The Supreme Court has warned against the perils of beginning work without agreeing the precise basis upon which the work is to be done. “The moral of the story is to agree first and to start work later” said Lord Clarke who delivered the court’s judgement.
The case involved an agreement to provide high tech production lines for Muller, the well known dairy product and yoghurt producers. The parties had initially intended to enter into a detailed written contract setting out all the complex terms but as so often happens, although they agreed a Letter of Intent (“LOI”) and most but not all the contract was agreed, the contract was never actually signed.
The dispute arose after RTS Flexible Systems Ltd (“RTS”) the suppliers, had provided the services and installed the productions lines, which included parts that Muller had provided from third parties. For various reasons, the parties fell into dispute and Muller refused to pay the balance of the total cost (agreed in the LOI at £1,682,000), which was still outstanding.
RTS sued for the money, but because the precise terms of the agreement were unclear it claimed for “money due under a contract, alternatively damages. The Judge in the High Court had to decide, as a preliminary issue, whether there was a contract in place, even though nothing had been signed after the LOI expired. The LOI actually expired by agreement between both parties long before the work was completed.
The Judge decided there was a contract that RTS would carry out the agreed work at the agreed price, but he didn’t think it was essential for them to have agreed the terms and conditions which the parties had been negotiating and the Judge declined to hold those terms applied.
RTS then appealed to the Court of Appeal asking it to decide whether the Judge was right in holding there was a contract, and if there was a contract, whether he was right in holding it was not on the terms that were being negotiated. The detail of the terms was important because the parties had negotiated liquidated damages and limit of liability clauses which were critical. The Court of Appeal allowed the appeal, declaring there was no contract after the LOI had expired.
Muller then appealed to the Supreme Court. The essential issues were whether the parties made a contact after the expiry of the LOI contract and if so, on what terms. The Court looked at all the facts including the extent of the negotiations, which involved Muller’s original draft terms being amended six times. It also introduced the concept of the “reasonable, honest business man” and found by looking at all the evidence of the contract negotiations that there was a contract and that it as on the terms the parties had negotiated – even though they had been “subject to contract”. That meant that the limit of RTS’ liability had been agreed in the contract and the Supreme Court took the view the parties had waived the clause in the terms that the draft was “subject to contract”.
The case serves as a worthwhile reminder, that even though there may be good commercial reasons for starting work without a detailed legal agreement in place, ideally business should finalise the formal contract before starting work, or at the very least ensure that any letter of intent is up to date and agreed.
For further background detail, the Court of Appeal decision is here and the Supreme Court decision is here.
Comments