JUDGMENT
RTS Flexible Systems Limited (Respondents) v
Molkerei Alois Müller Gmbh & Company KG (UK
Production) (Appellants)
before
Lord Phillips, President
Lord Mance
Lord Collins
Lord Kerr
Lord Clarke
JUDGMENT GIVEN ON
10 March 2010
Heard on 2 and 3 December 2009
Appellant Respondent
Kenneth MacLean QC Stuart CatchpoleQC
Michael Fealy Charles Manzoni QC
(Instructed by Pinsent
Masons LLP)
(Instructed by Addleshaw
Goddard LLP)
LORD CLARKE (delivering the judgment of the court)
Introduction
1. This is the judgment of the court. The appeal arises out of a dispute between
RTS Flexible Systems Limited (‘RTS’) and Molkerei Alois Müller GmbH &
Co KG (‘Müller’) in relation to work carried out and equipment supplied by
RTS to Müller. The different decisions in the courts below and the arguments
in this court demonstrate the perils of beginning work without agreeing the
precise basis upon which it is to be done. The moral of the story to is to agree
first and to start work later. The claim was brought by RTS for “money due
under a contract, alternatively damages”. A number of issues arose between the
parties and by an order dated 11 January 2008 Akenhead J ordered the trial of
specific preliminary issues. That trial came before Christopher Clarke J (‘the
judge’) and on 16 May 2008 he handed down a judgment in which he
determined each of them.
2. The parties had initially intended to enter into a detailed written contract which
would set out all the complex terms on which the work was to be carried out
and the equipment supplied. However, as often happens, the terms were not
finalised before it was agreed that work should begin. It was common ground
before the judge that the parties entered into a contract formed by a Letter of
Intent dated 21 February 2005 and a letter from RTS dated 1 March 2005 (‘the
LOI Contract’), the purpose of which was to enable work to begin on agreed
terms. The judge held that the LOI Contract was treated by the parties as
expiring on 27 May 2005. The judge further held that after the lapse of the LOI
Contract the parties reached full agreement on the work that was to be done for
the price that they had already agreed, which was £1,682,000 and had been
agreed in the LOI Contract. He held that the natural inference from the
evidence was that their contract was that RTS would carry out the agreed work
for the agreed price. It was not however essential for them to have agreed the
terms and conditions and they did not do so. They continued after the expiry of
the LOI Contract just as they had before, by calling for and carrying out the
work without agreement as to the applicable terms. The judge declined to hold
that the parties’ contract included the final draft version of certain terms known
as the MF/1 terms (the ‘MF/1 terms’).
3. RTS appealed to the Court of Appeal. At the outset of his judgment Waller LJ,
with whom Moses LJ and Hallett LJ agreed, made it clear that RTS had said that it
was not appealing any of the judge’s findings of fact. The issue before the Court of
Appeal was whether the judge was right in holding that there was a contract between
the parties at all after the expiry of the LOI Contract and whether, if there was a
contract, he was right in holding that it was not on the MF/1 terms. Waller LJ also
made it clear that there was an issue as to whether RTS was entitled to contend that
there was no contract. The Court of Appeal allowed the appeal and made a declaration
that the parties did not enter into any contract after the LOI Contract came to an end.
4. The essential issues in this appeal, which is brought by permission given by the
House of Lords, are whether the parties made a contract after the expiry of the LOI
Contract and, if so, on what terms. As to terms, the argument centres on whether the
contract was subject to some or all of the MF/1 terms as amended by agreement.
Müller submits that the judge was correct to hold, both that there was a contract after
the expiry of the LOI Contract, and that it was not on any of the MF/1 terms, whereas
RTS submits that the Court of Appeal was right to hold that there was no contract but
that, if there was, it was on all the MF/1 terms as amended in the course of
negotiations. The importance of the MF/1 terms is that they contain detailed
provisions as to many matters, including liquidated damages. In this judgment we will
focus on those two issues, although part of Müller’s challenge to the decision of the
Court of Appeal that there was no contract is a submission that it should not have
permitted RTS to take the point because it had not been taken before the judge. We
will refer briefly to that issue en passant.
The relevant facts
5. Both the judge and Waller LJ have set out the background facts in considerable
detail. It is only necessary to refer to some of the facts in order to resolve the issues in
this appeal.
6. We begin with the Letter of Intent, which was dated 21 February 2005 and sent
by Müller to RTS, and which included the following:
“Project: Build, delivery, complete installation and commissioning
by RTS … of the Automated Pot Mixing Lines 1 & 2 and the DePalletising Cell (‘the Equipment’) for the Repack line (‘Repack
Line’) within the Repack facility in Market Drayton of … Müller …
Thank you for your mail dated 16 February 2005 setting out your offer
(number FS04014 – Issue J) to supply the Equipment to Müller (“the
Offer”).
Please accept this letter of intent as confirmation of our wish to proceed
with the Project as set out in the Offer subject to the following terms:-
(i) The agreed price for the engineering, build, delivery, installation and
commissioning as set out in the Offer is GBP 1,682,000 …
(ii) RTS is now to commence all work required in order to meet Müller’s
deadlines set out in the Offer to allow commencement of full production
by Müller on the Repack Lines by 30 September 2005. Delivery of line
also to be in accordance with the timetable set out in the Offer.
(iii) That the full contractual terms will be based on Müller’s amended
form of MF/1 contract and the full terms and the relevant technical
specifications will be finalised, agreed and then signed within 4 weeks
of the date of this letter. Prior to agreement on the full contractual terms,
only Müller shall have the right to terminate this supply project and
contract. However, should Müller terminate, Müller undertakes to
reimburse RTS for the reasonable demonstrable out of pocket expenses
incurred by RTS up to the date of termination. Müller will not be liable
for any loss of profits (whether direct or indirect), loss of contracts, loss
of anticipated savings, data, goodwill and revenue or any other indirect
or consequential loss arising from such termination. No further legal
rights or remedies shall be available to RTS upon such termination.
Please confirm your acceptance of the above by signing below where
indicated.
This letter of intent shall be governed by English law and subject to the
exclusive jurisdiction of English courts.”
It is important to note that the Letter of Intent provided for the whole agreed contract
price and was not limited to the price of the works to be carried out during the
currency of the LOI Contract. It is also of interest and, we think, of some importance
that it was contemplated from the outset that the full contract terms were to be based
on Müller’s MF/1 terms.
7. On 1 March RTS wrote to Müller confirming that it had started work subject to
Müller accepting two points. The first was that the equipment would be commissioned
by 30 September and would be ready for Site Acceptance Testing (‘SAT’) activities as
shown in the programme. But the equipment would not then be expected to be at full
production quantities. Section (ii) of the Letter of Intent would be revised by omitting
“full”. The second point referred to section (iii) and made the point that during the
four week period covered by the Letter of Intent RTS would incur costs in both
engineering time and in order to meet the project programme. It would for example
place orders for long lead items such as robots, conveyors and tray erectors. RTS said
that, in the event of termination, it would require reimbursement for these costs,
including the cancellation costs of subcontract commitments as well as any out of
pocket expenses, albeit without profit. Those points were subsequently accepted by
Müller.
8. The judge held at his para 39 that it was implicit in the LOI Contract that upon
expiry of the four weeks it would come to an end. Neither party challenged his
conclusion that after the expiry of the LOI Contract it was not revived, either in the
Court of Appeal or in this court. In answering the question posed under Issue 1.1,
namely what were terms of the LOI Contract and the obligations of the parties under
it, the judge said this at para 42:
“a) The agreed price for the engineering, build, delivery, installation
and commissioning of the work set out in the Quotation was to be
£1,682,000;
b) RTS was bound to embark on such work as was necessary to
ensure the provision of the equipment to be supplied by it in
accordance with the provisions of sections 4 – 8 of Quotation J and
the timetable set out in Appendix 7 thereof. Commissioning was to
be completed by 30 September 2005 and the equipment was to be
ready for production (but not full production) and Site Acceptance
Testing as shown in that Appendix at that date;
c) Müller and RTS were to have a period of four weeks from 21
February 2005 to finalise, agree and sign a contract based on
Müller’s amended MF/1 form of contract. Following the expiry of
that period the contract would terminate;
d) Prior to agreement of the full contractual terms and conditions
based on Müller’s amended MF/1 contract, only Müller had the
right to terminate the supply project;
e) If Müller did so terminate or the term of the contract expired, it
would reimburse RTS for the reasonable, demonstrable out of
pocket expenses incurred by RTS up to the date of termination,
including the cost of engineering time, cancellation costs of
subcontract commitments, and any out of pocket expenses, but
without profit;
f) RTS would have no further legal right or remedy on termination
and Müller would not be liable for any loss of profit (whether
direct or indirect), loss of anticipated savings, data, goodwill and
revenue or any other indirect or consequential loss arising from
termination;
g) There were no exclusions or limitations of liability in the contract.”
9. It is important to note the references to the MF/1 terms both in the Letter of
Intent and in the judge’s conclusions. It seems to us to be almost inconceivable that
the parties would have entered into an agreement for the performance of the whole
project which was not based on detailed terms. The judge made this point at para 39 in
these terms:
“The absence of agreed full contractual terms would be of limited
significance over a four week period; but more significant, if it could
continue until the end of the project. The parties did not, in my
judgment, contemplate that, in the absence of finalisation and signature
within the specified timescale (or any agreed extension), RTS would be
bound to continue with a project for which the applicable terms had not
been agreed. Consistent with that the Letter of Intent says nothing about
when any part of the price would be payable and gives Müller a right to
cancel upon payment only of expenses and cancellation costs – a right
that is entirely reasonable during a four week period but inappropriate
for a contract for the entire project. The payment schedule in the
Quotation does specify a series of percentage payments, but the first of
those is the 30% of TCV payable on receipt of order and the Letter of
Intent is not an order.”
10. It is also important to set the LOI Contract and what happened subsequently in
their context. The negotiations had been proceeding for some time. As appears in the
Letter of Intent, apart from the price, the parties had been discussing Quotation J and
the schedules to it, including Schedule 7. After the LOI Contract and while work was
proceeding in accordance with it, detailed negotiations proceeded. The negotiations up
to 16 May are described by the judge at his paras 43 to 47. Mr David Salisbury, the
senior Buyer in Müller’s purchasing department, sent the first draft of a contract to
RTS on 15 March. The scheme of the draft (and each subsequent draft), in which
words beginning with a capital letter had defined meanings, was as follows. Clause 1
provided that on receipt of an Order for Delivery RTS would supply the Equipment
and perform the Works on the terms and conditions set out in the Contract and that
without prejudice to the other provisions of the Contract the Equipment would comply
with the Specification. Clause 2 provided for some terms to survive Termination.
