RTS Flexible Systems Limited v Molkerei Alois Muller Gmbh [2010] UKSC 14

Court: Supreme Court

Justices: Lord Phillips, Lord Mance, Lord Collins, Lord Kerr, Lord Clarke

Fact

RTS a supplier of the automated packaging agreed to install an automated system in Muller’s factory. A letter of intent (LOI) was drawn up and was due to be in force for four weeks of the date of the LOI. This LOI had set out the contractual price for the machinery and stated that the final contract will be on Muller’s contractual terms with amendment. The letter contained a clause that the contract would not be binding until each party has executed a counterpart, sign and exchanged it with the other. The parties proceeded with the agreement but they never signed the final contract. A dispute arose, RTS refused to finish installing the machinery and Muller refused to make any further payment. The parties referred preliminary issues regarding the formation of the contract and incorporation of terms to the court for determination.

Issue:

Did the parties enter into a contract following the expiry of the LOI and, if so, on what terms?

Held:

The High Court ruled that there was a contract but on limited terms. The Court of Appeal reversed this, finding that there could be no contract until the agreement was signed. Finally, the Supreme Court stated that there is a binding contract. The parties reveal a joint wish to give effect to the terms of the negotiated deal without formal signing and the counterparts clause had been waived by their conduct. Lord Justice Clarke summarised the principles as to whether or not there was a binding contract, and, if so, what the terms might be as follows:
“45… 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. Even if certain terms or economic or other significance to the parties have not been finalised, an objective appraisal of their words and conduct may lead to the conclusion that they did not intend agreement of such terms to be a precondition to a concluded and legally binding agreement.” [Emphasis added]

Note:

Letters of intent or agreement to agree are promises that the parties intend to enter to an agreement at a future date. These agreements are sometimes described as ‘subject to contract’ on the basis that the parties are still negotiating and do not intend to be bound until a formal written contract has been signed by both parties.

The statement of Lord Clark establish that test for deciding whether an agreement has been reached is objective rather than subjective.