RTS Flexible Systems Limited (Respondents) v Molkerei Alois ..., Lecture notes of Remedies

Download RTS Flexible Systems Limited (Respondents) v Molkerei Alois ... and more Lecture notes Remedies in PDF only on Docsity! 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) (ii) RTS is now to commence all work required in order to meet Müller's deadlines set out in the Offer to allow commencement of full production by Müller on the Repack Lines by 30 September 2005. Delivery of line also to be in accordance with the timetable set out in the Offer. (iii) That the full contractual terms will be based on Müller's amended form of MF/1 contract and the full terms and the relevant technical specifications will be finalised, agreed and then signed within 4 weeks of the date of this letter. Prior to agreement on the full contractual terms, only Müller shall have the right to terminate this supply project and contract. However, should Müller terminate, Müller undertakes to reimburse RTS for the reasonable demonstrable out of pocket expenses incurred by RTS up to the date of termination. Müller will not be liable for any loss of profits (whether direct or indirect), loss of contracts, loss of anticipated savings, data, goodwill and revenue or any other indirect or consequential loss arising from such termination. No further legal rights or remedies shall be available to RTS upon such termination. Please confirm your acceptance of the above by signing below where indicated. This letter of intent shall be governed by English law and subject to the exclusive jurisdiction of English courts.” It is important to note that the Letter of Intent provided for the whole agreed contract price and was not limited to the price of the works to be carried out during the currency of the LOI Contract. It is also of interest and, we think, of some importance that it was contemplated from the outset that the full contract terms were to be based on Müller’s MF/1 terms. 7. On 1 March RTS wrote to Müller confirming that it had started work subject to Müller accepting two points. The first was that the equipment would be commissioned by 30 September and would be ready for Site Acceptance Testing (‘SAT’) activities as shown in the programme. But the equipment would not then be expected to be at full production quantities. Section (ii) of the Letter of Intent would be revised by omitting “full”. The second point referred to section (iii) and made the point that during the four week period covered by the Letter of Intent RTS would incur costs in both engineering time and in order to meet the project programme. It would for example place orders for long lead items such as robots, conveyors and tray erectors. RTS said that, in the event of termination, it would require reimbursement for these costs, including the cancellation costs of subcontract commitments as well as any out of pocket expenses, albeit without profit. Those points were subsequently accepted by Müller. 8. The judge held at his para 39 that it was implicit in the LOI Contract that upon expiry of the four weeks it would come to an end. Neither party challenged his conclusion that after the expiry of the LOI Contract it was not revived, either in the Court of Appeal or in this court. In answering the question posed under Issue 1.1, namely what were terms of the LOI Contract and the obligations of the parties under it, the judge said this at para 42: “a) The agreed price for the engineering, build, delivery, installation and commissioning of the work set out in the Quotation was to be £1,682,000; b) RTS was bound to embark on such work as was necessary to ensure the provision of the equipment to be supplied by it in accordance with the provisions of sections 4 - 8 of Quotation J and the timetable set out in Appendix 7 thereof. Commissioning was to be completed by 30 September 2005 and the equipment was to be ready for production (but not full production) and Site Acceptance Testing as shown in that Appendix at that date; c) Müller and RTS were to have a period of four weeks from 21 February 2005 to finalise, agree and sign a contract based on Müller's amended MF/1 form of contract. Following the expiry of that period the contract would terminate; d) Prior to agreement of the full contractual terms and conditions based on Müller's amended MF/1 contract, only Müller had the right to terminate the supply project; e) If Müller did so terminate or the term of the contract expired, it would reimburse RTS for the reasonable, demonstrable out of pocket expenses incurred by RTS up to the date of termination, including the cost of engineering time, cancellation costs of subcontract commitments, and any out of pocket expenses, but without profit; f) RTS would have no further legal right or remedy on termination and Müller would not be liable for any loss of profit (whether direct or indirect), loss of anticipated savings, data, goodwill and revenue or any other indirect or consequential loss arising from termination; g) There were no exclusions or limitations of liability in the contract.” 9. It is important to note the references to the MF/1 terms both in the Letter of Intent and in the judge’s conclusions. It seems to us to be almost inconceivable that the parties would have entered into an agreement for the performance of the whole project which was not based on detailed terms. The judge made this point at para 39 in these terms: “The absence of agreed full contractual terms would be of limited significance over a four week period; but more significant, if it could continue until the end of the project. The parties did not, in my judgment, contemplate that, in the absence of finalisation and signature within the specified timescale (or any agreed extension), RTS would be bound to continue with a project for which the applicable terms had not been agreed. Consistent with that the Letter of Intent says nothing about when any part of the price would be payable and gives Müller a right to cancel upon payment only of expenses and cancellation costs - a right that is entirely reasonable during a four week period but inappropriate for a contract for the entire project. The payment schedule in the Quotation does specify a series of percentage payments, but the first of those is the 30% of TCV payable on receipt of order and the Letter of Intent is not an order.” 