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As a business owner, you may be in the process of entering into, or negotiating the terms of, a contract and have documented the key terms of agreement. You do not necessarily need a contract in place to make an agreement binding (i.e. legally enforceable). This is important to understand, especially if one party wants to pull out of the agreement. If a dispute arises, how do you know if the terms you have documented are binding?

A court case from the 1950s established four principles that the courts and lawyers use to help answer this question. The case is known as Masters v Cameron.

This article will provide a brief overview of Masters v Cameron, and explain the four principles arising from this case and how they apply. This will help you to understand whether or not you have entered into a binding agreement.

A Brief Overview of Masters v Cameron

In Masters v Cameron, the parties signed a written memorandum for the sale of a farm. 

The memorandum included the following wording: ‘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’. 

On the same day the memorandum was signed, the prospective purchaser (Masters) paid a deposit to Cameron’s agent. 

Masters subsequently wanted to cancel the transaction and asked for a refund. 

While neither Cameron or Masters had drafted or signed a formal agreement, Cameron claimed the written memorandum created a binding and enforceable contract. 

The dispute reached the High Court, which held that the parties had not intended the memorandum to be binding; rather, a written contract to be made at a later date was intended to be enforceable. 

This is because the memorandum used the words ‘subject to contract’, which suggested the memorandum was only providing a foundation for the terms of a written contract. 

The 4 Principles of Masters v Cameron

The four principles are essentially the lessons learned from the Masters v Cameron case. Each principle provides a circumstance where an agreement may be considered binding. Lawyers and courts take these principles into consideration when disputes arise over the status of an agreement.

Principle 1:

For an agreement to be binding, the parties have finalised the terms of the agreement and documented it. The parties agree that a more comprehensive document will be drafted at a later date, but for all intents and purposes, the existing documentation is binding.   

For example, you are buying a business and the terms have been documented in a Heads of Agreement. Whilst a contract will be drafted later, you and the other party agree that the terms in the Heads of Agreement are legally enforceable.

Principle 2:

For an agreement to be binding, the parties have agreed the terms of their arrangement and intend to honour it. However, the terms will not be binding until at least one of the terms has been honoured first.  

For example, you are buying a business and have agreed that the terms of the agreement will not be binding until:

  • due diligence has occurred; and
  • it does not turn up anything substantial that would prevent you from successfully running the business, such as a key supplier contract not being transferable. 

Until due diligence has been performed, the agreement is not binding.

Principle 3:

For an agreement to not be binding, the parties will not conclude discussions and finalise the terms of an agreement until a formal contract has been drafted and executed (i.e. signed by both parties). For instance, you are buying a business but the terms of the agreement are not binding until both parties have signed a formal contract.

Principle 4:

For an agreement to be binding, the parties come to a preliminary agreement and document this informally. They agree that additional terms can be included in a future contract. 

For example, you and the other party have negotiated an agreement to buy a business and documented the key terms in a Memorandum of Understanding. You agree that other terms may arise that you want to include in the future, which can be added into a formal contract.

Courts may now accept this as being a binding agreement and, following Masters v Cameron, stated a willingness to ‘fill in the gaps’ to uphold bargains, even if the parties’ intentions are obscurely expressed in a preliminary agreement. 

For this fourth principle to apply, the key commercial terms must be sufficiently clear for the agreement to be legally enforceable, rather than a starting point for further negotiations.

When Do the Principles of Masters v Cameron Apply? 

The position, generally, is that the principles of Masters v Cameron apply where: 

  • the parties have been negotiating and/or agreed on the terms of an agreement that are of a contractual nature; and
  • the parties agree that the terms they negotiated will be included in a formal contract.

Key Takeaways

Determining whether or not an agreement has been formed, or a contract has been entered into, relies heavily on the facts of your particular situation. 

When you are entering into a negotiation and/or believe you have reached an agreement on terms related to a potential contract, make sure:

  • the terms agreed between the parties are clear; and 
  • both parties intend to be bound by them. 

Ideally, those terms should be documented in writing. However, the principles in Master v Cameron and subsequent Australian case law can help determine whether an agreement or contract is enforceable.

If you need assistance with a dispute relating to the enforcement of a binding agreement, LegalVision’s experienced dispute lawyers can assist. It is important to understand your obligations, options and rights. Contact the LegalVision team on 1300 544 755 or fill out the form on this page.

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