Clause 3 provided that Müller would procure payment of the Contract Price as set out
in Schedule 2 and, importantly, clause 4 provided that the general terms and
conditions set out in Schedule 1 would apply to the Contract. We have not been shown
Schedule 2, which may indeed not exist. However, clause 49, which is a definitions
clause which was expressly given contractual force by clause 7, included the
definition of the Contract Price as £1,682,000 “being the price as set out in more detail
in Schedule 1.” Clause 5 was entitled Limitation of Liability and provided for
limitations of liability referable to particular clauses of the Contract. Clause 6
provided for the following order of preference to be applicable to the contractual
documents: first the general terms and conditions set out in Schedule 1, secondly the
User Requirement Specification (‘URS’) set out in Schedule 4, thirdly the Functional
Design Specification (‘FDS’) set out in Schedule 3 and finally all the other Schedules
comprised in the Contract.
11. Clauses 8 to 48 were entitled “Schedule 1 General Conditions” and, in their
original form, in essence set out the MF/1 terms. It is plain that they were always
intended to form an important part of the contract. They were given pride of place by
clause 6. In the course of the negotiations they were amended in significant respects.
We were provided with a version of the draft contract which shows the original draft
in black with subsequent variations in six other colours. In the form of clauses 8 to 48,
Schedule 1 included detailed provisions on all the topics one might expect, including
Equipment and Services to be Provided, Purchaser’s Obligations, the Contract Price,
Payment, Warranties, Guarantees, representation and management, Inspection and
Testing, Completion, Delay, Defects Liability, Limitations of Liability, Force Majeure
and the like. In the course of argument we were referred to many of the amendments
that were made in the course of the negotiations. To take one example, when read with
clause 5, clause 36 contained detailed provisions (as amended) limiting liability. For
example, subject to some exceptions, the limit of each party’s liability for an Event of
Default is the amount of the Price.
12. Schedule 1 also contained clause 48, which was the subject of considerable
debate and provided:
“48. COUNTERPARTS
48.1 This Contract may be executed in any number of
counterparts provided that it shall not become effective
until each party has executed a counterpart and exchanged
it with the other.”
13. The draft contract further contained a number of Schedules on various topics to
which we refer below. Some but not all of them were referred to in the clauses which
formed part of Schedule 1.
14. There were exchanges between the parties as to the terms of the first draft and
of the second draft, which was sent to RTS by Mr William Morris, in-house counsel to
Müller, on 14 April. One of the proposed changes in that draft was that RTS’ parent
company, RTS PLC, be added as a guarantor. Meanwhile on 13 April the parties
agreed or confirmed their agreement to RTS’ letter of 1 March and agreed that the
period for execution of a formal contract would expire on 16 May. Negotiations
continued and, as the judge noted at para 46, on 13 May Mr Morris e-mailed Mr
Gavin Brown, who was RTS’ Operations Director, as follows:
“Given that the contract is now almost agreed we hereby confirm that
the expiry date for the current letter of intent can be extended until 27
May 2005, or, if sooner, the date the contract is actually signed …”
As stated above, the judge held, in the light of the exchanges between the parties, that
they agreed that the LOI Contract would expire on 27 May.
15. Further drafts were sent by Mr Morris to RTS on 11 and 16 May, when, as the
judge put it at para 48, Mr Morris e-mailed to Mr Brown the draft “contract with final
tweaks”, adding “perhaps you can drop me a quick e-mail confirming you are happy –
we can then all concentrate on completing the schedules”. The draft sent on 16 May
was the fourth draft contract. The judge described the schedules sent as part of it at
that time in para 48 as follows:
“Schedule 1: General Conditions extending to 48 paragraphs.
Schedule 3: A page headed “Functional Design Specification”. This is
a document which states the intended functionality of the
RTS equipment. It is usually derived from the User
Requirement Specification: see below.
Schedule 4: A page headed “User Requirement Specification”. This is
usually compiled by the client but, on this occasion, was
lifted from RTS’ Quotation K at Müller’s request.
Schedule 5: A three page schedule, drafted by Müller, divided into Part
1 “Tests on Completion” and Part 2 “RTS Tests”.
Schedule 6: A two page schedule, drafted by Müller, headed
Performance Tests”. The last paragraph of this read as
follows:
“THIS SCHEDULE NEEDS TO PROVIDE THAT IF THE
TEST WITHIN A CERTAIN PERCENTAGE OF THE
REQUIRED LEVEL LDs WILL APPLY AND THE
EQUIPMENT WILL STILL HAVE “PASSED”. IF THE
PERCENTAGE ACHIEVED IS LOWER THAN THAT
SPECIFIED BY LDs (I.E. LOWER THAN THE MAXIMUM
PAYOUT UNDER LDS) THE EQUIPMENT WILL HAVE
FAILED THE TEST AND THE OTHER REMEDIES WILL BE
AVAILABLE TO THE PURCHASER”
Schedule 7: An Advance Payment Guarantee to be given by RTS’
parent.
Schedule 8: A defects liability demand guarantee also to be given by
RTS’ parent.
Schedule 9: This made provision for the supply of a list of stock items
and wear and non-wear parts.
Schedule 10: A description of what the programme needed to include.
Schedule 11: An empty table of Key Performance Indicators,
Performance required and Liquidated Damages.
Schedule 12: A page headed “Certificates of Payment” together with a
form of Delivery Certificate, Completion Certificate and
Final Certificate of Payment.
Schedule 13: A list of the operating manuals and other drawings and
maintenance schedules required.
Schedule 14: A Schedule dealing with Training Requirements.
Schedule 15: A Schedule headed “Health and Safety Requirements” but
otherwise blank.
Schedule 16: A Schedule headed “Free Issue Equipment” but otherwise
blank.
Schedule 17: A Schedule headed “Site Preparations” but otherwise
blank.”
16. On 19 May Mr Brown e-mailed Mr Morris to say that the fourth draft seemed
fine to him except for a small proposed amendment to clause 24.3, which
related to delay of Tests on Completion. On 25 May Mr Brown again e-mailed
Mr Morris, saying that he expected to have the schedules completed “today”.
Mr Morris replied saying that the small proposed amendment to clause 24.3
looked fine, but that he needed to get back to him on Force Majeure and “any
final tidy-ups”. On 26 May Mr Morris made some proposals relating to Force
Majeure, to which Mr Brown countered. The judge held at para 50 that on 5
July, after further negotiations, Mr Morris proposed a compromise form of the
Force Majeure clause which Mr Brown told him seemed fine and which Mr
Morris said he would incorporate into a contract when he put all the schedules
together with Müller’s Project Manager, Mr St John. He also said that the
agreement should be in a position to be signed and forwarded to Mr Brown for
signature that week.
17. In the meantime on 26 May Mr Brown had set out RTS’ understanding of the
current status of the contract schedules in a yet further e-mail to Mr Morris. At para
51, under the heading “Finalisation of the Schedules”, the judge set out in the form of
a kind of Scott schedule both Mr Brown’s position from the e-mail under the heading
‘Understood status’ and his own conclusions with regard to each item under the
heading ‘My Comment’ as follows:
SCH. Understood status My Comment
1 Not referred to in
the e-mail.
No need. Schedule 1 consisted of the General
Conditions.
2
Assumed not
required as the
payment schedule
is included in the
body of the
contract.
This schedule is described in the Contract as
setting out the price; but that is in the General
Conditions in Schedule 1 anyway.
3 FDS – currently
being reissued.
Brown suggested
it should be
referred to rather
than incorporated.
The FDS was later agreed:
see the RTS e-mail of 29 June and para 52.
4 URS. Agreed that
section 4 of the
Quotation would
form the URS,
which was
attached.
The URS had the appendices referred to at para
26.
5 Agreed that RTS
Test Plan would
form this
Schedule. With
Müller for
approval.
The RTS Test Plan was later agreed: see the
RTS e-mail of 29 June: para 52
6 RTS Test Plan RTS REGARDED ITS TEST PLAN AS
COVERING THE GROUND OF
SCHEDULES 5 AND 6 AND MÜLLER WAS
HAPPY WITH THAT PROVIDED THAT IT
DID SO. BUT THE ONLY VERSION OF
SCHEDULE 6 CONTAINED MÜLLER’S
WORDING.
7 Advance Payment
guarantee already
agreed.
The guarantee had been attached to the e-mail
of 16 May.
8 Defect Liability
guarantee – RTS’
parent company to
approve.
A draft had been attached to the 16 May e-mail.
The parent company never approved it.
9 To be completed
during the project.
Part 1 related to stock items. It was never
completed. Part 2 contains provisions for the
durability of Wear Parts, which is capable of
standing on its own.
10 Approved
programme
attached
The attachment was either as in Quotation I or
Quotation J.
This programme was overtaken by the overall
project plan and Installation at Müller plan
referred to in para 52 below.
11 KPIs agreed:
attached.
These included details of the Performance
Required and Liquidated Damages
12 Müller to
complete.
This related to Certificates of Payment. Never
completed.
13 To be completed
during the project.
This related to operating manuals. Never
completed, It would not have been possible to
provide them at the time.
14 To be completed
during the project.
This related to Training Requirements. Never
completed
15 Müller to provide
details.
This related to Health and Safety Requirements.
Never completed
16 As per attached
document.
The attached document contained the
Assumptions for Free Issue Equipment for the
Project
17 Müller to provide
site preparation
details.
This does not seem to have been provided, but
the site was prepared.
The references to para numbers in the Comment boxes are references to para numbers
in the judge’s judgment. For simplicity we have omitted two footnotes.
18. It can be seen from the Comment boxes that there were no problems about
Schedules 1 to 5. As already stated, Schedule 1 was in effect the MF/1 conditions (as
amended) and contained clauses 1 to 48. Schedule 2 was unnecessary and, as to
Schedules 3, 4 and 5, the FDS, the URS and the RTS Test Plan were variously agreed
in the e-mails referred to by the judge. As to Schedule 5, in addition to words to the
effect recorded in the judge’s Comment box, Mr Brown’s email of 26 May went on to
suggest that upon approval of the RTS Test plan by Muller “it is included in this
schedule and existing text is deleted”. On or by 29 June the use of the RTS Test plan
in Schedule 5 had been approved by both parties, as recorded in an exchange of emails
on that date and by the judge in paragraph 52 of his judgment.
