RTS Flexible Systems Limited v Molkerei Alois Müller Gmbh & Company KG (UK Production)

Contract formation depends on an objective assessment of the parties’ words and conduct. The court asks whether they intended legal relations and agreed every term which they, or the law, regarded as essential. Parties may bind themselves while leaving other matters or formalities outstanding.

A provision that negotiations are subject to contract may be waived by unequivocal agreement. Waiver need not be express and may be inferred from communications and conduct, although the court will not infer it lightly. Commencing or performing work does not invariably create a contract, but substantial performance is highly relevant. Where essential terms have been agreed and the parties proceed and vary their arrangements as binding, their conduct may establish a contract on the complete agreed terms despite the absence of formal execution.

RTS Flexible Systems Limited v Molkerei Alois Müller Gmbh & Company KG (UK Production) concerned work and equipment supplied under a major industrial project. The parties began work under a time-limited letter of intent while negotiating a detailed contract based on amended MF/1 conditions. The letter of intent expired, but work, payment and negotiations continued. No formal contract was signed.

Christopher Clarke J determined preliminary issues and held that the parties had made a contract after expiry of the letter of intent. He found that it covered the agreed work and price but excluded the MF/1 conditions. The Court of Appeal, [2009] EWCA Civ 26, allowed RTS’s appeal and declared that no later contract had been formed.

On Müller’s appeal, the central questions were whether a binding contract arose after the letter of intent expired and, if so, whether it incorporated the amended MF/1 conditions notwithstanding the unsigned-contract provision.

1. Appeal allowed. Lord Clarke delivered the judgment of the Court. The Court of Appeal’s order was set aside. Subject to submissions on form, declarations were to be made that the parties concluded a binding agreement on or about 25 August 2005 on the terms agreed by 5 July, as varied on 25 August, and that the agreement was neither subject to contract nor subject to clause 48.

2. Whether a contract exists, and its terms, depends objectively on the parties’ communications by words and conduct. The relevant questions are whether they intended legal relations and whether they agreed every term which they or the law regarded as essential. They may intend immediate legal effect despite leaving significant matters or formalities outstanding. The principles summarised in Pagnan SPA v Feed Products Ltd [1987] 2 Lloyd’s Rep 601 were approved.

3. Beginning and performing work before execution of a formal contract does not invariably establish a contract. Performance is nevertheless an important circumstance and may make it unrealistic to deny an intention to create legal relations. G Percy Trentham Ltd v Archital Luxfer Ltd [1993] 1 Lloyd’s Rep 25 did not establish an automatic rule based on performance. British Steel Corporation v Cleveland Bridge and Engineering Co Ltd [1984] 1 All ER 504 was distinguishable because essential liability terms there remained under negotiation.

4. The parties had agreed the price, substantially performed the project and treated their agreement of 25 August as a contractual variation. It made no commercial sense to regard their dealings as wholly non-contractual. It was equally untenable to select only the schedules while excluding the negotiated MF/1 conditions, since the draft was designed as a composite whole.

5. By 5 July all essential terms had been agreed. Incomplete schedules concerned matters which were inessential or could be completed during performance. The parties had agreed that the RTS Test Plan would comprise Schedules 5 and 6. Their failure to provide guarantees, appoint an engineer or follow particular contractual procedures did not prevent formation. Requirements intended for Müller’s benefit had been waived where Müller proceeded without insisting on them.

6. An agreement made subject to a signed contract can become binding if the parties unequivocally waive that condition. The waiver need not be stated expressly; it may be inferred from communications and conduct, although it will not lightly be inferred. By 25 August the agreed variation and continued performance established such a waiver. The contract provisionally fell to be treated as governing the whole period of performance, including earlier delay, subject to any waiver of particular terms.

1. United Kingdom Supreme Court: In RTS Flexible Systems Limited v Molkerei Alois Müller Gmbh & Company KG (UK Production) [2010] UKSC 14, Müller’s appeal was allowed and the Court of Appeal’s order was set aside. The Court held that a binding contract arose on or about 25 August 2005 on the terms agreed by 5 July, as varied on 25 August.

2. Court of Appeal: In [2009] EWCA Civ 26, the court allowed RTS’s appeal and declared that no contract had been formed after expiry of the letter of intent.

3. High Court: Christopher Clarke J determined preliminary issues and held that a contract arose after expiry of the letter of intent. It covered the agreed work and price but did not incorporate the amended MF/1 conditions.