10. It is also important to set the LOI Contract and what happened subsequently in their context. The negotiations had been proceeding for some time. As appears in the Letter of Intent, apart from the price, the parties had been discussing Quotation J and the schedules to it, including Schedule 7. After the LOI Contract and while work was proceeding in accordance with it, detailed negotiations proceeded. The negotiations up to 16 May are described by the judge at his paras 43 to 47. Mr David Salisbury, the senior Buyer in Müller’s purchasing department, sent the first draft of a contract to RTS on 15 March. The scheme of the draft (and each subsequent draft), in which words beginning with a capital letter had defined meanings, was as follows. Clause 1 provided that on receipt of an Order for Delivery RTS would supply the Equipment and perform the Works on the terms and conditions set out in the Contract and that without prejudice to the other provisions of the Contract the Equipment would comply with the Specification. Clause 2 provided for some terms to survive Termination. Clause 3 provided that Müller would procure payment of the Contract Price as set out in Schedule 2 and, importantly, clause 4 provided that the general terms and conditions set out in Schedule 1 would apply to the Contract. We have not been shown Schedule 2, which may indeed not exist. However, clause 49, which is a definitions clause which was expressly given contractual force by clause 7, included the definition of the Contract Price as £1,682,000 “being the price as set out in more detail in Schedule 1.” Clause 5 was entitled Limitation of Liability and provided for limitations of liability referable to particular clauses of the Contract. Clause 6 provided for the following order of preference to be applicable to the contractual documents: first the general terms and conditions set out in Schedule 1, secondly the User Requirement Specification (‘URS’) set out in Schedule 4, thirdly the Functional Design Specification (‘FDS’) set out in Schedule 3 and finally all the other Schedules comprised in the Contract. Schedule 9: This made provision for the supply of a list of stock items and wear and non-wear parts. Schedule 10: A description of what the programme needed to include. Schedule 11: An empty table of Key Performance Indicators, Performance required and Liquidated Damages. Schedule 12: A page headed "Certificates of Payment" together with a form of Delivery Certificate, Completion Certificate and Final Certificate of Payment. Schedule 13: A list of the operating manuals and other drawings and maintenance schedules required. Schedule 14: A Schedule dealing with Training Requirements. Schedule 15: A Schedule headed “Health and Safety Requirements” but otherwise blank. Schedule 16: A Schedule headed “Free Issue Equipment” but otherwise blank. Schedule 17: A Schedule headed "Site Preparations" but otherwise blank.” 16. On 19 May Mr Brown e-mailed Mr Morris to say that the fourth draft seemed fine to him except for a small proposed amendment to clause 24.3, which related to delay of Tests on Completion. On 25 May Mr Brown again e-mailed Mr Morris, saying that he expected to have the schedules completed “today”. Mr Morris replied saying that the small proposed amendment to clause 24.3 looked fine, but that he needed to get back to him on Force Majeure and “any final tidy-ups”. On 26 May Mr Morris made some proposals relating to Force Majeure, to which Mr Brown countered. The judge held at para 50 that on 5 July, after further negotiations, Mr Morris proposed a compromise form of the Force Majeure clause which Mr Brown told him seemed fine and which Mr Morris said he would incorporate into a contract when he put all the schedules together with Müller’s Project Manager, Mr St John. He also said that the agreement should be in a position to be signed and forwarded to Mr Brown for signature that week. 17. In the meantime on 26 May Mr Brown had set out RTS’ understanding of the current status of the contract schedules in a yet further e-mail to Mr Morris. At para 51, under the heading “Finalisation of the Schedules”, the judge set out in the form of a kind of Scott schedule both Mr Brown’s position from the e-mail under the heading ‘Understood status’ and his own conclusions with regard to each item under the heading ‘My Comment’ as follows: SCH. Understood status My Comment 1 Not referred to in the e-mail. No need. Schedule 1 consisted of the General Conditions. 2 Assumed not required as the payment schedule is included in the body of the contract. This schedule is described in the Contract as setting out the price; but that is in the General Conditions in Schedule 1 anyway. 3 FDS - currently being reissued. Brown suggested it should be referred to rather than incorporated. The FDS was later agreed: see the RTS e-mail of 29 June and para 52. 4 URS. Agreed that section 4 of the Quotation would form the URS, which was attached. The URS had the appendices referred to at para 26. 5 Agreed that RTS Test Plan would form this Schedule. With Müller for approval. The RTS Test Plan was later agreed: see the RTS e-mail of 29 June: para 52 6 RTS Test Plan RTS REGARDED ITS TEST PLAN AS COVERING THE GROUND OF SCHEDULES 5 AND 6 AND MÜLLER WAS HAPPY WITH THAT PROVIDED THAT IT DID SO. BUT THE ONLY VERSION OF SCHEDULE 6 CONTAINED MÜLLER'S WORDING. 7 Advance Payment guarantee already agreed. The guarantee had been attached to the e-mail of 16 May. 8 Defect Liability guarantee - RTS' parent company to approve. A draft had been attached to the 16 May e-mail. The parent company never approved it. 9 To be completed during the project. Part 1 related to stock items. It was never completed. Part 2 contains provisions for the durability of Wear Parts, which is capable of standing on its own. 10 Approved programme attached The attachment was either as in Quotation I or Quotation J. This programme was overtaken by the overall project plan and Installation at Müller plan referred to in para 52 below. 11 KPIs agreed: attached. These included details of the Performance Required and Liquidated Damages 12 Müller to complete. This related to Certificates of Payment. Never completed. 13 To be completed during the project. This related to operating manuals. Never completed, It would not have been possible to provide them at the time. 14 To be completed during the project. This related to Training Requirements. Never completed 15 Müller to provide details. This related to Health and Safety Requirements. Never completed 16 As per attached document. The attached document contained the Assumptions for Free Issue Equipment for the Project 17 Müller to provide site preparation details. This does not seem to have been provided, but the site was prepared. The references to para numbers in the Comment boxes are references to para numbers in the judge’s judgment. For simplicity we have omitted two footnotes. 18. It can be seen from the Comment boxes that there were no problems about Schedules 1 to 5. As already stated, Schedule 1 was in effect the MF/1 conditions (as amended) and contained clauses 1 to 48. Schedule 2 was unnecessary and, as to Schedules 3, 4 and 5, the FDS, the URS and the RTS Test Plan were variously agreed in the e-mails referred to by the judge. As to Schedule 5, in addition to words to the effect recorded in the judge’s Comment box, Mr Brown’s email of 26 May went on to suggest that upon approval of the RTS Test plan by Muller “it is included in this schedule and existing text is deleted”. On or by 29 June the use of the RTS Test plan in Schedule 5 had been approved by both parties, as recorded in an exchange of emails on that date and by the judge in paragraph 52 of his judgment. 