The specific wording of a contract is crucial to its interpretation and may be beneficial or a trap to parties.

Many parties fail to understand the implications the well-known phrase ‘subject to contract’ will have on their agreements. Masters v Cameron (1954) 91 CLR 353 (Masters v Cameron) is the leading Australian case which examines the consequences of certain wording on parties to a contract, and whether such wording leads to an enforceable and binding contract.

Background facts

Masters v Cameron involved a vendor and purchaser who signed a document relating to the sale of property. Although the document was itself an agreement to sell, it included the following statement:

‘… 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.’

A deposit was paid by the purchaser who shortly after declined to proceed with the sale due to financial difficulties. As a result the vendor sued.

The purchaser argued that there was no contract unless and until a formal agreement was signed, based on the ‘subject to’ statement made in the agreement and therefore, that the deposit had to be returned.

The vendor argued that the agreement created a binding and enforceable contract between the parties and that the deposit should be retained.

The court determined that since no such agreement was signed, the vendor was not entitled to retain the deposit.

Court’s findings

The Court derived their decision from the creation of three categories within which a scenario could fall:

First category: ‘the parties have reached finality in arranging all the terms of their bargain and intend to be immediately bound to the performance of those terms, but at the same time propose to have the terms restated in a form which will be fuller or more precise but not different in effect.’
Second category: ‘the parties have completely agreed upon all terms of their bargain and intend no departure from or addition to that which their agreed terms express or imply, but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document.’
Third category: ‘the intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract.’

In Masters v Cameron, the Court found that the case fell into the third category where the intention of the parties was that the agreement to purchase and sell was not binding unless and until the parties executed the formal agreement as stipulated by the ‘subject to’ statement.

In addition to the three categories analysed in Masters v Cameron, in more recent decisions, Australian courts have recognised a fourth category:[1]

Fourth category: ‘the parties were 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 contact, containing, by consent, additional terms.’

Criticisms have been made regarding the fourth category and its similarities to the second category. However, there is a recent trend in authorities to not treat all four categories as completely distinct but instead to focus on the intention of the parties to effect legal relations objectively.

Key Takeaways

The case highlights that a ‘subject to contract’ clause may diminish a party’s ability to claim that there is a binding and enforceable contract in the absence of a formal written agreement stating so.

When entering into an agreement parties should carefully consider all clauses and the potential impact of their wording. Consideration should especially be paid to any clauses containing the ‘subject to’ wording or which imply conditional performance requirements (e.g. Party A must complete 20 hours of service before the agreement with Party B becomes enforceable).

Parties should also take note of whether a further agreement is required for enforceability of the terms, and if so should take steps to protect their interests and ensure this further enforceable agreement is executed. This may include monitoring compliance of parties with any required performance aspects or preparing the document for the final agreement so that it is ready for completion.

If you would like to discuss this article, the ‘subject to’ clause or what constitutes a binding and enforceable contract, please contact any of the below contacts:

Alicia Hill
Principal
T +61 3 9611 0180 | M +61 484 313 865
E ahill@sladen.com.au

Inshani Ward
Senior Associate
T +61 3 9611 0110 | M +61 413 557 157
E iward@sladen.com.au

Meagan O’Connor
Principal
T +61 3 9611 0106| M +61 438 531 978
E moconnor@sladen.com.au

Dean Beaumont
Special Counsel
T +61 3 9611 0131 | M +61 437 257 648
E dbeaumont@sladen.com.au

Victor Di Felice
Principal
T +61 3 9611 0162 l M +61 419 515 010
E vdifelice@sladen.com.au

Claire Currucan
Principal Lawyer
T +61 3 9611 0161 | M +61 434 002 749
E ccarrucan@sladen.com.au

[1] See Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622.