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Is my contract binding or not binding? Masters v Cameron
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You should read this article if you:
- Have signed a Letter of Intent, an Agreement to Lease, a ‘Heads of Agreement’, an agreement ‘subject to contract’ or similar;
- Have entered into an agreement subject to executing a formal contract; or
- Are unsure whether you have entered into a legally binding contract or not.
These questions and more can be answered by applying the legal test for whether a written agreement is legally binding. This test has been primarily set out in the High Court case of Masters v Cameron.
‘Perhaps two of the biggest myths in contract law is that you need a written agreement for something to be binding, and that if you have a written agreement it is definitely binding. Both are false.’
A Brief Summary of Masters v Cameron
The case involved an agreement between a company manager (Violet Cameron) and a married couple (Norman and Mavis Masters) for the sale of a farming property in Western Australia. Cameron alleged that, by a written agreement, the couple had agreed to purchase the property. This written agreement was subject to the preparation of a formal written contract, and it included the following clause:
“…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”.
Shortly after entering into the agreement, the Masters couple paid the deposit for the property. The Masters couple subsequently decided not to proceed with the purchase. The dispute was primarily over who was entitled to keep the deposit; however, in determining the dispute, several ancillary questions were put to the Court to determine.
Issues raised in Masters v Cameron
When this dispute came before the Court, the Court was asked to determine a number of different issues, including:
- Whether Cameron had agreed to sell, and the Masters couple had agreed to buy, the property;
- Whether the agreement constituted a binding contract;
- Whether the parties intended to be legally bound by the agreement; and
- Whether performance of the obligations under the agreement was suspended until the parties executed the formal contract.
These issues will be discussed below.
The Four Main Categories that Agreements Fall Within
The High Court held that agreements containing a phrase such as the one found in this case (i.e. that the agreement was subject to the preparation of a formal contract) fall into different categories.
1. The First Category (binding)
The first category is where the parties have reached an agreement regarding the final terms of the agreement and intend to be immediately bound by those terms, but also intended for those terms to be set out in a formal document at a later date. This type of agreement can be enforced regardless of whether or not a formal document is signed (i.e. either party may sue for specific performance once the date for performance has arrived, whether or not the formal document has been executed at that point in time).
2. The Second Category (binding)
The second category is where the parties have similarly reached agreement on what will be the final terms of the agreement, and do not intend to vary those terms, but have nevertheless made performance of one or more of those terms conditional on the execution of the formal document. In such cases, a party can seek to enforce the promise, either made expressly or implicitly, to execute the formal document (e.g. neither party may call the other party to complete the sale but either party may require the other to execute the formal document so that the sale may be completed).
3. The Third Category (not binding)
The third category exists where the parties have not made a finalised agreement at all, and nothing can be enforced until the formal contract is signed.
4. The Fourth Category (binding)
Although not set out in Masters v Cameron, the existence of a fourth category of agreement is now widely accepted in Australia, namely, where the parties were content to be bound immediately and exclusively by the terms which they had agreed upon whilst expecting to make a further contract in substitution for the first contract, containing, by consent, additional terms.
5. Other Categories
The High Court in Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95 confirmed Masters v Cameron as still being good law, but also stated that its categories are no longer applied as strict categories into which cases must fall. That said, most matters will indeed fall within one of the above four categories.
These categories can be quite helpful to assist in deciding whether an agreement is binding or not binding, or even if there is enough ambiguity (and thus, risk at trial) that a matter is likely able to settle for less than the cost of following through with the contract.
The Legal Test
In order to interpret an agreement a court will typically:
- Determine objectively, having regard to the language contained in the agreement, whether or not the parties intended the agreement to be immediately binding; and
- Read the agreement in the light of the surrounding circumstances, including for example: the purpose, intention and objective of why the agreement was entered into, the knowledge of the parties, the typical commercial practices in that type of commercial transaction, the context and what the parties understood the agreement to mean.
If the terms of the agreement indicate that the parties intended to be bound immediately, effect must be given to that intention.
Typical Types of Clauses
Type of Clause
‘Heads of Agreement’ or ‘Letter of Intent’
The type of agreement is not itself a determining factor (but does go to intent and context). See below for some typical terms within a document that might be called a Heads of Agreement or Letter of Intent.
‘Subject to contract’ or ‘Subject to the contract being executed’ (or similar)
Not binding – there is an intended basis for a future contract and therefore typically falls within the third category of Masters v Cameron
‘Possession will not be granted until execution of formal lease by both parties has occurred’ (or similar)
Not binding – these types of clauses face difficulties because the party does not intend to be immediately bound (category 1 is therefore excluded) and the parties have not completely agreed upon all of the terms of their bargain (category 2 is therefore excluded) as such, these types of clauses typically fall within category 3 which is not binding.
‘Embodying the above terms’
Binding – this would appear to convey the conception of having terms restated in a form that will be fuller or more precise but not different in effect – the first category of Masters v Cameron.
These are some types of clauses and some typical responses, but each matter is different and falls on different facts, contexts, intentions, objectives and knowledge of the parties. As Heads of Agreement, Letters of Intent and other matters have a myriad of interconnected issues (including breach of contract, repudiation and potentially significant damages), it is important to have a skilled litigation lawyer consider and advise you of your legal position.
At Gibbs Wright Litigation Lawyers, our skilled litigation lawyers will be able to assess an agreement to determine with confidence whether it is more likely or not a binding agreement.
What was the Answer in Masters v Cameron?
The clause “…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” was found to fall within the third category of agreements and was therefore not binding upon the parties.
However, each contract is typically worded differently, and contracts can have a profound financial and legal impact on individuals and companies alike.
Masters v Cameron is a reminder that even in situations where there is a written agreement, that agreement may, in fact, not be binding. Parties to any agreement should carefully consider whether they wish to immediately enter into a binding contract, or whether they want to do so in the near future subject to any change or modification in the terms of that agreement as this may significantly impact the enforceability of that contract.
Contact Gibbs Wright Litigation Lawyers Today
The content of this publication is intended as general commentary only and may not be suitable or applicable to your personal circumstances. It is not intended to replace independent legal advice. You can contact us at our Brisbane Office for a free consultation on a range of litigation matters on (07) 3088 6364.
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