19. Schedule 6 gives rise to more difficulty. Mr Brown’s email of 26 May contained simply the words “RTS Test plan” which appear in the judge’s Comment box. The words in capitals set out in paragraph 15 above were inserted in the version of Schedule 6 attached to Mr Morris’ e-mail of 11 May and also appeared in the version attached to his email of 16 May. The evidence is that those words were originally inserted by Mr Morris as an internal note to his colleagues. However that may be, Schedule 6 was recorded in Mr Brown’s e-mail of 26 May as being simply the RTS Test Plan. In the course of his evidence Mr St John confirmed that Müller was content to use the RTS Test Plan as Schedule 6. It is clear from the judge’s entry 26. The judge made further findings as to the variation on 25 August and as to what happened thereafter at paras 106 to 135. It is not necessary to refer to those conclusions in any detail in order to determine the issues in this appeal. However, at para 106 the judge said that it was common ground between the parties that the contract between them was varied on 25 August 2005 at a meeting at RTS' premises in Irlam between Messrs Brown and Guest from RTS and Messrs St John, Benyon, Foster, Highfield and possibly others for Müller, at which the parties agreed to alter the delivery schedules of the lines and to dispense with the need for RTS to conduct CFAT tests on Line 1. 27. After the agreement on 25 August the parties concentrated on Line 1 and Line 2 fell behind. Resources which would otherwise have been dedicated to both Lines had to be dedicated to Line 1 only. Moreover, as the judge held at para 121, the need to deal with Line 1 so as to meet Müller’s production requirements seemed to have caused everyone to divert their efforts away from finalising contractual documentation, which was a matter which had gone quiet in mid July. Most of RTS’ equipment for Line 1 was delivered on 5 September and detailed work continued on Line 1, which Müller put into production on 10 October. 28. As Waller LJ said at para 43 of his judgment in the Court of Appeal, ultimately a dispute arose between the parties leading to the litigation. The details are unimportant save to comment first that no contract was ever signed as contemplated; second that until argument in the Court of Appeal each party had submitted as its primary position that at some stage a contract came into existence which governed their relationship; but third that both had at different times taken up positions inconsistent with that which they finally adopted at the trial as to whether MF/1 terms formed part of the contract. 29. As to payment, we take the position essentially from Waller LJ’s judgment at paras 44 to 46, where he summarised the conclusions of the judge. Müller paid RTS 30 per cent of the agreed price of £1,682,000 plus VAT on about 28 April 2005 and made further payments of 30 per cent on 8 September 2005 and of 10 per cent in January 2006. It did so following the issue by RTS of invoices which claimed those specified percentages of a total contract value of £1,682,000. Although 30 per cent was specified in Quotation J as the amount of the first two payments under the contract, the payments made were not all stage payments as specified in Quotation J. That Quotation called for (a) 30 per cent on receipt of order, (b) 30 per cent on delivery to RTS of the major items of bought out equipment, (c) 20 per cent on delivery to Müller, (d) 10 per cent on completion of commissioning and (e) 10 per cent within 30 to 90 days of takeover, although (a) was to be within 7 days of receipt of order and (b), (c) and (d) were to be within 30 days of the date of invoice. There was however no order and, even if the Letter of Intent was to be regarded as the equivalent, payment was not made within 7 days of it. The second 30 per cent was paid after delivery to RTS of major items and submission of an invoice. The 10 per cent paid in January 2006 was not however the 20 per cent due on delivery. Waller LJ further noted that the payments made were not the stage payments specified in clause 11 of the fourth draft of the Contract sent with the e-mail of 16 May. 30. While that is so, the fact remains that the payments were expressly made pursuant to requests by RTS for payment of specific percentages of the Contract Price, which seems to us to support the conclusion that the parties had agreed the Contract Price. The parties’ cases before the judge 31. As stated above, at para 67 the judge recorded Müller’s recognition that the parties reached a final draft of the contractual terms and conditions, namely Schedule 1, which contained the general conditions as modified in the e-mails of 19 and 25 May and 5 July. Müller had expressly pleaded in its Contractual Statement of Case (and submitted to the judge) that on 5 July RTS and Müller agreed the terms of the proposed written contract between them and the draft contract was ready for execution. Before the judge Müller’s case was that, despite that agreement, there was no binding contract between the parties on those terms for the reasons which the judge summarised at para 67. This was because it was the parties' intention that detailed terms negotiated by them would not have contractual effect until the relevant documentation, namely the Contract and the Schedules, was formally executed and signed. That that was so appeared from: “a) the Letter of Intent which referred to the full terms and the relevant technical specifications being finalised, agreed and then signed within 4 weeks of the date of that letter; b) Mr Morris' e-mail of 13 May, which referred to the Letter of Intent lasting until 27 May or, if sooner, the date the contract is "actually signed";” and was consistent with “c) the evidence of Mr Brown of RTS, in para 46 of his witness statement, referring to his e-mail of 26 May 2005 that: “My view was that whilst we had agreed the wording in principal (sic), until the whole contract including the schedules had been compiled as a complete document and signed as accepted by RTS then it wasn't enforceable. Whether this is right or not I don't now know, but it was what I thought then. Therefore, to my mind, the milestone event at which the terms and conditions of the anticipated contract were agreed and in force was when RTS signed the document.” 