Beware - unsigned contracts can be binding

With the English Supreme Court recently ruling that an unsigned contract can be binding, businesses should be careful to agree all aspects of the contemplated relationship before starting to perform a contract.

In RTS Flexible Systems v Muller [2010], the parties had agreed all of the crucial provisions of the contract, work had been carried out and equipment was supplied. However, the final draft of the contract was not signed and legally completed. A dispute then arose between the parties and the Court was obliged to determine whether or not a legally binding contract existed.

The facts of the case

The yoghurt producing company Muller entered into negotiations with RTS Flexible Systems (RTS) for the provision of a new packaging system for Muller's products. The parties intended to enter into a written contract setting out the terms on which the work was to be carried out. However, the work began before the contract was signed.

The parties signed a letter of intent (which in itself formed a contract) and set out key terms for the main contract including price. The terms of letter of intent expired on 27 May 2005.

By 5 July 2005 a final draft contract had been produced. This contract contained a clause which stated that the contract "...shall not become effective until each party has executed a counterpart and exchanged it with the other...". This may have led the parties to believe that neither would be bound until they signed a copy of the contract. On 25 August 2005, despite the contract still not having been legally completed, the parties varied the terms of the contract in certain important respects. The parties still did not sign the contract, but RTS started work on the new packaging system, including supplying equipment on the revised terms.

The parties had a disagreement and turned to the court to decide whether or not there was a binding contract. Both parties argued (for different reasons) that the terms of the unsigned contract did not apply. The Supreme Court held that there was a contract.

Court's reasoning

The Supreme Court held that it made no commercial sense to find that no contract existed. The price was agreed, the other key terms were agreed and then varied (with no indication that the variation was "subject to contract") and a significant amount of work was carried out on the basis of those agreed terms. The Court concluded that the necessity for a formal written agreement was overtaken by events and the parties' conduct.

Conclusion and implications for businesses

If parties agree the terms of a contract (including the price) and then carry out work in accordance with the agreed terms it can be inferred that the parties have an intention to enter into a legally binding contract. Therefore businesses should be aware that their conduct may demonstrate that they have waived the need to complete a written contract. Businesses should take heed of the judge's advice and agree all aspects of the contemplated relationship before starting to perform the contract. Further, if there is no written and completed contract to rely upon then it may prove difficult to swiftly resolve any dispute which arises at a later date. There is potential for uncertainty to arise. This will increase the likelihood of costly and lengthy litigation. The moral of this case is to "agree first and start work later".

For further information on the issues raised in this article, please contact Rem Noormohamed, Partner and Head of Technology, Media & Communications at Michelmores, at rehman.noormohamed@michelmores.com.