise that the policy would
continue in the future. Because both parties were well aware that in business a 'letter of comfort' imposed
moral and not legal responsibilities, it was held not to have been given with the intention of creating legal
relations.
4.5 Transactions binding in honour only
If the parties state that an agreement is 'binding in honour only', this amounts to an express denial of
intention to create legal relations.