Pictured above: Nichola Evans, Commercial Litigation Partner at Browne Jacobson

Businesses are being warned that not all contracts need to be signed before they become legally binding. 

The warning from Nichola Evans, Commercial Litigation Partner at Browne Jacobson, follows the recent Supreme Court decision in RTS Flexible Systems v Muller, the European food producer.

Muller hired RTS Flexible Systems to provide and install a series of packaging machines. 

Both parties agreed work should commence under an outline agreement called a letter of intent pending negotiations on a more detailed contract being agreed upon, signed and exchanged.

When the letter of intent expired some months later both parties continued negotiations on the full contract. 

A draft final contract was produced but unfortunately a dispute rose over the performance of the equipment that had been installed before the contract could be formally signed and exchanged.

The question for the courts was whether the two parties had made a contract after the letter of intent had expired and, if so, on what terms.

The Supreme Court overturned an earlier Court of Appeal decision that stated there was no contract after the letter of intent had expired.

According to Evans it is the intention of the parties that could ultimately decide if a contract exists. She added: 

"In some cases actions speak louder than words and if significant work is undertaken before terms are fully agreed, there is every possibility that the courts will accept that a contract does exist.

"In an ideal world no work should be undertaken until all the parties have put pen to paper on a formal detailed contract. However the courts appreciate that in some sectors commercial pressures mean that work often gets underway before the final terms of the contract have been agreed.

"In this case the intention of both parties was crystal clear. They carried on as if a fully signed contract was in place and the problem over its existence only became an issue when the parties were in dispute.

Evans believes the case is a wake up call for all businesses: "Despite this definitive ruling from the highest court in the land it is important to remember that each case will be judged on its own merits. Businesses should protect their interest by making sure all critical terms are included in any letter of intent and that these are incorporated into the main contract as soon as possible. It is far better to have the certainty of a written contract rather than trying to piece together the intention of the parties by looking at the letter of intention and the verbal negotiations which leaves room for interpretation.

"Where possible all contracts should be signed before proceeding with any work and never forget that whilst letters of intent can be binding they should not be relied on as a substitute for a detailed contract," she added.