Letters Of Intent: Agree First, Work Later

Last week's decision of the Supreme Court in RTS v Muller shows where contract terms are negotiated "subject to contract", and work begins under a letter of intent before contract terms are finalised that it is possible for the agreement that was "subject to contract" to become legally binding as a result of the parties conduct.

Background

Muller and the respondent RTS entered into negotiations in relation to the supply and installation of packaging. So that work could begin during contract negotiations the parties entered into a contract formed by a letter of intent dated 21 February 2005 and a letter of intent contract dated 1 March 2005. The letter of intent expired 27 May 2005 and work continued on after this date before the terms of the detailed written contract had been finalised.

The letter of intent provided for the whole agreed contract price and was not limited to the price of the works during the letter of intent period. It was envisaged under the letter of intent that the full contract terms would be based on Muller's amended form of MF/1 contract and signed within 4 weeks of the date of the letter of intent.

A final draft contract was provided by July 5, 2005. At this stage of the negotiations all the essential terms had been agreed which provided that the contract would not become effective until all parties had executed and exchanged their counterparts. The parties agreed some further variations to the contract in August . Muller argued there was no binding contract between the parties because no contract had been signed or exchanged.

The issue addressed by the court was whether, after the expiry of the letter of intent, Muller and RTS had entered into a contract and if so on what terms. In relation to the terms the issue was whether the contract was subject to some or all for the MF/1 terms as amended.

Findings

The Court stressed that it will not impose binding contracts where none exists and therefore each case will depend on its own facts taking into consideration what is communicated between the parties by words or conduct. Where contracts are negotiated "subject to contract" the court noted that it will not always infer (or even usually infer) that a contract has been agreed on those terms that are "subject to contract".

In this instance the court concluded that a binding contract had been reached and that binding contract was not subject to contract for the following reasons:

1. It was unrealistic to infer that the...