RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH & CO KG

This is an appeal from a judgment of Christopher Clarke J handed down on 16^th May 2008, by which he ruled on certain preliminary points. The points arose out of a dispute in relation to the delivery by the appellants of certain equipment to the respondents. The appellants, RTS Flexible Systems Limited (“RTS”), say they are not appealing any of the judge’s findings of fact. As the judge pointed out the problem arises out of the fact that the parties for good commercial reasons decided to start work before the terms of their contract had been agreed on a presumption that ultimately terms would be finalised. The challenge is to his conclusion as to whether there was ultimately a contract made on the terms as found by him. The judge found there was concluded a contract without the incorporation of conditions known as MF/1. Those terms if incorporated would have contained limitations on liability and/or liquidated damages provisions. The issue on the appeal is whether the judge was right in saying there was a contract at all (and indeed whether RTS are entitled to contend for no contract) and whether if there was a contract he was right in excluding the MF/1 terms.

It is in the circumstances possible to take most of the key findings of the judge and incorporate them into this judgment as the basis for considering the judge’s conclusions.

The defendant/respondent to the appeal - Molkerei Alois Müller GmbH & Co KG (“Müller”) - is a well known leading European dairy product supplier. At its premises in Market Drayton it produces, amongst other things, different brands of yoghurt and dairy rice products. The claimant/appellant on the appeal, RTS, specialises in the supply of automated machines for packaging and product handling in the food and consumer goods industry.

Müller wished to automate the process of collating and flow wrapping multi-packs of different flavours of twin pots of yoghurt. It also wished to produce multipacks of its single pot products which could be placed into a tray that had originally held 12 single pots. Müller and RTS made contact initially in 2000. Discussions continued in subsequent years, particularly from December 2003 onwards. In April 2004 RTS produced a quotation – Quotation A. Thereafter RTS produced 10 further quotations for equipment (down to Quotation K), all of them, after Quotation A, in a format requested by Müller. In the course of this process the scope of the project expanded, contracted and then expanded again as Müller discussed its requirements with RTS and other potential suppliers.

The work which, in the event, RTS undertook was the design, manufacture, assembly, works testing, delivery, installation and commissioning at Müller’s factory in Market Drayton of the equipment described as Line 1 and Line 2 as shown on the drawing annexed to the judge’s judgment.

RTS was not to supply all the equipment for Lines 1 and 2. It was Müller who was to supply, inter alia, the packaging equipment for the Lines. The ability of the lines to produce the desired number of packs per minute was dependent on the proper functioning of all the equipment and the efficient interaction of different pieces of equipment. That which was not to be supplied by RTS was described as “Free Issue Equipment”.

On 13^th January 2005 RTS issued its Quotation I. Mr Bradford of RTS also wrote to Müller expressing concern as to the time that it could take to reach agreement on the contract conditions, should RTS be successful in winning the contract. He indicated that RTS would be happy to enter into a contract with Müller based on the MF/1 conditions, appropriately modified to meet the specific requirements of the project. He expressed concern about the sheer extent and number of the changes that Müller had proposed in October 2004 and about the content of those changes. He enclosed for Müller’s consideration a copy of some conditions which had applied to another contract which RTS had recently carried out. He added:

“As a final point, bearing in mind the importance of the project timescales, we would also be quite prepared to commence work even before signature of a contract, on the basis of a Letter of Intent/Instruction to Proceed”.

On 13^th February Mick St John telephoned Etienne Croquette to tell him that RTS had been awarded the contract.

On 16^th February RTS issued Quotation J. Section 2 headed “Pricing Schedule” specified a fixed price of £ 1,682,000 for the design, manufacture, assembly, works testing, delivery, installation and commissioning “of the equipment as described and as generally shown as Line 1, Line 2 and De-Palletising Cell” on the drawing in Appendix 3, which was similar to the drawing appended to the judgment. It also provided for Liquidated Damages if the Site Acceptance Test (“SAT”) of Lines 1 and 2 or of the De-Palletising cell was delayed from the agreed programme date and the delay was entirely due to the fault of RTS. The damages were to be 0.5% of the Total Contract Value (“TCV”) per whole week of delay up to a maximum of 5 weeks.

