Last week's decision of the Supreme Court in RTS v Muller shows where contract terms are negotiated "subject to contract", and work begins under a letter of intent before contract terms are finalised that it is possible for the agreement that was "subject to contract" to become legally binding as a result of the parties conduct.


Muller and the respondent RTS entered into negotiations in relation to the supply and installation of packaging. So that work could begin during contract negotiations the parties entered into a contract formed by a letter of intent dated 21 February 2005 and a letter of intent contract dated 1 March 2005. The letter of intent expired 27 May 2005 and work continued on after this date before the terms of the detailed written contract had been finalised.

The letter of intent provided for the whole agreed contract price and was not limited to the price of the works during the letter of intent period. It was envisaged under the letter of intent that the full contract terms would be based on Muller's amended form of MF/1 contract and signed within 4 weeks of the date of the letter of intent.

A final draft contract was provided by July 5, 2005. At this stage of the negotiations all the essential terms had been agreed which provided that the contract would not become effective until all parties had executed and exchanged their counterparts. The parties agreed some further variations to the contract in August . Muller argued there was no binding contract between the parties because no contract had been signed or exchanged.

The issue addressed by the court was whether, after the expiry of the letter of intent, Muller and RTS had entered into a contract and if so on what terms. In relation to the terms the issue was whether the contract was subject to some or all for the MF/1 terms as amended.


The Court stressed that it will not impose binding contracts where none exists and therefore each case will depend on its own facts taking into consideration what is communicated between the parties by words or conduct. Where contracts are negotiated "subject to contract" the court noted that it will not always infer (or even usually infer) that a contract has been agreed on those terms that are "subject to contract".

In this instance the court concluded that a binding contract had been reached and that binding contract was not subject to contract for the following reasons:

1. It was unrealistic to infer that the parties did not intend to create legal relations given the agreement over the price which formed part of the contract between the parties and once the letter of intent had expired the contract containing the price must be contained in another agreement;

2. All the essential terms had been agreed by 5 July and the August variations were agreed without stating that they were "subject to contract" as such it could be inferred from the conduct of the parties that they had agreed to waive the "subject to contract clause". The actions and communications of the parties indicated that they had agreed to be bound by the terms of the contract without the necessity to require a formal written contract; and

3. The parties had negotiated in detail the clauses which comprised the MF/1 terms as amended and as such the clauses had been essentially agreed by the 5 July and varied in August.

Lord Clarke stated that the moral of this case "is to agree first and to start work later" and this case highlights the dangers inherent in starting work before a formal written contract is in place and as such letters of intent should always be treated with caution. In all instances, where possible, it is always preferable to have the contract in place to avoid the perils associated with letters of intent.


Commercial pressures within the construction and engineering industries often mean that it is not possible to finalise a contract and agree all the terms before the work needs to commence. In these instances a letter of intent may be required and this needs to be drafted with care to ensure that there is no ambiguity.

A letter of intent should:

  • Clearly specify those terms that have been agreed, and those that remain outstanding so that there is no uncertainty over what has or has not been agreed between the parties; and
  • State that no binding contract is to come into effect except to the extent set out in the letter, and that neither the letter nor any work done or payment made under the letter shall be deemed to be a waiver of the requirement to provide a binding contract.

Above all, every effort should be made to finalise the contract as soon as reasonably practicable after the letter of intent has been signed. Letting matters drift is a recipe for costly disagreement and dispute.

Reference: RTS v Muller (

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

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 19/03/2010.