19. Schedule 6 gives rise to more difficulty. Mr Brown’s email of 26 May
contained simply the words “RTS Test plan” which appear in the judge’s Comment
box. The words in capitals set out in paragraph 15 above were inserted in the version
of Schedule 6 attached to Mr Morris’ e-mail of 11 May and also appeared in the
version attached to his email of 16 May. The evidence is that those words were
originally inserted by Mr Morris as an internal note to his colleagues. However that
may be, Schedule 6 was recorded in Mr Brown’s e-mail of 26 May as being simply
the RTS Test Plan. In the course of his evidence Mr St John confirmed that Müller
was content to use the RTS Test Plan as Schedule 6. It is clear from the judge’s entry
in his Comment box that he accepted that there was agreement to that effect. That
seems to us to be so even though, as he added “the only version of Schedule 6
contained Müller’s wording”. It appears to us to follow from those conclusions that
Schedule 6 comprised, and comprised only, the RTS Test Plan (in a form which was,
as we have stated, subsequently agreed as recorded in emails on 29 June), and that the
draft or drafts in blue containing the text in capital letters which formed part of the
third and/or fourth draft were not agreed as part of Schedule 6. In these circumstances
we conclude that by the end of the negotiations there was no issue between the parties
as to the content of Schedule 6. We deal further below (para 71 et seq) with Müller’s
contrary submissions and with the judge’s conclusions at para 74 of his judgment on
the question whether agreement was reached on Schedule 6 as well as on the related
clauses 5 and 27.7 and the relationship between them.
20. We note in passing that it seems to us that the logic that has led us to the
conclusion that the RTS Test Plan replaced the draft or drafts of Schedule 6 also leads
to the conclusion that it was agreed that the RTS Test Plan entirely replaced the drafts
of Parts I and II of Schedule 5 as they appear in our bundle in black and blue
respectively. However, this is not a final conclusion because it was not directly
addressed in the course of the argument.
21. As to Schedule 7, the form of the Advance Payment Guarantee was agreed but
the judge held at para 75 that RTS did not procure the provision of it by its parent
company, which was to be the guarantor. As to Schedule 8, RTS’ parent company did
not approve the Defect Liability Guarantee. As we see it, the judge’s comments on
Schedules 9 to 17 present no problem. In so far as some items remained to be
completed during performance of the project, they seem to us to be items which did
not have to be agreed before the contract was made.
22. In para 52 the judge noted that on 29 June, after further discussion, Mr David
Guest, who was an RTS Project Manager, e-mailed to Mr Morris copies of the FDS,
the Test Plan, the Project Plan and the Installation at Müller plan, which Müller had
approved. Mr Guest also e-mailed Mr St John a copy of a detailed Test and Build
Schedule. The final version of the draft contract in the coloured version with which
we were provided includes the points agreed in the e-mail exchanges of 19 and 25
May, 29 June and 5 July.
23. At para 67 the judge recorded Müller’s recognition that the parties reached a
final draft of the contractual terms and conditions, namely Schedule 1, which
contained the general conditions as modified in the e-mails of 19 and 25 May and 5
July. The judge nowhere rejected Müller’s recognition as being wrong on the facts. In
our judgment, it was essentially correct. The modifications from the original draft
were significant and detailed and were tailored to the particular project. For example,
clause 8.2 included a provision that RTS was not to be held liable for breach of the
contract arising from any act or omission of a supplier of the Free Issue Equipment,
which was equipment which RTS was not going to design, build or supply but was
going to integrate. There are many other examples, including clause 36, which
provided, as one would expect, for Limitations of Liability. However, as we see it,
with the possible exception of clauses 5 and 27.7, none of the detailed clauses is
material to the resolution of the issues in this appeal. In summary, with that possible
exception, everything was agreed as at 5 July except for the provisions relating to the
parent company guarantee and items which it was not necessary to complete or which
were to be completed in the course of the project. We return to this point (and the
possible exception) below in the context of the reasoning of the judge.
24. At paras 53 to 61 of his judgment the judge described the performance by RTS,
which we can summarise more shortly. RTS began work on the project on 23
February. The expiry of the LOI Contract did not bring that work to an end. Problems
arose between June and August with delay to some of the Free Issue Equipment. The
project involved the installation of two production lines, Lines 1 and 2. Quotation J
and the URS had provided for a Customer Factory Acceptance Test (‘CFAT’) to be
carried out at RTS’ premises, after which the equipment was to be installed and
commissioned at Müller’s factory, followed by a SAT. That programme involved
installing Line 2 first. However, as a result of the problems of delay, which are set out
in detail at paras 53 to 57 of the judge’s judgment, consideration was given to Line 1
being installed before Line 2. As the judge explained at para 58, on 15 August Mr
Guest of RTS e-mailed Mr Foster of Müller with a revised schedule for Line 1, which
involved the equipment for Line 1 being sent immediately to Market Drayton, without
CFAT testing. Under the schedule, low volume production capability was planned as
starting on Wednesday 28 September, with SAT beginning on Monday 24 October.
This was on the assumption that Line 2 could be installed after Line 1.
25. Discussion of these problems led to a variation of the delivery plans. The judge
described the variation as follows:
“59. On 25 August 2005 there was a meeting to discuss the problem,
at which, as is common ground, there was an agreed variation of
the delivery plan.
60. It was agreed that there would be no CFAT at RTS’ premises and
that Line 1 would be installed first so that production could begin
on this Line as soon as it could be made operational once
delivered. At the meeting Mr Brown gave Müller certain
warnings to which I shall refer hereafter.
61. Most of the RTS components for Line 1 were delivered to Müller
on or about 5 September 2005. The RTS components for Line 2
were delivered on or about 2 December. Line 1 was run on
automatic, for the first time, on 1 October. The 150,000 packs
were produced, although much of the production was the result of
manual operation without the robots. SAT testing has never taken
place. One of the matters in dispute is as to whether it should
have done.”
26. The judge made further findings as to the variation on 25 August and as to
what happened thereafter at paras 106 to 135. It is not necessary to refer to those
conclusions in any detail in order to determine the issues in this appeal. However, at
para 106 the judge said that it was common ground between the parties that the
contract between them was varied on 25 August 2005 at a meeting at RTS’ premises in
Irlam between Messrs Brown and Guest from RTS and Messrs St John, Benyon,
Foster, Highfield and possibly others for Müller, at which the parties agreed to alter
the delivery schedules of the lines and to dispense with the need for RTS to conduct
CFAT tests on Line 1.
27. After the agreement on 25 August the parties concentrated on Line 1 and Line
2 fell behind. Resources which would otherwise have been dedicated to both Lines
had to be dedicated to Line 1 only. Moreover, as the judge held at para 121, the need
to deal with Line 1 so as to meet Müller’s production requirements seemed to have
caused everyone to divert their efforts away from finalising contractual
documentation, which was a matter which had gone quiet in mid July. Most of RTS’
equipment for Line 1 was delivered on 5 September and detailed work continued on
Line 1, which Müller put into production on 10 October.
28. As Waller LJ said at para 43 of his judgment in the Court of Appeal, ultimately
a dispute arose between the parties leading to the litigation. The details are
unimportant save to comment first that no contract was ever signed as contemplated;
second that until argument in the Court of Appeal each party had submitted as its
primary position that at some stage a contract came into existence which governed
their relationship; but third that both had at different times taken up positions
inconsistent with that which they finally adopted at the trial as to whether MF/1 terms
formed part of the contract.
29. As to payment, we take the position essentially from Waller LJ’s judgment at
paras 44 to 46, where he summarised the conclusions of the judge. Müller paid RTS
30 per cent of the agreed price of £1,682,000 plus VAT on about 28 April 2005 and
made further payments of 30 per cent on 8 September 2005 and of 10 per cent in
January 2006. It did so following the issue by RTS of invoices which claimed those
specified percentages of a total contract value of £1,682,000. Although 30 per cent
was specified in Quotation J as the amount of the first two payments under the
contract, the payments made were not all stage payments as specified in Quotation J.
That Quotation called for (a) 30 per cent on receipt of order, (b) 30 per cent on
delivery to RTS of the major items of bought out equipment, (c) 20 per cent on
delivery to Müller, (d) 10 per cent on completion of commissioning and (e) 10 per
cent within 30 to 90 days of takeover, although (a) was to be within 7 days of receipt
of order and (b), (c) and (d) were to be within 30 days of the date of invoice. There
was however no order and, even if the Letter of Intent was to be regarded as the
equivalent, payment was not made within 7 days of it. The second 30 per cent was
paid after delivery to RTS of major items and submission of an invoice. The 10 per
cent paid in January 2006 was not however the 20 per cent due on delivery. Waller LJ
further noted that the payments made were not the stage payments specified in clause
11 of the fourth draft of the Contract sent with the e-mail of 16 May.
30. While that is so, the fact remains that the payments were expressly made
pursuant to requests by RTS for payment of specific percentages of the Contract Price,
which seems to us to support the conclusion that the parties had agreed the Contract
Price.
The parties’ cases before the judge
31. As stated above, at para 67 the judge recorded Müller’s recognition that the
parties reached a final draft of the contractual terms and conditions, namely Schedule
1, which contained the general conditions as modified in the e-mails of 19 and 25 May
and 5 July. Müller had expressly pleaded in its Contractual Statement of Case (and
submitted to the judge) that on 5 July RTS and Müller agreed the terms of the
proposed written contract between them and the draft contract was ready for
execution. Before the judge Müller’s case was that, despite that agreement, there was
no binding contract between the parties on those terms for the reasons which the judge
summarised at para 67. This was because it was the parties’ intention that detailed
terms negotiated by them would not have contractual effect until the relevant
documentation, namely the Contract and the Schedules, was formally executed and
signed. That that was so appeared from:
“a) the Letter of Intent which referred to the full terms and the relevant
technical specifications being finalised, agreed and then signed within 4
weeks of the date of that letter;
b) Mr Morris’ e-mail of 13 May, which referred to the Letter of Intent
lasting until 27 May or, if sooner, the date the contract is “actually
signed”;”
and was consistent with
“c) the evidence of Mr Brown of RTS, in para 46 of his witness
statement, referring to his e-mail of 26 May 2005 that:
“My view was that whilst we had agreed the wording in principal
(sic), until the whole contract including the schedules had been
compiled as a complete document and signed as accepted by RTS
then it wasn’t enforceable. Whether this is right or not I don’t now
know, but it was what I thought then. Therefore, to my mind, the
milestone event at which the terms and conditions of the anticipated
contract were agreed and in force was when RTS signed the
document.”