Section 3 was headed “Conditions of Contract”. It provided in clause 3.1 that the quotation was “based on the RTS Standard Terms and Conditions of Sale”. Clause 3.2 provided that RTS’ parent company would guarantee RTS’ performance. Clause 3.3 provided a schedule of payments: 30% of TCV on receipt of order; 30% on delivery to RTS of the major items (i.e. robots) of bought out equipment; 20% on delivery; 10% on completion of commissioning; and 10% within 30 days, but no later than 90 days of takeover. Clause 3.4 provided for variations to be at RTS’ 2005 standard rates for labour and materials at cost plus 12.5%. Clause 3.5 stated that the quotation was based on the assumptions and exclusions detailed in Section 8.

Section 4 set out the User Requirements for both Lines and the De-Palletising Cell. Section 5 set out the Technical Description of both Lines and the De-Palletising Cell. Section 6 was a Summary of Performance Criteria. Section 7 specified the Scope of Supply. Section 8, headed “Limits of Proposal”, contained Exclusions and Assumptions.

The Quotation had a number of appendices. Appendix 1 headed “Product Specification” was a one page diagrammatic representation of the cartoning and flow wrapping sequence. Appendix 2 headed “Production Throughput Data” contained the calculations referred to in paragraph 19 above. Appendix 3 was a general arrangement drawing. Appendix 4 was a specification of the robots. Appendix 5 contained Müller mechanical and electrical specifications. Appendix 6 contained the Parent Company Guarantee, which was never given. Appendix 7 contained the Provisional Project Plan. That provided for delivery of the Free Issue Equipment by 6^th May 2005. Appendix 8 was a diagram of de-palletising sequences. Appendix 9 was a diagram indicating the locations of tray handling conveyors.

On 21^st February Müller sent to RTS the following Letter of Intent:

“Project: Build, delivery, complete installation and commissioning by RTS Advanced Robotics Limited (“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 Molkerei Alois Müller GmbH & Co (UK Production)(“Müller”).

Thank you for your mail dated 16^th 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 (one million six hundred and eighty two thousand sterling) . . .

(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^th 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 the English Court.”

On 1^st March RTS wrote to Müller confirming that they had commenced work on the project subject to Müller’s accepting two points. The first was that the equipment would be commissioned by 30^th September (which was the date specified in Appendix 7) and would be ready for Site Acceptance Testing activities as shown on 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 was expressed as follows:

“2.

The Letter of Intent section (iii) also states that Müller will:

“reimburse RTS for the reasonable demonstrable out of pocket expenses incurred by RTS up to the date of termination”. During the four week period covered by this Letter of Intent RTS will incur costs in both engineering time and in order to meet the project programme, will have placed orders for the long lead items such as robots, conveyors and tray erectors. In the event of Termination we would require reimbursement for these costs, including cancellation costs of subcontract commitments as well as any out of pocket expenses, albeit without profit”.

It was, the judge found, implicit in the agreement that, upon the expiry of the four weeks, the agreement would come to an end. Müller’s wish to proceed was as the judge found subject to the full contractual terms and relevant technical specifications having been finalised, agreed and signed within that timescale and was dependent on that taking place. If that did not occur its wish to proceed with the Project would, itself, terminate together with the contract based upon that wish. 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 judge held:-

“The parties did not 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 said nothing about when any part of the price would be payable and gave Müller a right to cancel upon payment only of expenses and cancellation costs – a right that was entirely reasonable during a four week period but inappropriate for a contract for the entire project. The payment schedule in the Quotation specified a series of percentage payments, but the first of those was the 30% of TCV payable on receipt of order and the Letter of Intent was not an order.”