32. Müller’s case was that no contractual document had been signed and thus no such document had been exchanged. Its case was not, however, that there was no contract between the parties. Its case that there was a contract depended upon the fact of payment and the work carried out, including delivery of the components comprising Line 1 on 5 September. There was a contract on the basis that Müller would pay the price, namely £1,682,000, in return for the goods and services that RTS had agreed to provide as set out in a number of specific documents identified by the judge at para 68. The specific documents relied upon by Müller and set out by the judge at para 68 were the following: (i) the documents attached to the e-mail of 26 May, namely (a) the URS and its Appendices, save that the Parent Company guarantee was never given and the Provisional Project Plan was overtaken by the documents set out at para 22 above (and para 52 of the judgment) in June, (b) the KPIs and (c) the Assumptions for Free Issued Equipment (‘the Assumptions’); and (ii) the documents attached to Mr Guest's two e-mails of 29 June, namely (a) the FDS, (b) the Test Plan, (c) the overall project plan (which superseded the delivery programme attached to the e-mail of 26 May) which was to form Schedule 10 to the contract, (d) the installation plan and (e) the Test and Build Schedule. In short Müller submitted that the parties had an intention to create contractual relations when RTS provided the goods and services and Müller made its payments. 33. Müller’s case was that no further contractual terms as to payment had been agreed, with the result that RTS was not entitled to payment of the balance of the price over and above the amount in fact paid by Müller as set out below until it had completed substantial performance. Moreover, a critical part of Müller’s case was that the amended MF/1 terms as agreed and set out in clauses 8 to 48 as amended never became part of a binding agreement. 34. The primary case for RTS before the judge by contrast (as summarised at para 71) was (i) that the LOI Contract incorporated Quotation J, including RTS’ standard terms, (ii) that it did not expire in May and (iii) that it was never replaced by any new contract. The judge rejected (i) and (ii), which left RTS’ alternative case, which was that, if there was a new contract, it incorporated the agreed amended MF/1 conditions. This was on the basis that if, as Müller submitted, most of the Schedules were incorporated, so also were the terms and conditions in Schedule 1, which was the basis of the contract. We accept Mr Catchpole’s submission that before the judge RTS’ primary case was that there was a continuing contract on the terms of the LOI Contract, but that it had two alterative cases, namely that there was either no contract (but RTS was entitled to a quantum meruit) or, if there was a contract, that it was on MF/1 terms. 35. We note in passing that preliminary issue 1.2.4 was formulated in such a way that one of the possible results was a right to payment, not under contract but by way of quantum meruit. In these circumstances we agree with the Court of Appeal that, in the light of the submissions before him, it would have been open to the judge to hold that there was no contract but that RTS was entitled to a quantum meruit. As Waller LJ put it at para 55, before the judge could decide what contract had come into existence after the expiry of the LOI Contract, he would have to consider whether a contract came into existence at all. The Court of Appeal was correct to hold that it was open to RTS to submit that there was no contract and we reject Müller’s submissions Conclusion and reasoning of the Court of Appeal 42. The Court of Appeal decided the appeal on a narrow basis. It rejected the submission that it was not open to RTS to contend that there was no contract. It accepted the proposition in the first sentence of para 79 of the skeleton. Waller LJ held at para 56 that the judge had misconstrued clause 48. He added: “He relied on condition 48 as preventing a contract coming into being on the MF/1 conditions [see para 76]. This, I understand, to be the point taken by [Müller] at paragraph 79 of their skeleton quoted above. But once it is appreciated that the definition of contract in condition 48 covers not just those conditions but the contract including the schedules, condition 48 seems to me to become a complete answer.” We put ‘Müller’ in square brackets because the copy of the judgment we have refers to RTS. However that is a typographical error because the reference is in fact to Müller’s skeleton, as Waller LJ’s para 61 states. His reference to ‘the definition of contract’ is a reference to clause 49, which defined ‘Contract’ as meaning ‘this Contract signed by the parties and the Schedules’. 43. It is of interest to note that at para 58 Waller LJ appreciated that the conclusion that there was no contract could be said to be very unsatisfactory but he added that the judge’s answer was also very unsatisfactory in that, although the MF/1 conditions had to all intents and purposes been agreed and the limit of RTS’ liability had been agreed, “by selecting simply the schedules [the judge] achieved a bargain neither side intended to enter into”. Waller LJ then said this by way of conclusion at para 61: “It would, as it seems to me, from the way negotiations had gone as between the parties, and once the true construction of condition 48 has been appreciated, have needed a clear express variation of condition 48 for a court to be able to reach the conclusion which the judge reached, i.e. that all of MF/1 had been put on one side by the parties and the Schedules (and only in so far as they have been agreed) applied. With condition 48 properly understood and in the context of the importance the parties actually considered the negotiations of MF/1 to have, in my view, the above conclusion is simply not open to the court, and I reject Mr Maclean's submissions as encapsulated in paragraph 79 of his written submissions.” 44. There was no detailed analysis in the Court of Appeal of the possibility that the preferable conclusion was not either of the solutions which Waller LJ (in our view correctly) rejected but that the parties had by their conduct unequivocally waived clause 48 and that there was a contract on the terms agreed as at 5 July as subsequently varied by the agreement of 25 August. Discussion The principles 45. The general principles are not in doubt. Whether there is a binding contract between the parties and, if so, upon what terms depends upon what they have agreed. It depends not upon their subjective state of mind, but upon a consideration of what was communicated between them by words or conduct, and whether that leads objectively to a conclusion that they intended to create legal relations and had agreed upon all the terms which they regarded or the law requires as essential for the formation of legally binding relations. Even if certain terms of economic or other significance to the parties have not been finalised, an objective appraisal of their words and conduct may lead to the conclusion that they did not intend agreement of such terms to be a pre-condition to a concluded and legally binding agreement. 