The Meaning of Subject to Contract in Law
In this article, we explain what "subject to contract" means in a legal sense. If you are involved in any kind of business in Australia, it is important to understand what "subject to contract". An agreement that is "subject to contract" may have significant consequences.
Author: Farrah Motley, Legal Principal of Prosper Law.
Both the parties, Cameron and Masters, signed a written memorandum where Cameron agreed to sell the property to Masters at a specified price. However, Masters later met with financial complications which led them towards wanting to withdraw from the deal, by claiming that they were not bound to make the purchase, legally. It means, if a contract existed, Cameron can keep the deposit and if not it would be returned.
The court ascertained three versions of the ‘subject to contract’ clause:
All the parties are meant to bound immediately but it will be performed only when the document comes into existence.
Irrespective of the formal document’s existence, parties should reach a finalized bargain and should be bound instantly.
All parties may not come to a finalized decision without the document’s existence (this is also considered as an example of a non-binding contract).
From the above scenarios, the first two are immediately binding contracts and the third one is not.
However, in most of the cases ‘subject to contract’ clause will mean parties consider the third scenario. It means there will be no binding contract without the existence of an official document. Similarly, with this case, the Masters could retrieve their deposit as there was no contract.
Issues Found in Masters Vs Cameron
When the dispute of Masters v Cameron was presented before the Court, the Court asked to identify a few issues, that included:
If the agreement had a binding contract or not;
If Cameron agreed to sell the property and the Masters couple agreed to buy the property;
If both the parties planned to be bound by the agreement, legally;
If the execution of the requirements in the agreement was discontinued till the formal contract was in existence by both parties.
Categories under which the Agreements Fall
The High Court stated that if the agreement including the phrase, like in this case, comes under separate categories.
The First Category (Binding Category)
The first category states that the parties come to an agreement according to the final terms of the agreement and are meant to be bound by those terms instantly. However, they agree to add those terms in a formal document later. This means that these agreements are obligatory irrespective of the non-signing of a formal document. It means, that any of the parties can sue the other for a specific task on its particular date, regardless of the existence of the formal document at that time.
The Second Category (Binding Category)
In this category, all the parties have finalized the final terms of the agreement mutually, and have no intentions to change them, but have not obligated the performance until the formal document is executed. This means that no party can tell the other party to complete the sale procedure but all the parties must implement the formal document to complete the sale process.
The Third Category (Not Binding Category)
Under this category, no agreement has been finalised by any of the parties and nothing is obligatory unless the formal document is made and signed by all the parties.
The Fourth Category (Binding Category)
This category agreement is not mentioned in the Masters V Cameron case, but it is now widely recognized in Australia. Under this category, all the parties are satisfactorily bound instantly by the terms they agreed upon while at the same time, being expectant of creating a substitutional contract in place of the first one, which by consent of all the parties, contain additional terms.
The Result from Masters V Cameron
In Masters v Cameron, it was found that the clause “…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” is considered under the third category of agreements and thus was not binding. Nevertheless, all contracts are written differently and thus have an intense impact on companies and individuals, both financial or legal.
Masters v Cameron served as an example for the situations where a written agreement can not be binding as well. All the parties must make sure whether they want to enter into a binding contract promptly or if they want to enter soon with any changes or modifications in the agreement terms. This is necessary to decide clearly as it has a substantial effect on the applicability of that contract.
The morals and ethics that were held in Masters v Cameron are still considered equally important as they were in 1954 when it was originally decided. Moreover, according to a recent case, these rules and morals are important specifically during the negotiation of a settlement agreement.
The Case of Damcevski v Demetriou
In a recent case in New South Wales on 29th June 2018, the Supreme Court gave a decision in Damcevski v Demetriou’s case. In this case, the Court discussed if the settlement agreement that was created during the negotiation of the implementing of the formal agreement was a binding contract.
While negotiating, all the parties signed a document that was titled ‘Heads of Agreement.’ This document needed the parties to enter into a settlement agreement and also give security by way of mortgage.
In this case, the complainant claimed that the Heads of Agreement was a binding contract and fell under the first category of Masters v Cameron. However, the first accused denied this claim and argued that it fell under the third category of Masters v Cameron and the fourth accused stated that the Heads of Agreement fell under the third category or in the second category of Masters v Cameron.
To identify whether the agreement was binding, the Court held:
Whether or not all the parties wanted the agreement to be bounded immediately must be identified impartially, respecting the language of the Heads of Agreement.
The Heads of Agreement should be read considering the encompassing situations.
If the Heads of Agreement’s terms show clearly that the parties wanted to be bounded immediately, then it must be given effect.
There is no doubt that post-contractual conduct is acceptable if it identifies the existence of the contract between the parties.
With these facts and principles, the Court determined that the Heads of Agreement fell under the first category of Masters v Cameron and was therefore legally binding.