Accordingly the answers that the judge gave to the following questions posed in the preliminary issue were as follows:

On 4^th March 2005 Mr Bradford of RTS wrote to Mr Trevor Benyon, Müller’s Chief Engineer, pointing out that RTS agreed to commence work on the basis of a Letter of Intent prior to the agreement of a formal set of contract terms, and that under the Letter of Intent the terms and conditions of contract were to be agreed within 4 weeks “after which the Letter of Intent will expire. The Letter of Intent is therefore due to expire on 22^nd March 2005”. He expressed RTS’ preparedness to enter into a contract based on either (i) RTS’ Terms & Conditions; (ii) Standard MF/1 Conditions; or (iii) MF/1 plus appropriate modifications to meet the specific requirements of the project. But he expressed RTS’ remaining concern about the sheer extent and number of changes made to the MF/1 form in the document produced by Müller in 2004. He sought to arrange a meeting to discuss the issues.

On 15^th March 2005 Mr David Salisbury, the Senior Buyer in Müller’s purchasing department, e-mailed to Mr Croquette of RTS a draft contract in anticipation of a meeting on 22^nd March. This was based on MF/1. RTS regarded it as a significant improvement on Müller’s first amendment of MF/1. On 21^st March Mr Gavin Brown, RTS’ Operations Director, wrote to Mr William Morris, in Müller’s legal department, with a number of detailed comments on the draft. He had been helped in this by Mr David Wright, a consultant engaged by RTS to deal with legal matters. On 23^rd March there was a meeting attended by representatives of the parties at RTS’ premises at Irlam, near Manchester, at which there were negotiations on the terms and the schedules thereto. It was at this meeting that Müller asked RTS if RTS would create a URS by pasting Section 4 onwards of Quotation K into a new document that would then form the URS. Someone at the meeting pointed out that the Letter of Intent had expired.

On 13^th April Mr Benyon of Müller wrote to Mr Bradford of RTS as follows:

“Thank you for your letter of 1^st March and your acceptance (subject to the qualifications you list) of the terms of the letter of intent dated 21^st February 2005.

In accordance with section (iii) of the letter of intent above, we agreed that a formal contract with full contractual terms would be executed within 4 weeks of the date of the letter of intent. We have now mutually agreed to extend this period up to and including 16^th May 2005 during which period the terms of the letter of intent will continue to have full force and effect.

Please confirm your acceptance of the above by signing below where indicated.”

Mr Bradford signed a copy of this letter on behalf of RTS. The parties thereby agreed, or confirmed their agreement, to the qualifications made by RTS in its letter of 1^st March; and to the fact that the period for execution of a formal contract would expire on 16^th May.

Negotiations in relation to the contract continued. On 13^th May Mr Morris of Müller e-mailed to Mr Brown:

“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 the 27^th May 2005, or, if sooner, the date the contract is actually signed…”

In the light of the exchanges between the parties on 4^th March, 22^nd March, 13^th April and 13^th May, it is apparent that they agreed that the Letter of Intent contract would expire on 27^th May 2005.

While the letter of intent covered the position negotiations continued. At this stage, I divert from the judge’s findings to expand on the way in which the MF/1 conditions and amendments thereto were negotiated between the parties so as to record matters on which RTS rely as to limitations on liability which ultimately were agreed. I can take the description from Mr Catchpole QC’s skeleton on behalf of RTS since, as I understood Mr Maclean QC’s position, he did not dispute this description, save in two important respects which I should point up at this stage. He submitted that, although Mr Catchpole’s description suggests full agreement was reached on the MF/1 terms, that was not so because full agreement on those terms depended on finalisation of one of the Schedules, Schedule 6 which was never finalised. He further emphasised that the conditions contemplated a tripartite arrangement with RTS’ holding company entering into a guarantee and he pointed out that company never itself agreed the conditions. Otherwise he did not dispute the following.

