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Debunking myths in contract law - Are all written agreements legally binding?

Wednesday August 9, 2023

Debunking myths in contract law - Are all written agreements legally binding?

Does an enforceable agreement arise when the parties have negotiated all or most of the key terms, but note that it is “subject to contract”? This question arises frequently in the context of negotiations between parties. In 1954, the High Court of Australia delivered a celebrated judgment in Masters v Cameron [1] in which the Court considered the various degrees of consensus in written agreements. [2]

Brief summary of the case: Masters v Cameron

Cameron agreed to sell a piece of land to Masters (a couple) by signing a written memo that included the following statement:

'…this agreement is made subject to the preparation of a formal contract of sale which shall be acceptable to my [Cameron's] solicitors on the above terms and conditions'.

Masters paid a deposit after entering into the agreement and shortly after decided not to proceed with the purchase, claiming that they were not legally bound to the agreement.

The four main categories of agreements

In analysing the case, the High Court found that agreements which contained “subject to the preparation of formal contract” clauses fell into three main categories:

  1. The first category is an arrangement where parties have finalised all the terms of their bargain and intend to be immediately bound subject to having those terms restated in a formal document. This type of agreement is binding on both parties regardless of a formal document being executed.
  2. The second category is an agreement where parties have completely agreed upon all the terms, however, they have made performance of one or more terms conditional on execution of a formal document.
  3. In the third category, parties have no intention to enforce any terms of the bargain unless and until a formal document is signed. Parties may only have dealt with major matters and contemplated for the rest to be set out in a formal document.

    The first two scenarios result in a binding contract. The third category is ‘fundamentally different’ as the intention of the parties is not to have a concluded bargain. The facts in Masters v Cameron fell within the third category.

  4. A fourth category emerged in Baulkham Hills Private Hospital [3] where parties intended to be bound immediately and exclusively by the agreed terms whilst expecting to make a further contract with additional terms, by consent.

The above classifications are not applied strictly [4] and are dependent on circumstances of each negotiation. The intention disclosed by the language used by the parties needs to be carefully examined.[5]   The key question is whether the parties intend to be legally bound by what they have put in writing or agreed verbally.

The legal principles of Masters v Cameron are a reminder that entering into email negotiations or proposed formal documents such as ‘letter of intent’, ‘memorandum of understanding’, ‘term sheet’, ‘head of agreement’ may not necessarily indicate the existence of a binding contract. The chain of emails, exchange of letters, and any document produced will need to be carefully examined.

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[1] Masters v Cameron (1954) 91 CLR 353.

[2] May F Choong, Australian Contract Law: Principles and Cases, (Thomson Reuters, 2020).

[3] Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622.

[4] Pavlovic v Universal Music Australia Pty Ltd (2015) 90 NSWLR 605; [2015] NSWCA 313 per Beazley P at [69]–[70].

[5] Masters v Cameron (1954) 91 CLR 353 at 362–364.


Author:
Tanya Menon