A Supreme Court decision has reiterated the legal concept that where parties have negotiated contract terms "subject to contract" but one party begins work prior to terms being finalised, on the evidence a binding contract can be established on the terms that had originally been agreed. RST Flexible Systems Ltd v Molkerei Alois Muller GmbH & Co KG , heard in March of this year, involved the appeal by Molkerei against a decision of the Court of Appeal which held that a valid contract had not been formed between themselves and the respondents. The parties had entered into negotiations with the intent of formalising their arrangements into a written contract which would set out the terms of the agreement. To allow work to commence whilst negotiations were ongoing the parties entered into a letter of intent, which set out the agreed price and stated that it was expected that the contract would be completed on MF/1 terms. Following this a draft contract was drawn up, specifically providing that it would not become effective unless it had been executed and exchanged by each party. However, before this took place, as often occurs in these situations, the parties then got into a dispute over the terms with substantial work having already been completed. The appeal was allowed; the Supreme Court overruled the previous decisions of the two lower courts and found that there was a binding agreement between the two parties. It was held that, on the basis of all the terms in the negotiations between the parties, it could be inferred that the parties had waived the requirement for signature and exchange. It was made clear that each case will be decided on its own facts. Where work commenced during negotiations between parties, before a formal contract was formed, there is no guarantee that there will be a contract formed. In the specific case the existence of the letter of intent and the draft contract provided sufficient evidence for the courts to find a binding contract. The court will not impose binding contracts on terms that the parties have not reached; it would make little commercial sense to hold negotiating parties to agreements without any relevant contract terms. For additional information or comment please contact: Justin Emerson of Gepp & Sons. The above is not legal advice; it is intended to provide information of general interest about current legal issues.