However, the cases of the third type are fundamentally different. Contractual conditions are not intended to produce binding effects and therefore have no binding effect. This will be the case if it is possible to insert new terms or change terms already discussed. The execution of a formal document is necessary before the agreement can engage the parties. A fourth class was then proposed and recognized as a variant of the first class4. There will be a binding agreement in which the parties plan to be linked immediately, but expect to conclude another contract with additional conditions. In Masters v. Cameron, the parties agreed on the sale of farm real estate. The agreement took the form of a memorandum which states that “this agreement is conditional on the preparation of a formal sales contract acceptable to my lawyers on the above terms.” A down payment of $1750 was also made in connection with this agreement. Before signing a formal sales contract, the buyer decided not to buy the property. This refusal raised two important issues that remained to be decided. First, if the written agreement constituted a binding contract; ultimately decide whether or not the buyer is bound by the agreement. The court was also required to determine which party was entitled to the bail paid.
This case is a timely reminder that this agreement may not be binding, even if a written agreement is reached. The parties should carefully consider whether they wish to conclude a binding agreement without delay or if they wish to establish binding relations only at a later stage. Conditions that indicate that the agreement is “contract-compliant” or “subject to the performance of the contract” would generally mean that there is no binding contract before an agreement is executed in its final form. Masters v Cameron was a relevant case in the area of contract law, particularly with regard to the application of preliminary agreements. In cases where the parties negotiated in writing the terms of an agreement that remain “in accordance with the contract,” the three categories defined in Masters/Cameron were essential in determining the applicability of such agreements. Preliminary agreements – often referred to as the “Heads of Agreement” or “Memorandums of Understanding” – are often used to outline the commercial intent of the parties to complete the transaction and to create a key framework for the terms of a proposed transaction. These documents may be declared legally binding, non-binding or partially legally binding. In cases where negotiations fail and formal transaction documents are never closed, difficulties may arise in determining whether and to what extent the interim agreement is legally applicable. In this article, Andrew Windybank, from our corporate and sales team, examines how recent cases have dealt with issues related to past agreements. While it can be proven that the parties to a pre-agreement have introduced additional conditions in a future contract, the courts have been reluctant to apply such agreements because of the uncertainty inherent in the agreed terms. Lately, however, the courts have shown a willingness to “fill in the gaps,” despite the obscure intention, to maintain good business.