Contractual Obligations: Binding vs Non-BindingThe limbs in Masters v Cameron

In some cases, it is clear that where there is a written agreement, it follows that there is a formal contract. However, there are many instances where parties negotiating the terms of a contract may include the terms agreed upon in writing, subject to the preparation of a formal contract. While there seems to be a written agreement here, the phrases “subject to the preparation of a formal contract” or “subject to contract” raises the issue as to whether the agreement actually constitutes a binding contract between the parties. This issue was considered in the influential case of Masters v Cameron ((1954) 91 CLR 353). This High Court case considered a memorandum expressing the terms of the sale of land 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 solicitors on the above terms and conditions.”

The question for the High Court was whether the memorandum was a binding contract between the parties or merely a written agreement of negotiated terms upon which a formal contract would be executed.

The High Court identified that where parties reach an agreement and state that it is subject to contract, the case can be any of three distinct categories:

  1. The parties intend to be immediately bound to the performance of those terms, but also propose to restate the terms in a fuller or more precise form but not different in effect; or
  2. The parties have reached agreement on all the terms of their bargain and do not intend to depart from or add to that agreement but have made performance of one or more of the terms conditional upon the execution of a formal document; or
  3. The parties do not intend to make a concluded bargain, unless and until they execute a formal contract (at 360).

The first and second limbs constitute a binding contract but the third limb does not.

The first limb

The first limb provides a binding contract for the parties to perform the agreed terms whether the contemplated formal document comes into existence or not and to join in settling and executing the formal document. Therefore, agreements found to fall under this limb can be enforced even where there is no formal contract.

For example, the phrase “embodying the above terms” will constitute a binding contract as this suggests the notion of having those terms restated in a form that will be “fuller or more precise but not different in effect”.

Of the first and second limbs, the first limb is more common.

The second limb

The second limb provides a binding contract for the parties to join in bringing the formal document into existence and then carry it into execution.

For example, where there is a written agreement for the sale of land falling under this limb, a party may enforce the other party to execute the agreement so that the sale may be completed, but not to enforce the other party to complete the sale.

The third limb

Cases of the third limb are fundamentally different (at 361). These cases indicate that the terms of agreement are not intended to have, and therefore do not have, any binding effect of their own. Undoubtedly, if any prospective contract, involving the possibility of new terms, or the modification of those already discussed, remains to be adopted, matters must be taken to be still in a train of negotiation (at 362). That is, there is no enforceable contract.

For example, in light of the natural meaning of “subject to the preparation of a formal contract” or “subject to contract”, the phrases must be regarded as an intended basis for a future contract and not a contract itself and therefore will not constitute a binding contract.

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