RTS Flexible Systems Ltd v Molkerei Alois Müller [2010] UKSC 14
Citation:RTS Flexible Systems Ltd v Molkerei Alois Müller [2010] UKSC 14
Rule of thumb:If terms in an ‘Honour clause’ or ‘subject to contract’ sheet are followed closely and regularly in practice showing an intent to create legal obligations, can they become a legal contract? Yes, if they are relied upon consistently for a long period of time, although this type of case can be decided either way.
Background facts:
The facts of this case were that RTS manufactured machines. They agreed a 'letter of intent' with Molkerei for the basis on which they would do the work needed done, and the letter said, ‘subject to contract’. It was agreed that RTS should carry out the work for Molkerei and did so without a formal contract being agreed. The work was then largely done on the basis of the 'letter of intent' but when it came to agreeing the price RTS claimed that they were entitled to the default hourly market rate for their work rather than the price stated. Molkerei refused to pay this extra amount and insisted on the price in the letter of intent being followed.
Parties argued:
RTS claimed that the letter of intent did not apply and that by common law they were entitled to more money. They claimed that the job had been more complicated than envisaged with the letter and it did not apply. They further argued that letters of intent did not have the intent to create legal obligations. Molkerei argued that virtually all of the terms on the letter of intent had been followed except when it came to the price, and so these had ended up being incorporated into the contract as the terms for the agreement.
Judgment:
The Court upheld the arguments of Molkerei - they stated that where a 'letter of intent' lays out the fundamental terms the principle of incorporation of terms applies and these are incorporated into the contract. The Court affirmed that 'letters of intent' and 'Honour Clauses' can gain legal status if they are largely followed and no contract is agreed. Again, it is difficult for a Court to decide if 'letters of intent' or 'Honour Clauses' retain their lack of intent to create legal obligations under the essential principle or whether the principle of incorporation of terms takes over from this and gives these documents legal effect.
Ratio-decidendi:
‘54. There is said to be a conflict between the approach of Steyn LJ in the Percy Trentham case and that of Robert Goff J in theBritish Steel case. We do not agree. Each case depends upon its own facts. We do not understand Steyn LJ to be saying that it follows from the fact that the work was performed that the parties must have entered into a contract. On the other hand, it is plainly a very relevant factor pointing in that direction. Whether the court will hold that a binding contract was made depends upon all the circumstances of the case, of which that is but one. The decision in the British Steel case was simply one on the other side of the line. Robert Goff J was struck by the likelihood that parties would agree detailed provisions for matters such as liability for defects and concluded on the facts that no binding agreement had been reached. By contrast, in Pagnan Bingham J and the Court of Appeal reached a different conclusion, albeit in a case of sale not construction. 55. We note in passing that the Percy Trentham case was not a 'subject to contract' or 'subject to written contract' type of case. Nor was Pagnan, whereas part of the reasoning in the British Steel case in the passage quoted above was that the negotiations were throughout conducted on the basis that, when reached, the agreement would be incorporated in a formal contract. So too was the reasoning of the Court of Appeal in Galliard Homes Ltd v J Jarvis & Sons Ltd (1999) 71 Con LR 219. In our judgment, in such a case, the question is whether the parties have nevertheless agreed to enter into contractual relations on particular terms notwithstanding their earlier understanding or agreement. Thus, in the Galliard Homes case Lindsay J, giving the only substantive judgment in the Court of Appeal, which also comprised Evans and Schiemann LJJ, at page 236 quoted with approval the statement in Megarry & Wade, The Law of Real Property, 5th ed (1984) at pages 568-9 that it is possible for an agreement 'subject to contract' or 'subject to written contract' to become legally binding if the parties later agree to waive that condition, for they are in effect making a firm contract by reference to the terms of the earlier agreement. Put another way, they are waiving the 'subject to [written] contract' term or understanding’, Lord Clarke at 54-55
'Each case depends on its facts... it is possible for an agreement "subject to contract" or "subject to written contract" to become legally binding', Lord Clarke
Warning: This is not professional legal advice. This is not professional legal education advice. Please obtain professional guidance before embarking on any legal course of action. This is just an interpretation of a Judgment by persons of legal insight & varying levels of legal specialism, experience & expertise. Please read the Judgment yourself and form your own interpretation of it with professional assistance.