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Hilary Term [2010] UKSC 14 On appeal from: [2009] EWCA Civ 26
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 Catchpole QC Michael Fealy Charles Manzoni QC (Instructed by Pinsent Masons LLP) (Instructed by Addleshaw Goddard LLP) Source
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.
- 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
- 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.
- 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 De-Palletising 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
- 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.
- 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
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.”
- 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.”
- 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.
- 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.
- Schedule 1 also contained clause 48, which was the subject of considerable debate and provided:
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 Perfor m ance 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.”
- 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.
- 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:
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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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
- 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.”
- 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.
- 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.
- 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.
- 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.
- 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
- 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 ";”
- 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.
- 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
- 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/ 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.
- 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.
- 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.
- 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