On 15 March 2005 Müller sent to RTS a first draft of the standard conditions MF/1, amended by Müller to reflect this project, which included for liquidated damages and limitations on RTS’s liability as follows:

“For delay in delivery of the equipment, liquidated damages were to be 0.5% of the Contract Price for each week of delay subject to a maximum of 2.5% (i.e. five weeks delay);

For delay in completion, liquidated damages were to be 0.5% of the Contract Price, again subject to a maximum of 2.5%;

For each week in which the equipment did not pass the specified performance tests, liquidated damages were to be 0.5% of the Contract Price subject to a maximum of 2.5% (after which, following the scheme of the MF contract, Müller would be entitled to terminate the contract and take such steps as were necessary at the expense of RTS to ensure that the equipment did pass the performance tests);

Subject to certain exceptions, there was an overall cap on RTS’s and Muller’s liability under the Contract equivalent to the Contract Price.

Clause 27.8 also envisaged that there would be liquidated damages payable if the equipment failed to meet certain Key Performance Indicators during the Defects Liability Period, although the indicators and the amount(s) of any liquidated damages were left blank in Schedule 11 attached to the draft.”

RTS’ initial comments on the draft, sent on 21^st March 2005, referred back to the existing agreement on liquidated damages for delay, and required, amongst other things, discussion of certain aspects of the overall cap on liability under Clause 36 and in relation to the detail of Schedule 11. RTS also raised as a general point that there was no exclusion of Muller’s consequential costs as a result of any breach of contract by RTS.

A second draft of the MF/1 conditions was sent by email dated 14 April 2005. It contained all the intended limitations of liability but made some amendments to the liquidated damages payable (removing those for delayed delivery and amending the payment profile for delayed completion) and limited the costs of Müller recoverable in the event of a breach by RTS. It was subject to detailed comment by RTS in the email dated 5^th May 2005.

The third draft of the MF/1 Amended conditions was sent by Müller to RTS by email dated 11 May 2005. This version of the draft included an adjustment to the level of the liquidated damages that were payable (so that the level of liquidated damages for delayed completion was raised to 3.5% and the liquidated damages for failure to pass the performance tests were said to be calculated in accordance with Schedule 6, subject to a maximum cap of 5% of the Contract Price).

A fourth draft of the Amended MF/1 terms and conditions was sent to RTS on 16 May 2005, under an email in which Mr Morris of Müller said:

“Please find attached contract with final tweaks. Perhaps you can drop me a quick email confirming you are happy – we can then all concentrate on completing the schedules.”

In the fourth draft the liquidated damages for delay remained at 3.5%, and the liquidated damages for a failure to pass the performance tests were to be calculated in accordance with Schedule 6 but with a maximum liability of 2.5% of the Contract Price.

On 19 May 2005, Mr. Brown of RTS sent an email to Mr. Morris of Müller saying that the “latest draft seems fine except for one issue” which related to an amendment to Clause 24.3 of the draft. On 25 May 2005, Mr. Brown sent a further email asking Mr. Morris if he had any comments on the latter point and saying “Also we are working on the schedules and expect to have them completed today”. Mr. Morris’ response, also dated 25 May 2005, acknowledged that he (Mr. Morris) still had to respond in relation to certain points that RTS had raised on the definition of “force majeure”, but agreed with Mr Brown’s comments on Clause 24.3. His response on the force majeure point (which did not accept the amendments proposed by RTS) was emailed on 26 May 2005.

Therefore, the parties were in agreement as to the wording of the amended MF/1 conditions, save for the definition of Force Majeure Event, by 25 May 2005.

The final wording of theForce Majeure Event definition was agreed by an exchange on emails of 5 July 2005.

So far as the schedules were concerned the position was as follows, and I can now return to the language of the judge. As indicated on 16^th May Mr Morris of Müller e-mailed to Mr Brown the 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”. What he sent was the body of the contract (two pages headed “Machine and Equipment Supply and Installation Contract 4500360589”) with the following by way of schedules:

On 26^th May Mr Brown, who was about to go on holiday for a fortnight, sent an e-mail to Mr Morris setting out his understanding of the contract schedules. The judge set the points out in tabular form with his comments as follows:

On 29^th June, after further discussion, David Guest of RTS sent to Mr Morris of Müller copies of (i) the FDS, (ii) the Test Plan, (iii) the Project Plan, and (iv) the Installation at Müller plan, which Müller had approved. A few moments later he sent to Mr St John a copy of a detailed Test and Build schedule.

