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Petitioner: RTS FLEXIBLE SYSTEMS LTD. VS Respondent: MOLKEREI ALOIS MULLER GmbH AND CO. KG
Court Name: Supreme Court of United Kingdom Judge(s): Lord Mance, Lord Kerr, Lord Clarke, Lord Collins, Lord Phillips Title: RTS FLEXIBLE SYSTEMS LTD. vs MOLKEREI ALOIS MULLER GmbH AND CO. KG Case No.: UKSC 14 = [2010] 3 All ER 1] Date of Judgment:2010-03-10 Reported As: 2012 SCMR 1027 Result: Appeal set aside
JUDGMENT
JUDGMENT ' LORD CLARKE, SCJ.---INTRODUCTION---1. This is the judgment of the court. The appeal arises out of a dispute between RTS Flexible Systems Ltd. (RTS) and Moliere Aloes Muller GmbH and Co. KG (Muller) in relation to work carried out and equipment supplied by RTS to Muller. 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 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 11th January, 2008 Skinhead J ordered the trial of specific preliminary issues. That trial came before Christopher Clarke J (the judge) and on 16th May, 2008 he handed down a judgment in which he determined each of them (see [2008] EWHC 1087 (TCC), [2008] All ER (D) 206 (May)). 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 finalized 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 21st February, 2005 and a letter from RTS dated 1st March, 2005 (the LOI contract), the purpose of which was to enable work to begin on agreed terms. The judge held that the Loll contract was treated by the parties as expiring on 27th 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
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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 hi judgment Waller LJ, with whom Moses and Haslett LJJ 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 Li 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 (see [2009] EWCA Civ 26, [2009] 2 All ER (Comm) 542). 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 centers on whether the contract was subject to some or all of the MF/1 terms as amended by agreement. Muller 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 Muller'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 Li 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 21st February, 2005 and sent by Muller to RTS, and which included the following: -- `Project: Build, delivery, complete installation and commissioning by RTS ... Of the Automated Pot Mixing Lines 1 and 2 and the De-Palletising Cell ("the Equipment") for the Repack line ("Repack Line") within the Repack facility in Market Drayton of ... Muller ... ' Thank you for your mail dated 16th February, 2005 setting out your offer (number FSO4014---Issue J) to supply the Equipment to Muller ("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 Muller's deadlines set out in the Offer to allow commencement of full production by Muller on the Repack Lines by 30th 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 Muller's amended form of MF/1 contract and the full terms and the relevant technical specifications will be finalized, agreed and then signed within 4 weeks of the date of this letter. Prior to agreement on the full contractual terms, only Muller shall have the right to terminate this supply project and contract. However, should Muller terminate, Muller undertakes to reimburse RTS for the reasonable demonstrable out of pocket expenses incurred by RTS up to the date of termination. Muller 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
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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 Muller's MF/1 terms. 7. On 1st March RTS wrote to Muller confirming that, it had started work subject to Muller accepting two points. The first was that the equipment would be commissioned by 30th September and would be ready for site acceptance testing (SAT) activities as shown in the programed. 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 programed. 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 sub-contract commitments as well as any out of pocket expenses, albeit without profit. Those points were subsequently accepted by Muller. 8. The judge held (at [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 [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 to 8 of Quotation J and the timetable set out in Appendix 7 thereof. Commissioning was to be completed by 30th 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) Muller and RTS were to have a period of four weeks from 21st February, 2005 to finalize, agree and sign a contract based on Muller'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 Muller's amended MF/1 contract, only Muller had the right to terminate the supply project; (e) If Muller 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 Muller 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
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into an agreement for the performance of the whole project which was not based on detailed terms. The judge made this point (at [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 finalization 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 Muller 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 16th May are described by the judge (at [43]-[47]). Mr. David Salisbury, the senior buyer in Muller's purchasing department, sent the first draft of a contract to RTS on 15th 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 Muller 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 daises 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.
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12. Schedule 1 also contained clause 48, which was the subject of considerable debate and provided: `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 Muller, on 14th April. One of the proposed changes in that draft was that RTS's parent company, RTS plc., be added as a guarantor. Meanwhile on 13th April the parties agreed or confirmed their agreement to RTS's letter of 1st March and agreed that the period for execution of a formal contract would expire on 16th May. Negotiations continued and, as the judge noted (at [46]), on 13th May Mr. Morris e-mailed Mr. Gavin Brown, who was RTS's 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 an be extended until the 27th 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 27th May. 15. Further drafts were sent by Mr. Morris to RTS on 11th and 16th May, when, as the judge put it (at [48]), Mr. Morris e-mailed to Mr. Brown the draft contract 'with final tweaks' adding [p]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 16th May was the fourth draft contract. The judge described the schedules sent as part of it at that time as follows (at [48]):-- ' `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's quotation K at Muller's request. ' Schedule 5: A three-page schedule, drafted by Muller, divided into Part 1 "Tests on Completion" and Part 2 "RTS Tests". ' Schedule 6: A two-page schedule, drafted by Muller, 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 (IE 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's parent. ' Schedule 8: A defects liability demand guarantee also to be given by RTS's 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 programmer needed to include. ' Schedule 11: An empty table of key performance indicators, performance required and liquidated damages.
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' Sehedule 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 19th 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 25th 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 26th May Mr. Morris made some proposals relating to force majeure, to which Mr. Brown countered. The judge held (at [50]) that on 5th 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 Muller'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 26th May Mr. Brown had set out RTS's understanding of the current status of the contract schedules in a yet further e-mail to Mr. Morris. Under the heading 'Finalization of the Schedules' (at [51]), 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 UNDERST OOD ST ATUS MY COMMENT 1 Not ref fered to in the-email No need. Schedule I 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 in in the general conditions in Schedule 1 anyway . 3 FDS- currently being reissued. Brown suggested it should be reffered to rather than incorporated.The FDS was later agreed: see the R TS e-mail of 29 June and [52],below . 4 URS. Agreed that section 4 of the quotation would form the URS, which was attached.The URS had the appendices referred to at [26],above. 5 Agreed that R TS test plan would form this schedule. With Muller for approval.The R TS test plan was later agreed: see the R TS e- mail of 29 June: [52] below . 6 RTS test plan. RTS regarded its Plan as covering the ground of Schedules 5 and 6 and Muller was happy with that provided that provided that it did so, but the only version of Schedule 6 contained Muller 's wording. 7 Advance payment guarantee already agreed.The guarantee had been attached to the e-mail of 16 May.th th
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8 Defect liability guarantee- R TS'S 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 attached was either as in quotation I or quotation J.This programme was overtaken by the overall project plan and Installation at Muller plan referred to in [52],below . 11 KPIs agreed: attached These included details of the performance required and liquidated damaged. 12 Muller 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 Muller 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 Muller to provide site preparation details.This does not seem to have been provided,but the site was prepared. ' The references to paragraph numbers , in the comment boxes are references to paragraph 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 e-mail of 26th 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 29th June the use of the RTS test plan in Schedule 5 had been approved by both parties, as recorded in anexchange of e-mails on that date and by the judge (at [52]). 19. Schedule 6 gives rise to more difficulty. Mr. Brown's e-mail of 26th May contained simply the words RTS Test plan' which appear in the judge's comment box. The words in capitals set out in [15], above were inserted in the version of Schedule 6 attached to Mr. Morris's e-mail of 11th May and also appeared in the version attached to his e-mail of 16th 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 26th May as being simply the RTS test plan. In the course of his evidence Mr. St. John confirmed that Muller 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…
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