32. Müller’s case was that no contractual document had been signed and thus no
such document had been exchanged. Its case was not, however, that there was no
contract between the parties. Its case that there was a contract depended upon the fact
of payment and the work carried out, including delivery of the components
comprising Line 1 on 5 September. There was a contract on the basis that Müller
would pay the price, namely £1,682,000, in return for the goods and services that RTS
had agreed to provide as set out in a number of specific documents identified by the
judge at para 68. The specific documents relied upon by Müller and set out by the
judge at para 68 were the following: (i) the documents attached to the e-mail of 26
May, namely (a) the URS and its Appendices, save that the Parent Company
guarantee was never given and the Provisional Project Plan was overtaken by the
documents set out at para 22 above (and para 52 of the judgment) in June, (b) the KPIs
and (c) the Assumptions for Free Issued Equipment (‘the Assumptions’); and (ii) the
documents attached to Mr Guest’s two e-mails of 29 June, namely (a) the FDS, (b) the
Test Plan, (c) the overall project plan (which superseded the delivery programme
attached to the e-mail of 26 May) which was to form Schedule 10 to the contract, (d)
the installation plan and (e) the Test and Build Schedule. In short Müller submitted
that the parties had an intention to create contractual relations when RTS provided the
goods and services and Müller made its payments.
33. Müller’s case was that no further contractual terms as to payment had been
agreed, with the result that RTS was not entitled to payment of the balance of the price
over and above the amount in fact paid by Müller as set out below until it had
completed substantial performance. Moreover, a critical part of Müller’s case was that
the amended MF/1 terms as agreed and set out in clauses 8 to 48 as amended never
became part of a binding agreement.
34. The primary case for RTS before the judge by contrast (as summarised at para
71) was (i) that the LOI Contract incorporated Quotation J, including RTS’ standard
terms, (ii) that it did not expire in May and (iii) that it was never replaced by any new
contract. The judge rejected (i) and (ii), which left RTS’ alternative case, which was
that, if there was a new contract, it incorporated the agreed amended MF/1 conditions.
This was on the basis that if, as Müller submitted, most of the Schedules were
incorporated, so also were the terms and conditions in Schedule 1, which was the basis
of the contract. We accept Mr Catchpole’s submission that before the judge RTS’
primary case was that there was a continuing contract on the terms of the LOI
Contract, but that it had two alterative cases, namely that there was either no contract
(but RTS was entitled to a quantum meruit) or, if there was a contract, that it was on
MF/1 terms.
35. We note in passing that preliminary issue 1.2.4 was formulated in such a way
that one of the possible results was a right to payment, not under contract but by way
of quantum meruit. In these circumstances we agree with the Court of Appeal that, in
the light of the submissions before him, it would have been open to the judge to hold
that there was no contract but that RTS was entitled to a quantum meruit. As Waller
LJ put it at para 55, before the judge could decide what contract had come into
existence after the expiry of the LOI Contract, he would have to consider whether a
contract came into existence at all. The Court of Appeal was correct to hold that it was
open to RTS to submit that there was no contract and we reject Müller’s submissions
to the contrary. In any event, we detect no injustice in permitting RTS to contend that
there was no contract, either in the Court of Appeal or in this court.
The conclusion and reasoning of the judge
36. The judge accepted Müller’s submissions. He held at para 72 that after the
lapse of the LOI Contract the parties reached full agreement on the work that was to
be done “for the price that they had already agreed”. Having referred at para 66 to the
decision and reasoning of Steyn LJ in G Percy Trentham Ltd v Archital Luxfer Ltd
[1993] 1 Lloyd’s Rep 25 at 27 he said that it was, as Steyn LJ had contemplated,
unrealistic to suppose that the parties did not intend to create legal relations. So far so
good. However, he held that it was not essential for them to have agreed the terms and
conditions, by which we think he meant the MF/1 conditions, and they did not do so.
He held that the parties continued after the expiry of the LOI Contract just as they had
done before, that is by calling for and carrying out the work without agreement as to
the applicable terms. In paras 73 to 76 he gave four reasons for declining to infer that
the contract included the final draft version of the MF/1 conditions.
37. The four reasons were these:
i) Müller’s Letter of Intent and its e-mail of 13 May 2005 indicated that the
final terms were not to be contractually agreed until signature.
ii) The contract sent with the e-mail of 16 May was designed to operate as a
composite whole, consisting of (a) the basic two page, seven clause
contract, and (b) the 17 schedules that are annexed to it and referred to in
the general conditions which constitute Schedule 1. Although many of
these Schedules were agreed several were not. In particular it was not
agreed what Schedule 6 would contain. The words in capitals
represented a proposed, but never agreed, refinement to give Müller
some ampler remedy than liquidated damages if the performance of the
equipment was lower than that degree of non performance which would
give rise to the maximum liquidated damages.
iii) The parties did not proceed on the basis of the conditions. RTS did not
procure the provision of the Advance Payment Guarantee (Schedule 7),
which, under the conditions, was required to be procured prior to the
advance payment being made. Schedules 15 and 17, which address
matters relevant from the start of the contract, were not completed.
Müller did not appoint an Engineer. Payment was not made in
accordance with the application and certification procedure laid down in
clause 11 and the procedure for Changes to the Contract laid down by
clause 39 was not followed. The dispute procedure required by clause 41
was not followed.
iv) Clause 48 of the general conditions was not satisfied because the
contract was not executed, nor were any counterparts exchanged.
38. As we read them, those reasons contain two different strands. The first is set
out in reasons i) and iv) and is that any agreement made between the parties was made
subject to contract and was not binding until a formal contract was signed by and
perhaps exchanged between both parties. The second is set out in ii) and iii) and is that
all essential terms were not agreed.
39. For those reasons the judge held that by no later than 29 June 2005 the contract
between the parties, which was to apply retrospectively, was that RTS was to provide
the goods and services specified, and comply with the obligations set out, in the
documents set out in his para 68, subject to the conditions specified therein.
The parties’ cases in the Court of Appeal
40. In the Court of Appeal, RTS abandoned its case that the LOI Contract did not
expire but continued. It submitted to the Court of Appeal that the judge was wrong to
hold that there was a contract on terms which excluded the MF/1 terms. Its
submissions were first that there was no contract and, secondly, that, if there was a
contract, it was on the terms agreed as at 5 July, which included the MF/1 terms set
out in clauses 8 to 48 and the Schedules, as amended by agreement. Müller submitted
that the point that there was no contract was not open to RTS. At para 53 Waller LJ
said this:
“53. The force of this argument was clearly not lost on Müller. The
major part of their skeleton in the Court of Appeal was aimed at
arguing that RTS should not be entitled to argue the point in the
Court of Appeal having regard to the stance they had taken before
the judge. The answer to the point on its merit was put shortly as
follows and in much the same way as the argument had been put
before the judge:-
‘79. On its proper construction, clause 48 of the amended form
MF1 prevented a contract on those terms taking effect without
signature by the parties and RTS plc. It does not follow that in the
absence of a signed agreement there could not be a binding
contract between the parties on some other terms as a result of
their conduct.’”
41. As we read para 53, Waller LJ is there setting out Müller’s skeleton argument.
The argument was that, although clause 48 prevented a contract on MF/1 terms, it did
not prevent a contract on other terms based on conduct. On that footing Müller sought
to uphold the approach taken by the judge.
Conclusion and reasoning of the Court of Appeal
42. The Court of Appeal decided the appeal on a narrow basis. It rejected the
submission that it was not open to RTS to contend that there was no contract. It
accepted the proposition in the first sentence of para 79 of the skeleton. Waller LJ held
at para 56 that the judge had misconstrued clause 48. He added:
“He relied on condition 48 as preventing a contract coming into being
on the MF/1 conditions [see para 76]. This, I understand, to be the point
taken by [Müller] at paragraph 79 of their skeleton quoted above. But
once it is appreciated that the definition of contract in condition 48
covers not just those conditions but the contract including the schedules,
condition 48 seems to me to become a complete answer.”
We put ‘Müller’ in square brackets because the copy of the judgment we have refers
to RTS. However that is a typographical error because the reference is in fact to
Müller’s skeleton, as Waller LJ’s para 61 states. His reference to ‘the definition of
contract’ is a reference to clause 49, which defined ‘Contract’ as meaning ‘this
Contract signed by the parties and the Schedules’.
43. It is of interest to note that at para 58 Waller LJ appreciated that the conclusion
that there was no contract could be said to be very unsatisfactory but he added that the
judge’s answer was also very unsatisfactory in that, although the MF/1 conditions had
to all intents and purposes been agreed and the limit of RTS’ liability had been agreed,
“by selecting simply the schedules [the judge] achieved a bargain neither side
intended to enter into”. Waller LJ then said this by way of conclusion at para 61:
“It would, as it seems to me, from the way negotiations had gone as
between the parties, and once the true construction of condition 48 has
been appreciated, have needed a clear express variation of condition 48
for a court to be able to reach the conclusion which the judge reached,
i.e. that all of MF/1 had been put on one side by the parties and the
Schedules (and only in so far as they have been agreed) applied. With
condition 48 properly understood and in the context of the importance
the parties actually considered the negotiations of MF/1 to have, in my
view, the above conclusion is simply not open to the court, and I reject
Mr Maclean’s submissions as encapsulated in paragraph 79 of his
written submissions.”
44. There was no detailed analysis in the Court of Appeal of the possibility that the
preferable conclusion was not either of the solutions which Waller LJ (in our view
correctly) rejected but that the parties had by their conduct unequivocally waived
clause 48 and that there was a contract on the terms agreed as at 5 July as
subsequently varied by the agreement of 25 August.
Discussion
The principles
45. The general principles are not in doubt. Whether there is a binding contract
between the parties and, if so, upon what terms depends upon what they have agreed.
