When is a written agreement legally binding – Masters v Cameron revised

There seems to be a common misconception within the business community that the term ‘contract’ refers only to a formal, signed document that sets out the detailed terms of an agreement.  What people may not be aware of is that contracts are entered into every day, whether or not the parties think of them in this way. Doing something as simple as purchasing groceries from the supermarket, or entering a paid car park, usually will result in the parties entering a binding agreement even though there is no forms or signatures. In fact, there are only a few very specific types of contracts that are required to be in writing.

On the other hand, even when an agreement is in writing, it may not be binding.  One example of this is found in Masters v Cameron (1954) 91 CLR 353 (Masters v Cameron).  This High Court case considered whether a document expressing the terms for a sale of land was a binding contract between the parties, or merely an agreement of negotiated terms upon which the contract would be executed.  The contract in question said:

“This agreement is made subject to the preparation of a formal contract of sale which shall be acceptable to my solicitors on the above terms and conditions.”

What are the three (3) types of written agreement?

According to the decision of the High Court in Masters v Cameron, at 10, signed ‘contracts’ can be one of three (3) types:

• 1 – where the parties have agreed upon all the terms of the contract and intend to be immediately bound to the performance of those terms but at the same time propose to have the terms restated in a form which will be fuller or more precise but not different in effect; or
• 2 – where the parties have agreed upon all the terms of their arrangement, but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document; or
• 3 – where the intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract.

Which category a particular agreement falls into depends on the intention of the parties as disclosed in the language of the agreement.

Which of the three types of written agreement are binding?

In the first two (2) cases, there will be a binding contract, regardless of whether or not a formal document is ever signed.  In the first case the parties are immediately bound to perform the agreed terms whether or not the contemplated formal document comes into existence.

In the second case the parties are bound to join in bringing the formal contract into existence and then to carry it into execution.  This will be the case where the agreement embraces all the particulars essential for finality and completeness, and the people drawing up the formal agreement do not have the power to vary the terms already settled.

However, cases of the third type are fundamentally different.  The terms of the agreement are not intended to have, and therefore do not have, any binding effect. This will be the case where there is a possibility of inserting new terms, or modifying terms already discussed. The execution of a formal document will be required before that agreement can bind the parties.

Was the ‘contract’ in Masters v Cameron binding?

In deciding the case, the High Court said of the clause in the contract:

 “…the meaning is sufficiently evident that the contract shall contain, not only the stated terms and conditions expressed in a form satisfactory to the solicitors, but also whatever else the solicitors may fairly consider appropriate to the case.”

Therefore, as the contract made it clear that there remained a step before the document came in to force, the contract was held not to be binding upon the parties.

What about if the agreement is ‘subject to contract’?

Where words to the effect of ‘agreement subject to contract’ or similar are used, it is likely that there will be no binding agreement until such a document is executed.  This, however, is contextual, and may depend on the circumstances in which the agreement was executed, the intention of the parties, and the meaning of the words used in the contract.

Links and further references

Cases

Brice v Chambers [2014] QCA 310

Stellard Pty Ltd v North Queensland Fuel Pty Ltd [2015] QSC 119

Tabcorp Holdings Limited v The State of Victoria [2014] VSC 301

Further information about contract law

If you would like further advice to ensure that your contracts are legally binding or if you require assistance in drafting a commercial contract, contact us for a confidential and obligation-free discussion: 

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

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