RTS Flexible Systems Ltd v Molkerei Alois Muller Gmbh & Company KG (UK Production)

Factual and Procedural Background

Company A (a supplier of automated production equipment) and Company B (a food-manufacturing enterprise) began negotiations for a complex engineering project. On 21 February 2005 Company B issued a Letter of Intent (“LOI”) so that work could start immediately while a full written contract, envisaged to incorporate amended MF/1 conditions, was being finalised. The LOI covered the entire contract price of £1,682,000 and expressly stated that formal terms were to be “finalised, agreed and then signed within 4 weeks.”

Work commenced, and the LOI period was repeatedly extended, expiring on 27 May 2005. By 5 July 2005 the parties had exchanged a fourth draft contract comprising (i) a short form agreement, (ii) 17 schedules (many already agreed), and (iii) Schedule 1 containing amended MF/1 clauses 8-48. No counterpart was ever executed as required by clause 48 (“subject to contract” provision).

Performance nevertheless continued. On 25 August 2005 the parties met and varied the delivery programme, abandoning factory testing and agreeing to install “Line 1” before “Line 2”. Substantial equipment was delivered on 5 September and Company B made staged payments amounting to 70 % of the contract price. Subsequent disputes over delay, testing and payment led Company A to sue for the balance “under the contract, alternatively in damages.”

Specific preliminary issues were tried by Judge [Clarke], who held that a contract existed after the LOI expired but not on the MF/1 terms. The Court of Appeal (per Judge [Waller] LJ, with Judges [Moses] and [Hallett] LJJ concurring) reversed that decision, declaring that no contract existed after the LOI. The present appeal to the Supreme Court of the United Kingdom addresses those conflicting conclusions.

Legal Issues Presented

1. Whether the parties concluded any contract after the LOI expired on 27 May 2005.
2. If a contract existed, whether it incorporated the amended MF/1 terms (including clause 48) or only a limited subset of documents.
3. Whether the “subject to contract / counterparts” clause could be waived by conduct.
4. Whether the Appellant was entitled, despite earlier positions, to argue that no post-LOI contract existed.

Arguments of the Parties

Appellant's Arguments (Company A)

• Primary stance before the Court of Appeal: no contract arose after the LOI; alternatively, if one did, it incorporated all amended MF/1 terms agreed by 5 July.
• The Court of Appeal correctly accepted that it could raise the “no-contract” point.
• Clause 48 prevented any binding agreement on MF/1 terms without signature; therefore there was either no contract or a contract on the full MF/1 draft once clause 48 was waived.

Respondent's Arguments (Company B)

• Judge [Clarke] was right: a contract existed post-LOI but excluded the MF/1 conditions; only certain schedules and technical documents formed the bargain.
• The Appellant should have been barred from arguing “no contract” on appeal because it had not pressed that point at first instance.
• Clause 48 meant the MF/1 terms never took effect; nevertheless, a contract could arise by conduct on a narrower set of terms.
• Some schedules (especially Schedule 6 on performance tests) were never finalised, so the MF/1 conditions could not have been agreed.

Table of Precedents Cited

Court's Reasoning and Analysis

1. Objective Intent. Applying the objective test, the Court found it “unrealistic” to suggest the parties did not intend legal relations once substantial work and significant payments had been made.

2. Identification of Agreed Terms. By 5 July 2005 virtually all contractual clauses—including amended MF/1 clauses 8-48 and most schedules—were agreed. Remaining gaps (parent-company guarantees, health & safety schedule, site-preparation details) were minor or for later completion and did not prevent contract formation.

3. Waiver of ‘Subject to Contract’ Clause. Although clause 48 required executed counterparts, the parties’ conduct after 5 July—especially the 25 August variation meeting and continued performance—constituted an unequivocal waiver of that requirement. No reasonable businessperson would think signature was still a pre-condition.

4. Rejection of Intermediate Solutions. The Court rejected (a) the Court of Appeal’s finding of “no contract,” which ignored the agreed price and ongoing performance, and (b) Judge [Clarke]’s view that only a subset of schedules formed the contract, as that made little commercial sense and conflicted with the integrated drafting structure.

5. Effect of Unperformed Clauses. Non-provision of guarantees, incomplete schedules, and deviations from payment procedures were treated as matters of breach or waiver, not indicators of absent agreement.

6. Resulting Contract. A single binding contract arose on or about 25 August 2005, retrospectively covering prior performance, incorporating the terms agreed by 5 July (including amended MF/1 clauses) as varied on 25 August.

Holding and Implications

HOLDING: APPEAL ALLOWED. The Court set aside the Court of Appeal’s declaration. It declared that a binding contract existed on or about 25 August 2005 on the terms agreed by 5 July 2005 as subsequently varied, and that the requirement for executed counterparts in clause 48 was waived.

Implications: The decision reinforces that parties who proceed with performance and payment risk being bound by comprehensive draft terms even if a formal document is never signed. “Subject to contract” protections can be lost through conduct. Practically, the case underscores the commercial danger of commencing work before executing the final agreement and signals that courts will strive to uphold business efficacy where detailed terms have been substantially settled.