It depends not upon their subjective state of mind, but upon a consideration of what
was communicated between them by words or conduct, and whether that leads
objectively to a conclusion that they intended to create legal relations and had agreed
upon all the terms which they regarded or the law requires as essential for the
formation of legally binding relations. Even if certain terms of economic or other
significance to the parties have not been finalised, an objective appraisal of their
words and conduct may lead to the conclusion that they did not intend agreement of
such terms to be a pre-condition to a concluded and legally binding agreement.
46. The problems that have arisen in this case are not uncommon, and fall under
two heads. Both heads arise out of the parties agreeing that the work should proceed
before the formal written contract was executed in accordance with the parties’
common understanding. The first concerns the effect of the parties’ understanding
(here reflected in clause 48 of the draft written contract) that the contract would “not
become effective until each party has executed a counterpart and exchanged it with
the other” – which never occurred. Is that fatal to a conclusion that the work done was
covered by a contract? The second frequently arises in such circumstances and is this.
Leaving aside the implications of the parties’ failure to execute and exchange any
agreement in written form, were the parties agreed upon all the terms which they
objectively regarded or the law required as essential for the formation of legally
binding relations? Here, in particular, this relates to the terms on which the work was
being carried out. What, if any, price or remuneration was agreed and what were the
rights and obligations of the contractor or supplier?
47. We agree with Mr Catchpole’s submission that, in a case where a contract is
being negotiated subject to contract and work begins before the formal contract is
executed, it cannot be said that there will always or even usually be a contract on the
terms that were agreed subject to contract. That would be too simplistic and dogmatic
an approach. The court should not impose binding contracts on the parties which they
have not reached. All will depend upon the circumstances. This can be seen from a
contrast between the approach of Steyn LJ in the Percy Trentham case, which was
relied upon by the judge, and that of Robert Goff J in British Steel Corporation v
Cleveland Bridge and Engineering Co Ltd [1984] 1 All ER 504, to which the judge
was not referred but which was relied upon in and by the Court of Appeal.
48. These principles apply to all contracts, including both sales contracts and
construction contracts, and are clearly stated in Pagnan SPA v Feed Products Ltd
[1987] 2 Lloyd’s Rep 601, both by Bingham J at first instance and by the Court of
Appeal. In Pagnan it was held that, although certain terms of economic significance to
the parties were not agreed, neither party intended agreement of those terms to be a
precondition to a concluded agreement. The parties regarded them as relatively minor
details which could be sorted out without difficulty once a bargain was struck. The
parties agreed to bind themselves to agreed terms, leaving certain subsidiary and
legally inessential terms to be decided later.
49. In his judgment in the Court of Appeal in Pagnan Lloyd LJ (with whom
O’Connor and Stocker LJJ agreed) summarised the relevant principles in this way at
page 619:
“(1) In order to determine whether a contract has been concluded in
the course of correspondence, one must first look to the
correspondence as a whole…
(2) Even if the parties have reached agreement on all the terms of the
proposed contract, nevertheless they may intend that the contract
shall not become binding until some further condition has been
fulfilled. That is the ordinary ‘subject to contract’ case.
(3) Alternatively, they may intend that the contract shall not become
binding until some further term or terms have been agreed…
(4) Conversely, the parties may intend to be bound forthwith even
though there are further terms still to be agreed or some further
formality to be fulfilled…
(5) If the parties fail to reach agreement on such further terms, the
existing contract is not invalidated unless the failure to reach
agreement on such further terms renders the contract as a whole
unworkable or void for uncertainty
(6) It is sometimes said that the parties must agree on the essential
terms and it is only matters of detail which can be left over. This
may be misleading, since the word ‘essential’ in that context is
ambiguous. If by ‘essential’ one means a term without which the
contract cannot be enforced then the statement is true: the law
cannot enforce an incomplete contract. If by ‘essential’ one
means a term which the parties have agreed to be essential for the
formation of a binding contract, then the statement is tautologous.
If by ‘essential’ one means only a term which the Court regards
as important as opposed to a term which the Court regards as less
important or a matter of detail, the statement is untrue. It is for
the parties to decide whether they wish to be bound and if so, by
what terms, whether important or unimportant. It is the parties
who are, in the memorable phrase coined by the Judge [at page
611] ‘the masters of their contractual fate’. Of course the more
important the term is the less likely it is that the parties will have
left it for future decision. But there is no legal obstacle which
stands in the way of the parties agreeing to be bound now while
deferring important matters to be agreed later. 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.
50. Before the judge much attention was paid to the Percy Trentham case, where,
as Steyn LJ put it at page 26, the case for Trentham (the main contractor) was that the
sub-contracts came into existence, not simply from an exchange of contracts, but
partly by reason of written exchanges, partly by oral discussions and partly by
performance of the transactions. 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. Instead the governing criterion is the reasonable
expectations of honest sensible businessmen. (2) Contracts may come into existence,
not as a result of offer and acceptance, but during and as a result of performance. (3)
The fact that the transaction is executed rather than executory can be very relevant.
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. Specifically, the fact that the
transaction is executed makes it easier to imply a term resolving any uncertainty, or,
alternatively, it may make it possible to treat a matter not finalised in negotiations as
inessential. This may be so in both fully executed and partly executed transactions. (4)
If a contract only comes into existence during and as a result of performance it will
frequently be possible to hold that the contract impliedly and retrospectively covers
pre-contractual performance.
51. 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. He thought (para 59) that, if the judge had had Robert Goff J’s judgment cited to
him (and/or if the no contract point had been fully developed before him) the judge
would not have reached the conclusion he did.
52. 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, of course, a notorious fact that, when a contract is
made for the supply of goods on a scale and in circumstances such as the
present, it will in all probability be subject to standard terms, usually the
standard terms of the supplier. Such standard terms 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. It is a
commonplace that a seller of goods may exclude liability for
consequential loss, and may agree liquidated damages for delay. In the
present case, an unresolved dispute broke out between the parties on the
question whether CBE’s or BSC’s standard terms were to apply, the
former providing no limit to the seller’s liability for delay and the latter
excluding such liability altogether. 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. It would be an extraordinary result
if, by acting on such a request in such circumstances, the [seller] were to
assume an unlimited liability for his contractual performance, when he
would never assume such liability under any contract which he entered
into.”
(Waller LJ rightly put ‘seller’ in parenthesis since, although the report reads ‘buyer’,
Robert Goff J must have meant ‘seller’.)
53. 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. Thus a seller may exclude liability for
consequential loss, and may agree liquidated damages for delay. In the British Steel
case itself there was an unresolved dispute as to whose standard terms were to apply.
One set of terms provided no limit to the seller’s liability for delay and the other
excluded such liability altogether. 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.
54. There is said to be a conflict between the approach of Steyn LJ in the Percy
Trentham case and that of Robert Goff J in the British Steel case. We do not agree.
Each case depends upon its own facts. We do not understand Steyn LJ to be saying
that it follows from the fact that the work was performed that the parties must have
entered into a contract. On the other hand, it is plainly a very relevant factor pointing
in that direction. Whether the court will hold that a binding contract was made
depends upon all the circumstances of the case, of which that is but one. The decision
in the British Steel case was simply one on the other side of the line. 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.
55. We note in passing that the Percy Trentham case was not a ‘subject to contract’
or ‘subject to written contract’ type of case. 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. So too was the reasoning of the
Court of Appeal in Galliard Homes Ltd v J Jarvis & Sons Ltd (1999) 71 Con LR 219.
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. Put another way,
they are waiving the ‘subject to [written] contract’ term or understanding.
56. Whether in such a case the parties agreed to enter into a binding contract,
waiving reliance on the ‘subject to [written] contract’ term or understanding will again
depend upon all the circumstances of the case, although the cases show that the court
will not lightly so hold. We turn to consider the facts.
Application of the principles to the facts
57. There are three possible conclusions which could be reached. They are (1) that,
as the Court of Appeal held, there was no contract between the parties; (2) that, as the
judge held, there was a contract between the parties on the limited terms found by the
judge; and (3) that there was an agreement between the parties on wider terms. In the
third case there is some scope for argument as to the precise terms. As appears below,
it is our view that, if the third solution is adopted, the most compelling conclusion is
that the terms were those agreed on and before 5 July as subsequently varied on 25
August. We consider each possible conclusion in turn.
(1) No contract
58. We agree with the judge that it is unrealistic to suppose that the parties did not
intend to create legal relations. This can be tested by asking whether the price of
£1,682,000 was agreed. Both parties accept that it was. If it was, as we see it, it must
have formed a part of a contract between the parties. Moreover, once it is accepted (as
both parties now accept) that the LOI Contract expired and was not revived, the
contract containing the price must be contained in some agreement other than the LOI
Contract. If the price is to be a term binding on the parties, it cannot, at any rate on
conventional principles, be a case of no contract. Although it did not address this
question, the Court of Appeal’s solution involves holding that there was no binding
agreement as to price or anything else and that evidence of the agreed price is no more
than some evidence of what a reasonable price would have been for quantum meruit
purposes. The difficulty with that analysis seems to us to be threefold. First, neither
party suggested in the course of the project that the price was not agreed and RTS
invoiced for percentages of the price and Müller paid sums so calculated as described
above. Second, the price of £1,682,000 was agreed and included in the LOI Contract
on the footing that there would be a detailed contract containing many different
provisions including, as expressly recognised in the LOI Contract, the MF/1 terms.
Third, there was an agreed variation on 25 August which nobody suggested was not a
contractual variation.
59. In these circumstances the no contract solution is unconvincing. Moreover, it
involves RTS agreeing to proceed with detailed work and to complete the whole
contract on a non-contractual basis subject to no terms at all.
(2) Contract on the terms found by the judge
60. We entirely agree with the judge that the parties initially intended that there
should be a written contract between them which was executed by each and
exchanged between them. We further accept that, if the matter were tested on, say, 5
July, the correct conclusion may well have been that that remained the position and
that there was no binding agreement between them. However, that is not on the basis
that the parties had not reached agreement (or sufficient agreement) but because the
agreement they had reached remained (in the traditional language) ‘subject to
contract’. Thus, as correctly submitted in Müller’s skeleton argument before the judge,
the agreement was ready for execution at that stage but was subject to contract. In the
same skeleton argument Müller correctly submitted that the question was, objectively
speaking, whether the parties’ intentions took a new turn at some stage such that they
intended to be bound by the ‘final draft contract’ without the need for its formal
execution. As we read it, the skeleton defined the ‘final draft contract’ as the draft sent
by Mr Morris on 16 May, subject to subsequent e-mail agreement as stated above.
