Contract or no contract?
RTS FLEXIBLE SYSTEMS v MÜLLER (SC) [2010]
Anyone negotiating commercial contracts will recognise the scenario where, because of the urgent need to get on with the project, work is allowed to start without there being a fully concluded agreement on all of the terms of the contract. In the absence of a signed agreement in this case, a contract was initially found to exist, then on appeal the Court said there was no contract and now the Supreme Court (SC) has held a contract was indeed in place after all, albeit on different terms to the initial judge. How is that for certainty? Ultimately the SC ruled that by their behaviour, R and M had adhered to the contract’s demands and had effectively waived the requirement for a formal exchange of signed documents.
facts:
- The parties were negotiating terms for R to supply and install machinery for M. Although they had intended the terms for the performance of the work would be set out in a written contract, work had begun before they were finalised. The draft contract had a ‘subject to contract’ clause stating the agreement was not effective until signed.
- To enable the supply and installation to begin, and while continuing to discuss the full contract terms, the parties entered into a letter of intent (LoI), effective only for a limited period, but which specified the agreed contract price for the entirety of the work and contemplated that the full contract terms would be based on so called ‘MF/1’ terms. The MF/1 terms contained detailed provisions on matters such as liquidated damages and limitation of liability.
- The High Court Judge held a contract existed that R would perform the agreed work for the agreed price, but that it did not include the MF/1 terms.
- The Court of Appeal overturned the earlier decision, holding there was no contract at all after the expiry of the LoI and that R’s payment for the work was simply a matter of quantum meruit (ie as much as R may deserve or merit in the circumstances).
- M then appealed against this ruling to the SC.
decision:
- The Judges found in favour of M as, in the circumstances, a finding of no contract was said to be “unconvincing”. The draft agreement took effect as a binding contract since they found that all of the essential terms had been agreed and neither party had intended agreement of the remaining terms to be a precondition to a concluded contract.
- Whether there was a binding agreement and, if so, on what terms, depended on the facts of each individual case, on the parties' communications and conduct and whether an objective appraisal would conclude they had intended to create legal relations and had agreed on all the essential terms for the contract to be legally enforceable. This was the case even if certain terms of economic or other significance to the parties had not been finalised. The subjective intention of the parties is not relevant.
- An agreement ‘subject to contract’ could become legally binding if the parties later agreed to waive that condition, even if only by implication. On the facts, R and M had done so by their correspondence and behaviour; such a waiver need not be express. There had been unequivocal conduct by both parties to show it was agreed that R would carry out the project for the agreed price on the terms agreed, including the MF/1 terms. None of the issues outstanding was regarded as an essential matter requiring agreement before the contract could be binding.
points to note:
- One of the Judges said that the different decisions from the Courts “demonstrated the perils of beginning work without agreeing the precise basis upon which it was to be done, and the moral was to reach agreement before work began”. This is perhaps easier said than done in the commercial world, but businesses should note that by starting to perform their side of the agreement, they may waive the protection offered by a ‘subject to contract’ provision. Where work does need to commence, careful attention needs to be given to ensure there is sufficient certainty about whether a contract exists and on what terms.
- It is interesting that the ‘subject to contract’ clause was actually a counterparts provision in the draft agreement being negotiated. The wording was: “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.” All three Courts treated this as a ‘subject to contract’ clause which could prevent any agreement coming into existence at all until the contract is signed.
- This decision is also worth noting when compared with other recent decisions on contract formation, such as the Whittle Movers v Hollywood Express case. In that judgment, no contract was found and the restitutionary remedy of quantum meruit was applied instead. It was remarked a court should not strain to find a contract, because a restitutionary remedy can solve most, if not all, the problems. This latest view here may result in a deviation from this position.
- Overall, this latest judgment from the SC has to be welcomed and seems much more in line with common sense and greater certainty. However, it could mean that there is an increased risk that through silence or conduct you are taken to have impliedly accepted contract terms proffered by the other party.