Lack of Finalised Contract Causes Costly Litigation


A recent case heard in the Supreme Court has highlighted the necessity to ensure that terms of business are fully settled before work commences under a contract.  

Although both parties in the case had intended to enter into an agreement, difficulties arose when one party (RTS) sent a Letter of Intent (LOI) to the other (Muller), and began the work under this initial contract when the final contract was still being negotiated.
The initial LOI confirmed the terms for completion of the work, including the price and the timescales within which it had to be completed. It also made reference to a final contract, which should have been signed within four weeks. In order for RTS to be able to meet the timescales for production required by Muller, it had to start work almost immediately.
RTS commenced the work, which was worth nearly £1.7 million. Meanwhile, the in-house legal teams continued to exchange numerous drafts of the final contract. RTS invoiced Muller at various stages of the work’s completion. At some stage, the nature of the work changed and RTS had to concentrate more on completing one part of the project than on the rest. When a dispute arose between the parties, the terms upon which business had been agreed were not clear.
Muller claimed the LOI did not create contractual relations and disputed the payments claimed. RTS disagreed.
The Supreme Court came to a different conclusion from the High Court and the Court of Appeal, finding that there had been a binding set of terms to which both parties had agreed, despite the fact that no contract had actually been signed.

Share this article