June 17, 2010
A recent case involving the well known yoghurt maker Müller has highlighted the risk of companies starting work before a contract has been signed.
During negotiations between Müller and one of their suppliers a draft contract was prepared, which included a clause stating that the contract would not be effective until both parties had signed and exchanged it. For good commercial reasons the parties decided to start work before the terms of their contract had been formally agreed. As a stop gap measure the parties signed a letter of intent, which set out the basic terms they had agreed. However, soon after the works had started, so too did problems between the parties. As the draft contract had not been signed by Müller and the supplier the dispute was decided through the courts.
The Supreme Court decided that the conduct of the parties, in starting the work, had waived the right to rely on the clause that stated the contract was not effective until it had been signed and approved. It was therefore decided that the unsigned draft contract had come into existence even though all the terms had not been agreed between the parties. This decision was particularly unfavourable to one party.
Given the Supreme Court’s decision, companies should carefully consider the benefits of entering into a fully agreed contract with their business clients before commencing work. If not, companies risk being faced with the consequences highlighted in the Müller case.
Companies should take note of the Supreme Court Judge’s following recommendation “… 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.
For further information please contact Spratt Endicott’s Company Commercial Department on 01295 204000.
