UK: The Best Of Intentions: Contract Formation Under Letters Of Intent

Last Updated: 9 March 2009
Article by Caroline Cummins and Samantha Landsberry

In the fast-paced world of construction projects, letters of intent are a common feature of the contractual landscape. So what happens if the formal contract being negotiated is never entered into? We take a brief look at some of the approaches the Courts have taken in light of a recent decision of the Court of Appeal.

To view the article in full, please see below:



Full Article

Where a building project is time-critical (as it often is) and contractual negotiations are ongoing, it is common for parties to enter into a letter of intent ("LOI") to enable the Contractor to commence work before the contract proper has been finalised. The form and content of LOIs are as varied as the circumstances in which they may be issued.No doubt it is this variety that led Robert Goff J in British Steel Corp v Cleveland Bridge and Engineering Co Ltd (1984) to observe that there is "no hard and fast answer to the question whether a letter of intent will give rise to a binding agreement: everything must depend on the circumstances of the particular case."

British Steel

British Steel concerned negotiations between British Steel Corp ("BSC") and Cleveland Bridge and Engineering ("CBE") for the sale of steel nodes to be manufactured and delivered by BSC.

  • CBE issued a LOI, which stated the price and proposed contractual terms (in the form of the I.C.E. standard form sub-contract)
  • The LOI requested that BSC proceed with the work "pending the preparation and issuing to you of the official form of sub-contract"
  • Disagreements subsequently arose between the parties in relation to the price and other contractual conditions. In particular, BSC proposed its own standard conditions, which contained a limitation of liability for late delivery (under the I.C.E. conditions, liability was unlimited). Although these disagreements were never resolved, BSC went ahead with production and delivery of the nodes
  • CBE refused to pay for the nodes, instead claiming damages for late delivery

Robert Goff J considered that a LOI could potentially give rise to 2 different types of contract. However, the judge rejected both on the basis that the LOI in question applied "pending a formal sub-contract the terms of which were still in a state of negotiation". (It was no doubt significant that agreement had not yet been reached on a number of terms which, on the facts of the case, were found by the judge to be essential).
Accordingly the Court found that no contract had been concluded and CBE, as the party who had made the request for performance, was obliged to pay BSC a reasonable sum for BSC's performance in accordance with that request. In arriving at this conclusion, the Court appears to have been particularly swayed by the fact that both parties were pedalling their standard conditions, which each took vastly different approaches to liability for delay.

In such circumstances, Robert Goff J held that it was "impossible to predicate what liability (if any)" BSC would have assumed, and it would therefore be "an extraordinary result" for him to find that, in acting on CBE's request that works be carried out before the anticipated formal contract had been finalised, BSC had assumed a level of liability it would never have agreed to under the contract proper.

Trentham

Trentham v Archital Luxfer Ltd (1993) did not concern a LOI, but it is an interesting case on contract formation, as it concerned a fully performed and paid sub-contract

  • Archital was a sub-contractor for the manufacture, supply and installation of windows.
  • Trentham was being pursued under the main contract for delays and defects and sought to recover in turn from its sub-contractors, including Archital.
  • Archital argued that no sub-contract had ever come into existence.
  • The trial judge analysed the facts on the basis of offer and acceptance, and found that it had (all undecided issues being held inessential on the facts).

On appeal, the Court stated that a contract could be concluded by conduct, and that the commercial character of the transaction should be considered. In particular, the Court stated that this was not a contract where there had been a continuing stipulation that a contract would only come into existence if in writing, and that all "obstacles to contract formation" had been removed in the course of the negotiations and performance.

Accordingly, while agreeing with the trial judge's "offer and acceptance" analysis, the Court of Appeal would have been satisfied to hold that a contract (in the circumstances of "this fully executed transaction") had come into existence on the basis of the parties' performance alone.The Court held that this contract impliedly governed pre-contractual performance as well; thus the fact that it had not arisen until the work had been partially executed and paid for was no difficulty.

RTS v Müller

British Steel and Trentham recently came under the microscope in the case of RTS v Müller, which concerned negotiations between the parties in respect of equipment for collating and flow wrapping Müller yoghurt multi-packs.

  • While negotiations were ongoing, RTS commenced work under a LOI with a set expiry date (which was subsequently extended several times)
  • The LOI broadly stated the scope of the project, the price and date for completion, and confirmed Müller's wish to proceed with the project subject to (among other things) a requirement that "the full contractual terms" would be based on Müller's amended form of MF/1 contract and that full terms and specifications would be "finalised, agreed and then signed" within 4 weeks of the date of the LOI
  • Upon expiry of the extended LOI date, the parties had largely agreed the MF/1 conditions, but not the accompanying schedules. Despite this, RTS continued to build and deliver the equipment and was partially paid for it

The trial judge, applying the "commercial" considerations in Trentham, held that, the contract having been largely executed, it would be unrealistic to suppose the parties had not intended to create legal relations. He held that the parties had agreed that RTS would carry out the "agreed work" (which the trial judge held was embodied in a number of documents forming part of the MF/1 schedules) for the "agreed price" (stated in the LOI), and that it was "not essential for them to have agreed the terms and conditions and they did not do so".

The trial judge declined to find that the contract between the parties included the MF/1 conditions on the basis that (1) the LOI and other correspondence indicated that the final MF/1 terms were not to be contractually agreed until signed; (2) the MF/1 conditions and the schedules were meant to operate as a "composite whole" and a number of the schedules had not been agreed; (3) the parties had not adhered to the MF/1 conditions in practice; and (4) clause 48 of the MF/1 conditions prevented the contract from becoming effective until signature and exchange of counterparts.

The Court of Appeal reversed the trial judge's decision, holding that no contract had been concluded after expiry of the LOI. The writing stipulation in clause 48 of the MF/1 was central to this decision. The Court held that the "contract" expressed to be subject to writing in that clause included the schedules, and that the parties' negotiations were conducted on the basis of that stipulation; accordingly the Court applied British Steel (and distinguished Trentham, which had expressly declared itself not to be a case in which the formation of a contract was subject to writing).

A deciding factor in the Court's decision appears to have been the fact that the parties had agreed to a limitation of liability under the MF/1 conditions and that the trial judge, in ignoring this and finding a contract concluded on the basis of conduct alone, had brought about the "extraordinary result" contemplated by British Steel, and "achieved a bargain neither side intended to enter into".

Conclusion

RTS v Müller serves as a timely reminder that the intentions of the parties will be the paramount consideration in the question of contract formation. While it is acknowledged that LOIs play a useful role in many construction projects, the above cases demonstrate the importance of making their effect clear (both in themselves, and as to the contract still being negotiated).

The outcome in RTS v Müller demonstrates that where the Court feels that to find there was a contract concluded by conduct would achieve a bargain at odds with the intentions of the parties, and where there are obstacles to finding the contract under negotiation to apply (for example, the presence of a writing stipulation or failure to agree essential terms), it will be reluctant to find a contract at all. Thus, as ever, these cases remind us of the desirability for parties to reach agreement on essential terms and conditions early in the project, rather than hoping that significant differences (such as each party's take on liability) will resolve themselves during the course of the project.

Reference: RTS Flexible Systems Ltd v Molkerei Alois Műller GmbH & Co KG [2009] EWCA Civ 26

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 06/03/2009.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.