When is a contract binding?

High Court asked to rule if a contract existed and was binding

Masters versus Cameron [1954] HCA 72 is a classic legal case that is still the leading authority on whether there is a binding contract or not. Even though this law case is over 50 years old the legal precedent it set is still used in Australian court cases today.

The facts

This legal dispute arose in respect of a sale of land from the plaintiff (in the original trial) to the defendant. On 6 December 1951 Mr & Mrs Masters (the defendants and proposed purchasers) agreed to buy from Mrs Cameron (the plaintiff and vendor) a farming property in Western Australia called “Bokhara”. The agreement was contained in a short written document.  Both the vendor and the purchasers signed their signatures to the document. A deposit of £1,750 was paid by the proposed purchasers to the vendor’s agent shortly after signing the agreement.  Final settlement of the property was scheduled to occur on 15 March 1952.


The written agreement included, at the request of the vendor, a specific provision in the following form:
“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.”

After signing the initial agrement on 6 December 1951 the Masters changed their minds and decided not to proceed with the purchase of the property and claimed a refund on the deposit. No ‘formal contract’ had been signed by the parties in reliance on the above term of the contract.

The issue to be determined by the High Court was whether a binding contract had already been made.

High Court of Australia decision

• Parties reach ‘finality’ in arranging all the terms of their bargain 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 fuller and more precise form but not different in effect.
• Parties have agreed on all the terms of their bargain and intend no departure or addition thereto but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document.
• The intention of the parties is not to make a concluded bargain at all unless and until they have executed a formal contract.

In the first two instances a binding contract has been made. In the third instance no binding contract has come into being.
The Court noted that in determining which circumstance applied to the document, it was necessary to enquire as to the intention disclosed by the language the parties had employed. The High Court found that despite parties having taken steps consistent with and in anticipation of a formal contract being executed, signed and completed, these further actions did not amount to a binding representation or a stop-all.

Accordingly, the proposed purchaser in this case entered into financial difficulties and decided to pull out of the agreement. 

 

The Court found that on the expressed intention in the signed document, there was no formal contract entered into and as this had been subject to a “formal contract”, the parties were not bound.

The defendants were successful and obtained orders for the recovery of the deposit paid and an order for costs.

Comment from Mark Streeter

Despite the case being decided over 50 years ago, this decision is still the leading authority for interpreting agreements that are ‘subject to contract’.



The parties, the terms and the existence of an agreement between the parties are an essential element of the enquiry into the enforceability of every contract. 

 

Fundamental to this enquiry are the following:

• The identity of the parties to the agreement
• The subject of the agreement (for example to undertake work or provide specified goods or services) 
• An acceptance of the offer to provide the subject of the agreement on the terms offered
• Tax invoice being issued and demand for payment made
  
• Payment not being made
  

Often, deals are done on a hand-shake or via a telephone. Sometimes there are documents or emails – sometimes not.

The absence of a signed agreement which contains all the relevant terms usually makes it more expensive (both in terms of time and in legal costs) to compile the evidence to enforce the agreement by compiling the documents and statements that collectively give an account of the contract and the elements described above.

Written by Mark Streeter

The Director of Streeterlaw, Mark has been practicing Law since 1994. He has attained his Masters of Law in 1999 and in 2006 was awarded his Specialist Accreditation in Commercial Litigation. Mark is a member of ARITA, a graduate of the AICD and a member of AICM. A member of STEP, Mark enjoys working in the area of Wills and Estates. In 2020 Mark is the Chair of STEP NSW.

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