Yoghurt in a pea soup

You can almost hear the judge sigh: “This case is another example of the perils of proceeding with work under a letter of intent. The preliminary issue before me requires the determination of what were the terms of a contract constituted, in part, by a letter of intent, whether that contract came to an end, whether it was replaced by another one, and if so, what were its terms.”

Mind you, if the learned judge in this case (RTS vs Molkerei Müller, 16 May 2008) one day graduates to become a construction dispute adjudicator, he will get much more practice at deciding letter of intent conundrums. Adjudicators don’t sigh at letters of intent; we sing a little song: “Here we go again, happy as can be, same old silly games, same old repartee.”

Müller makes rather delicious yoghurt, especially the twin-pot pack. RTS Flexible Systems makes automated machines for packaging the pots. In 2003, Müller and RTS started courting each other. Quotation A winged its way to Müller. They danced.

Then they danced to another 10 quotations: Müller’s requirements expanded, contracted, and expanded again. Eventually RTS did the work of design, manufacture, assembly, delivery, installation and commissioning.

And then they had their dispute. No different to any construction industry story. Useful, though, to have the views of Mr Justice Christopher Clarke.

Parliament says that what is to be paid if no price can be fathomed is ‘a reasonable price’, the time for doing the work is a ‘reasonable time’. Murky, yes, but a contract all the same

In the courting stage, Müller put up its smallprint terms. RTS put up its own smallprint terms. Eventually, RTS suggested the standard form MF/1, that being the even-handed Institute of Electrical Engineers document. They hummed and hawed. They met and talked. By now we are at quotation J. Müller sent the letter of intent. It started well: “thank you for your … offer … 16 February reference J”. “Please accept this letter of intent as confirmation of our wish to proceed, subject to the following terms …” and then there were more hums and haws.

RTS hummed in return. The judge said quotation J was an offer to carry out the work set out, including RTS’ terms. But the letter of intent was not acceptance; it was a counter offer. RTS’ reply a few days later was “acceptance subject to the two qualifications contained therein”. Müller accepted all that. So that part of the courting gives us “the letter of intent contract”. Then the judge declared what that deal promised. It included a time period of four weeks to “finalise” amendments to the standard form contract or else the letter of intent would expire.

Credit: Simone Lia

The negotiations went on and on and work continued. That’s what always happens. The letter of intent by now had expired. The work goes on, the money comes in. There is, in my language, a “murky” contract lurking in the gloom. Pea soup.

So what now is the deal? The judge said that the two companies at least agreed on the work that was to be done for the price already named. He called this a “natural inference”. But it was not essential for them to have agreed the terms and conditions and they did not do so. All that was happening was that Müller was calling for, and RTS carrying out, the work without agreement as to terms.

I’m often told that it is essential to a contract that the “form” or smallprint is to be agreed, otherwise no contract is formed.

The work goes on, the money comes in. There is, in my language, a ‘murky’ contract lurking in the gloom. Pea soup.

Be careful. The construction industry has recourse to the payment machinery in the Scheme. So if the work itself is agreed or identified, whether in advance or on the hoof, the time for payment is laid down by parliament: what is to be paid if no price can be fathomed is “a reasonable price”, the time for doing the work is a “reasonable time”.

Murky, yes, but a contract all the same. Incidentally, when we say that “essential terms” have to be in writing, can you begin to see what in law is needed to satisfy “essential”? It isn’t as much as often made out.

So, the letter of intent is a contract. Its promises, or terms, are figured out from the express provisions as objectively ascertained from the wording of the letter, as well as what is implied to resolve uncertainties. If that letter of intent expires but the parties are still edging their way towards some deal and meanwhile do work, call that the “pea soup contract”. But contract it certainly is.