Contracts: Research Assignment
i) Introductory Statement
The following assignment aims to draw attention to certain features of the approach to ‘subject to contract’ cases by a comparative analysis of both Masters v Cameron and Baulkham Private Hospital Pty Ltd v GR Securities Pty Ltd. Included will be the ratio decidendi and conclusions from each case, giving an in-depth discussion of what the law is on the term ‘subject to contract’.
ii) Subject to Contract – Overview
Commercial parties have often negotiated preliminary documents with the intention of replacing that document with more formal documents at a later stage. However, in some circumstances it is difficult to determine whether the preliminary document has contractual validity, as there have been specific cases where the parties negotiating the terms of the contract may have decided to write down the agreed terms, directly subject to being formalized in a legally enforceable contract. As such, the key terms distinguishing these type of agreements have been labelled ‘subject to contract’.
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Upon the conclusion of such an agreement, if any of the parties decide they no longer wish to create a contract with the other party before a formal contract is formed, the issue is whether that preliminary agreement is still binding. While deciding if a legally enforceable contract is still present, the parties have to establish that there was a clear intention amongst both parties to be legally bound by the document. Masters v Cameron can be described as a significant authority within this area of contract law. The case determines the level of certainty and if there was intention by the parties to be legally bound by their initial agreement.
iii) Masters v Cameron – What Constitutes a Binding Contract?
As aforementioned, Masters v Cameron is the leading case when analysing the phrase ‘subject to contract’. Specifically, the issue discussed is whether the document outlining the sale of land can be considered legally binding or if it was simply an agreement concerning negotiations upon which the contract would be executed. The case concluded that there could be one of three possible legal outcomes. Firstly, the agreement being ‘subject to contract’ may refer to a mere formality and the parties only intend to be immediately bound by its conditions, putting the agreement into a formal document at some point in the future. Secondly, the parties may intend to be immediately bound, but performance is discontinued until they execute a formal contract. Third, the parties may not intend to be bound at all, until a formal agreement is executed.
However, a fourth legal outcome arose from a judgement of McLelland J in Baulkham Hills Private Hospital. In attributing a legal effect to this category recognised from an earlier case, he stated “In the absence of agreements as to further terms being inserted in the formal contract, the obligation of each party would be to execute a formal contract in accordance with the terms of the agreement appearing from the…[evidence of an informal contract]”. Therefore, when an opportunity to add new conditions to the current agreement exists, it will generally not be considered legally binding. Rather, it is necessary for the parties to execute a prior document before the final contract can be considered legally enforceable.
Thus, Masters v Cameron establishes that any clauses present in the contract are adequately clear. It conveys that the contract will not contain both the terms and conditions mentioned by the parties in a form acceptable by all solicitors, and whatever else is deemed suitable by those solicitors in the case. Additionally, the condition that an agreement is entered into is a suspensory condition, and that performance of the initial agreement amounts to a waiver of the suspensory condition. The parties will therefore not be bound by any arrangements made before the execution of a formal document.
iv) Baulkham Hills Private Hospital Analysis – Significance of Intention
Baulkham Hills Private Hospital established the importance of identifying the intention of both parties. Specifically, the court stated that under the circumstances of this particular case, it was not the parties’ intention for the contract to be determined by reference to a single document, but instead from the words exchanged with their solicitors through email. Upon evaluation of the negotiation between the parties, the court held that any immediately binding agreement to settle proceedings was decided through the exchange of e-mails between the solicitors. Additionally, the court stated that even though the execution of this agreement is not conditional of performance, there is a duty of cooperation to execute that formal contract by both parties.
The primary issue in Baulkham Hills Private Hospital was if there was an existing intention to create a contract for the sale of land, building or equipment. Another issue highlighted within the case was whether the letters exchanged between the vendor and purchaser can be considered as a legally enforceable contract, despite no former document ever being executed between the parties. Specifically, the court had to analyse the series of letters exchanged among the parties, and determine whether they can be considered as evidence to a contract for the sale of a hospital. For instance, in one of the letters mentioned the words ‘legally binding agreement in principle’, concluding that a binding contract had been created by the engaged parties by count of specific performance in the agreement.
Upon deciding this case, McLelland J held the opinion that because the words, “legally binding” were used, this case is excluded from the third legal effect outlined within Masters v Cameron. Alternatively, the use of these words brought the case under the purview of a fourth classification that was first recognised by the High Court in Sinclair, Scott & Co Ltd v Naughton. According to this category, the parties are ‘content to be bound immediately and exclusively by the terms which they have agreed upon whilst expecting to make a further contract in substitution for the first contract, containing, by consent, additional terms’.
As such, intention demonstrates its significance within the creation of a binding and legally enforceable contract. Specifically, it is not possible for the parties to enter an agreement, unless it was their intention that the agreement will be enforceable by law. However, when trying to decide if the initial agreement is binding on the parties, the court examines factors such as the importance of the contract drawn between the parties, the level of formality and the language used in the agreement. Additionally, the court uses the provided facts to determine if a signed agreement was present and if the contract was implied or expressly delivered.
As discussed, both Masters v Cameron and Baulkham Private Hospital were concerned with the legal effect of a subject to contract clause. Though both analyse the significance of intention and legally binding terminology, they also explain the three legal outcomes of contract execution. Specifically, if there is in fact a fourth category that can be established, it can only be legitimate if some type of legal outcome is achieved. Additionally, if the agreement falls within the third category, there is no requirement for the parties to execute a formal contract. The only time that the parties will be obliged to enter into a formal contract is when it falls under any of the other categories.
– Peden, Elisabeth, John Carter and Greg Tolhurst, ‘When Three Just Isn’t Enough: The Fourth Category of the ‘Subject to Contract Cases’ (2004) 20 Journal of Contract Law 156
– Tolhurst, Greg, John Carter and Elisabeth Peden, ‘Masters v Cameron – Again!’ (2011) 42 VUWLR 52
– Lucke, Horst K, ‘The Intention to Create Legal Relations’ (1970) The Adelaide Law Review 421
– Tarrant, John, ‘Preliminary Agreements’ (2006) 3 UNELJ 152
- Case Law
- Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622
– Eccles v Bryant  1 Ch 93
– Masters v Cameron (1954) 91 CLR 353
- PRA Electrical Pty Ltd v Perseverance Exploration Pty Ltd  VSC 432
- Sinclair Scott and Company Limited v Naughton (1929) 43 CLR 310
 John Tarrant, ‘Preliminary Agreements’ (2006) 3 UNELJ 152.
 Elisabeth Peden, John Carter and Greg Tolhurst, ‘When Three Just Isn’t Enough: The Fourth Category of the ‘Subject to Contract Cases’ (2004) 20 Journal of Contract Law 156.
 Eccles v Bryant  1 Ch 93.
 Masters v Cameron (1954) 91 CLR 353.
 Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622.
 Sinclair Scott and Company Limited v Naughton (1929) 43 CLR 310.
 Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd, above n 6, at 629.
 Greg Tolhurst, John Carter and Elisabeth Peden, ‘Masters v Cameron – Again!’ (2011) 42 VUWLR 52.
 Masters v Cameron, above n 4.
 PRA Electrical Pty Ltd v Perseverance Exploration Pty Ltd  VSC 432 (Unreported, Habersberger J, 15 November 2006).
 Masters v Cameron, above n 4.
 Sinclair Scott and Company Limited v Naughton, above n 7.
 Horst K. Lucke, ‘The Intention to Create Legal Relations’ (1970) The Adelaide Law Review 421.
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