RTS Flexible Systems Limited v Molkerei Alois Müller Gmbh & Co Kg (UK Productions)

A letter of intent may create a binding interim contract even though the parties expect to agree fuller terms later. The court must identify objectively the work, price and obligations undertaken. If the agreed period for finalising the intended contract expires without agreement, the interim contract may terminate, with reimbursement obligations arising on termination or expiry where that is the parties’ reasonable intention.

Subsequent performance may establish a further contract retrospectively, even without a conventional sequence of offer and acceptance. Where parties agree the work and lump-sum price but do not agree detailed conditions, the contract may comprise those agreed matters alone. Payment of the balance under a lump-sum contract is ordinarily due on substantial completion.

RTS supplied automated equipment for Müller’s food-production lines. The parties began work under a letter of intent dated 21 February 2005, as qualified by RTS’s letter of 1 March. They contemplated agreeing a fuller contract based on Müller’s amended MF/1 terms, but negotiations continued without a signed contract.

RTS nevertheless continued designing, manufacturing, delivering and commissioning equipment after the letter of intent period expired. Müller made substantial payments and the parties reached agreement on the work and price, although they did not agree the proposed detailed conditions. The court determined the terms and duration of the letter of intent contract, whether a later contract arose by the parties’ conduct, the scope of RTS’s performance obligations, the effect of a later variation, and Müller’s payment obligations.

1. Letter of intent contract. Quotation J was an offer. Müller’s letter of intent was a counter-offer, accepted by RTS’s letter of 1 March subject to its qualifications and, at the latest, by Müller’s subsequent conduct. The resulting contract incorporated the necessary work described in sections 4–8 of Quotation J and its timetable, but not RTS’s standard terms and conditions.
2. The letter of intent contract was intended to last for four weeks, subject to agreed extensions, while the parties finalised, agreed and signed a contract based on Müller’s amended MF/1 form. It terminated when the extended period expired on 27 May 2005. Müller was liable on termination or expiry for RTS’s reasonable and demonstrable expenses, including engineering time and cancellation costs, but not profit or consequential loss.
3. Later contract. After expiry, the parties’ continued performance, agreement on the work and agreement on the price showed an intention to create legal relations. Applying the reasoning in Trentham v Archital Luxfer, [1993] 1 Lloyds LR 25, the later contract arose retrospectively by performance, no later than 29 June 2005. It comprised the identified URS, appendices, assumptions, functional design specification, test plan, project plans and related documents, but not the unexecuted MF/1 conditions.
4. RTS was required to provide the specified goods and services and satisfy the tests in the Test Plan, subject to the URS and assumptions. Its performance obligations were assessed by reference to the functioning and throughput of the lines as a whole, although the assumptions protected it against deficiencies in free issue equipment.
5. The August variation removed CFAT testing for Line 1 but did not remove RTS’s obligations to commission the equipment, undertake SAT testing or meet the contractual performance criteria. SAT testing was mandatory unless Müller dispensed with it, and takeover followed successful completion of SAT.
6. Müller owed the agreed lump-sum price of £1,682,000 plus VAT. Since no binding schedule governed the unpaid balance, it was payable on substantial completion, ordinarily achieved when SAT was passed. Additional work outside the contract was payable at a reasonable sum. No further contractual exclusions or limitations of liability applied.