Avoiding law?

In addition to revealing the divergence of formation doctrines and practice RTS v Muller draws our attention to the way in which commercial parties may actually plan to avoid the imputation of a contract. Much was made in the Supreme Court of the fact that intention to create legal relations is often easily inferred in cases where performance has already commenced and the contract price has been agreed. It has long been the case that the law presumes an intention to create legal relations in such commercial agreements. However, in line with the theoretical underpinnings of neoclassical doctrine, with its respect for freedom to contract and freedom from contract, intention can also be negated by an express statement to the contrary. The devices which have been developed to reflect such a repudiation are letters of intent, comfort letters, framework agreements and subject to contract clauses, all of which signal that a final formal agreement has not yet been concluded. Though unpopular in some sectors of the business world, the case of Baird v Marks & Spencer (2001) provides the business sector with a salutary reminder of the extent to which an express intention to avoid the imposition of a contract continues to be respected by the senior judiciary. In the current case, two contract avoidance devices, the letter of intent and subject to contract provision, were used to avoid the imputation of an agreement.

Viewed from another perspective, letters of intent are often used as a declaration that the parties are in the process of negotiating and as a symbol of a preliminary commitment to each other. They can come in a number of forms but are in essence a communication expressing a serious intention to enter a contract at a future date. They may take the form of a non-binding statement of the future intentions of both parties; an 'if' contract or good faith proviso which creates binding contractual rights if certain conditions are met. They may also been seen as a complete 'preliminary' contract as was found in RTS v Muller. Either way, this device is used where there are good reasons to start work in advance of the finalization of all of the contract documents being agreed, and this technique is commonly employed in cases of commercial urgency. The letter provides an important safeguard of legal rights whilst the contract documents are being completed. In the present case, the parties used the letter of intent to outline Muller's intention to proceed with the project as set out in their offer. The Supreme Court recognized a contract based on the letter of intent and was only able to search for a final contract once it had established that the preliminary letter of intention agreement had expired and the subject to contract clause had been waived.

Letter of intent

  • 1 Whole agreement price ?1,682,000
  • 2 Work to commence immediately in order to meet 30 September deadline
  • 3 Full contractual terms to be based on Muller's amended form of MF/I contract
  • 4 Full terms and relevant technical specification to be finalized, agreed and signed within four weeks of the date of the letter
  • 5 Prior to agreement on full terms only Muller will have right to terminate the project and contract
  • 6 If Muller terminates, it will reimburse RTS for reasonable demonstrable out-of-pocket expense up to date of termination.
  • 7 Muller will not be liable for any loss of profits, contracts, anticipated savings, data, goodwill and revenue or other indirect costs arising from termination
  • 8 No further remedies available on termination

Rather than rushing towards the moment of responsibility, these devices demonstrate that it is commercial parties, and not the courts, that have developed ways of suspending or avoiding the importation of a final contract. These mechanisms are commonly used where time is of the essence and work needs to proceed but there is still a requirement to conduct investigations or raise finance, or where legal departments need to catch up with developments in the engineering department. These devices are evidence of anything but a lack of planning and fulfil an important function in allowing the parties to move towards a more detailed and formal agreement. Collins (1999) suggests that such 'gentlemen's agreements' are not usually enforceable on the basis that the intention appears to be to rely on each other's good faith and honour until a formal contract is made. Drawing on a socio-legal analysis, he also points to the importance of past dealings and the non-legal sanctions which might also be available to bind the parties to these preliminary agreements. Neoclassical doctrine tends to pay much greater heed to certainty than to flexibility in contracts. The use of letters of intent in RTS v Muller, where a long-term relationship was not anticipated, bought the parties time and built into their commercial dealings the type of flexibility appreciated in empirical studies and the works of relational contract theorists.

 
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