Conduct or Contract? With Reference to the Case of RTS Flexible Systems Limited v Molkerei Alois Mul

Bill Zahr discusses a crucial contract formation issue, with an emphasis on the conduct of contracting commercial parties.

This article will discuss whether a contract can be found through the conduct of the parties, based on a Letter of Intent. Parties to a commercial contract should be aware of this as the contract is of the utmost importance in the context of a transaction for either supplying or buying goods.

Where there is no contract that is validly executed and satisfies all the essential elements to a valid contract, neither of the parties will be able to enforce or even obtain a valid remedy against the other party. In the case of RTS v Muller, RTS (the manufacturer of automated packaging machines for the food industry) agreed with Muller (the buyer) to manufacture and install two production lines.

The manufacturer then commenced work based on a letter of intent received from the buyer. This letter of intent contained the agreed price upon completion of the two production lines, the set date of completion, damages and liquidated damage clauses. The contract also included a clause intending to limit liability (clause 48) which provided that the contract ‘shall not become effective until each party had executed a counterpart and exchanged it with the other party’. Neither of the parties complied with this.

The issue came to light upon the completion of the contract. Although RTS commenced manufacturing the machinery, and Muller paid up to 70% of the agreed price, there was no legally binding contract. The parties proceeded to complete the work. However, a dispute arose as to the machinery not complying with the specifications agreed upon. Consequently, Muller refused to forward further instalments of the outstanding money.

The Court of Appeal held that there was no legally binding contract as neither of the parties had executed the Letter of Intent.[1] This decision failed to consider the possibility of a contract arising out of the conduct of the parties. However, the Supreme Court was reluctant to declare that there was no legally binding contract, considering it commercially unrealistic to declare this as both parties began performing their obligations - RTS commenced manufacturing and Muller made a payment of 70% of the agreed price.[2]

By contrast, the Court of Appeal referred to the case of British Steel Corpn v Cleveland Bridge and Engineering Co Ltd.[3] In this case, the court declared that a letter of intent is not a legally binding contract because essential terms are not fully agreed upon. This, therefore, creates uncertainty when it comes to the intention to create legal relations. However, distinguishing the case of RTS v Muller, the parties did agree upon the essential terms and were already performing their contractual obligations despite the formal contract being neither signed nor exchanged. The terms were included in the letter of intent containing a draft ‘contract’.

Therefore, given the fact that the parties were performing their contractual obligations, it would be commercially unrealistic to declare that there was no contract.

Written by Bill Zahr.

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[1] RTS Flexible System Ltd v Molkerei GmbH [2009] EWCA 28.

[2] RTS Flexible System Ltd v Molkerei GmbH [2010] UKSC 14.

[3] British Steel Corpn v Cleveland Bridge and Engineering Co Ltd [1984] 1 All ER 504.