61. The striking feature of this case which makes it very different from many of the
cases which the courts have considered is that essentially all the terms were agreed
between the parties and that substantial works were then carried out and the agreement
was subsequently varied in important respects. The parties treated the agreement of 25
August as a variation of the agreement that they had reached by 5 July. Nobody
suggested in August that there was no contract and thus nothing to vary. It was not
until November, by which time the parties were in dispute, that points were taken as to
whether there was a contract.
62. We have reached the firm conclusion that by 25 August at the latest the parties’
communications and actions lead to the conclusion that they had agreed that RTS
would perform the work and supply the materials on the terms agreed between them
up to and including 5 July as varied by the agreement of 25 August. Thereafter the
work continued on a somewhat different basis because of the provision of Line 1
before Line 2. As stated above, it does not seem to us to make commercial sense to
hold that the parties were agreeing to the works being carried out without any relevant
contract terms. In this regard we agree with the judge.
63. On the other hand it does not seem to us to make commercial sense to hold that
the work was carried out on some but not all the terms agreed by 5 July. The terms
were negotiated on the basis that the Schedules would form part of the Contract,
which also contained the detailed Conditions in Schedule 1, which had themselves
been subject to much discussion and comprised clauses 8 to 48. We accept Mr
Catchpole’s submission that the Conditions, based as they were on the MF/1 terms
which were put forward by Müller and expressly referred to in the LOI Contract and
which (among many other things) defined RTS’ performance obligations, set out the
warranties provided by RTS and identified the limit of its potential liability. It is, in
our judgment, inconceivable that the parties would have agreed only some of the
terms, namely those in the specific documents identified by Müller, and not those in
clauses 8 to 48. It seems to us that this was one of the considerations which the Court
of Appeal had in mind in reaching the extreme conclusion which it did, namely that
there was no contract at all.
64. We agree with the Court of Appeal that the judge’s analysis cannot be correct.
As appears from paras 36 and 37 above, there were four reasons for his decision,
expressed in para 72, not to infer that the contract included the final draft version of
the MF/1 conditions. They were expressed in his paras 73 to 76. His first and fourth
reasons appear to us to be essentially the same. As to his first reason, it is true that the
LOI Contract and the e-mail of 13 May indicated that the final terms were not to be
contractually agreed until signature. That was indeed the original plan and remained
the position until after 5 July. Equally, his fourth reason was that the effect of clause
48 was that the contract was not to be binding until signed.
65. The problem with these conclusions is that, as Mr Catchpole submitted, they
prove too much. Given that no formal contract was signed or exchanged, we accept
that, unless and until the parties agreed to vary or waive clause 48, the Contract would
not become binding or effective. The problem for Müller is that identified by the
Court of Appeal. Given the definition of ‘Contract’ in clause 49 as including the
Schedules, the effect of clause 48 would be that the Schedules would be as ineffective
as the MF/1 conditions because they all form part of the Contract as defined. Yet
Müller’s case is that the documents identified by the judge as forming the terms of a
binding agreement are all or almost all ‘Schedules’ within the meaning of clause 49. It
follows that, if clause 48 prevented the MF/1 terms from being binding terms of a
contract, by parity of reasoning it prevented the documents relied upon by Müller (and
accepted by the judge) from being binding terms either.
66. It follows that, subject to one point, we agree with the reasoning of the Court of
Appeal in paras 56 and 61 of Waller LJ’s judgment and referred to above. That one
point is this. Waller LJ said that it would have required a
“clear express variation of condition 48 for a court to be able to reach
the conclusion which the judge reached, i.e. that all of MF/1 had been
put on one side by the parties and the Schedules (and only in so far as
they have been agreed) applied.” (para 61)
We can well understand that, given the Court of Appeal’s conclusion that, for the
reasons discussed above, there could have been no contract on the terms found by the
judge if clause 48 (or the ‘subject to contract’ understanding embodied in it) remained,
the court would have no alternative but to hold that there was no contract. That is not,
however, so if the parties have by their exchanges and conduct waived the ‘subject to
contract’ condition or understanding.
67. We agree with the Court of Appeal that, before it could be held that there was a
binding contract on the MF/1 terms as amended by agreement, unequivocal agreement
that clause 48 had been waived would be required. We do not however think that it is
necessary for that agreement to be express if by that is meant an express statement by
the parties to that effect. Such unequivocal agreement can in principle be inferred
from communications between the parties and conduct of one party known to the
other.
68. If such an inference can be drawn on the facts, then the correct solution would
not be the second but the third of the possibilities identified above, subject to the
judge’s second and third reasons identified in para 37 above. It would not, in our
opinion, be the second possibility because that would involve holding that the parties
agreed some but not all of the terms agreed on or before 5 July. Yet, as the judge held
at his para 74 (our para 37ii)), the contract sent with the e-mail of 16 May was
designed to operate as a composite whole, consisting of (a) the basic two page, seven
clause contract and (b) the 17 schedules that are annexed to it and referred to in the
general conditions which constitute Schedule 1, that is the MF/1 terms. In our
judgment, the parties at no time reached agreement on the terms set out in the
documents referred to in the judge’s para 68 without the MF/1 terms as amended,
which form an important part of the Contract, namely clauses 8 to 48.
(3) Contract on terms wider than found by the judge
69. The first question under this head is whether the parties departed from the
understanding or agreement that it was to be subject to contract, as had been the
original understanding of the parties and as expressly provided in clause 48. The
second is whether the parties intended to be bound by what was agreed or whether
there were further terms which they regarded as essential or which the law regards as
essential in order for the contract to be legally enforceable. It is convenient to consider
the second point first.
All essential terms agreed?
70. The second point is embodied in the judge’s paras 74 and 75 and is set out in
para 37ii) and iii) above. We entirely agree with the judge’s conclusion in the first
sentence of our para 37ii) that the fourth draft of the contract sent with the e-mail of
16 May was designed to operate as a composite whole consisting of the two page
seven clause contract and clauses 8 to 48 which comprised the MF/1 terms as
amended and the 17 Schedules annexed. We have set out the facts in this regard in
some detail at paras 11 to 30 above. In summary, the parties negotiated clauses 8 to 48
in some detail and, subject to some of the Schedules, the clauses were essentially
agreed. As noted at para 23 above, at his para 67 the judge recorded Müller’s
recognition that the parties reached a final draft of the contractual terms and
conditions, namely Schedule 1, which contained the general conditions as modified in
the e-mails of 19 and 25 May and 5 July. The judge nowhere rejected Müller’s
recognition as being wrong on the facts. That draft is the version with coloured
amendments up to purple in the version provided to us.
71. As to the Schedules, the judge recognised at his para 74 (our para 37ii) and
iii)), that although many of the Schedules were agreed, several were not. In particular,
he said that it was not agreed what Schedule 6 would contain and that the words in
capitals represented a proposed, but never agreed, refinement to give Müller some
ampler remedy than liquidated damages if the performance of the equipment was
lower than that degree of non performance which would give rise to the maximum
liquidated damages. We have already expressed the view in para 19 above that, on the
judge’s findings of fact, the parties had agreed that Schedule 6 would comprise, and
comprise only, the RTS Test Plan.
72. We return to Mr Maclean’s submissions that (a) the parties had not reached
agreement on the suggestion contained in the capital letters in the text of the fourth
draft quoted above and that, absent such agreement, there could be no binding
agreement between the parties and/or (b) clauses 5 and 27.7 were not or cannot be
taken as having been agreed.
73. Clause 5 provided for limits of liability in relation to specific clauses. In
relation to clause 27.7, as amended by Müller in blue, as shown in italics below, and
sent to RTS with the third draft it provided:
“Percentage of Contract Price to be paid to the Purchaser or deducted
from the Contract Price [words deleted] [to be calculated in accordance
with Schedule 6].
Maximum percentage of Contract Price for which liquidated damages
payments paid under clause 27.7.2 is 2.5%.
74. Clause 27.7.1 and 2 provided:
“27.7 If the Works fail to pass the Performance Tests [words deleted]
as determined by the provisions of Schedule 6 above then the
following remedies will be available to the Purchaser:-
27.7.1 the Contractor shall (without prejudice to the Purchaser’s
other rights and remedies) pay to the Purchaser [words deleted]
the sum set out in clause 5 [words deleted] within 14 days of
receipt of an invoice from the Purchaser such sum being agreed
between the parties as being a genuine pre-estimate of losses
suffered by the Purchaser as a result of the Equipment not
meeting the requisite standards;
27.7.2 where the Purchaser has not become entitled to liquidated
damages due to the Performance Tests not being successfully
passed and the Equipment not meeting the requisite standards to
entitle the Purchaser to claim the maximum liquidated damages
pursuant to clause 27.7.1 as set out in clause 5 above the
Purchaser may give written notice to terminate the Contract
immediately such failure shall be deemed a material breach
incapable of remedy and pursuant to clause 34.1.2 and without
prejudice to its other rights and remedies in the Contract the
Purchaser may by written notice terminate the Contract
immediately and take at the expense of the Contractor such steps
as may in all circumstances be reasonable to ensure that the
Works pass the Performance Tests.”
The words deleted show that in the original draft clause 27.7.1 was concerned with
delay. The words in italics are in blue and were first added by Müller in Mr Morris’s
email of 11 May.
75. It will be recalled that the suggestion in capital letters made by Müller was in
these terms:
“THIS SCHEDULE NEEDS TO PROVIDE THAT IF THE TEST
WITHIN A CERTAIN PERCENTAGE OF THE REQUIRED LEVEL
LDs WILL APPLY AND THE EQUIPMENT WILL STILL HAVE
“PASSED”. IF THE PERCENTAGE ACHIEVED IS LOWER THAN
THAT SPECIFIED BY LDs (I.E. LOWER THAN THE MAXIMUM
PAYOUT UNDER LDS) THE EQUIPMENT WILL HAVE FAILED
THE TEST AND THE OTHER REMEDIES WILL BE AVAILABLE
TO THE PURCHASER”
76. It is important to note that the suggestion was not that there should be any
amendment to any of the terms of clauses 7 to 48, or indeed to clause 5 or any of the
other clauses. It was suggested that in some circumstances ‘other remedies’ should be
available to Müller and, moreover, that such remedies should be provided for in
Schedule 6. The problem for Müller in this regard is that it was agreed between the
parties that the RTS Test Plan would form Schedules 5 and 6 and, as at 5 July, there
was no further suggestion that Schedule 6 should contain something further and, if so,
what that something might be. It is far from clear what Müller had in mind, but
whatever it was it was not pursued.
