RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH & CO KG

Where commercial parties start work before settling all contractual terms, performance may support an intention to create legal relations and a contract arising during performance. That inference does not override a continuing stipulation that no contract will become effective until a written agreement is executed and exchanged. Where the contemplated agreement is a composite whole of general conditions and schedules, the court cannot select the agreed work and price while omitting terms and schedules that the parties treated as part of that whole. If the stipulated formalities are not completed, the court must not construct an alternative bargain. Any entitlement to payment may remain for determination on a quantum meruit at trial.

RTS appealed preliminary rulings made by Christopher Clarke J in the Queen’s Bench Division concerning a dispute over equipment supplied for Müller’s production lines. The parties began work under a letter of intent requiring full contractual terms and technical specifications based on amended MF/1 conditions to be finalised, agreed and signed. The period was extended, but no formal composite contract was executed and some schedules remained incomplete. The High Court held that a retrospective contract existed for the agreed work and price, but that the MF/1 conditions were not incorporated: [2008] EWHC 1087 (TCC). The central issue was whether continued performance after expiry of the letter of intent created any contract at all, or whether formation remained conditional on formal execution.

Lord Justice Waller gave the judgment of the court. Lord Justice Moses and Lady Justice Hallett agreed.

1. Point on appeal. RTS was entitled to argue that no contract came into existence after the letter of intent expired. The first-instance court necessarily had to consider whether any contract existed before deciding its terms, so the issue was open on appeal.
2. Contract formation. Performance before all terms are settled may support an intention to create legal relations and may permit a contract to arise during performance. The court considered the approach in Trentham v Archital Luxfer [1993] 1 Lloyds LR 25. It also relied on the reasoning in British Steel Corporation v Cleveland Bridge and Engineering Co Ltd [1984] 1 All ER 504, where work undertaken pending agreement of unresolved formal terms did not establish the assumed contractual responsibility.
3. Effect of condition 48. Condition 48 of the amended MF/1 terms was agreed as the basis of the negotiations. Properly construed, it required the contemplated contract to be executed by the parties and exchanged before it became effective. The term covered the composite arrangement comprising the basic contract, the general conditions and its schedules. No such document was signed or exchanged, and important schedules, particularly Schedule 6, remained unagreed.
4. The court therefore held that it was impermissible to isolate the agreed work and price and impose the agreed schedules as a contract. That would create a bargain neither party intended. The alternative argument concerning incorporation of the MF/1 terms did not require determination. The appeal was allowed and it was declared that no contract came into existence after termination of the letter of intent.
5. The court made no declaration concerning any quantum meruit; that question was left for trial. The costs order below was unchanged. Overall appeal costs were left for the trial judge to assess after trial, although the court indicated that, absent the complicating factors, it would have ordered the respondents to pay 80 per cent. No variation was made to the interim payment order, and permission to appeal to the House of Lords was refused.

• Court of Appeal (Civil Division): allowed the appeal and declared that no contract came into existence after expiry of the letter of intent.
• Queen’s Bench Division of the High Court of Justice: Christopher Clarke J held that a retrospective contract existed for the agreed work and price, excluding the MF/1 conditions: [2008] EWHC 1087 (TCC).