46. The problems that have arisen in this case are not uncommon, and fall under two heads. Both heads arise out of the parties agreeing that the work should proceed before the formal written contract was executed in accordance with the parties’ common understanding. The first concerns the effect of the parties’ understanding (here reflected in clause 48 of the draft written contract) that the contract would “not become effective until each party has executed a counterpart and exchanged it with the other” – which never occurred. Is that fatal to a conclusion that the work done was covered by a contract? The second frequently arises in such circumstances and is this. Leaving aside the implications of the parties’ failure to execute and exchange any agreement in written form, were the parties agreed upon all the terms which they objectively regarded or the law required as essential for the formation of legally binding relations? Here, in particular, this relates to the terms on which the work was being carried out. What, if any, price or remuneration was agreed and what were the rights and obligations of the contractor or supplier? 47. We agree with Mr Catchpole’s submission that, in a case where a contract is being negotiated subject to contract and work begins before the formal contract is executed, it cannot be said that there will always or even usually be a contract on the terms that were agreed subject to contract. That would be too simplistic and dogmatic an approach. The court should not impose binding contracts on the parties which they have not reached. All will depend upon the circumstances. This can be seen from a contrast between the approach of Steyn LJ in the Percy Trentham case, which was relied upon by the judge, and that of Robert Goff J in British Steel Corporation v Cleveland Bridge and Engineering Co Ltd [1984] 1 All ER 504, to which the judge was not referred but which was relied upon in and by the Court of Appeal. 48. These principles apply to all contracts, including both sales contracts and construction contracts, and are clearly stated in Pagnan SPA v Feed Products Ltd [1987] 2 Lloyd’s Rep 601, both by Bingham J at first instance and by the Court of Appeal. In Pagnan it was held that, although certain terms of economic significance to the parties were not agreed, neither party intended agreement of those terms to be a precondition to a concluded agreement. The parties regarded them as relatively minor details which could be sorted out without difficulty once a bargain was struck. The parties agreed to bind themselves to agreed terms, leaving certain subsidiary and legally inessential terms to be decided later. 49. In his judgment in the Court of Appeal in Pagnan Lloyd LJ (with whom O’Connor and Stocker LJJ agreed) summarised the relevant principles in this way at page 619: “(1) In order to determine whether a contract has been concluded in the course of correspondence, one must first look to the correspondence as a whole... (2) Even if the parties have reached agreement on all the terms of the proposed contract, nevertheless they may intend that the contract shall not become binding until some further condition has been fulfilled. That is the ordinary ‘subject to contract’ case. (3) Alternatively, they may intend that the contract shall not become binding until some further term or terms have been agreed... (4) Conversely, the parties may intend to be bound forthwith even though there are further terms still to be agreed or some further formality to be fulfilled... (5) If the parties fail to reach agreement on such further terms, the existing contract is not invalidated unless the failure to reach agreement on such further terms renders the contract as a whole unworkable or void for uncertainty (6) It is sometimes said that the parties must agree on the essential terms and it is only matters of detail which can be left over. This may be misleading, since the word ‘essential’ in that context is ambiguous. If by ‘essential’ one means a term without which the contract cannot be enforced then the statement is true: the law cannot enforce an incomplete contract. If by ‘essential’ one means a term which the parties have agreed to be essential for the formation of a binding contract, then the statement is tautologous. If by ‘essential’ one means only a term which the Court regards as important as opposed to a term which the Court regards as less important or a matter of detail, the statement is untrue. It is for the parties to decide whether they wish to be bound and if so, by what terms, whether important or unimportant. It is the parties who are, in the memorable phrase coined by the Judge [at page 54. There is said to be a conflict between the approach of Steyn LJ in the Percy Trentham case and that of Robert Goff J in the British Steel case. We do not agree. Each case depends upon its own facts. We do not understand Steyn LJ to be saying that it follows from the fact that the work was performed that the parties must have entered into a contract. On the other hand, it is plainly a very relevant factor pointing in that direction. Whether the court will hold that a binding contract was made depends upon all the circumstances of the case, of which that is but one. The decision in the British Steel case was simply one on the other side of the line. Robert Goff J was struck by the likelihood that parties would agree detailed provisions for matters such as liability for defects and concluded on the facts that no binding agreement had been reached. By contrast, in Pagnan Bingham J and the Court of Appeal reached a different conclusion, albeit in a case of sale not construction. 55. We note in passing that the Percy Trentham case was not a ‘subject to contract’ or ‘subject to written contract’ type of case. Nor was Pagnan, whereas part of the reasoning in the British Steel case in the passage quoted above was that the negotiations were throughout conducted on the basis that, when reached, the agreement would be incorporated in a formal contract. So too was the reasoning of the Court of Appeal in Galliard Homes Ltd v J Jarvis & Sons Ltd (1999) 71 Con LR 219. In our judgment, in such a case, the question is whether the parties have nevertheless agreed to enter into contractual relations on particular terms notwithstanding their earlier understanding or agreement. Thus, in the Galliard Homes case Lindsay J, giving the only substantive judgment in the Court of Appeal, which also comprised Evans and Schiemann LJJ, at page 236 quoted with approval the statement in Megarry & Wade, The Law of Real Property, 5th ed (1984) at pages 568-9 that it is possible for an agreement ‘subject to contract’ or ’subject to written contract’ to become legally binding if the parties later agree to waive that condition, for they are in effect making a firm contract by reference to the terms of the earlier agreement. Put another way, they are waiving the ‘subject to [written] contract’ term or understanding. 