77. As to the clauses of the contract itself, as stated above the parties agreed them
as at 5 July, when the one remaining issue, which related to Force Majeure, was
agreed. There was no suggestion at that time that Schedule 6 had not been finally
agreed or that, because of any incompleteness in it, Müller could not or would not
agree clauses 5 or 27.7. As amended in blue, clause 27.7 set out the remedies available
to Müller if the Works failed to pass the Performance Tests as determined by Schedule
6. The amount payable by RTS as damages for failure to pass Performance Tests was
to be that stated in clause 5, namely 2.5 per cent of the Contract Price. There is plenty
of scope for argument as to the true construction of clauses 27.7 and clause 5 in the
context of the RTS Test Plan which it was subsequently agreed should comprise
Schedule 6. On one view the 2.5 per cent was to be both a maximum and a minimum.
However, we note that clause 27.7.1 is expressed to be “without prejudice to the
Purchaser’s other rights and remedies”. The position is further confused by the
insertion, as a result of Mr Morris’s emails of 11 and 16 May, of a blue ‘not’ in the
first line of clause 27.7.2. It would not be appropriate for us to express a view as to the
true construction of those terms, which (absent agreement) will be a matter for the
trial judge.
78. It is Müller’s concern that the effect of clauses 5 and 27.7 may be held to be
that its damages for any failure by RTS to pass the Performance Tests are limited to
2.5 per cent of the Contract Price. However, Mr Maclean for Müller correctly
recognised that no attempt was made to amend those clauses further. He simply relied
upon the point left open by the capital letters. He submitted that in the light of that fact
the court cannot conclude that clauses 27.7 and 5 were agreed terms. However, there
is, in our judgment, no basis upon which the court could hold that clauses 27.7 and 5
were not agreed to be part of the agreed clauses as at 5 July. They had been agreed, in
fact by 26 May (see paras 18-19 above) and, although there was initially an
outstanding point in the Schedule, the terms of the Schedule itself were subsequently
agreed and, as at 5 July Müller was not saying that it could not agree either those
terms or Schedule 6.
79. As is clear from his judgment, the judge focused on the position as at 5 July.
He did not make any finding relating to exchanges between the parties after that and
in particular on 11 or 12 July. This is not perhaps surprising because, although in his
initial e-mail when sending the third draft to RTS on 11 May Mr Morris of Müller
flagged the point made in the capital letters and said that he intended completing a
suggested draft on this in a couple of days, he never did so or reverted to the point.
Müller at no time reverted to RTS on the point before the agreed variation on 25
August or, indeed, until a much later date. Although there is some evidence that Mr
Morris still had it in mind on 11 July (see the next paragraph) as long before that as 16
May he had e-mailed the fourth draft, which included the capital letters but which he
referred to as the contract ‘with final tweaks’. Moreover, the RTS Test Plan was
agreed as Schedules 5 and 6 on 29 June. This point was not therefore presented to
RTS as of any real importance. If it had been regarded as of any real importance to
Müller it would surely have been referred to again before 5 July, either in the context
of clauses 27.7 and 5 or in the context of Schedule 6. In these circumstances, in our
judgment, whether viewed as at 5 July, 25 August or 5 September, this point could not
fairly be regarded from exchanges between the parties as an essential part of the
agreement.
80. We reach this conclusion having fully taken into account such evidence as
there is relating to the events of 11 and 12 July. It appears that on 11 July Mr Morris
gave a copy of the draft contract with its Schedules to Mr St John with a view to its
being given to Mr Gavin Brown of RTS. There is evidence that a draft was given to
Mr Brown and there is some evidence that Schedule 6 was in the same form as we
have it in the blue version; that is with the capital letters, in other words, without any
reference at all to the RTS Test Plan which had on any view by then been agreed as at
least a part of Schedules 5 and 6. Mr St John’s evidence was that he handed the
document to Mr Brown without looking at it. There is no evidence or suggestion that
it was discussed. We have been shown a copy of a document in that form which has
Mr Brown’s notations on it but those were put on in November, not July. The position
is not clear because, when Mr Brown was asked whether that was the draft which Mr
St John handed him in July he said that he could not recall his handing it to him in
July. He thought he had received it at the end of October or early November, although
he accepted that July was a possibility. When asked whether there had been any
discussion about signing the contract in July, he said no. He then said that it had all
gone quiet in mid-July and that he was expecting the schedules to be completed
formally. He said that in mid-July he was content to let sleeping dogs lie and that RTS
saw no problems with not signing the contract.
81. In these circumstances we conclude that there is no evidence of a discussion on
the capital letters or any other point on 11 or 12 July or, indeed at any time after 5 July
until much later, probably in November. Essential agreement was in our judgment
reached by 5 July. None of the issues remaining after that date, including the capital
letters point, was regarded by the parties as an essential matter which required
agreement before a contract could be binding. On the contrary, they had agreed on the
RTS Test Plan as the basis of Schedules 5 and 6. In so far as the judge reached a
different conclusion in his reason ii), we respectfully disagree.
82. It is true, as the judge stated in his reason iii), that the parties did not proceed
on the basis of all the agreed conditions and that not all the Schedules were agreed.
The judge noted as part of his reason iii) that RTS did not procure the provision of the
Advance Payment Guarantee as required by Schedule 7, provision of which was
according to clause 16.1 “a condition of the contract” to be procured before any
monies were paid towards the Price. That is so but that failure does not prevent the
Contract having binding effect. In any event, as appears below, part of the Price was
paid by Müller notwithstanding the failure to provide the guarantee. Even if (contrary
to our view) procurement of the guarantee would otherwise have been a condition
precedent to any contract, it was waived. The judge further noted in reason iii) that
Schedules 15 and 17 were not completed, even though they address matters relevant
from the start of the contract. However Schedule 15 was plainly not regarded as an
essential matter: it simply related to health and safety requirements. Schedule 17
related to Site Preparations. According to an email dated 26 May sent by Mr Brown,
Müller was to “provide site prep details”. While it appears that Müller may not have
prepared those details, the site was in fact prepared and, so far as we are aware this
caused no problem. It could not be regarded as a critical provision of the contract.
83. The judge added in his reason iii) that Müller did not appoint an Engineer.
However, by clause 49, the Engineer was defined as the person appointed by the
Purchaser and in default of any appointment, as the Purchaser. It follows, as Mr
Catchpole observed, that in default of appointment of an Engineer, Müller was the
Engineer. Finally, in his reason iii) the judge said that payment was not made in
accordance with the application and certification procedure laid down in clause 11,
that the procedure for Changes to the Contract laid down by clause 39 was not
followed and that the dispute procedure required by clause 41 was not followed. We
do not see how those facts lead to the conclusion that the various clauses were not
agreed as indicated above. Another point touched on in submissions was the failure of
RTS to procure any parent company guarantee in accordance with clause 48A of the
terms in Schedule 1. But that was a provision which was for Müller’s exclusive
benefit and open to Müller to waive, which in our view it clearly did by going ahead
with the contract by and after the 25 August 2005 variation.
84. Although the judge did not make specific mention of the other Schedules in his
reason iii), he did refer to them in his Comment box and we have dealt with them in
para 21 above. In so far as some of them remained to be completed, in our judgment,
they are in the same category as the terms which were not agreed in Pagnan. On a fair
view of the negotiations and all the circumstances of the case, neither party intended
agreement of those terms to be a precondition to a concluded agreement. As we say at
para 23, in summary everything was agreed except for the provisions relating to the
parent company guarantee and items which it was not necessary to complete or which
were to be completed in the course of the project.
85. In all these circumstances we agree with Waller LJ’s conclusion at para 58 of
his judgment that the MF/1 conditions had to all intents and purposes been agreed and
the limit of RTS’ liability had been agreed. In short, by 25 August there was in our
judgment unequivocal conduct on the part of both parties which leads to the
conclusion that it was agreed that the project would be carried out by RTS for the
agreed price on the terms agreed by 5 July as varied on 25 August.
Clause 48 and subject to contract
86. The first point remains. Had the parties agreed to be bound by the agreed terms
without the necessity of a formal written contract or, put another way, had they agreed
to waive that requirement and thus clause 48? We have reached the conclusion that
they had. The circumstances point to the fact that there was a binding agreement and
that it was not on the limited terms held by the judge. The Price had been agreed, a
significant amount of work had been carried out, agreement had been reached on 5
July and the subsequent agreement to vary the Contract so that RTS agreed to provide
Line 1 before Line 2 was reached without any suggestion that the variation was agreed
subject to contract. The clear inference is that the parties had agreed to waive the
subject to contract clause, viz clause 48. Any other conclusion makes no commercial
sense. RTS could surely not have refused to perform the contract as varied pending a
formal contract being signed and exchanged. Nobody suggested that it could and, of
course, it did not. If one applies the standard of the reasonable, honest businessman
suggested by Steyn LJ, we conclude that, whether he was an RTS man or a Müller
man, he would have concluded that the parties intended that the work should be
carried out for the agreed price on the agreed terms, including the terms as varied by
the agreement of 25 August, without the necessity for a formal written agreement,
which had been overtaken by events.
87. By contrast we do not think that the reasonable honest businessman in the
position of either RTS or Müller would have concluded as at 25 August that there was
no contract between them or that there was a contract on some but not all of the terms
that had been agreed on or before 5 July as varied by the agreement of 25 August.
Although this is not a case quite like the Percy Trentham case because that was not a
subject to contract case, it was equally not a case like the British Steel case because
here all the terms which the parties treated as essential were agreed and the parties
were performing the contract without a formal contract being signed or exchanged,
whereas there parties were still negotiating terms which they regarded as essential. As
Mr Brown said, instead of signing the contract the parties here simply let sleeping
dogs lie or, as Mr Manzoni put it in his skeleton argument at first instance, neither
party wanted the negotiations to get in the way of the project. The project was the only
important thing. The only reasonable inference to draw is that by or on 25 August, the
parties had in effect agreed to waive the ‘subject to contract’ provision encapsulated
by clause 48. We have considered whether it would be appropriate to take a later date
than 25 August, perhaps 5 September when most of RTS’ equipment for Line 1 was
delivered, or even 8 September when a second 30 per cent instalment of the Price was
paid. However, on balance we prefer 25 August because by then the die was cast and
all the parties’ efforts were directed to preparations for Line 1.