There were at this stage some delays in the delivery of the free issue equipment, the precise details of which are unimportant. On 11^th August Mr Benyon of Müller contacted Mr Bradford of RTS. He expressed his deep frustration with the lateness of some of that equipment and asked for RTS’ help in mitigating the effect of their lateness on the project programme. He told Mr Bradford that Müller had obtained a contract with Tesco’s pursuant to which Müller had to provide at least 150,000 Top Clip rice product packs in the week beginning Monday 10^th October. This was because the product was due to be launched in stores on 17^th October. Mr Bradford said that RTS would do its best to meet Müller’s needs but did not promise that the 150,000 target would be met.

150,000 packs would not take more than a day and a half to produce if Line 1 was up and running. That number of packs equates to a production of 10 pallets per 12 hour shift for a 7 day period when the specified requirement of 80 packs per minute equates to 10 pallets per hour for a 24 hour shift. But under the plan attached to the e-mail of 29^th June Site Acceptance Testing (“SAT”) was not due to begin until Monday 10^th October and finish on Friday 14^th October with training and production support occupying Monday to Thursday of the following week. In the telephone conversation of 11^th August Mr Bradford said that RTS would do its best so to prioritise its activities as to try to meet Müller’s needs. He gave no further assurance, not surprisingly since the free issue equipment had only arrived 3 days before.

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, after which there would be a “SAT”. The program that had been contemplated had involved installing Line 2 first.

On 15^th 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^th September, with SAT beginning on Monday 24^th October. This was on the assumption that Line 2 could be installed after Line 1.

On 25^th 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.

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.

Most of the RTS components for Lines 1 were delivered to Müller on or about 5^th September 2005. The RTS components for Line 2 were delivered on or about 2^nd December. Line 1 was run on automatic, for the first time, on 1^st 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.

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 each party has suggested until argument in the Court of Appeal as their primary position that at some stage a contract came into existence which governed their relationship but third both have at different times taken up positions inconsistent with that which they finally adopted at the trial as to whether MF/1 formed part of the contract.

The judge dealt with payment in the following terms. Müller paid RTS 30% of £ 1,682,000 + VAT on about 28^th April 2005, a further 30% in September 2005 and 10% in January 2006. It did so following the issue of invoices which claimed the specified percentages of a total contract value of £ 1,682,000.

Although 30% was specified in Quotation J as the amount of the first two payments under the contracts, the payments made were not all stage payments specified in Quotation J. That Quotation called for (a) 30% on receipt of order, (b) 30% on delivery to RTS of the major items of bought out equipment, (c) 20% on delivery to Müller, (d) 10% on completion of commissioning and (e) 10% within 30-90 days of takeover although (a) was to be within 7 days of receipt of order and (b) (c) and (d) within 30 days of the date of invoice. There was no order and, even if the Letter of Intent is to be regarded as the equivalent, payment was not made within 7 days of it. The second 30% was paid after delivery to RTS of major items and submission of an invoice. But the 10% was not the 20% due on delivery.

Nor were these payments the stage payments specified in Schedule 1 to the contract included with the e-mail of 16^th May. That provided for 30% of the Contract Price to be paid after RTS had furnished a duly executed Advance Payment Guarantee in the terms of schedule 7 (which RTS never did); 30% within 30 days of delivery of the equipment to RTS; 20% within 30 days of presentation of the Delivery Certificate to RTS by Müller; 10% on Completion (as defined) and 10% after presentation by Müller of the final certificate of payment. All but for the first of such payments were only to be made after RTS had applied to the Engineer (who was never appointed) and upon him issuing the applicable Certificate (which did not occur) and RTS issuing an invoice.

Judge’s conclusions

“As is apparent from the above, after the Letter of Intent contract expired RTS continued to build the Equipment, delivered it to Müller and were partially paid for it. In those circumstances the court strongly inclines to concluding that the parties have entered into some contract even though such a contract cannot be spelt out by a classic analysis of the sequence of offer and acceptance.

