Masters v Cameron

[1954] HCA 72; (1954) 91 CLR 353

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Case details

Court
High Court of Australia

Citations
[1954] HCA 72
(1954) 91 CLR 353

Judges
Dixon CJ
McTiernan J
Kitto J

Appeal from
Supreme Court of WA 
(appeal allowed)

Issues
Intention to create legal relations
Conditional contracts
Subject to contract

Link
AustLII ➤

Overview

The parties signed a written memo whereby Cameron agreed to sell property to Masters at a stipulated price. It included the following statement:

'This agreement is made subject to the preparation of a formal contract of sale which shall be acceptable to my [Cameron's] solicitors on the above terms and conditions'.

Masters subsequently ran into financial difficult and sought to withdraw from the purchase, claiming they were not legally bound to purchase.  This was important; if there was a contract Cameron could retain the deposit; if not it would have to be returned.

The Court observed that three different interpretations could be placed on subject to contract clauses:

1. parties intend to be immediately bound, but the obligation to perform does not arise until the document is executed.

2. parties may have reached a concluded bargain and intend to be bound immediately regardless of whether or not a formal document comes into existence

3. parties may have intended no concluded bargain unless the document was executed (in other words it might be treated as a condition precedent to a binding contract)

The first two scenarios result in an immediately binding contract; the third does not.

In most cases ‘subject to contract’ clauses will mean parties intended the third scenario; that there is no binding contract unless and until a formal document is executed. That was the case here, with the result that there was no contract and Masters could recover the deposit.

Catchwords

Vendor and Purchaser - Sale of land - Contract - "Subject to the preparation of a formal contract of sale &which shall be acceptable to my solicitors on the above terms and conditions" - Whether concluded contract - Nature of sum paid as a "deposit" - Intention of parties.

The Court

The Court considered the likely intention where parties reach agreement and state that it will be subject to contract, or subject to formal contract.

[page 360] Where parties who have been in negotiation reach agreement upon terms of a contractual nature and also agree that the matter of their negotiation shall be dealt with by a formal contract, the case may belong to any of three cases. It may be one in which the parties have reached 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 form which will be fuller or more precise but not different in effect. Or, secondly, it may be a case in which the parties have completely agreed upon all the terms of their bargain and intend no departure from or addition to that which their agreed terms express or imply, but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document. Or, thirdly, the case may be one in which the intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract. (at p360)

Breaking these down, the court identified three scenarios:

1. parties intend to be immediately bound to perform, but also propose formalising or restating terms, but not changing their effect

2. parties have reached agreement and do not intend to depart from the agreement but have made performance of one or more of the terms conditional upon executing a formal contract; or

3. parties do not intend a concluded bargain unless and until executing a formal contract

The first two cases result in a binding contract. In the second scenario it is implicit that the parties do what is necessary to bring into existence and execute the formal contract.

Of these first two scenarios, the first was considered the most common.

But, the Court observed, cases in the third class are ‘fundamentally different’. Here, the agreements are not intended to and do not have ‘any binding effect of their own’ (p 361)

Which category any given case fits within ‘depends upon the intention disclosed by the language the parties have employed, and no special form of words is essential to be used in order that there shall be no contract binding upon the parties before the execution of their agreement in its ultimate shape.’ (page 363)

However, the ‘natural’ meaning of the words ‘subject to contract’ or ‘subject to the preparation of a formal contract’ is that there is no intention to be immediately bound unless and until executing a formal contract (in other words, the third scenario)

Applied to this case

In this case the formal contract, while to be on the same conditions as those agreed, were to be ‘satisfactory to the solicitors’.  No binding contract was made prior to the formalising of the agreement.

[page 364] In the present case the context provides no reason for holding that the case is outside the application of these authorities. The formal contract, it is true, is to be "on the above terms and conditions", but it is to be acceptable to the vendor's solicitors, and the meaning is sufficiently evident that the contract shall contain, not only the stated terms and conditions expressed in a form satisfactory to the solicitors, but also whatever else the solicitors may fairly consider appropriate to the case. … no binding contract for the sale and purchase of the property mentioned … was made between the defendant Cameron (the respondent) and the defendants Masters (the appellants).

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