56. Whether in such a case the parties agreed to enter into a binding contract, waiving reliance on the ‘subject to [written] contract’ term or understanding will again depend upon all the circumstances of the case, although the cases show that the court will not lightly so hold. We turn to consider the facts. Application of the principles to the facts 57. There are three possible conclusions which could be reached. They are (1) that, as the Court of Appeal held, there was no contract between the parties; (2) that, as the judge held, there was a contract between the parties on the limited terms found by the judge; and (3) that there was an agreement between the parties on wider terms. In the third case there is some scope for argument as to the precise terms. As appears below, it is our view that, if the third solution is adopted, the most compelling conclusion is that the terms were those agreed on and before 5 July as subsequently varied on 25 August. We consider each possible conclusion in turn. (1) No contract 58. We agree with the judge that it is unrealistic to suppose that the parties did not intend to create legal relations. This can be tested by asking whether the price of £1,682,000 was agreed. Both parties accept that it was. If it was, as we see it, it must have formed a part of a contract between the parties. Moreover, once it is accepted (as both parties now accept) that the LOI Contract expired and was not revived, the contract containing the price must be contained in some agreement other than the LOI Contract. If the price is to be a term binding on the parties, it cannot, at any rate on conventional principles, be a case of no contract. Although it did not address this question, the Court of Appeal’s solution involves holding that there was no binding agreement as to price or anything else and that evidence of the agreed price is no more than some evidence of what a reasonable price would have been for quantum meruit purposes. The difficulty with that analysis seems to us to be threefold. First, neither party suggested in the course of the project that the price was not agreed and RTS invoiced for percentages of the price and Müller paid sums so calculated as described above. Second, the price of £1,682,000 was agreed and included in the LOI Contract on the footing that there would be a detailed contract containing many different provisions including, as expressly recognised in the LOI Contract, the MF/1 terms. Third, there was an agreed variation on 25 August which nobody suggested was not a contractual variation. 59. In these circumstances the no contract solution is unconvincing. Moreover, it involves RTS agreeing to proceed with detailed work and to complete the whole contract on a non-contractual basis subject to no terms at all. (2) Contract on the terms found by the judge 60. We entirely agree with the judge that the parties initially intended that there should be a written contract between them which was executed by each and exchanged between them. We further accept that, if the matter were tested on, say, 5 July, the correct conclusion may well have been that that remained the position and that there was no binding agreement between them. However, that is not on the basis that the parties had not reached agreement (or sufficient agreement) but because the agreement they had reached remained (in the traditional language) ‘subject to contract’. Thus, as correctly submitted in Müller’s skeleton argument before the judge, the agreement was ready for execution at that stage but was subject to contract. In the same skeleton argument Müller correctly submitted that the question was, objectively speaking, whether the parties’ intentions took a new turn at some stage such that they intended to be bound by the ‘final draft contract’ without the need for its formal execution. As we read it, the skeleton defined the ‘final draft contract’ as the draft sent by Mr Morris on 16 May, subject to subsequent e-mail agreement as stated above. 61. The striking feature of this case which makes it very different from many of the cases which the courts have considered is that essentially all the terms were agreed between the parties and that substantial works were then carried out and the agreement was subsequently varied in important respects. The parties treated the agreement of 25 August as a variation of the agreement that they had reached by 5 July. Nobody suggested in August that there was no contract and thus nothing to vary. It was not until November, by which time the parties were in dispute, that points were taken as to whether there was a contract. 62. We have reached the firm conclusion that by 25 August at the latest the parties’ communications and actions lead to the conclusion that they had agreed that RTS would perform the work and supply the materials on the terms agreed between them up to and including 5 July as varied by the agreement of 25 August. Thereafter the work continued on a somewhat different basis because of the provision of Line 1 before Line 2. As stated above, it does not seem to us to make commercial sense to hold that the parties were agreeing to the works being carried out without any relevant contract terms. In this regard we agree with the judge. 63. On the other hand it does not seem to us to make commercial sense to hold that the work was carried out on some but not all the terms agreed by 5 July. The terms were negotiated on the basis that the Schedules would form part of the Contract, which also contained the detailed Conditions in Schedule 1, which had themselves been subject to much discussion and comprised clauses 8 to 48. We accept Mr Catchpole’s submission that the Conditions, based as they were on the MF/1 terms which were put forward by Müller and expressly referred to in the LOI Contract and which (among many other things) defined RTS’ performance obligations, set out the warranties provided by RTS and identified the limit of its potential liability. It is, in our judgment, inconceivable that the parties would have agreed only some of the terms, namely those in the specific documents identified by Müller, and not those in clauses 8 to 48. It seems to us that this was one of the considerations which the Court of Appeal had in mind in reaching the extreme conclusion which it did, namely that there was no contract at all. 64. We agree with the Court of Appeal that the judge’s analysis cannot be correct. As appears from paras 36 and 37 above, there were four reasons for his decision, expressed in para 72, not to infer that the contract included the final draft version of the MF/1 conditions. They were expressed in his paras 73 to 76. His first and fourth reasons appear to us to be essentially the same. As to his first reason, it is true that the LOI Contract and the e-mail of 13 May indicated that the final terms were not to be contractually agreed until signature. That was indeed the original plan and remained the position until after 5 July. Equally, his fourth reason was that the effect of clause 48 was that the contract was not to be binding until signed. 