In some cases, parties negotiating the terms of a contract may put the negotiated terms agreed upon in writing, subject to them being formalised in a legally binding contract. Key terms that may be used to distinguish these agreements are ‘subject to contract’ or ‘subject to the preparation of a formal contract’. Following this agreement, if for some reason one party decides against entering into a contractual relationship before a formal contract has been executed; the issue arises of whether the initial agreement is binding on the parties. In determining whether a legally binding contract exists, the parties must prove that there exists an intention to be legally bound by the document. The case of Masters v Cameron has marked itself as an influential authority in the area of contract law, by establishing key principles to determine certainty and whether or not an intention to be legally bound exists in relation to preliminary agreements.
In Masters v Cameron the parties reached an agreement on the sale of farming property. The agreement was made in the form of a memorandum stating that ‘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’. A deposit of £1750 was also paid in conjunction with this agreement. Prior to signing a formal contract of sale, the purchaser decided against purchasing the property. This refusal raised two significant issues that were to be decided. Firstly, whether the written agreement constituted a binding contract; ultimately deciding whether or not the purchaser was bound by the agreement. The court was also required to determine which party was entitled to the deposit that had been paid.
At first instance, it was held that the memorandum was a legally binding contract, however, on appeal in the High Court of Australia, the Court found that the document did not constitute a legally binding contract. The High Court stated that in the case of agreements that remain subject to being dealt with by formal contract, the agreement may fall into one of three categories. These categories aim to identify the intention of the parties to bound by the agreement and the certainty of its terms; as stated in Masters v Cameron, they are as follows:
If it can be satisfied that the nature of the agreement falls into the first two categories, the contract will be deemed to be binding upon the parties. Agreements that satisfy the first category are binding regardless of whether a formal contract is executed as the parties have exhibited an intention to be bound and certainty has been reached in determining the terms of the agreement. The second category of agreements will be binding however subject to the execution of a formal contract. Finally, agreements that fall within the third category are not binding upon the parties.
To determine which category the agreement falls within, the intention of the parties must be determined based upon the language used. In the case of Masters v Cameron, the use of the language, ‘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 held by the court to be an application of the third category. Agreements which fall within this category are not intended to be legally binding. The agreement in Masters v Cameron allowed the vendor’s solicitors to modify the agreement to their satisfaction and include any other terms they consider appropriate. In this respect, the agreement was not a concluded agreement until a formal contract was executed, therefore the parties were not legally bound by the agreement and able to decide against formalising the agreement.
In relation to the nature of the sum of money paid and the party that was entitled to that money, the court held that the money should be returned to its original hands; being the party who had initially paid the money and sought to purchase the property. Due to the nature of the agreement being subject to a formal contract, the sum of money paid was found to not constitute a true deposit as the money was paid merely in anticipation of there being a formally executed contract. Only upon entering into a formal contract would the money be classed as a true deposit and become the property of the seller.
Masters v Cameron has been a pertinent case in the area of contract law particularly in relation to the enforcement of preliminary agreements. In cases where the parties have negotiated terms to an agreement in writing that remain ‘subject to contract’, the three categories established in Masters v Cameron have been essential to determining the enforceability of such agreements.