Contract Law 101 – Beginner’s Guide to Contract Law
Australian Contract Law has made it clear that an agreement is only enforceable if there is:
- an offer and acceptance [agreement];
- an exchange of something with value (i.e money/service) [consideration];
- intention for the parties to be legally bound [intent]
Although the criteria above seem simple enough to digest, unfortunately there’s added level of complexity in scenarios where a proper written agreement was never entered into by the parties. What happens when there’s no written agreement but instead, the parties merely entered into a “hand shake agreement”? In popular lingo, one would call this a “Gentleman’s Agreement”.
A Gentleman’s Agreement?
This common term is used when referring to an informal, unwritten agreements between two parties to undertake a transaction or commitment. In this article, we will extend this definition to written, incomplete and unsigned agreements.
Real World Examples
In most cases, it is quite common for parties to discuss and reach an agreement in principle (key terms only) before entering a written agreement. In some of these cases, the parties may get overexcited with the opportunity and proceed to carry out the terms of the agreement without the presence of any written agreement or if the parties have engaged lawyers and their respective lawyers were still in the process of ironing out the finer details of the agreement. In short, no agreement was signed or if the agreement was signed by one party.
Although Gentleman’s Agreement was never officially recognised as an actual legal term but it was in fact indirectly referenced and determined in Australian case laws.
Whether there are enforceable or not…. The short answer (using a classic lawyer’s manoeuvre) is…..”Yes… but sometimes”. The reason for this answer can be easily summarised from the leading cases of Masters v Cameron  HCA 72 and AJ Lucas Operations Pty Ltd v Gladstone Area Water Board & Anor  QCA 284.
The reader’s digest version of these cases can be summarised as follows (please note that the summary below are oversimplified and should not be construed as an accurate depiction of the said cases. We strongly recommend that the reader review the full decision of the actual cases to understand the full factual background):
Masters v Cameron
Facts: Parties (Buyer and Seller) reached an agreement, and the agreement was made in the form of a memorandum stating that “this agreement is made subject to the preparation of a formal contract of sale which shall be acceptable to my solicitors on the above terms and conditions”. Deposit was paid and before the parties signed a formal contract, the Buyer decided against the transaction. The Seller proceeded to sue to Buyer to enforce the contract.
Outcome: Court held the memorandum was not a valid contract because the memorandum used the words “subject to contract”.
AJ Lucas Operations Pty Ltd v Gladstone Area Water Board & Anor
Facts: Parties (Corporations) reached an agreement in principle with its key terms and a signed agreement (signed by one arty only) was circulated. The other party did not properly sign the written agreement. The said party relied on the fact that the document was not properly signed to establish that no binding agreement was reached.
Outcome: Court examined the parties’ actions, intentions and facts on how the signed agreement came into existence and ultimately held the agreement was valid and binding despite it not being fully signed by the parties.
The Australian cases have established three categories regarding the negotiation of contract terms as follows:
- the parties intend to be immediately bound to perform but subject to formalising such terms in writing but not changing its effect;
- the parties have completely agreed upon all the terms and do not intend to depart from it, but instead have performed one or more of the agreed terms;
- the parties do not intend a concluded bargain, unless and until they execute a formal contract;
- the parties have reached clear key terms and there’s no ambiguity regarding the agreed key terms.
Contracts in the first two and fourth categories are legally binding whereas contracts in the third category are not.
As to whether a binding agreement/contract exist will depend significantly on the factual scenario of each case.
Although the principles of a binding agreement/contract have been clearly identified in Australian law, the application of facts to these principles may not be as clear and there may be scenarios where it may fall into more than one of these categories.
Therefore, if you believe you are involved in a contractual dispute (either if the party or yourself is trying to get out of an agreement), we strongly recommend that you consult a lawyer to obtain legal advice.
Articolo scritto da Ting Wei Hu del nostro ufficio di Brisbane.