65. The problem with these conclusions is that, as Mr Catchpole submitted, they prove too much. Given that no formal contract was signed or exchanged, we accept that, unless and until the parties agreed to vary or waive clause 48, the Contract would not become binding or effective. The problem for Müller is that identified by the Court of Appeal. Given the definition of ‘Contract’ in clause 49 as including the Schedules, the effect of clause 48 would be that the Schedules would be as ineffective “Percentage of Contract Price to be paid to the Purchaser or deducted from the Contract Price [words deleted] [to be calculated in accordance with Schedule 6]. Maximum percentage of Contract Price for which liquidated damages payments paid under clause 27.7.2 is 2.5%. 74. Clause 27.7.1 and 2 provided: “27.7 If the Works fail to pass the Performance Tests [words deleted] as determined by the provisions of Schedule 6 above then the following remedies will be available to the Purchaser:- 27.7.1 the Contractor shall (without prejudice to the Purchaser's other rights and remedies) pay to the Purchaser [words deleted] the sum set out in clause 5 [words deleted] within 14 days of receipt of an invoice from the Purchaser such sum being agreed between the parties as being a genuine pre-estimate of losses suffered by the Purchaser as a result of the Equipment not meeting the requisite standards; 27.7.2 where the Purchaser has not become entitled to liquidated damages due to the Performance Tests not being successfully passed and the Equipment not meeting the requisite standards to entitle the Purchaser to claim the maximum liquidated damages pursuant to clause 27.7.1 as set out in clause 5 above the Purchaser may give written notice to terminate the Contract immediately such failure shall be deemed a material breach incapable of remedy and pursuant to clause 34.1.2 and without prejudice to its other rights and remedies in the Contract the Purchaser may by written notice terminate the Contract immediately and take at the expense of the Contractor such steps as may in all circumstances be reasonable to ensure that the Works pass the Performance Tests.” The words deleted show that in the original draft clause 27.7.1 was concerned with delay. The words in italics are in blue and were first added by Müller in Mr Morris’s email of 11 May. 75. It will be recalled that the suggestion in capital letters made by Müller was in these terms: “THIS SCHEDULE NEEDS TO PROVIDE THAT IF THE TEST WITHIN A CERTAIN PERCENTAGE OF THE REQUIRED LEVEL LDs WILL APPLY AND THE EQUIPMENT WILL STILL HAVE "PASSED". IF THE PERCENTAGE ACHIEVED IS LOWER THAN THAT SPECIFIED BY LDs (I.E. LOWER THAN THE MAXIMUM PAYOUT UNDER LDS) THE EQUIPMENT WILL HAVE FAILED THE TEST AND THE OTHER REMEDIES WILL BE AVAILABLE TO THE PURCHASER” 76. It is important to note that the suggestion was not that there should be any amendment to any of the terms of clauses 7 to 48, or indeed to clause 5 or any of the other clauses. It was suggested that in some circumstances ‘other remedies’ should be available to Müller and, moreover, that such remedies should be provided for in Schedule 6. The problem for Müller in this regard is that it was agreed between the parties that the RTS Test Plan would form Schedules 5 and 6 and, as at 5 July, there was no further suggestion that Schedule 6 should contain something further and, if so, what that something might be. It is far from clear what Müller had in mind, but whatever it was it was not pursued. 77. As to the clauses of the contract itself, as stated above the parties agreed them as at 5 July, when the one remaining issue, which related to Force Majeure, was agreed. There was no suggestion at that time that Schedule 6 had not been finally agreed or that, because of any incompleteness in it, Müller could not or would not agree clauses 5 or 27.7. As amended in blue, clause 27.7 set out the remedies available to Müller if the Works failed to pass the Performance Tests as determined by Schedule 6. The amount payable by RTS as damages for failure to pass Performance Tests was to be that stated in clause 5, namely 2.5 per cent of the Contract Price. There is plenty of scope for argument as to the true construction of clauses 27.7 and clause 5 in the context of the RTS Test Plan which it was subsequently agreed should comprise Schedule 6. On one view the 2.5 per cent was to be both a maximum and a minimum. However, we note that clause 27.7.1 is expressed to be “without prejudice to the Purchaser’s other rights and remedies”. The position is further confused by the insertion, as a result of Mr Morris’s emails of 11 and 16 May, of a blue ‘not’ in the first line of clause 27.7.2. It would not be appropriate for us to express a view as to the true construction of those terms, which (absent agreement) will be a matter for the trial judge. 78. It is Müller’s concern that the effect of clauses 5 and 27.7 may be held to be that its damages for any failure by RTS to pass the Performance Tests are limited to 2.5 per cent of the Contract Price. However, Mr Maclean for Müller correctly recognised that no attempt was made to amend those clauses further. He simply relied upon the point left open by the capital letters. He submitted that in the light of that fact the court cannot conclude that clauses 27.7 and 5 were agreed terms. However, there is, in our judgment, no basis upon which the court could hold that clauses 27.7 and 5 were not agreed to be part of the agreed clauses as at 5 July. They had been agreed, in fact by 26 May (see paras 18-19 above) and, although there was initially an outstanding point in the Schedule, the terms of the Schedule itself were subsequently agreed and, as at 5 July Müller was not saying that it could not agree either those terms or Schedule 6. 