1CONTRACT LAW Introduction: There lies a general misconception that contract refers to only a formal and signed document which provides the detailed terms and conditions of the agreement. But, this is generally not the case as in some situations, negotiations done informally can even form binding contract. In present world, it is a very common practice for the parties to involve in informal and pre contractual negotiations prior to create a written and formal contract. After a successful mediation, the parties in general prepare a formal agreement for recording what is being agreed by them. In some situations, the parties may draft a less formal document known as the ‘heads of agreement’. Whether such heads of agreement can be enforced usually depends on the intensity of the parties to get themselves bound legally by the terms of the contract. An important element to ascertain the intentions of the parties is how precisely the contract terms are written and whether the agreement has any wording or clause that suggests that such terms are agreed ‘in principle’ merely. At common law, the four basic elements required to form a contract are offer and its acceptance, the consideration, the intention of entering into a legal relation and certainty of terms of the contracts. The third criterion is little bit confusing and requires detailed analysis which will be done in the later part of the assignment with reference to decisions given in some of the leading cases. Discussion: The usual notion behind any contract is that when a contract satisfies its essential elements, it is binding. However, in some situations, an agreement though in writing may not be binding on the parties. This was observed in the leading case of Masters v. Cameron1. The High 1Masters v. Cameron (1954) 91 CLR 353.
2CONTRACT LAW Court in this particular case has taken into consideration two facts; whether a document which expresses the terms of sale of land will be binding on the parties or just a negotiating agreement depending on which the contract will be exercised. In this case, the parties have agreed upon an agreement for selling of a property suitable for farming. The written memorandum was created for selling property of Cameron to Masters. On 6thDecember 1951, such agreement was created as a memorandum which states that“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 Masters paid a cash of 1750 $ to the agent of real estate of Cameron. But later on, Masters changed his mind and refused to proceed with the contract. After that both the parties claimed money from each other. The purchaser Masters claimed money as according to him, there was no contract, hence money deposited by him must be returned. On the other hand, the seller Cameron claimed money that as a valid contract was created between them, Masters breached the contract and hence, his money is to be forfeited. The legal issue to be decided was whether an enforceable and binding contract is created by the memorandum. The judge in the trial court held that the memorandum forms a binding a contract. But on appeal, the High Court of Australia reversed the decision. The Court decided that the memo did not create any enforceable contract. It stated that the ‘signed contracts’ can be one of the following three types; 1.The parties had reached a final decision regarding the terms and condition of the contract and have intention to put it in brief form so that they can be immediately get bound to perform those terms but simultaneously propose that the terms must be reinstated in a
3CONTRACT LAW manner that will be either more precise or fuller but will not have different effect. Consent without the power and capacity of varying the terms of the contract indicates that a contract is completed. 2.The parties may have agreed to all the terms and conditions of the agreement and have no intention of departing from it or even adding any extra terms but have performed one or more terms conditional on execution of the formal document. 3.The case situation may be such the parties have no intention to conclude the bargain unless a formal contract is executed. In such situation, the parties may have the desire to withdraw the contract if the agreement fails to reach the outstanding factors. These categories are aimed to identify the intention of the parties to be bound bythe agreement and its terms. It is obvious that when the intention of the parties falls into the first and second categories, the parties will be bound by the contract. Agreements that fall into the 1stcategory are binding irrespective of the fact whether the contract is being executed formally because it is exhibited by the parties that they have an intention to be bound by the contract and it is certain as per the terms of the contract. The second category is also binding but it is subject to the contract’s execution formally. Lastly, the parties are not bound by the agreements that are covered under the last category. In order to determine which agreement will be covered in which category depends on the parties’ intention and is usually decided considering the language used. In the case of Masters v Cameron, the language use in the phrase ‘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’ was regarded by the court as an application of third party. Agreements that are covered under this third category do not bind the parties legally. In this regard, the agreement
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4CONTRACT LAW cannot be considered as a concluded agreement unless a contract is executed. Hence, the agreement does not bind the parties to such contract legally and the parties can even decide going against the agreement getting formalized. In this case, the court held that in respect of the clause of the contract, its meaning is very clear. It states that the contract shall not only consider the terms or conditions given by the parties but also contain terms and conditions as per the satisfaction of the solicitors. Considering all these, it was decided that the contract does not bind the parties. In respect of the nature of the money paid under the agreement and the party who was entitled to such money, the court decided that the money has to be returned to the party who paid it. As the contract was subjected to the formal contract, amount of money paid just out of anticipation will not result into a true deposit. Only when a formal contract is entered, the money deposited will be regarded as an actual deposit and results into the seller’s property. The decision of this case was again taken into consideration in the case of Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd2where the issue before the court was whether the intention of the parties to form a contract for selling equipment, land or building was present. Apart from the categories mentioned above, the presence of the a 4thcategory was felt for the first time in the case of Baulkham Hills. This was held by Justice MCLelland in this case. But he did not claim of its invention rather he stated that it was recognized prior to the decision of Masters v Cameron in the case of Sinclair, Scott & Co Ltd v Naughton3. According to the 4thcategory, the parties were satisfied to be bound by the agreement terms exclusively and immediately which the parties have agreed mutually while they also expect to create a contract formally which will substitute 2Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622. 3Sinclair, Scott & Co Ltd v Naughton (1929) 43 CLR 310.
5CONTRACT LAW the preliminary contract and the final contract resulted can contain additional terms by mutual consent. Thus, it is seen that intention acts as an important element to create a binding contract which is also legally enforceable. The parties can enter into an agreement intentionally only. Unless the parties have decided that the agreement to be enforceable by law, it cannot be held that the parties have intention to create the contract. When deciding whether any preliminary agreement will be binding on the parties, the court considers factors like the complexity as well as significance of the dealings between the parties and also the formality or the informality level and the language used by the parties in the contract. The court also considers whether any signed agreement exists and mode of communication between the parties. Conclusion: Considering the discussion made above regarding presence of any agreement between the parties and whether such agreement binds the parties, it can be stated that the four categories that are provided by the courts must be applied to determine the enforceability of any contract. The words used in the contract must be clearly stating the intention of the parties so that the parties can use them in future to prove their intention.
6CONTRACT LAW References: Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622. Masters v. Cameron (1954) 91 CLR 353. Sinclair, Scott & Co Ltd v Naughton (1929) 43 CLR 310.