RTS Flexible Systems Ltd v Molkerei Alois Müller GmbH & Co KG [2010] UKSC 14

RTS agreed to supply automated equipment to Müller under a Letter of Intent while negotiating detailed contract terms. Work proceeded without a formal contract being signed. The Supreme Court held that by their conduct, particularly a variation agreement on 25 August 2005, the parties waived the ‘subject to contract’ requirement and were bound by the negotiated MF/1 terms.

Facts

RTS Flexible Systems Limited agreed to supply automated pot mixing lines and related equipment to Müller for £1,682,000. The parties entered into a Letter of Intent dated 21 February 2005 to enable work to commence while they negotiated detailed contract terms based on Müller’s amended MF/1 conditions. The Letter of Intent contemplated that full contractual terms would be ‘finalised, agreed and then signed’ within four weeks. Negotiations continued beyond this period, and by 5 July 2005 the parties had essentially agreed all material terms, including the MF/1 conditions as amended. However, no formal written contract was ever signed or exchanged.

Work continued, and on 25 August 2005 the parties agreed a significant variation to the delivery schedule, dispensing with factory acceptance testing and altering the order of installation of the two production lines. Substantial payments were made by Müller based on percentages of the agreed contract price. A dispute later arose, leading to litigation over whether any binding contract existed after the Letter of Intent expired, and if so, on what terms.

Issues

1. Was there a binding contract between the parties after the expiry of the Letter of Intent?

2. If so, what were the terms of that contract, particularly whether the MF/1 conditions formed part of it?

3. Did clause 48 of the draft contract, which required execution and exchange of counterparts, prevent any contract from coming into existence?

Judgment

The Supreme Court unanimously allowed the appeal, holding that a binding contract existed on the terms agreed by 5 July 2005 as varied on 25 August 2005, including the MF/1 conditions. The Court rejected both the Court of Appeal’s conclusion that there was no contract and the trial judge’s finding that there was a contract on limited terms excluding the MF/1 conditions.

Lord Clarke, delivering the judgment of the Court, set out the governing principles:

“Whether there is a binding contract between the parties and, if so, upon what terms depends upon what they have agreed. It depends not upon their subjective state of mind, but upon a consideration of what was communicated between them by words or conduct, and whether that leads objectively to a conclusion that they intended to create legal relations and had agreed upon all the terms which they regarded or the law requires as essential for the formation of legally binding relations.”

The Court emphasised that the fact work was performed is a highly relevant factor in determining whether a contract exists:

“The fact that the transaction is executed rather than executory can be very relevant. The fact that the transaction was performed on both sides will often make it unrealistic to argue that there was no intention to enter into legal relations and difficult to submit that the contract is void for vagueness or uncertainty.”

On the critical question of whether the ‘subject to contract’ requirement had been waived, the Court held:

“The clear inference is that the parties had agreed to waive the subject to contract clause, viz clause 48. Any other conclusion makes no commercial sense. RTS could surely not have refused to perform the contract as varied pending a formal contract being signed and exchanged.”

The Court concluded that by 25 August 2005, the parties had by their conduct unequivocally waived clause 48 and agreed to be bound by the negotiated terms without the necessity of a formal written contract.

Implications

This case provides authoritative guidance on contract formation where parties commence performance before signing a formal agreement. The key principles established include:

• Courts will apply an objective test to determine whether parties intended to create legal relations
• A ‘subject to contract’ requirement can be waived by subsequent conduct
• The fact that work has been performed makes it easier to infer contractual intention
• Where parties have substantially agreed terms and performed accordingly, courts will not lightly conclude that no contract exists

The judgment reconciles the approaches in G Percy Trentham Ltd v Archital Luxfer Ltd and British Steel Corporation v Cleveland Bridge, confirming that both are correct on their facts and that each case turns on its particular circumstances. The case serves as a cautionary tale for commercial parties to ensure formal contracts are executed before work commences, as Lord Clarke observed: “The moral of the story is to agree first and to start work later.”

Verdict: Appeal allowed. The Supreme Court declared that the parties reached a binding agreement on or about 25 August 2005 on the terms agreed on or before 5 July 2005 as subsequently varied on 25 August 2005, and that this binding agreement was not subject to contract or to the terms of clause 48.

Source: RTS Flexible Systems Ltd v Molkerei Alois Müller GmbH & Co KG [2010] UKSC 14