RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH & Co KG
High Court
Citations: [2010] UKSC 14; [2010] 1 WLR 753; [2010] 3 All ER 1; [2010] 2 All ER (Comm) 97; [2010] Bus LR 776; [2010] 1 CLC 388; [2010] BLR 337.
Facts
The claimant sold automated food packaging machines. The defendant supplied dairy products. The parties were negotiating for the claimant to design, manufacture and install two production lines for the defendant’s factory. On the 21st of February 2005, the defendant sent the claimant a letter of intent, which included a draft contract. This draft contract required the claimant to complete the work by the 30th of September 2005 for £1.6 million. It was based on the Institutes of Mechanical Engineers and Electrical Engineers’ standard terms and conditions (referred to as ‘the MF/1 conditions’). The MF/1 conditions needed to be signed before they would bind either party, and contained various exclusion and limitation clauses.
Neither party signed the draft agreement. However, the claimant began work. On the 25th of August 2005, the defendant asked the claimant to vary the agreement, and the claimant agreed. By the time the claimant completed the work, the defendant had paid 70% of the price. However, the defendant refused to pay anything further after the parties began to dispute whether the work complied with the agreed specifications.
The claimant sued the defendant for the price on one of three alternative bases:
- A contract had been formed according to the terms of the September 30 draft contract;
- This contract had been replaced by a varied contract incorporating the MF/1 terms on the 25th of August; or
- No contract had formed, but the claimant was entitled to quantum meruit.
The defendant counter-claimed for damages. They argued that no contract including the MF/1 terms could arise, because those terms required a signature before any party was bound. As such, they suggested that the work took place under a simple contract with no exclusion or limitation clauses. If so, then the defendant could obtain damages for defective performance. If not, then their claim would be defeated by the MF/1 exclusion terms.
Issue(s)
- Had a contract arisen, and if so, on what terms?
Decision
The House of Lords held in favour of the claimant. Both parties had unequivocally waived the need for a signature by performing according to the terms of the draft contract. The relevant contract therefore arose on or by the 25th of August. That contract included all the terms regarded as essential (eg the price) as well as the MF/1 terms.
This Case is Authority For…
Where ‘subject to contract’ negotiations are taking place, it is open to a party to waive the need for a signature. They may only do so with unequivocal words or conduct. However, the waiver does not need to be express.
Where the parties have begun performing, whether this amounts to a waiver of the need for a signature depends on how a reasonable bystander would understand the party’s actions. Similarly, a reasonable bystander’s perspective determines what terms the parties objectively agreed to.
Where the only terms involved in negotiations are a standard term contract and a party has begun work before it is properly executed, the proper inference will normally be that they assumed liability based on those standard terms. A waiver of any signature requirement is therefore quite likely in this kind of case.
Where a contract arises out of mutual performance rather than traditional offer/acceptance, the court may hold that the parties implicitly intended the contract to cover pre-contractual performance.
Other
The court noted that it is unlikely to hold that the parties did not intend to be legally bound or that the contract is void for uncertainty where both parties have begun performing.
