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RTS Flexible Systems Ltd v Molkerei Alois Müller [2010] UKSC 14

Valid contract concluded despite “subject to contract” clause

Facts

The claimant was a supplier of automated machines and agreed to manufacture an automated system in the defendant’s factory. Work began on the basis of a letter of intent with a long form contract to follow. The letter of intent expired whilst negotiations on the long form contract continued. A dispute arose as to whether the defendants’ performance requirements were satisfied by the machines delivered by the claimants.

Issue

The claimant sued for the balance of the purchase price on the basis that either a continuing contract or a new contract formed upon expiry of the letter of intent or that it was entitled to be paid a reasonable sum on a quantum meruit basis. The defendant counterclaimed for damages on the basis that the parties had concluded a simple contract which had no limitation on liability. The High Court held that after the letter of intent expired a new contract was concluded which applied retrospectively. The Court of Appeal held that there had been no contract.

Held

The defendant successfully appealed to the Supreme Court. The Court considered the communication between the parties in terms of words and conduct and whether it could be objectively concluded that honest sensible businessmen in the position of the parties intended to enter legally binding relations. In the circumstances, the idea that there was no contract was unconvincing. Where a contract is negotiated “subject to contract” and work begins before the final contract is executed, it depends on the circumstances whether the parties had waived the subject to contract term. In the instance case, the unequivocal conduct of the parties led to the conclusion that they had made a binding agreement to waive the “subject to contract” provision.

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