Applicable Principles
33 The applicable principles are well established. In Archer Capital 4A Ltd as Trustee for the Archer Capital Trust 4A v Sage Group PLC [2015] FCA 960; 108 ACSR 218, Farrell J provided the following summary:
126. It is uncontroversial that in determining whether the parties have reached a binding agreement, the Court must ascertain the "objective intention" of the parties. It is not enough that the parties reached a consensus; they must have intended that the consensus arrived at will be legally binding, enforceable by a court: Air Great Lakes Pty Ltd v K S Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309 at 326 per Mahoney JA If the terms of a document indicate that the parties intended to be bound immediately, effect must be given to that intention irrespective of the subject matter, magnitude or complexity of the transaction: [Baulkham Hills Private Hospital Pty Ltd v G R Securities Pty Ltd (1986) 40 NSWLR 622 ] at 634 per McHugh JA (with whom Kirby P and Glass JA agreed). In that case, the use of the words "legally binding agreement in principle" demonstrated an intention to be bound immediately even though there was an expectation that a further contract would be substituted for it.
127. Determining objective intention is a fact based inquiry. Although judges are wont to formulate guiding "principles" or "propositions", those "principles" and "propositions" are subservient to the fact-specific objective finding of the parties' intention: Sagacious Procurement Pty Ltd v Symbion Health Ltd [2008] NSWCA 149 ("Sagacious") at [66] per Giles JA (with whom Hodgson and Campbell JJA agreed). See also Tasman Capital Pty Ltd v Sinclair [2008] NSWCA 248 at [26] per Glass JA (McColl JA and Young CJ in Eq agreeing).
128. Intention may be found in a series of communications or a single document. It is the intention that a reasonable person would discern that the parties had concerning the subject-matter of the alleged contract if that reasonable person had the parties' knowledge of the words and actions communicated to each other and of the surrounding circumstances: Ryledar Pty Ltd v Euphoric Pty Ltd (2007) 69 NSWLR 603 at 655 per Campbell JA (with whom Mason P and Tobias JA agreed).
129 I do not accept that there is any presumption in favour of an intention to create legal relations in a context such as this. It is a factual inquiry. I endorse the comments of Tadgell J in Toyota Motor Corporation Australia Ltd v Ken Morgan Motors Pty Ltd [1994] 2 VR 106 at 177 that:
No intention to make a promise can be imputed to a person whose words and conduct, objectively considered, do not lead to the inference that he intended to make one. Negotiations, no matter how heavily commercial in character, are no substitute for such an intention ... when the question is whether the legal effect of the transaction is promissory, there is no presumption that it is ...
130 It is uncontroversial that labelling a document "subject to contract" is not determinative of whether the parties intended to be bound before the execution of a formal agreement. However, the use of the phrase usually creates a presumption that the parties did not intend that document to be binding, but rather the basis for a future contract. The applicants rely on Helmos Enterprises Pty Ltd v Jaylor Pty Ltd [2005] NSWCA 235 at [73] per Young CJ in Eq (as he then was) for the proposition that the presumption may be weaker outside the context of contracts for the sale of land. However, Young CJ in Eq made no finding to that effect and the issue is always one of intention determined objectively.
131. The conduct of the parties after the time the alleged contract arose may be relevant for the purpose of casting light on the meaning of communications and whether the parties intended to be legally bound: Sagacious at [69]; see also [105]-[106] in relation to the probative value of subsequent inter partes and internal communications.
34 In Masters v Cameron [1954] HCA 72; 91 CLR 353, the High Court said at [360]:
9. Where parties who have been in negotiation reach agreement upon terms of a contractual nature and also agree that the matter of their negotiation shall be dealt with by a formal contract, the case may belong to any of three cases. It may be one in which the parties have reached finality in arranging all the terms of their bargain and intend to be immediately bound to the performance of those terms, but at the same time propose to have the terms restated in a form which will be fuller or more precise but not different in effect. Or, secondly, it may be a case in which the parties have completely agreed upon all the terms of their bargain and intend no departure from or addition to that which their agreed terms express or imply, but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document. Or, thirdly, the case may be one in which the intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract.
