The principles set out in Masters v Cameron are as relevant today as they were when the case was decided by the High Court in 1954. As a recent case shows, the principles are particularly relevant when negotiating a settlement agreement.
But first, to recap…
In Masters v Cameron, the High Court of Australia held that where parties reach an agreement of a contractual nature and also agree to subsequently draw up a formal contract, the case may fall into one of three categories:
- the parties intend to be bound immediately, though expressing a desire to draw up their agreement in a more formal document at a later stage;
- the parties intend to be bound immediately but may wish the operation of a particular clause or term to be conditional upon the execution of a more formal document; or
- the parties intend to postpone the creation of contractual relations until they execute a formal contract.
Australian courts have subsequently recognised a fourth category. That is, where the parties intend to be bound immediately and exclusively by the terms that they have agreed upon while expecting to make a further contract, in substitution for the first, contract containing additional terms.
A recent case…
On 29 June 2018, the Supreme Court of New South Wales handed down a decision in the case of Damcevski v Demetriou. The Court considered whether a settlement agreement, drawn up during mediation and contemplating the subsequent execution of a formal deed of settlement and release, was a binding agreement.
During mediation the parties signed a document titled "Heads of Agreement". The Heads of Agreement required the parties to subsequently enter into a deed of release and settlement and provide security in the form of a mortgage.
The Plaintiff submitted that the Heads of Agreement was an agreement with immediately binding and enforceable terms and asserted that the agreement fell within the first category of Masters v Cameron.
The First Defendant denied that the Heads of Agreement was binding and argued that it constituted no more than "an agreement to agree" falling within the third category of Masters v Cameron. The Fourth Defendant alleged that the Heads of Agreement was within the third category (or alternatively the second category) of Masters v Cameron.
In determining whether the agreement was binding, the Court stated:
- whether or not the parties intended the agreement to be immediately binding is to be determined objectively having regard to the language contained in the Heads of Agreement;
- the Heads of Agreement must be read in the light of the surrounding circumstances;
- if the terms of the Heads of Agreement indicate that the parties intended to be bound immediately, effect must be given to it; and
- it is uncontroversial that post-contractual conduct is admissible to determine whether a contract exists between the parties.
Applying these principles to the facts at hand, the Court determined that, objectively viewed, the Heads of Agreement was a binding agreement with two outstanding outcomes to occur. First the preparation and signing of the deed of release and settlement by the parties and second a mortgage to be provided. That is, the Heads of Agreement fell under the first category of Masters v Cameron.
This case serves as a reminder that parties to a settlement agreement should carefully consider whether they intend a settlement agreement to be immediately binding and enforceable.
  HCA 72
 Sir Kim Lewison and David Hughes (eds), The Interpretation of Contracts in Australia (Thomson Reuters, 1st ed, 2012) [8.16.1].
 Bobi Damcevski v Emilios Demetriou & Ors  NSWSC 988