Despite the parties never signing a formal written agreement, in RTS Flexible Systems Ltd v Molkerei Alois Muller Gmbh & Company KG the Supreme Court found that an agreement had come into effect on the basis of a letter of intent, notwithstanding that it was expressed to be "subject to contract".

Whilst in negotiations with Muller, RTS began work on the basis of a letter of intent which set out terms, including the contract price, and which contained a counterparts clause. The letter of intent expired but RTS continued to carry out the work and the agreement was subsequently varied in material respects. When the relationship between Muller and RTS broke down, the question arose as to whether a contract existed.

The Supreme Court found that the wording of the counterparts clause meant it was to be treated as a "subject to contract" clause, but the subsequent variation of the agreement was without any suggestion that the variation was agreed "subject to contract". The Supreme Court clarified that a variation or waiver of a "subject to contract" clause could in principle be inferred from the parties' correspondence and conduct and, on the facts, the circumstances clearly pointed to the inference that the parties had waived the "subject to contract" clause. The fact that the agreement had been subsequently varied demonstrated that there was no suggestion then that there was no agreement and accordingly nothing to vary, making a finding of no agreement unconvincing.

This case highlights the need for boilerplate counterpart clauses to be reviewed to ensure that these are not construed as "subject to contract" provisions. More generally, parties should agree terms first and start work later wherever possible. Where this is not possible, any interim arrangements should be drafted in very clear terms, stating what work is to be done, for what price and for what period, and expressed to be binding on the parties. Careful consideration should also be given to whether the terms of the arrangement are robust enough to deal with the consequences of a dispute.

Click here for our review of the Muller case, including guidance on how parties can best protect against these issues.