10. In each of the first two cases there is a binding contract: in the first case a contract binding the parties at once to perform the agreed terms whether the contemplated formal document comes into existence or not, and to join (if they have so agreed) in settling and executing the formal document; and in the second case a contract binding the parties to join in bringing the formal contract into existence and then to carry it into execution. Of these two cases the first is the more common. Throughout the decisions on this branch of the law the proposition is insisted upon which Lord Blackburn expressed in Rossiter v. Miller (1878) 3 App Cas 1124 when he said that the mere fact that the parties have expressly stipulated that there shall afterwards be a formal agreement prepared, embodying the terms, which shall be signed by the parties does not, by itself, show that they continue merely in negotiation. His Lordship proceeded: " . . . as soon as the fact is established of the final mutual assent of the parties so that those who draw up the formal agreement have not the power to vary the terms already settled, I think the contract is completed" (1878) 3 App Cas, at p 1151: see also Sinclair, Scott & Co. Ltd. v. Naughton [1929] HCA 34; (1929) 43 CLR 310, at p 317 . A case of the second class came before this Court in Niesmann v. Collingridge [1921] HCA 19; (1921) 29 CLR 177 where all the essential terms of a contract had been agreed upon, and the only reference to the execution of a further document was in the term as to price, which stipulated that payment should be made "on the signing of the contract". Rich and Starke JJ. observed (1921) 29 CLR, at pp 184, 185 that this did not make the signing of a contract a condition of agreement, but made it a condition of the obligation to pay, and carried a necessary implication that each party would sign a contract in accordance with the terms of agreement. Their Honours, agreeing with Knox C.J., held that there was no difficulty in decreeing specific performance of the agreement, "and so compelling the performance of a stipulation of the agreement necessary to its carrying out and due completion" (1921) 29 CLR, at p 185: see also O'Brien v. Dawson [1942] HCA 8; (1942) 66 CLR 18, at p 31.
11. Cases of the third class are fundamentally different. They are cases in which the terms of agreement are not intended to have, and therefore do not have, any binding effect of their own: Governor & c. of the Poor of Kingston-upon-Hull v. Petch [1854] EngR 995; (1854) 10 Exch 610 (156 ER 583). The parties may have so provided either because they have dealt only with major matters and contemplate that others will or may be regulated by provisions to be introduced into the formal document, as in Summergreene v. Parker [1950] HCA 13; (1950) 80 CLR 304 or simply because they wish to reserve to themselves a right to withdraw at any time until the formal document is signed. These possibilities were both referred to in Rossiter v. Miller (1878) 3 App Cas 1124. Lord O'Hagan said: "Undoubtedly, if any prospective contract, involving the possibility of new terms, or the modification of those already discussed, remains to be adopted, matters must be taken to be still in a train of negotiation, and a dissatisfied party may refuse to proceed. But when an agreement embracing all the particulars essential for finality and completeness, even though it may be desired to reduce it to shape by a solicitor, is such that those particulars must remain unchanged, it is not, in my mind, less coercive because of the technical formality which remains to be made" (1878) 3 App Cas, at p 1149. And Lord Blackburn said: "parties often do enter into a negotiation meaning that, when they have (or think they have) come to one mind, the result shall be put into formal shape, and then (if on seeing the result in that shape they find they are agreed) signed and made binding; but that each party is to reserve to himself the right to retire from the contract, if, on looking at the formal contract, he finds that though it may represent what he said, it does not represent what he meant to say. Whenever, on the true construction of the evidence, this appears to be the intention, I think that the parties ought not to be held bound till they have executed the formal agreement" (1878) 3 App Cas, at p 1152. So, as Parker J. said in Von Hatzfeldt-Wildenburg v. Alexander (1912) 1 Ch 284, at p 289 in such a case there is no enforceable contract, either because the condition is unfulfilled or because the law does not recognize a contract to enter into a contract.
35 The authorities have subsequently recognised an additional category of agreements to contract which is where the parties intend to be bound immediately and exclusively by the terms which they had agreed upon while expecting to make a further contract in substitution for the first contract, containing, by consent, additional terms: Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622 at 628. For convenience, I will refer to this as the fourth category.