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Answer:

Introduction: There are certain cases when the parties negotiating the terms of the contract, may decide to write down the agreed terms, subject to being formalized in a legally enforceable contract. In such a case, the key terms used for distinguishing these agreements have been described as 'subject to contract'. After concluding such an agreement, if due to any reason, one of the parties decides that it is not going to enter into a contractual relationship with the other party before entering a formal contract, the issue is if the initial agreement is binding or not. While deciding if a legally enforceable contract is present in such a case, the parties have to establish that there was an intention among the parties to be legally bound by the document. Masters v Cameron can be described as a significant authority in this area of contract law. This case has established the key principles that can be used for deciding certainty and if the parties had the intention to be legally bound by the preliminary agreement.

In Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986)[1], the court had explained that whichever category of contractual negotiation is being considered, it is very significant to identify the intention of the parties and also the need to objectivity ascertain this intention. In this case, the court stated that under the circumstances of this case, it was not the intention of the parties to be ascertained by reference to a single document, but instead from the words and phrases that have been used in different e-mails exchanged between their solicitors. The court reviewed the negotiation between the parties (the exchange of e-mails) . In context of the present litigation and for the purpose of doing so, you have to ask three questions, if the parties have arrived at a consensus during the negotiations, if the answer was yes, whether such a consensus was capable of the formation of a binding contract and if this was the case, if the parties had the intention according to which, the consensus arrived by them needs to be treated as a binding contract. While deciding if the exchange of e-mail between the solicitors of the parties can be treated as a binding contract, would also stated that it was proper to take into consideration, the subsequent communications between the parties and if these communications were consistent with a binding agreement. On these grounds, the court stated that any immediately binding agreement to settle the proceedings was concluded through the exchange of e-mails between the solicitors and attached documents. It was also stated by the court that the agreement was not of the nature, which was intended to be consummated in the subsequent formal documentation.

Masters v Cameron: In Masters v Cameron[2] the issue before the High Court was if the document containing the terms of a sale of land can be considered as a binding or if it was merely an agreement regarding the negotiating terms upon which the parties would be executing the contract. In its decision, the high court stated that a signed contract can be out of the three below mentioned types. In the first type of case, the parties have agreed regarding all the terms of the contract and it is the intention that they will be immediately bound for the performance of the terms. However, they also propose that the terms will be restated in a form that is more precise but not different in another contract. Similarly, the parties would have agreed regarding all the terms of the agreement, however they have made the performance of any of these terms conditional on the execution of a formal document. In the third case, it could be the intention of the parties that are concluded bargain is not made at all, unless a formal contract has been executed by them. It was held by the court that in the first two cases, the parties are legally bound to create the formal contract and then to perform their obligations under the contract. This will be the case when all the particulars that are required for completeness and finality are present in the agreement and the people drawing the formal contract do not have the power to vary the terms already decided by the parties. On the other hand, in case of the third type of agreements, it was not the intention of the parties that the agreement will have a binding effect. Therefore when the possibility to add new terms to the agreement or to modify the terms already decided is present, the agreement will not be considered as legally binding. In such a case, it will be required that the parties should have executed a former document before the agreement can be considered as binding for the parties. On the basis of the above-mentioned reasoning, in Masters v Cameron , the court stated regarding the clause present in the contract that the meaning is sufficiently clear. It provides that the contract will not only contain the terms and conditions mentioned by the parties in a form that is satisfactory for the solicitors but also, it will also contain whatever else is considered by the solicitors to be appropriate in the case. Hence, the court stated that on the perusal of the agreement, it becomes clear that the parties were a step before the document came into force. As a result, it was held that the contract was not binding on the parties.

The reasoning of the court was that first of all, for the purpose of taking effect immediately, the agreement should only contain the terms and conditions that have been agreed upon by the parties. Similarly, the intention that the agreement will be legally enforceable can be carried so long as it is not indicated in the current agreement that a suspension of a term or condition will be made after the former document is signed. Lastly, it is indicated by the circumstances that the parties do not wish to be bound by the agreement before the execution of a formal document.

Baulkham Private Hospital Pty Ltd v GR Securities: In Baulkham Private Hospital Pty Ltd v GR Securities Pty Ltd.[3], the issue before the court was if the intention to create a contract for the sale of land, building and equipment was present. If the letters sent by the vendor and purchaser can be considered as legally enforceable contract even when a former contract was not executed between the parties. In this way, the court has to see if the series of letters that have been exchanged by the parties can be considered as the evidence of a contract for the sale of a hospital, as in one of these letters, the words, 'legally binding agreement in principle' have been mentioned. In this case, the conclusion of the court was that a binding contract has been created between the parties on the basis of the letters exchanged between them and as a result, the court held that the seller was entitled to the specific performance of the contract. In this case, McLelland J was of the opinion that as the words, “legally binding” have been used, this case is excluded from the third category that was established in Masters v Cameron. Instead, the use of these words brought the case under the purview of a fourth category that was recognized by the High Court for the first time in Sinclair, Scott & Co Ltd v Naughton. According to this category, the parties were content to be bound by the terms of the agreement immediately and exclusively that have been agreed upon by them while expecting to make a formal contract that will be in substitution of the preliminary contract and which may contain, by consent additional terms.

In this way, intention acts as a significant element in the creation of a binding and legally enforceable contract. It is possible for the parties to enter an agreement however unless it was their intention that the agreement will be enforceable by law, it cannot be said that the parties intended to enter a contract. While deciding the issue if the preliminary agreement is binding on the parties, the court looks at the factors like the significance and the complexity of the transaction taking place between the parties and the level of formality or informality as well as the language used in the agreement. It also looks at the facts if a signed agreement was present and also if there was any exchange of correspondence or if there was only an oral exchange between the parties.

Conclusion: On these grounds, regarding the issue if the preliminary agreement concluded between the parties binds the parties or not, it can be said that there are four categories provided by the courts. Therefore, if the agreement falls within the third category, the parties will not be bound to execute a formal contract. On the other hand, if the agreement concluded between the parties falls within any of the other categories, the parties will be bound to enter into a formal contract.

References

Case Law

Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622

Masters v Cameron (1954) 91 CLR 353

Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622

Masters v Cameron (1954) 91 CLR 353

Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622