As Steyn LJ, put it in Trentham v Archital Luxfer [1993] 1 Lloyds LR 25:

“Secondly, it is true that the coincidence of offer and acceptance will in the vast majority of cases represent the mechanism of contract formation. It is so in the case of a contract alleged to have been made by an exchange of correspondence. But it is not necessarily so in the case of a contract alleged to have come into existence during and as a result of performance…..The third matter is the impact of the fact that the transaction is executed rather than executory. It is a consideration of the first importance on a number of levels… 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. It will often make it 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. In this case fully executed transactions are under consideration. Clearly, similar considerations may sometime be relevant in partly executed transactions. Fourthly, if a contract only comes into existence during and as a result of performance of the transaction it will frequently be possible to hold that the contract impliedly and retrospectively covers pre-contractual performance…”

Müller’s submissions

Müller submits that, although the parties reached a final draft of the contractual terms and conditions, namely Schedule 1, which contains the general conditions, as modified in the e-mails of 19^th and 25^th May, and 5^th July 2005 set out in paragraphs 51-2 above, that final draft never became binding on the parties. This is because it was the parties’ intention that detailed terms negotiated by them would not have contractual effect until the documentation i.e. the contract and the accompanying schedules, was formally executed and signed. That that is so appears 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^th May, which referred to the Letter of Intent lasting until 27^th May or, if sooner, the date the contract is “actually signed”;

My conclusion

72.

In my judgment Müller’s submissions are well founded. After the lapse of the Letter of Intent the parties reached full agreement on the work that was to be done for the price that they had already agreed. It is, as Lord Justice Steyn contemplated, unrealistic to suppose that they did not intend to create legal relations. The natural inference is that their contract was that RTS would carry out the agreed work for the agreed price. It was not essential for them to have agreed the terms and conditions and they did not do so. In this respect they continued after the expiry of the Letter of Intent just as they had before, i.e. calling for and carrying out the work without agreement as to the applicable terms.

73.

I decline to infer that the parties’ contract included the final draft version of the MF/I conditions for a number of reasons. Firstly, Müller’s Letter of Intent and its e-mail of 13^th May 2005 indicated that the final terms were not to be contractually agreed until signature.

74.

Secondly, the contract sent with the e-mail of 16^th 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 set out in paragraph 48 above 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.

75.

Thirdly, 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.

76.

Fourthly, clause 48 of the general conditions provides that:

“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”

The contract was not executed nor were any counterparts exchanged.

77.

I hold, therefore, that, by no later than 29^th 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 paragraph 68 above, subject to the conditions specified therein.”

As is apparent from the judge’s summary of RTS’ submissions the main thrust of RTS’ arguments before the judge were to argue for a continuance of the terms of the letter of intent so as to have in place a contract under which RTS continued to work despite expiry of the period fixed by that letter. As is also apparent from the judge’s judgment the possibility of there being no contract after that period was left open but no positive case was being made for that result by either party. Indeed Steyn LJ’s approach dictated the way in which the whole case was perceived.

In the Court of Appeal RTS changed their stance. They decided not to challenge the judge’s ruling on the period of time for which the letter of intent applied and the main argument they put forward was that in the result there simply was no contract concluded and that, thus, any entitlement they had to receive payment was on a quantum meruit. They accepted that the effect of that conclusion remained to be argued out at the full trial but, at worst, they submitted it would limit any liability to the return of any money they had received. Their alternative submission was that if there was a contract the judge should have held that the MF/1 conditions, in so far as they had been agreed, incorporated those conditions containing a cap on their liability equivalent to the price.

