When is an agreement legally binding?

4 July 2022 in Commercial Lawyers, Contract Lawyers

It is important to recognise that whether an agreement is legally binding may not be as straight forward as you might imagine and has been the cause of many legal disputes. The BSM lawyers often see the consequences of a negotiated business agreement where there is confusion over whether the agreement is legally binding. Unfortunately the consequences of this misunderstanding can have significant consequences including litigation for breach of contract and potentially significant damages.

The High Court case of Masters v Cameron 1954 (HCA) highlights that even in situations where there is a written agreement, that agreement may in fact not be binding, or conversely a party may believe any document is not binding until formally documented but is unexpectedly binding. Parties to any agreement should carefully consider whether they wish to immediately enter into a binding contract, or whether they want to do so in the future subject to any change or modification in the terms of the agreement because this may significantly impact the enforceability of that contract.

The highly experienced business lawyers at Brander Smith McKnight are able to advise you prior to entering into an agreement, negotiate for you, meticulously draft legally binding agreements and contracts and carefully review existing agreements and contracts. They are experts in the complex area of contract law.

It is useful to consider agreements falling into four main categories as described in the case of Masters v Cameron 1954 (HCA) and subsequent cases. These can be helpful to decide whether an agreement is binding or not, or where ambiguity would create the risk of litigation.

First category (binding)

This is where the parties have reached an agreement regarding the final terms of the agreement and intend to be immediately bound by those terms, but also intend those terms to be set out in a formal document at a later date. This type of agreement can be enforced regardless of whether or not a formal document is signed.

Second category (binding)

This is where the parties have similarly reached agreement on what will be the final terms of the agreement, and don’t intend to vary those terms, but have nevertheless made performance of one or more of those terms conditional on the execution of the formal document.

Third category (not binding)

This is where the parties have not made a complete or finalised agreement at all, and nothing can be  enforced until the formal contract is signed.

Fourth category (binding)

This is where the parties are content to be bound immediately and exclusively by the terms which they had agreed upon whilst expecting to make a further contract in substitution for the first contract, containing, by consent, additional terms.

The Legal Test

In order to interpret an agreement a court will typically:

1. Determine objectively, having regard to the language contained in the agreement, whether or not the parties intended the agreement to be immediately binding.
2. Read the agreement in the light of the surrounding circumstances, including such things as, (a) the purpose, intention and objective of the agreement, (b) the knowledge of the parties, (c) the typical commercial practices in that type of commercial transaction, (d) the context and (e) what the parties understood the agreement to mean.

The Effect of some Clauses which can make a Contract not Binding

1. “Subject to contract or subject to the contract being executed”. This is typically not binding as there is an intended basis for a future contract. This test has been primarily set out in the High Court case of Masters v Cameron 1954 (HCA) where an agreement between Violet Cameron and Norman and Mavis Masters for the sale of a farming property was deemed to be not binding due to 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”.
2. “Possession will not be granted until execution of formal lease by both parties has occurred”. This is typically not binding because the parties do not intend to be immediately bound and have not completely agreed upon all of the terms of the bargain.

It is however, important to note that each matter is different depending on the facts, contexts, intentions, objectives and knowledge of the parties.

It is therefore highly beneficial to speak to the BSM business lawyers who have extensive experience in the complex area of contract law. It is preferable to seek their advice prior to finalising a significant commercial or business negotiation.