Agreement that is ‘subject to contract’ is generally not binding
Masters v Cameron update
The Victorian Court of Appeal has recently handed down its decision in The Edge Development Group Pty Ltd v Jack Road Investments Pty Ltd.1 The case involved a dispute as to whether a letter of offer signed by both parties was a binding contract for the sale of property. Ultimately, because the letter of offer was ‘subject to the contract being executed’, the Court found that the letter was not binding.
Relevant facts
In early November 2017, The Edge Group and Jack Road Investments signed a letter headed ‘Offer of Purchase’, relating to the sale of land.
The Offer to Purchase identified that The Edge Group would purchase the land for $6,000,000, with a 20% deposit to be paid on execution of the Contracts of Sale and 1% payable on the execution of the Offer to Purchase. The settlement was to occur on 14 June 2018. The parties agreed that the vendor’s standard Contract of Sale was to be adopted, incorporating the details in the Offer to Purchase.
The Offer to Purchase also included several conditions, including:
- Condition 1: The purchaser has immediate access to the office/warehouse under a license upon payment of the deposit and execution of the Contract of Sale.
- Condition 2: The purchaser will pay the full deposit of $1,200,000 at the expiry of 30 days from exchange of contracts.
- Conditions 3 and 5: The purchaser is bound by a confidentiality agreement, which ceases upon execution of the Contract of Sale.
Significantly, it also included:
- Condition 4: This offer was ‘subject to the contract being executed’.
Subsequently, The Edge Group and Jack Road Investments were involved in negotiations over the license agreement. Jack Road Investments provided various documents to the purchaser and The Edge Group paid the 1% of the purchase price.
On 30 November 2017, Jack Road Investments received a higher offer from a third party for the sale of the property. The Edge Group lodged a caveat and sought specific performance.
The trial judge’s decision
At trial, The Edge Group argued that the Offer of Purchase was a binding contract for the sale of the property.
The primary judge noted that there were well established authorities in relation to whether a preliminary agreement is binding.2 The judge referred to the three classes in the High Court decision of Masters v Cameron.3
- The parties intend to be bound immediately, but want to have the terms restated in a contract that is fuller in form, but not different in effect.
- The parties have agreed on all terms, but have made the performance of one or more of the terms conditional on the execution of a formal document.
- The parties do not intend to be bound, until the execution of a formal contract.
In each of the first two classes, there is a binding contract, while in the third class there is not.
A fourth class has subsequently been suggested and recognised as a variation of the first class.4 There will be a binding agreement where the parties intend to be bound immediately, but expect to make a further contract, which would include additional terms.
The trial judge found that the Offer to Purchase fell into the third class of Masters v Cameron and was not binding.
The appeal
On appeal, The Edge Group argued that the Offer to Purchase was a binding agreement within the fourth class.
The Edge Group also argued, in the alternative, that the Offer to Purchase was the contract referred to in condition 4.
In a unanimous decision, the Court of Appeal held that the trial judge was correct and that the Offer to Purchase was not a binding agreement.
The Court held that this was a clear case within the third class of Masters v Cameron, because of the existence of condition 4 that the offer was ‘subject to the contract being executed.’ The Court cited Masters v Cameron, stating that the phrase ‘subject to contract’ and similar expressions meant that any agreement must be regarded as ‘the intended basis for a future contract and not as constituting a contract.’5
The Court decided that the scope of possible further negotiation was significant, with outstanding issues such as the licence agreement, GST and disclosures under section 32 of the Sale of Land Act 1962 (Vic). This meant that the Offer to Purchase did not fall within the fourth class.
The Court also noted that aspects of the Offer to Purchase would have no commercial purpose if the Offer to Purchase was the contract referred to in condition 4. The time of the execution of the contract was significant because that was when the balance of the deposit became payable, The Edge Group obtained immediate access to the office/warehouse and the confidentiality agreement would cease. The Court found that these matters all suggested that the execution of the Contract of Sale was intended to mark a significant transition in the relations between the parties and there was no binding contract until that stage was reached.
Implications
This case is a timely reminder that, even when there is written agreement, that agreement may not be binding. Parties should carefully consider whether they wish to immediately enter into a binding agreement, or only enter binding relationships at a time in the future. Terms suggesting that the agreement is ‘subject to contract’ or ‘subject to the contract being executed’, would generally mean that there is no binding contract before the execution of an agreement in its final form.
1[2019] VSCA 91.2The Edge Development Group Pty Ltd v Jack Road Investments Pty Ltd [2018] VSC 326.
3(1954) 91 CLR 353.
4Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd [1986] 40 NSWLR 622; Laidlaw v Hillier Hewitt Elsley Pty Ltd [2009] NSWCA 44.
5Masters v Cameron [1954] 91 CLR 353, 362-363.