A binding agreement is a contract, and a contract is an agreement the law will enforce. If one party fails to do what they promised, the other can sue for a remedy, usually damages and in some cases an order for specific performance. Australian courts do not care much what you called the document. They look at what you agreed, how you expressed it, and how you behaved.
The hard question for most small business owners is working out when a deal stops being a negotiation and becomes a contract. This article sets out the elements that make an agreement binding, the rules on writing and electronic signatures, when "subject to contract" language protects you and when it does not, and a worked example of how a casual email exchange can become enforceable. It closes with the misconceptions that most often cause trouble and the point at which a lawyer is worth engaging.
The elements of a binding contract
Under Australian law, an agreement becomes binding when the core elements of contract formation are all present. A court weighs them together rather than requiring a particular form of document. The elements are offer and acceptance, consideration, intention to create legal relations, certainty, and capacity and legality.
Offer and acceptance
A contract starts with a clear offer, followed by an unconditional acceptance of that offer. A supplier's quote is an offer; the customer's email saying "we accept, please proceed" is the acceptance. If the response changes the price, scope or timing, it is usually treated as a counter-offer rather than an acceptance, and the original offer lapses. When the exchange happens by email or messaging, keep a record of the exact words, because the contract is formed at the moment the acceptance is communicated.
Consideration
Consideration is the bargain element. Each side must give something of value, usually payment in exchange for goods or services. A promise with nothing given in return is generally not enforceable. Deeds are the main exception: a deed is binding without consideration, which is why settlement deeds and guarantees are often executed as deeds. Deeds also enjoy a longer limitation period, twelve years under s 16 of the Limitation Act 1969 (NSW), compared with six years for ordinary contracts under s 14 of that Act.
Intention to create legal relations
The parties must intend their arrangement to be legally binding rather than casual or social. Since Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95, the High Court has made clear that intention is assessed objectively, from the words and conduct, not from what a party privately claims they meant. In a commercial setting the dealings are presumed to be intended to be binding, but the words of the document can displace that presumption.
Certainty
The terms must be clear enough for a court to enforce. If important details are left as "to be agreed", there may be no contract at all. But the bar is not as high as many assume. In Feldman v GNM Australia Ltd [2017] NSWCA 107, the New South Wales Court of Appeal confirmed that parties can be immediately bound while deferring important matters to be agreed later, provided the essential terms are settled.
Capacity and legality
Each party must have the legal capacity to contract, and the subject matter must be lawful. An agreement with a minor or a person lacking mental capacity raises enforceability issues, as does a contract for an unlawful purpose. These elements rarely bite for everyday business deals, but they are part of the analysis a lawyer runs when a dispute emerges.
Writing and signatures: what form does the law require?
Most business contracts do not need to be in writing. Oral agreements are enforceable, and so are agreements made by a mix of conversation, email and conduct. The problem with an oral deal is proof: if a dispute arises, a court must reconstruct what was agreed from conflicting accounts. If you rely on a phone conversation, capture the terms in an email soon afterwards.
There are exceptions. In New South Wales, s 54A of the Conveyancing Act 1919 (NSW) provides that a contract for the sale of land, or an interest in land, cannot be sued upon unless the agreement, or a note or memorandum of it, is in writing and signed by the party to be charged. Subsection (4) confirms that an agreement in electronic form with an electronic signature satisfies this requirement.
Electronic signatures are generally valid for business documents. Under s 10 of the Electronic Transactions Act 1999 (Cth), and the equivalent state laws, a signature requirement is met where a method identifies the person and indicates their intention in respect of the information, the method is as reliable as appropriate in the circumstances (or is proven in fact to have done the job), and the recipient consents. That is why a typed name in an email footer, or a click on a digital signing platform, can bind a company, provided the authorised person does the signing.
When "subject to contract" still leaves you bound
This is where most businesses get caught. The classic authority is Masters v Cameron (1954) 91 CLR 353, a High Court decision about a deposit paid on a farm sale made "subject to the preparation of a formal contract of sale". The Court identified three situations where parties have negotiated and then spoken of a formal contract. In the first, the parties have settled every term and intend to be bound immediately, with the formal document simply restating the deal in fuller form: there is a binding contract. In the second, the terms are settled but performance is conditional on a formal document being executed: again binding. In the third, the parties intend no bargain at all until the formal contract is signed: nothing binds them.
