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A recent case in the Supreme Court demonstrates how important it is to agree the terms of a contract before starting work. How often parties fail to do this. Keen to get on with the job, both assume the contract will be easy to finalise. So work starts with an exchange of letters. While the project proceeds without a hitch, all is sweetness and light. Those on site will be pushing things forward, while in the background the parties鈥� representatives will be attempting to finalise the contract. Then something goes wrong and the relationship cools. A dispute evolves and the parties then realise they do not have a signed contract. The situation is now a recipe for the lawyers to make money trying to sort out the mess.

This was roughly what happened in RTS Flexible Systems vs Molkerei Alois M眉ller Gmbh & Company KG (UK Production). Remarkably this contract/no contract case reached the very top of the judicial pyramid: the Supreme Court. Lord Clarke summed up the sorry lesson to be learned. 鈥淭he different decisions in the courts below and the arguments in this court demonstrate the perils of beginning work without agreeing the precise basis upon which it is to be done. The moral of the story is to agree first and to start work later.鈥�

RTS and M眉ller had intended to enter into a detailed written contract that would set out all the complex terms on which the job was to be done. However, as so often happens, the terms were not finalised before work started. So the parties entered into a temporary contract at the beginning of March 2005 based on a letter of intent (LOI) and a letter from RTS. This contract lasted until 27 May of that year.

Before and after the lapse of the LOI the parties were negotiating the detailed contractual provisions. It was their intention that certain terms known as the M眉ller MF/1 terms should be incorporated. By 5 July a final draft had been worked out between them. Clause 48 of the proposed MF/1 terms provided that the contract would not become effective until each party had executed a counterpart and exchanged it with the other. These requirements were never met. Problems began to crop up with the work and eventually a dispute arose, which led to litigation. A preliminary hearing was ordered by the court. Sadly for the parties, this went through three courts, ending up in the Supreme Court.

While the project proceeds without a hitch, all is sweetness and light. Then a dispute evolves and the parties realise they do not have a signed contract. It鈥檚 now a recipe for lawyers to make money trying to sort out the mess

The judge at first instance held that after the lapse of the LOI the parties entered into a subsequent contract. However, he also held that it did not incorporate the MF/1 terms, which the parties had been intending to include. The judge said it was not essential for the parties to have agreed the detailed terms and conditions. The parties had simply carried on after the lapse of the LOI with work being called for and carried out with an agreed price but no agreement as to the terms on which the work was being done.

In the Court of Appeal RTS argued as its primary case that there was no contract at all after the expiry of the LOI. M眉ller argued that it was not open to RTS to do this, but the court disagreed. It also heldthat RTS was correct: clause 48 was a complete answer in that it prevented any contract coming into existence unless its express requirements were met. The judge below had construed clause 48 as only preventing a contract coming into existence on the MF/1 terms.

So on to the Supreme Court. It found the no contract answer unconvincing. It involved RTS agreeing to proceed with detailed work and to complete the whole of the contract on a non-contractual basis subject to no terms at all. The court held that the essential terms had in fact been agreed by the end of August. As for clause 48, the conclusion was that the parties had waived it. So it disagreed with both the courts below.

Three different courts, three different conclusions. How the parties must have wished they had signed before starting work.