88. By the time the contract was concluded, there had been some delay for reasons
which were already contentious (see para 24 above and paras 53-57 of the judge’s
judgment). The contract, once concluded on 25 August, must, as we presently see it
(though the point was not fully explored before us), be treated as applicable to the
whole period of contractual performance. Any issues arising in respect of such delay
would, on that basis, fall to be determined under the terms of the contract (subject to
any waiver which there may have been of particular terms), as if these had already
been in force during the period of such delay.
CONCLUSION
89. For the reasons we have given, we have a reached a different conclusion from
both the judge and the Court of Appeal. It was agreed in the course of the argument
that the court would reach its conclusions on the issues of principle before it and that
the parties would subsequently have an opportunity to make submissions on the form
of the order. However, subject to submissions on the precise form of order, including
the precise formulation of the declarations to be made, our conclusion is that the
appeal should be allowed, the order of the Court of Appeal set aside and declarations
made (1) that the parties reached a binding agreement on or about 25 August on the
terms agreed on or before 5 July as subsequently varied on 25 August and (2) that that
binding agreement was not subject to contract or to the terms of clause 48.
Trinity Term
[2010] UKSC 38
On appeal from: [2009] EWCA Civ 26
JUDGMENT
RTS Flexible Systems Limited (Respondents) v
Molkerei Alois Müller Gmbh & Company KG (UK
Production) (Appellants) (No. 2)
before
Lord Phillips, President
Lord Mance
Lord Collins
Lord Kerr
Lord Clarke
JUDGMENT ON FORM OF ORDER AND COSTS
21 July 2010
Appellant Respondent
Kenneth MacLean QC Stuart CatchpoleQC
Michael Fealy Charles Manzoni QC
(Instructed by Pinsent
Masons LLP)
(Instructed by Addleshaw
Goddard LLP)
Page 2
JUDGMENT ON FORM OF ORDER AND COSTS
Form of order
1. At the end of its judgment the Court said at para 89 that, subject to
submissions on the precise form of order, including the precise formulation of the
declarations to be made, its conclusion was that the appeal should be allowed, the
order of the Court of Appeal set aside and declarations made (1) that the parties
reached a binding agreement on or about 25 August 2005 on the terms agreed on
or before 5 July and subsequently varied on 25 August and (2) that that binding
agreement was not subject to contract or to the terms of clause 48.
2. The parties have now made detailed submissions on the form of order, each
naturally seeking to prepare for the future in the most advantageous way possible
from its point of view. The approach which the Court has taken to the resolution
of the issues is this. It recognises that there remain a number of issues which,
absent settlement (much the most desirable course), will have to be determined by
the trial judge. In particular, as the Court’s judgment makes clear in a number of
places, there remain issues of construction of the agreement. It was no part of the
role of the Court to resolve issues of construction. The Court has sought to resolve
the issues as to formation of the contract that were fully argued before it. It has not
sought to resolve issues that were not fully argued. The Court takes the view that
it is clear from the judgment which documents formed part of the contractual
terms. It does not deem it appropriate to seek to spell those conclusions out again
in summary form in specific declarations.
3. As to issues 1.1 and 1.1.1 to 1.1.6, so far as the Court is aware, there is no
suggestion that the conclusions of the judge should not stand.
4. As to issue 1.2, the Court gives the same answer as the judge, namely that
Müller and RTS did enter into a new contract after the Letter of Intent Contract.
However, the Court has held that the terms of the contract are different from those
found by the judge. The judge answered the questions raised by issues 1.2.1 to
1.2.6 because, having identified particular documents as being part of the contract,
he decided that it was necessary to do so. The Court has now held that the terms
were much more extensive than those found by the judge. It has discussed the
terms in some detail in its judgment and has now concluded that nothing is to be
gained by summarising in an order the documents which it has held form part of
the contract. The position is fully explained in the judgment. If there are any
loose ends they must be resolved by the trial judge.
Page 3
5. In particular, some of the issues determined by the judge, as for example
issues 1.2.2 and 1.2.5, essentially raise issues of construction of the contract. As
explained in the judgment, issues of construction of the contract which the Court
has held to exist, and upon which the Court has not heard detailed argument,
cannot sensibly be resolved by the Court and must be left to the trial judge.
6. As to issue 1.3, it was common ground that the contract, whatever may have
been its original terms, was varied by agreement on 25 August 2005. The Court
has referred to the variation at paras 25 to 27 of the judgment. In particular, at
para 26 it has referred to the judge’s findings of fact as to the variation and as to
what happened thereafter and observed that it was not necessary for the Court to
refer to them in any detail in order to resolve the issues in the appeal. That
remains the position. Moreover, so far as the Court can see, neither party had at
any stage challenged the judge’s answer to issue 1.3. In these circumstances the
Court accepts the submission made on behalf of Müller that it should not now
reopen those findings as suggested by RTS. The detailed position will be a matter
for the trial judge.
Costs
7. Each party seeks an order for costs in its favour. Each says that it has won
or that it has won on balance. It is undoubtedly true that each party has had some
measure of success, from which it follows that each party has had some measure of
failure. On the basis of the conclusions reached by this Court as set out in its
judgment, neither party has succeeded on the primary case that it advanced at any
stage.
8. Before the judge the primary case advanced by RTS was that the Letter of
Intent did not expire in May 2005 and was not replaced by a new contract. Its
alternative case was that, if there was a new contract, it was on MF/1 terms.
Müller’s case was that there was a new contract, not on MF/1 terms but on the
particular terms identified by the judge. The MF/1 terms were essentially those
which this Court held to be the terms of the contract. The judge accepted Müller’s
case.
9. RTS appealed to the Court of Appeal, where its primary case was that there
was no contract between the parties and that it was entitled to be paid on a
quantum meruit basis. Its alternative case was that there was a contract on MF/1
terms. Müller submitted that the no contract point was not open to RTS and
sought to uphold the contract found by the judge. The Court of Appeal accepted
RTS’ primary case and held that there was no contract.
Page 4
10. In this Court Müller argued that the Court of Appeal was wrong to find that
there was no contract and that the judge was right to hold that there was a contract,
not on MF/1 terms, but on the terms found by him. RTS argued that the Court of
Appeal was correct to hold that there was no contract but that, if there was a
contract, it was on MF/1 terms. This Court held that there was a contract,
essentially on MF/1 terms, as explained in detail in the judgment.
11. The Court has concluded that at the end of this whole process RTS has had
a significantly greater success than Müller. It is true that, in the light of the
Court’s judgment, RTS’ primary case has failed at each stage but its alternative
case at each stage has succeeded. The result is that, although there was a contract,
it was essentially on MF/1 terms and, importantly, was not on the limited terms
identified by the judge and relied upon by Müller at each stage. In arriving at a
fair overall result on costs, the Court must take account of those considerations but
must also have regard both to the time spent in the Court of Appeal on the no
contract point (which was raised by RTS and upon which it has now lost) and to
the fact Müller had to come to this Court to displace the decision of the Court of
Appeal and has succeeded in doing so. Moreover RTS persisted in advancing the
no contract point in this Court.
12. Both parties made Part 36 Offers at first instance. In the light of that fact,
subject to three points, the judge decided that the costs should be reserved to the
trial judge. Subject to the same three points, this Court agrees that the costs should
be reserved to the trial judge because the appropriate order might be affected by
the offers. However, it seems appropriate to indicate what order the Court would
have made as to the costs at first instance on the basis of its conclusion there was a
contract, essentially on MF/1 terms. Subject to the three points, on this basis
Müller’s submissions have been rejected and RTS’ alternative case has been
accepted. The Court concludes that, in principle, Müller should pay part of RTS’
costs. A fair proportion would be 60 per cent. Accordingly, other things being
equal, the Court would have ordered Müller to pay 60 per cent of RTS’ costs at
first instance.
13. The three points are these. The first point relates to issue 1.3. The judge
ordered RTS to pay the costs of issue 1.3, which essentially asked what were the
consequences of the variation agreed on 25 August 2005. The judge answered the
question in his judgment and in the schedule to his order. He held that RTS should
pay the costs of this issue whatever the result of the main issue. This Court sees no
reason to interfere with that conclusion.
14. The second point relates to issue 1.1.6, which raised the impact of the
Unfair Contract Terms Act. For the reasons given in his judgment on the costs of
this issue (at page 34 of the transcript for 10 June 2008) the judge held that RTS
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should pay these costs in any event. Again this Court sees no reason to interfere
with that conclusion.
15. The third point relates to the costs referable to the inadmissible evidence in
RTS’ witness statements. Again, this conclusion is not affected by the conclusions
reached by this Court in its judgment and this part of the judge’s order should be
restored.
16. There have been no Part 36 Offers which are relevant to the appeals to the
Court of Appeal or to this Court. The Court has concluded that the fairest
approach is to treat the costs in this way. RTS has ultimately succeeded in what
was its alternative argument at each stage, namely that there was a contract on
MF/1 terms. For that reason Müller should pay part of its costs. Those costs
should however be reduced both in the Court of Appeal and in this Court for the
reasons stated above. In the Court of Appeal the no contract point, which RTS
raised and has now lost, plainly took up a significant amount of time. Moreover,
the fact that RTS took and succeeded on that point in the Court of Appeal meant
that Müller had to appeal to this Court, where RTS persisted in advancing it. In
order to reflect what this Court regards as the overall success of RTS on the one
hand and these considerations on the other, it has concluded that that Müller
should pay 40 per cent of RTS’ costs in the Court of Appeal and in this Court.
17. RTS paid Müller £65,000 on account of the costs of the three points
referred to above in accordance with para 4 of the order of the judge. RTS seeks
an order for repayment of that sum, but the Court has concluded that, in the light of
its conclusion that that part of the order should stand, it would not be appropriate
to order repayment.
18. The remaining question is whether the Court should make an order for an
interim payment of the costs that it has ordered Müller to pay RTS 40 per cent of
its costs in the Court of Appeal and in this Court. It has concluded that it should
do so and that an interim payment of a total of £80,000 would be appropriate.
