Contract; formation; intention to be legally bound; conditional intention.
Facts: Cameron agreed to sell her farm to Masters for £17,500. Both parties signed a written agreement which described the property and set out other details of the agreement. One of the provisions in the document was the following: "This agreement is made subject to the preparation of a formal contract of sale which shall be acceptable to my [Cameron's] solictors on the above terms and conditions..."
Issue: Since the essential terms of a contract had been agreed by the parties when they signed their initial agreement, was a contract created even before the preparation of a formal contract by Cameron's solicitors?
Decision: In the circumstances it was clear that Cameron had intended not to be bound until a formal contract was prepared and signed.
Reason: Reason: Making an agreement subject to a condition does not always have the same effect. Depending on the circumstances, the facts may show one of the following situations:
(1) the parties intended to be immediately bound by the agreement and required to perform it, so that the written contract would only restate the agreed terms more fully or precisely;
(2) the parties intended to be immediately bound by the agreement, but to suspend any performance until formal documents are signed; or
(3) the parties did not intend to be legally bound by the agreement at all unless and until the formal documents are prepared and signed. In the present case, the words 'subject to' the preparation of a formal contract were sufficient to indicate that Cameron did not intend to be legally bound by the agreement at all until a formal contract was prepared and signed.
NOTE: In GR Securities Pty Ltd V Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631 the court recognised a fourth category of case.
(4) If the parties have agreed on sufficient terms for a workable transaction and intend to be immediately bound by that informal agreement even though they propose thereafter to execute a formal contract which may contain additional terms yet to be agreed, then the initial agreement is legally binding even before the formal contract is executed.