RTS Flexible Systems Ltd v Molkerei Alois Muller Gmbh & Co KG (UK Production) [2010] UKSC 14

Following an executed Letter of Intention, the parties began work before a contract was signed. A dispute arose. The claimant asserted that a contract had been agreed and that it included certain terms (the ‘MF/1 terms’) on the basis that these had been agreed in the fi nal draft. The defendant claimed that as no formal contract had been signed, the only contract in place was based upon the fact of payment and the work carried out for the price agreed as set out in a number of specifi c documents, but with no further terms and, specifi cally, not the MF/1 terms.

The Court of Appeal found that there was no contract between the parties. The Supreme Court disagreed. Noting that every case depends on its facts, the Court undertook a detailed review of the correspondence between the parties before concluding that all of the essential terms of the contract had in fact been agreed, and that the parties waived the (express) provision that the contract must be executed, by way of their subsequent actions, most notably in agreeing a subsequent (oral) variation to the delivery plan under the contract.

Comment

This decision highlights the problems that arise from commencing work under a contract before the contract is fi nalised (and, indeed, failing to fi nalise the contract at all). All three of the courts involved reached completely differing views on the facts: the trial judge had found a contract with limited terms; the Court of Appeal found no contract at all, and the Supreme Court found a contract on the terms of the fi nalised draft on the basis that any further details were not ‘essential’.

Perhaps more remarkably, the Supreme Court found that the express stipulation that the contract would “not become effective until each party has executed a counterpart and exchanged it with the other” had been waived by the parties’ subsequent conduct. Given the prevalence of this form of clause or similar, the case provides yet another caution against the risk of relying on ‘subject to contract’ provisions as providing protection against the risk of a court fi nding that a fi nalised agreement has been concluded. While commercial pressures frequently require work to commence before negotiations have been fi nalised, this case highlights the importance of subsequently fi nalising the contracts.