press release
Unsigned contracts ruling give businesses food for thought
17 March 2010
Businesses are being warned that not all contracts need to be
signed before they become legally binding.
The warning from Nichola Evans, Commercial Litigation Partner at
Browne Jacobson, follows the recent Supreme Court decision in RTS
Flexible Systems v Muller, the European food producer.
Muller hired RTS Flexible Systems to provide and install a
series of packaging machines.
Both parties agreed work should commence under an outline
agreement called a letter of intent pending negotiations on a more
detailed contract being agreed upon, signed and exchanged.
When the letter of intent expired some months later, both
parties continued negotiations on the full contract.
A draft final contract was produced but unfortunately a dispute
rose over the performance of the equipment that had been installed
before the contract could be formally signed and exchanged.
The question for the courts was whether the two parties had made
a contract after the letter of intent had expired and, if so, on
what terms.
The Supreme Court overturned an earlier Court of Appeal decision
that stated there was no contract after the letter of intent had
expired.
According to Evans it is the intention of the parties that could
ultimately decide if a contract exists. She added:
“In some cases actions speak louder than words, and if
significant work is undertaken before terms are fully agreed, there
is every possibility that the courts will accept that a contract
does exist.
“In an ideal world no work should be undertaken until all the
parties have put pen to paper on a formal detailed contract.
However the courts appreciate that in some sectors commercial
pressures mean that work often gets underway before the final terms
of the contract have been agreed.
“In this case the intention of both parties was crystal clear.
They carried on as if a fully signed contract was in place and the
problem over its existence only became an issue when the parties
were in dispute.
Evans believes the case is a wake up call for all
businesses:
“Despite this definitive ruling from the highest court in the
land, it is important to remember that each case will be judged on
its own merits. Businesses should protect their interest by making
sure all critical terms are included in any letter of intent and
that these are incorporated into the main contract as soon as
possible. It is far better to have the certainty of a written
contract rather than trying to piece together the intention of the
parties by looking at the letter of intention and the verbal
negotiations which leaves room for interpretation.
“Where possible all contracts should be signed before proceeding
with any work and never forget that whilst letters of intent can be
binding they should not be relied on as a substitute for a detailed
contract,” she added.