Contract Law: Analysis of Contract Formation and Legal Implications

This report provides a comprehensive analysis of contract law, delving into the essential elements required for contract formation, including offer, acceptance, consideration, intention to create legal relations, and certainty of terms. It examines the common misconception that a contract is only a formal, signed document, highlighting that informal negotiations can also lead to binding agreements. The report discusses the significance of pre-contractual negotiations and the preparation of formal agreements or 'heads of agreement'. It explores the key element of intention, using the landmark case of Masters v. Cameron to illustrate how courts determine whether an agreement is binding. The report details the different categories of agreements, as established in Masters v. Cameron, and how these categories reflect the parties' intentions to be bound by the contract. Furthermore, it references the case of Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd to introduce a fourth category of agreement. The report also considers factors such as the complexity and formality of the dealings and the language used in the contract to ascertain intention. The report concludes with a summary of the key principles and the application of the four categories to determine contract enforceability.

Running head: CONTRACT LAW
CONTRACT LAW
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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
1 Masters v. Cameron (1954) 91 CLR 353.

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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 6th December 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

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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 by the
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
1st category 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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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 Ltd2 where 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 4th category 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 4th category, 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
2 Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622.
3 Sinclair, Scott & Co Ltd v Naughton (1929) 43 CLR 310.

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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.

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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.