Intention to create legal relations. Agreement subject to contract. Letter of intent setting out draft contract with standard terms to take effect when executed Letter of intent expiring with negotiations as to detailed terms continuing and work having commenced Work completed and part paid for without parties executing contract Subsequent dispute as to performance of work Whether contract arising by reason of performance Whether including standard terms in draft agreement as to liability. Whether subject to contract proviso waived.
Cases referred to in the judgment of the court
British Steel Corpn v Cleveland Bridge and Engineering Co Ltd [1984] 1 All ER 504
Galliard Homes Ltd v J Jarvis&Sons plc (1999) 71 Con LR 219, CA
Pagnan SpA v Feed Products Ltd [1987] 2 Lloyd s Rep 601, Bingham J and CA
Trentham (G Percy) Ltd v Archital Luxfer Ltd [1993] 1 Lloyd s Rep 25, CA
Background
CONTRACT LAW. LETTERS OF INTENT.
The claimant, a supplier of automated packaging machines, entered into negotiations with the defendant, a dairy product supplier, to install production lines in the defendant’s factory. The defendant provided a draft contract in a letter of intent dated 21 February 2005, outlining a completion deadline and price, while referring to standard terms called MF/1, which included liability limitations, and which provided that the contract would not be binding unless signed and executed by the parties (Cl.48). However, the draft contract required signatures to be binding, and this was not done.
Despite this, both parties proceeded with the project on 5th July 2005. The claimant later agreed to alter the installation order, at the client’s request on 25th August. After completing the work and receiving partial payments, a dispute arose over equipment specifications. The claimant sought the remaining payment based on the letter of intent terms, a new contract incorporating MF/1, or a quantum meruit claim. The defendant counterclaimed for damages, asserting a simple contract with no liability limitations due to the absence of signed agreements.
Issue
What are the terms of the contract formed by the letter of intent and RTS s letter of 1 March 2005 and what are the obligations of the parties under it? In particular:
– Does it incorporate any of the detailed terms of the quotation or the claimant s written standard terms of business, including the terms which allow the recovery of cost for variations, and which exclude the liability post production?
– If so, which terms does it incorporate?
– Under the letter of intent, what were the parties obligations? In particular: (a) does the claimant take a responsibility for the lines as a whole, or just for the equipment which it supplied? (b) What is the nature of the obligation in terms of the performance criteria of either the lines or the equipment as appropriate?
Key paragrahs
[45] “… Whether there is a binding contract between the parties and, if so, upon what terms depends upon what they have agreed., It depends not upon their subjective state of mind, but upon a consideration of what was communicated between them by words or conduct, and whether that leads objectively to a conclusion that they intended to create legal relations and had agreed upon all the terms which they regarded or the law requires as essential for the formation of legally binding relations., Even if certain terms of economic or other significance to the parties have not been finalised, an objective appraisal of their words and conduct may lead to the conclusion that they did not intend agreement of such terms to be a pre-condition to a concluded and legally binding agreement.”
[50] “… Instead the governing criterion is the reasonable expectations of honest sensible businessmen., (2) Contracts may come into existence, not as a result of offer and acceptance, but during and as a result of performance., (3) The fact that the transaction is executed rather than executory can be very relevant., The fact that the transaction was performed on both sides will often make it unrealistic to argue that there was no intention to enter into legal relations and difficult to submit that the contract is void for vagueness or uncertainty., […] , This may be so in both fully executed and partly executed transactions….”
Clause 48 and subject to contract:
Had the parties agreed to be bound by the agreed terms without the necessity of a formal written contract or, put another way, had they agreed to waive that requirement and thus clause 48? We have reached the conclusion that they had. The circumstances point to the fact that there was a binding agreement and that it was not on the limited terms held by the judge. The price had been agreed, a signi cant amount of work had been carried out, agreement had been reached on 5 July and the subsequent agreement to vary the contract so that RTS agreed to provide line 1 before line 2 was reached without any suggestion that the variation was agreed subject to contract. The clear inference is that the parties had agreed to waive the subject to contract clause, viz clause 48. Any other conclusion makes no commercial sense.
Conclusion
The parties reached a binding agreement on or about 25 August (date of the agreed variation of the order of installation of the lines) on the terms agreed on or before 5 July as subsequently varied on 25 August and (2) that that binding agreement was not subject to contract or to the terms of clause 48.