RTS Flexible Systems Limited v Molkerei Alois Müller GmbH [2010] UKSC 14 is an English contract law case, concerning how it will be judged whether an agreement is reached.

The Judge held that after the letter of intent expired, they entered a contract for RTS to do the work for an agreed price, but that did not include the final draft version of the MF/1 terms.

It happens every day when parties enter into so-called 'heads of agreement'.The same principles apply where, as here, one is considering whether a contract was concluded in correspondence as well as by oral communications and conduct.

In the passage from the judgment of Steyn LJ at page 27 quoted by the judge at para 66 he identified these four particular matters which he regarded as of importance.

(1) English law generally adopts an objective theory of contract formation, ignoring the subjective expectations and the unexpressed mental reservations of the parties.

The fact that the transaction was performed on both sides will often make it unrealistic to argue that there was no intention to enter into legal relations and difficult to submit that the contract is void for vagueness or uncertainty.

By contrast, in the Court of Appeal much attention was paid to the decision of Robert Goff J in the British Steel case, which had not been cited to the judge.

At para 51 Waller LJ said that the factors which influenced Robert Goff J to conclude in that case that there was no binding contract apply with equal force to the factual matrix here.

The particular passage in Robert Goff J's judgment (starting at page 510G) on which Waller LJ relied reads as follows: "The real difficulty is to be found in the factual matrix of the transaction, and in particular the fact that the work was being done pending a formal sub-contract the terms of which were still in a state of negotiation.

It is a commonplace that a seller of goods may exclude liability for consequential loss, and may agree liquidated damages for delay.

Accordingly, when, in a case such as the present, the parties are still in a state of negotiation, it is impossible to predicate what liability (if any) will be assumed by the seller for, eg defective goods or late delivery, if a formal contract should be entered into.

In these circumstances, if the buyer asks the seller to commence work 'pending' the parties entering into a formal contract, it is difficult to infer from the [seller] acting on that request that he is assuming any responsibility for his performance, except such responsibility as will rest on him under the terms of the contract which both parties confidently anticipate they will shortly enter into.

In that passage Robert Goff J recognised that contracts for the supply of goods on a significant scale will in all probability be subject to standard terms, which will frequently legislate, not only for the liability of the seller for defects, but also for the damages (if any) for which the seller will be liable in the event not only of defects in the goods but also of late delivery.

We can understand why, in such a case, if the buyer asks the seller to commence work 'pending' the parties entering into a formal contract, it is difficult to infer from the seller acting on that request that he is assuming any responsibility for his performance, "except such responsibility as will rest on him under the terms of the contract which both parties confidently anticipate they will shortly enter into".

By the last words, Robert Goff J was not suggesting that there was, in the case before him, any contract governing the performance rendered, merely that the parties had anticipated (wrongly in the event) that there would be.

Robert Goff J was struck by the likelihood that parties would agree detailed provisions for matters such as liability for defects and concluded on the facts that no binding agreement had been reached.

By contrast, in Pagnan Bingham J and the Court of Appeal reached a different conclusion, albeit in a case of sale not construction.

Nor was Pagnan, whereas part of the reasoning in the British Steel case in the passage quoted above was that the negotiations were throughout conducted on the basis that, when reached, the agreement would be incorporated in a formal contract.

In our judgment, in such a case, the question is whether the parties have nevertheless agreed to enter into contractual relations on particular terms notwithstanding their earlier understanding or agreement.

Thus, in the Galliard Homes case Lindsay J, giving the only substantive judgment in the Court of Appeal, which also comprised Evans and Schiemann LJJ, at page 236 quoted with approval the statement in Megarry & Wade, The Law of Real Property, 5th ed (1984) at pages 568-9 that it is possible for an agreement 'subject to contract' or 'subject to written contract' to become legally binding if the parties later agree to waive that condition, for they are in effect making a firm contract by reference to the terms of the earlier agreement.