Legal briefing | IP & Technology, Commercial & Technology |

Unsigned contracts: how draft contracts can still be binding

Overview

It's easily done: following months of negotiations, a draft contract is ready for signature but other things take priority, work begins and the contract never gets signed. Six months later, a dispute arises – but, as the draft hasn't been signed, it isn't binding. Or is it? A recent Supreme Court ruling shows how an unsigned draft could nevertheless be binding and how contractual disputes are generally easier to resolve with a signed agreement in place.

The dispute

The well-known yoghurt manufacturer Müller required a new automated packaging system. It sent its chosen supplier, RTS, a relatively short letter of intent. This stated that a detailed contract would be signed within 4 weeks, based on Müller's standard terms. In the meantime, RTS started work.

Agreement was reached on more detailed terms but these were never signed. A dispute arose because the equipment did not work as well as Müller had expected; it refused to make any further payments to RTS.

The moral of the story is to agree first and to start work later.

Lord Justice Clarke

A non-binding draft?

For different reasons, both parties argued that the unsigned draft did not apply. RTS argued that the arrangement continued to be governed by the letter of intent (because that meant that it was subject to less stringent specifications). 

Müller, on the other hand, argued that there was an implied agreement for RTS to provide the system (but on limited terms which were much more favourable to Müller than those of the unsigned draft).

In the High Court, Müller won – but RTS appealed and the case went to the Court of Appeal.

No contract at all?

The Court of Appeal agreed that the letter of intent did not apply because it had expired - and nor did the detailed draft (because it had not been signed).

It placed particular reliance on boilerplate wording in the letter of intent, which stated that a more detailed contract would only come into effect once a copy of that agreement had actually been signed by each party.

However, it also rejected Müller's implied contract in favour of a finding that there was no contract at all. Had it been allowed to stand, this outcome would probably have favoured RTS.

The Supreme Court decision

Müller then appealed to the Supreme Court, where the draft agreement "came back from the dead." The Supreme Court ruled that by going ahead with the work, at the agreed price, the parties had waived the "subject to contract" boilerplate wording requiring the agreement to be signed. 

Particular significance was attached to the fact that, during negotiations of the draft, the parties had agreed all the critical provisions of the contract.

Although this was a better result for Müller than the Court of Appeal ruling, RTS has not come away empty-handed; it should be able to rely on the limitations of liability in the unsigned draft (which Müller had hoped to avoid).

The moral of the story

Inevitably, some agreements will give rise to disputes. But lack of a signed contract encourages both parties to take up irreconcilable positions on the key issue of what has actually been agreed. This increases the likelihood of costly, time-consuming litigation, which is exactly what happened here.

As Lord Justice Clarke observed, this case demonstrates "the perils of beginning work without agreeing the precise basis upon which it is to be done. The moral of the story is to agree first and to start work later."

Of course, in practice, there are likely to be situations where work has to start before a detailed contract is finalised – but it still pays to make sure the detailed contract gets signed as soon as is practicable and to make clear the basis on which work has started.

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