Subject to Contract?

The recent Supreme Court decision in the case of RTS Flexible Systems Limited v Molkerei Alois Müller Gmbh & Co KG [2010] UKSC 14 is a reminder of the dangers to businesses of commencing work on commercial projects without having agreed contractual terms in advance. In this case the court held that a contract had come into effect in spite of the fact that the agreement had never been signed and included a clause which stated that the agreement would not become effective until it had been signed and exchanged by both parties.

RTS, a provider of automation systems for packaging foods, had been awarded the contract to supply the well known dairy product manufacturer Muller with an automated system for packaging some of its dairy products. RTS began work on this project on the basis of a four week letter of intent ("LOI") pending agreement of a final contract between the parties. A draft contract incorporating Muller's amended version of the mechanical engineering industry's standard terms for such projects ("Standard Terms") was subsequently prepared but never signed.

After the LOI had...