The argument for there being no contract does not simply rest on seeking to demonstrate that no final agreement had been reached as to all the essential terms but on what (Mr Catchpole submitted) was an even more powerful and indeed conclusive point. It is clear he pointed out from clause 48 of the MF/1 conditions, which were agreed by 25 May 2005, that there was a continuing stipulation that a contract would only come into existence if a written agreement was entered into. He submitted that the definition of contract contained in the MF/1 conditions demonstrated that the anticipated contract included not just the MF/1 conditions themselves (as the judge seemed to have thought –see paragraph 76 above) but included the schedules. He also submitted that, this case was exactly the type of case which Steyn LJ had concluded that Trentham was not – see page 29 of Trentham: where Steyn LJ said:-

“In the negotiations and during performance of phase 1 of the work all obstacles to the formation of a contract were removed. It is not a case where there was a continuing stipulation that a contract would only come into existence if a written agreement was entered into. Plainly the parties intended to enter into binding contractual relations.”

He submitted that the agreement between Müller and RTS to the relevant specifications and programmes could not override the stipulation that, for there to be a concluded contract, that contract had to be in writing and signed by the parties. At best, such agreement, together with payment of part of the price identified in the letter of intent, amounted to a request to RTS to carry out the work identified in the agreed specifications, which both parties anticipated would become the subject of the formal contract.

Thus, rather than being a case similar to Trentham, in fact the case, it was submitted, was one similar to that analysed by Robert Goff J in British Steel Corporation v Cleveland Bridge and Engineering Co Ltd [1984] 1 All ER 504 (and in particular at pages 509 to 511). The factors which influenced Robert Goff J (at page 510 G) as indicating no contract in that case apply with equal force in the factual matrix of this case:-

“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 of 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 such a case 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, e.g, 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.”

(Note: I have put ‘seller’ in parenthesis since, although the report reads ‘buyer’, Robert Goff J must have meant ‘seller’.)

Mr Catchpole submitted that the way the parties approached the negotiations referring to the MF/1 terms as “the contract” and dealing with that first and then coming on to deal with the Schedules demonstrated: first, that those terms were essential to the parties and second, in particular, that RTS was insisting on a limitation of liability being incorporated into the MF/1 conditions and thus the contract. It could also be seen that Müller had agreed to such limitations. It was thus clear that the judge had reached what Robert Goff J suggested would be “the extraordinary result” which he should not have done.

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. ”

Should the “no contract point” be allowed to be argued? Despite the number of paragraphs of the respondents’ skeleton devoted to the point, including an argument that if the point had been pursued before the judge that might have made a difference to the evidence called, there is in my view a short answer. I put to Mr Maclean the question whether, if the judge had taken the point in his judgment and ruled there was no contract, he could have suggested that it was not open to the judge to do so. He, after some thought, answered that he would have appealed the point but he could not have said it was not open to the judge to so rule. That was clearly the only proper answer he could give.

Before the judge could decide what contract had come into existence, post the period covered by the letter of intent, he would have to consider whether any contract came into existence at all. The parties had to direct their evidence to that point. Indeed that was how the judge approached the matter albeit shortly. That follows from his formulation of RTS’ submissions in paragraph 71 and the reference to it being RTS’ third submission that there was not post the letter of intent “any new contract”. It follows from paragraph 72 where in dealing with that submission he says that it was “as Lord Justice Steyn contemplated unrealistic to suppose that they [the parties] did not intend to create legal relations” by carrying on work after the expiry of the period of the letter of intent. But he had to consider whether it was intended to create the legal relationship of contractors.

The judge’s focus was unfortunately on Lord Justice Steyn’s approach. What he did not have cited to him was the passage from Robert Goff J’s judgment. Furthermore whether it was because of that focus or because the point was not fully explored before him, he in my view misconstrued condition 48. He relied on condition 48 as preventing a contract coming into being on the MF/1 conditions [see paragraph 76]. This, I understand, to be the point taken by the RTS 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.

I reject the submission that it was not open to RTS to take the point which they have on this appeal. In considering even RTS’ alternative point this court would have had to consider whether there was a contract post the letter of intent and what its terms were, and even if taken late, the point was open to RTS. Furthermore, it seems to me that in the light of the fact that condition 48 had clearly been agreed between the parties as the basis on which they were negotiating, there is no answer to the argument that no contract came into existence.

