Brief Summary
You may be negotiating a contract or deal in a business setting, or seeking to resolve litigation, and, at some point, you and the other party have put your “agreement” in writing. Sometimes a document might be drawn up. It might be called a “Heads of Agreement” or “Memorandum of Understanding” or something else entirely. One party may think that the terms in the document are the final (and binding) terms and must now be complied with; the other party may think otherwise.
So, is your “agreement” actually binding? Well, it may fall into one of the 4 classes of cases we outline below.
In summary – it’s always a good idea, when negotiating an agreement, to be very clear in oral and written communication about whether you intend the terms to be wholly complete and binding, or just a place from which to have further discussions; or, if you want it to be binding but want something to only happen once a formal document is signed (for example, the payment of deposit) then make that clear.
Four Classes of Cases
The famous case of Masters v Cameron (1954) 91 CLR 353 sets out 3 (of the 4) classes of cases where there are disputes about whether negotiated terms are binding.
Class 1
Where the parties have finalised all terms of their bargain and all parties want to be immediately bound to the performance of those terms BUT propose to have the terms restated in a fuller or more precise document.
Class 2
Where the parties have agreed on all terms of their bargain and they intend that the parties stick to those terms. However, they want one or more of the terms conditional upon a formal document being signed by all parties (to be drafted later).
An example here is a case where all terms are agreed, except that payment of the deposit or contract price was conditional upon the signing of a formal contract.
Class 3
Where the parties intend not to make a concluded bargain at all, unless and until they execute a formal contract.
For example, where an offer is made by one party which is stated clearly to be “subject to the parties entering into a formal agreement on terms and conditions to be mutually agreed. In other words, the parties both know what they want to agree to “in principle” but aren’t ready to be bound to them until reduced to writing using agreed language.
Class 4
Finally, class 4 is drawn from some other case law but is not quite “settled law” – that means that not all judges and courts in Victoria (or Australia) agree that this is an actual class.
It is the situation where the parties are happy to be bound immediately in full by the agreed terms (so, a type of contract) but also expect to make a further contract which replaces the first contract which will contain additional terms (which might not have been fully agreed to yet).
How to Determine the Class
The important thing is always the intention of the parties. A Court hearing an argument about an agreement will try to figure out the parties’ intentions from reading the terms in the document itself, when read in light of the surrounding circumstances. That is, the Court will not just listen to each party’s own statement about what they intended. “Commercial” or “business” language used in the document may be interpreted by the Court to mean what a reasonable person in that business/industry would have understood such terms to mean.
That is why it’s important to be clear in language used in the document, or in correspondence about the document, what your intentions are.