Contract terms – Formation of contract – Letters of intent – Waiver

RTS Flexible Systems Ltd v Molkerei Alois Muller GMBH & Co KG (UK production): SC (Lords Phillips (president), Mance, Collins, Kerr, Clarke): 10 March 2010

The appellant (M) appealed against a decision of the Court of Appeal ([2009] EWCA Civ 26, [2009] 2 All ER (Comm) 54) that it had not entered into a contract with the respondent (R).

M and R had entered into negotiations about R supplying and installing automated packaging machinery for M. Although they had intended that a written contract would set out the terms on which the work was to be carried out, work had in fact begun before the terms were finalised. For the purpose of enabling the work to begin, and while continuing to negotiate the full contract terms, the parties had entered into a contract formed by a letter of intent, which provided for the whole agreed contract price and contemplated that the full contract terms would be based on ‘MF/1’ terms. By 5 July 2005, a draft final contract was produced, which provided that it would not become effective until each party had executed and exchanged a counterpart. That was never done. Rather, all the terms having been agreed, substantial works were carried out and, on 25 August, the agreement was varied in important respects. The issue was whether, after the expiry of the letter of intent, M and R had entered into a contract and, if so, on what terms. The judge at first instance found that, after the expiry of the letter of intent, the parties had entered into a contract whereby R would carry out the agreed work for the agreed price. He declined, however, to find that the contract included the final draft version of the MF/1 terms. The Court of Appeal overturned that decision, finding that no contract had come into existence after the expiry of the letter of intent. M submitted that there was a contract after the expiry of the letter of intent contract and that it was not on any of the MF/1 terms. R submitted that there was no contract or, if there was, it was on all the MF/1 terms as amended in the course of negotiation.

Held: (1) The instant case demonstrated the perils of beginning work without agreeing the precise basis upon which it was to be done, and the moral was to reach agreement before work began. Where a contract was being negotiated subject to contract, and work began before the formal contract was executed, it could not be said that there would always, or even usually, be a contract on the terms that were agreed subject to contract. That was too simplistic and dogmatic an approach. The court was not to impose binding contracts that the parties had not reached; all would depend upon the circumstances, Pagnan SpA v Feed Products Ltd [1987] 2 Lloyd’s Rep 601 CA (Civ Div) applied. There was no conflict between the approach of Steyn J in G Percy Trentham Ltd v Archital Luxfer Ltd [1993] 1 Lloyd’s Rep 25 CA (Civ Div), and that of Robert Goff J in British Steel Corp v Cleveland Bridge & Engineering Co Ltd [1984] 1 All ER 504 QBD, G Percy Trentham and British Steel considered. Each case depended on its own facts. Where the parties had conducted negotiations on the basis that, when reached, the agreement would be incorporated in a formal contract, the question was whether they had nevertheless agreed to enter into contractual relations on particular terms notwithstanding their earlier understanding or agreement.

(2) The idea that there was no contract was unconvincing. It was unrealistic to suppose that the parties had not intended to create legal relations. If, as was accepted, the price had been agreed, it must have formed part of a contract. Once the letter of intent contract had expired, the contract containing the price must have been contained in some other agreement.

(3) It did not make commercial sense to hold that the parties were agreeing to the works being carried out without any relevant contract terms. They treated the agreement reached on 25 August as a variation of the agreement that they had reached by 5 July, and it was not until they were in dispute that that suggestion was made that there was no contract. By 25 August at the latest the parties’ communications and actions led to the conclusion that they had agreed that the work would be performed on the terms agreed. Equally, though, it would make no commercial sense to hold that the work was to be carried out on some, but not all, of the terms agreed by July 5.

(4) In considering whether there was a contract on terms wider than those found by the judge it was necessary to ask whether the parties intended to be bound by what was agreed; whether further, essential terms were necessary in order for the contract to be legally enforceable; and whether they had departed from the understanding that it was to be subject to contract. By 5 July they had reached an agreement designed to operate as a composite whole. None of the issues outstanding thereafter was regarded as an essential matter requiring agreement before the contract could be binding, and they had agreed to waive the requirement that the agreement was subject to contract. In conclusion, they had reached a binding agreement on or about 25 August on the terms agreed on or before 5 July as subsequently varied, and that agreement was not subject to contract.

Appeal allowed.

Kenneth MacLean QC, Michael Fealy (instructed by Pinsent Masons) for the appellant; Stuart Catchpole QC, Charles Manzoni QC (instructed by Addleshaw Goddard) for the respondent.