We often see matters where clients have negotiated the terms of a business deal with another person and the parties then sign a short form document (usually called a Heads of Agreement or Memorandum of Understanding) that embodies the terms of the deal with the intention of executing a more formal agreement later.

What happens if the parties cannot agree on the terms of the formal agreement?  Can a party that wants to proceed with the deal force the other party to go ahead? Or can the party that doesn’t want to proceed walk away?

The answer to this question is the lawyer’s standard answer: “It depends”.

The document needs to be clear about the parties’ intentions as that will determine the issue.

 

Masters v Cameron

The leading decision in this area is the High Court case of Masters v Cameron (1954) 91 CLR 353.

That case established that there are 3 possible scenarios:

  • The parties have reached agreement and intend to be immediately bound. However, the parties propose to have the terms restated in a form which will be fuller or more precise but not different in effect.
  • The parties have completely agreed on the terms of their bargain and intend no departure from or addition to those terms. However, the parties have made performance of one or more of the terms conditional on the execution of a formal document.
  • The intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract.

The High Court then identified that determining which scenario applies depends on “the intention disclosed by the language the parties have employed, and no special form of words is essential to be used in order that there shall be no contract binding upon the parties before the execution of their agreement in its ultimate shape”.

Later cases have established a fourth category – that is, cases where the parties are content to be bound immediately and exclusively by the terms on which they have agreed, while expecting to make a further contract in substitution for the first contract containing additional terms.

 

Cahill v Kiversun

A recent case that considered a Masters v Cameron scenario was the Supreme Court case of Cahill v Kiversun Pty Ltd; Molonglo Group (Australia) Pty Ltd v Cahill [2017] VSC 641.

Kiversun owned property in Collingwood.  Cahill and Molonglo were both property developers.

On 15 July 2016 Kiversun and Cahill signed a document headed “Agreement to Purchase”.  This document contemplated that there would be a formal contract prepared, but did not clearly state whether the parties intended the Agreement to Purchase to be legally binding.

On 29 July 2016, Kiversun signed a second document agreeing to sell the property to Molonglo for $10.15 million.

On 31 July 2016, Kiversun’s solicitors provided a formal contract to Cahill (this contract was prepared by Molonglo’s solicitors).  Under the Agreement to Purchase, Cahill had 5 days to accept the terms of the contract provided to it or Kiversun had a right to “withdraw from the sale”.  This contract included terms that Molonglo and Kiversun knew Cahill would not accept.

On 4 August 2016, Kiversun and Molonglo signed a formal contract by which Molonglo agreed to purchase the property.  This contract was conditional on Cahill failing to sign the other contract.

When Cahill did not return the signed contract with the deposit by 8 August 2016, Kiversun indicated that unless Cahill returned the signed contract by close of business, Kiversun would withdraw from the sale.  Cahill lodged a caveat over the property that day.

Molonglo lodged a caveat over the property the following day.

The court held that the Agreement to Purchase between Kiversun and Cahill was a binding contract.

Kiversun and Molonglo argued that the Agreement to Purchase was not a binding agreement.  Their major argument was that the document included the words “[t]his offer is conditional upon the purchaser’s solicitor’s approval of the final contract of sale and [s 32 statement]”.  They submitted that the use of the word “offer” indicated that there was no binding agreement.  However, the court held that the fact that Kiversun had a right to “withdraw from the sale” if the documents were not returned within 5 days was inconsistent with the claim that the document was only an offer rather than an agreement.

Molonglo has appealed to the Victorian Court of Appeal in this case.  Interestingly, Kiversun has not appealed.

This case highlights that it is extremely important that if:

  • someone has negotiated a deal but does not want to be legally bound until some other event has occurred or a formal document is prepared; or
  • someone has negotiated a deal and wants the other party to be legally bound

that any document that is signed reflects the desired outcome.

Ideally, the document should clearly state whether or not the document is intended to be binding.

 

Contact Patrick Cussen, Nicole Wilson or Konnie Lontos if you or a client are about to sign a Heads of Agreement or Memorandum of Understanding and you want advice about the legal effect of the document.

By Patrick Cussen