The categories are not a magic formula. In Feldman v GNM Australia Ltd, the Court of Appeal said they are not strict or prescriptive, and the primary question remains whether, assessed objectively, the parties intended to create contractual relations. The Court also held that conduct after the alleged agreement is admissible on the question of whether a contract was formed. If you keep saying "subject to contract" but then start delivering goods, issuing invoices and accepting payment, a court may well find you were bound all along.
This is the logic behind non-binding documents such as memoranda of understanding, letters of intent, term sheets and heads of agreement. Used properly, they record headline terms without creating obligations. But a document marked "non-binding" can still contain binding pockets: confidentiality, exclusivity or no-shop periods, cost-sharing of due diligence, and governing law and dispute resolution clauses are routinely drafted to bind immediately. Label each clause as binding or non-binding, and act consistently with that labelling.
A worked example: the email that became a contract
Consider a coffee roaster in Melbourne that emails a cafe group: "We will supply 500 kg of beans a month at $18 per kg, delivery every Friday, first delivery 1 March. Formal supply agreement to follow." The cafe group replies "Great, we're in", and the roaster begins roasting and delivers the first two consignments, which the group pays for. If the group then stops ordering, the roaster can argue a binding contract existed from the exchange, because price, quantity and timing were settled, and the performance on both sides showed an intention to be bound. Under the first category in Masters v Cameron, the pending formal agreement is simply a restatement of the deal.
Now change one detail. The email says the supply is "subject to a formal supply agreement being executed by both parties", and neither side starts performing. That falls into the third category: no contract until the document is signed. If the group pulls out before signing, the roaster has no claim for lost profits, though any binding confidentiality or exclusivity clauses in the exchange would still operate.
Misconceptions that cost businesses
Four misconceptions cause the most trouble:
- An MOU cannot be enforced: A court enforces what the words and conduct show, not the label on the document. A document headed "Memorandum of Understanding" that contains settled terms and is followed by performance can be a binding contract.
- No written document means no contract: Oral agreements are binding in most commercial settings. The exceptions, such as contracts for the sale of land under s 54A of the Conveyancing Act 1919 (NSW), are limited.
- Electronic signatures are less reliable: Under s 10 of the Electronic Transactions Act 1999 (Cth), an electronic signature satisfies a signing requirement if it identifies the signatory and indicates intention. The real issue is usually proof of who clicked, which is why audit trails matter, not validity.
- "Subject to contract" is a shield: It only works if it reflects a genuine intention not to be bound, and if your conduct does not contradict it. Starting performance, accepting payment or confirming orders in writing can all signal that you were bound despite the words.
When to get a lawyer involved
Two situations call for professional input:
- Assessing whether you are already bound: A lawyer can review an email chain, a term sheet or a signed MOU and tell you whether the elements are present, which clauses are enforceable and what your exposure is before you perform further.
- Drafting the documents themselves: A practitioner will draft the binding and non-binding clauses so the boundary is explicit, keep the "subject to contract" language consistent, recommend whether a deed is appropriate where consideration is an issue, and check that the right people sign on behalf of the company.
The practical benefit is certainty. Knowing exactly which obligations you have taken on, and which you have not, lets you negotiate and perform without the fear of a surprise claim. It also makes disputes cheaper, because the contract itself, rather than a reconstruction of the emails, sets the terms.
The question to ask before you send the email
Before you write "we agree", "confirmed" or "happy to proceed" in an email, or before you sign a document labelled non-binding, ask yourself one question: if this exchange was put before a court, would it find an intention to be bound? The answer turns on the words you use and the things you do afterwards. The most expensive mistake in this area is not failing to sign a formal contract. It is starting to perform, accepting payment or delivering goods while a formal document is still pending, because that conduct can turn a negotiation into a binding agreement overnight. If you are not ready to be bound, say so in the document and in your emails, and act as though you mean it.