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Contractual Negotiations - Caution Required

SSM Roundel

Steamship Mutual

Published: September 01, 2010


Müller (the diary product company) began negotiations with RTS (who make and supply packaging equipment) for the supply and installation of machinery at a Müller factory. Müller gave a Letter of Intent and upon receipt RTS began work, notwithstanding that formal contract terms were still being negotiated. Inter alia, the Letter of Intent provided for the whole contract price and was not limited to the price of works carried out whilst the Letter was “alive” and further it provided that full contract terms were to be based upon Müller’s MF/1 terms. Clause 48 of those MF/1 terms provided as follows:

“48. Counterparts

48.1 This Contract may be executed in any number of counterparts provided that it shall not become effective until each party has executed a counterpart and exchanged it with the other.”           

The Letter of Intent expired and work continued as did negotiation of contract terms. By July 2005 the final draft contract was all but agreed. It incorporated Müller’s MF/1 terms. In August 2005 a revised delivery date was agreed. RTS subsequently delivered the system and Müller, alleging defects, paid only part of the price. Signature of the contract had never taken place and disputes subsequently arose requiring a preliminary determination as to the existence of a contract and the terms thereof.

The High Court held there was a contract in existence which incorporated some of the terms in the final draft contract. The Court of Appeal overturned that decision on the grounds that clause 48, requiring signature of the contract, operated as a “subject to contract” provision and, thus, no contract subsisted after expiry of the Letter of Intent.

The matter then came before the Supreme Court, judgment being delivered by Lord Clarke (the former Admiralty and Commercial Court judge). Given the varying decisions of the courts, the moral of this story as Lord Clarke phrased it, “is to agree first and start work later.”

There were two questions to address: had the parties agreed the “essential” terms for the formation of a legally binding contract and the effect of Clause 48, “the subject to contract” provision.

As to the first question, the Supreme Court overturned the Court of Appeal and decided that the evidence clearly supported the existence of a contract. By July 2005 the contract was all but agreed and RTS had performed substantial works for which Müller had made payment. Payment was in accordance with the contract price originally agreed in the Letter of Intent. Further, variations were agreed in August 2005, with no suggestion from either party that there was no contract in existence which was capable of being varied.

Applying the “reasonable man” test, the court held that no reasonable businessman would hold the view that no contract was in place between the parties.

As to the terms of that contract, those were found to be as agreed in July 2005, including the MF/1 terms. This was at variance with the High Court decision that only some of those terms were applicable. However, in line with the Court of Appeal decision, the Supreme Court held that the “subject to contract” provision meant no contract was binding until signed.

However, what the Court of Appeal had failed to address was whether that requirement had been waived by the conduct of the parties. Such waiver, whilst it must be unequivocal, need not be in the form of an express statement. Clearly, in this instance, such waiver could be inferred from the communications and conduct of the parties.

Aside from the obvious point that parties must ensure, as far as is possible, that contractual terms are agreed and properly documented before work begins, it is easy to fall foul of “boilerplate” clauses such as clause 48, which although headed “Counterparts” was held to be a “subject to contract” provision.

RTS Flexible Systems Ltd v Molkerei Alois Müller Gmbh [2010] UKSC 14 on appeal 10th March 2010

Article by Sian Morris

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