Flexible-Systems Web (part of RTS Group)

A two-day hearing is due to commence on Wednesday 2 December 2009 to decide whether the parties in this case entered into a contract following the expiry of a letter of intent. 

The respondent, a robot construction firm (R), had contracted with the appellant, yoghurt manufacturers (M), to supply an automated system of packaging yoghurt pots (the “System”). The parties had entered into a letter of intent while negotiations for a full contract were ongoing. This letter of intent was intended to be binding but was only for a term of four weeks. After its expiration, R continued to undertake the work of designing, manufacturing, assembling, testing, delivering, installing and commissioning the System, even though the final form contract based on M’s model form MF/1 was never executed due to a dispute that arose between the parties. 

R argued in the High Court for a continuance of the terms of the letter of intent after its expiry. The Judge at first instance, Mr Justice Christopher Clarke, found that after the expiry of the letter of intent, a new contract had been concluded, the terms of which had been set by various emails and attached documents that had been sent between the parties. It was found that this ‘new’ contract incorporated some of the obligations contained in the schedules to the draft MF/1 conditions but did not incorporate the MF/1 conditions themselves. He relied on clause 48 of the model form MF/1 which stated that its conditions were not to be agreed until written signature (“…the Contract … shall not become effective until each party has executed a counterpart and exchanged it with the other”). 

Mr Justice Christopher Clarke found that, on the facts, it was unrealistic to suppose that the parties had not intended to create the legal relationship of contractors and that it was not essential for them to have agreed by signature all of the terms governing the agreement between them.  R’s provision of the goods and services specified should comply with what was said in the emails and attached documents.
R appealed this decision, but instead of arguing as they did in the High Court for the continuance of the terms of the letter of intent they instead advanced the argument that there was no contract at all after the expiry of the letter of intent and that their fees were to be decided on a quantum meruit basis.  The Court Appeal allowed R’s appeal, finding that the clause 48 extended beyond just the MF/1 conditions to encompass the schedules to MF/1. They therefore concluded that the parties’ agreements to various works going ahead under the schedules via the emails found by the first instance judge to form the new contract could not override the stipulation under clause 48. Therefore, the Court of Appeal held that no contract had come into existence post termination of the letter of intent and that the amount due to R should indeed be decided on a quantum meruit basis.
M applied for permission to appeal against this decision, which was granted by the House of Lords on 14 May 2009. The appeal will be heard in the United Kingdom Supreme Court by Lords Phillips, Rodger, Mance, Collins and Clarke who are likely to consider the application of clause 48 in deciding whether a contract was in existence after the expiry of the letter of intent. 
This case yet again highlights the dangers inherent in carrying out work under a letter of intent before final contractual terms are agreed. Furthermore, it illustrates that including an expiry date in a letter of intent under the assumption that the parties will have negotiated a full long-term contract by that date is a risky approach to take.  If the work continues after the letter of intent expires even though no full contract has been entered into, the courts will have to then look to the circumstances surrounding the agreement in each case in order to determine the intended commercial bargain between the parties. It will certainly be interesting to see what the Supreme Court decides.