That could be said to be very unsatisfactory and in one sense that is true but it also seems to me that the judge’s answer was 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 he achieved a bargain neither side intended to enter into.

The judge’s conclusion that “The natural inference is that their contract was that RTS would carry out the agreed work for the agreed price. It was not essential for them to have agreed the terms and conditions and they did not do so” is one that in my view the judge would not have reached if he had been referred to Robert Goff J’s judgment and/or if the no contract point had been fully developed before him.

Mr Maclean suggested that the judge’s finding was that the MF/1 terms were not essential terms and that that was a finding of fact. He sought indeed to suggest that RTS could not challenge that finding because they were not challenging findings of fact.

It is not fruitful to get into a debate about precisely what in this area would be strictly a finding of fact and what would be at least in part a matter of law because on any view RTS were challenging that conclusion of the judge. 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.

Having formed the above clear view it is unnecessary to deal with the RTS’ alternative arguments.

I would accordingly allow the appeal and declare that no contract came into existence post termination of the letter of intent.

I agree.

I also agree.

Disputes have arisen as to the appropriate orders as to costs and appropriate form of order resulting from the judgment handed down [today], and this judgment is a judgment of the court dealing with those matters.

We do not think it appropriate to make any declaration. The question whether any sum will be due on a quantum meruit is for the trial.

There should be no variation to the order for costs made below. If the appellants had run the no contract argument below the same order for costs would have been made. That is so because, for example, the variation point would still have been fought out. The judge would have made the same order on the variation point if the appellants had succeeded on the no contract argument. If the appellants suggest that perhaps they would not have fought out the variation argument if they had run the no contract argument, then they only have themselves to blame for the fact that that is not the way matters proceeded.

This is the most difficult aspect of what we at this stage have to decide. The complicating factors seem to us to be the following. First the decision in HSS Hire Services which the judge followed deals with a situation in which preliminary points have been decided by the court of first instance, a part 36 offer exists but its quantum is still unknown and the best person ultimately to rule on costs will be the trial judge, but as the judge here found that may still allow for an order for costs of particular issues where there are reasons why in any event one party should pay those costs. The second complicating factor is that so far as Part 36 is concerned an appeal is an independent regime [see part 52.12 and what is stated in parenthesis at the end] and the appellants having made clear that they were taking the no contract point in the court of appeal, and the respondents having chosen to resist both them being able to do so and the point itself and lost, without having made any part 36 offer, must prima facie be at risk of paying the costs in the court of appeal. But in this case the third complicating factor is that the appellants did not run the no contract point as their primary point in the court below and thus it can be said that considerable costs were expended fighting preliminary issues in the court below for which the appellants should bare at least some responsibility. The final complicating factor is that on the second point taken in the alternative that if there was a contract it was on MF/1 terms, the appellants cannot be said to have succeeded.

It seems to us that once a trial is over and once the position on a part 36 offer is known a trial judge will be in the best position to see what the appropriate order for costs will be. We say this because already the costs of the preliminary issue other than the identified items have been reserved to him. It would not be right simply to order the respondents to pay the costs of the no contract aspect of the appeal when costs were expended fighting the preliminary issues on a different basis in the court below and where those costs have been reserved to the trial judge. The matter should be looked at in the round once a trial has taken place.

What a trial judge would like assistance with is our assessment of the position as between the no contract aspect of the appeal and the alternative case asserting incorporation of the MF/1 terms. Our view is that comparatively little time and effort was spent on the alternative aspect. If we had been dealing with the appeal without the complications outlined above we would have ordered the respondents to pay 80% of the costs of the appellants.

This aspect of the judge’s order was not the subject of an appeal under the original notice of appeal. If there was force in the argument for a variation we would have allowed the amendment, but since this was the exercise of the judge’s discretion in relation to the issues on which he had made orders for costs and since we have declined to vary those aspects of the judge’s order, we will not interfere with the judge’s discretion and no variation is ordered.

Permission is refused.