PUT IT IN WRITING

A recent decision of the Supreme Court has underlined the dangers of starting works without first agreeing the precise basis on which that work is to be done.

In RTS Flexible Systems v Müller, RTS quoted for the design and installation of packaging machines for Müller – who then sent RTS a letter of intent, which provided that the parties had four weeks to finalise, agree and sign a contract based on Müller’s amended standard construction contract conditions.

RTS began work on this basis and the parties continued to negotiate the final contract, extending the period of the letter of intent while they did so. When the letter of intent expired, RTS continued to build and deliver the equipment, and was partially paid for it. However, no formal written contract was ever signed and a dispute arose, which eventually reached the Supreme Court.

The key issue was whether the parties had made a contract after the expiry of the letter of intent and, if so, on what terms. The Court took the view that there was a binding contract – not least because the price had been agreed and extensive work had been undertaken.  It also held that certain variations made to the terms of the draft contract had not been agreed on a "subject to contract" basis, as the Court inferred that this had been waived by both parties by their conduct.

Whilst this decision ultimately turned on its facts, this is by no means an unusual set of circumstances and it highlights the importance of ensuring, where it is not possible to agree terms and conditions in an executed written contract before works begin, that any letters of intent are drafted in very clear terms, including the scope of the work price and timescale.  Otherwise, there will be considerable uncertainty (and scope for litigation) as to whether any contract has been concluded and, if so, on what terms.

An important note is that even where a letter of intent or draft contract is expressly stated to operate “subject to contract”, this may still be regarded as having been waived by conduct (as in this case) and, if a contract is found to exist, the terms of that contract also will be determined by reference to the parties’ conduct.

Chris Bannister