79. As is clear from his judgment, the judge focused on the position as at 5 July. He did not make any finding relating to exchanges between the parties after that and in particular on 11 or 12 July. This is not perhaps surprising because, although in his initial e-mail when sending the third draft to RTS on 11 May Mr Morris of Müller flagged the point made in the capital letters and said that he intended completing a suggested draft on this in a couple of days, he never did so or reverted to the point. Müller at no time reverted to RTS on the point before the agreed variation on 25 August or, indeed, until a much later date. Although there is some evidence that Mr Morris still had it in mind on 11 July (see the next paragraph) as long before that as 16 May he had e-mailed the fourth draft, which included the capital letters but which he referred to as the contract ‘with final tweaks’. Moreover, the RTS Test Plan was agreed as Schedules 5 and 6 on 29 June. This point was not therefore presented to RTS as of any real importance. If it had been regarded as of any real importance to Müller it would surely have been referred to again before 5 July, either in the context of clauses 27.7 and 5 or in the context of Schedule 6. In these circumstances, in our judgment, whether viewed as at 5 July, 25 August or 5 September, this point could not fairly be regarded from exchanges between the parties as an essential part of the agreement. 80. We reach this conclusion having fully taken into account such evidence as there is relating to the events of 11 and 12 July. It appears that on 11 July Mr Morris gave a copy of the draft contract with its Schedules to Mr St John with a view to its being given to Mr Gavin Brown of RTS. There is evidence that a draft was given to Mr Brown and there is some evidence that Schedule 6 was in the same form as we have it in the blue version; that is with the capital letters, in other words, without any reference at all to the RTS Test Plan which had on any view by then been agreed as at least a part of Schedules 5 and 6. Mr St John’s evidence was that he handed the document to Mr Brown without looking at it. There is no evidence or suggestion that it was discussed. We have been shown a copy of a document in that form which has Mr Brown’s notations on it but those were put on in November, not July. The position is not clear because, when Mr Brown was asked whether that was the draft which Mr St John handed him in July he said that he could not recall his handing it to him in July. He thought he had received it at the end of October or early November, although he accepted that July was a possibility. When asked whether there had been any discussion about signing the contract in July, he said no. He then said that it had all gone quiet in mid-July and that he was expecting the schedules to be completed formally. He said that in mid-July he was content to let sleeping dogs lie and that RTS saw no problems with not signing the contract. 81. In these circumstances we conclude that there is no evidence of a discussion on the capital letters or any other point on 11 or 12 July or, indeed at any time after 5 July until much later, probably in November. Essential agreement was in our judgment reached by 5 July. None of the issues remaining after that date, including the capital letters point, was regarded by the parties as an essential matter which required agreement before a contract could be binding. On the contrary, they had agreed on the RTS Test Plan as the basis of Schedules 5 and 6. In so far as the judge reached a different conclusion in his reason ii), we respectfully disagree. judgment). The contract, once concluded on 25 August, must, as we presently see it (though the point was not fully explored before us), be treated as applicable to the whole period of contractual performance. Any issues arising in respect of such delay would, on that basis, fall to be determined under the terms of the contract (subject to any waiver which there may have been of particular terms), as if these had already been in force during the period of such delay. CONCLUSION 89. For the reasons we have given, we have a reached a different conclusion from both the judge and the Court of Appeal. It was agreed in the course of the argument that the court would reach its conclusions on the issues of principle before it and that the parties would subsequently have an opportunity to make submissions on the form of the order. However, subject to submissions on the precise form of order, including the precise formulation of the declarations to be made, our conclusion is that the appeal should be allowed, the order of the Court of Appeal set aside and declarations made (1) that the parties reached a binding agreement on or about 25 August on the terms agreed on or before 5 July as subsequently varied on 25 August and (2) that that binding agreement was not subject to contract or to the terms of clause 48. Trinity Term [2010] UKSC 38 On appeal from: [2009] EWCA Civ 26 JUDGMENT RTS Flexible Systems Limited (Respondents) v Molkerei Alois Müller Gmbh & Company KG (UK Production) (Appellants) (No. 2) before Lord Phillips, President Lord Mance Lord Collins Lord Kerr Lord Clarke JUDGMENT ON FORM OF ORDER AND COSTS 21 July 2010 Appellant Respondent Kenneth MacLean QC Stuart Catchpole QC Michael Fealy Charles Manzoni QC (Instructed by Pinsent Masons LLP) (Instructed by Addleshaw Goddard LLP) Page 4 10. In this Court Müller argued that the Court of Appeal was wrong to find that there was no contract and that the judge was right to hold that there was a contract, not on MF/1 terms, but on the terms found by him. RTS argued that the Court of Appeal was correct to hold that there was no contract but that, if there was a contract, it was on MF/1 terms. This Court held that there was a contract, essentially on MF/1 terms, as explained in detail in the judgment. 11. The Court has concluded that at the end of this whole process RTS has had a significantly greater success than Müller. It is true that, in the light of the Court’s judgment, RTS’ primary case has failed at each stage but its alternative case at each stage has succeeded. The result is that, although there was a contract, it was essentially on MF/1 terms and, importantly, was not on the limited terms identified by the judge and relied upon by Müller at each stage. In arriving at a fair overall result on costs, the Court must take account of those considerations but must also have regard both to the time spent in the Court of Appeal on the no contract point (which was raised by RTS and upon which it has now lost) and to the fact Müller had to come to this Court to displace the decision of the Court of Appeal and has succeeded in doing so. Moreover RTS persisted in advancing the no contract point in this Court. 12. Both parties made Part 36 Offers at first instance. In the light of that fact, subject to three points, the judge decided that the costs should be reserved to the trial judge. Subject to the same three points, this Court agrees that the costs should be reserved to the trial judge because the appropriate order might be affected by the offers. However, it seems appropriate to indicate what order the Court would have made as to the costs at first instance on the basis of its conclusion there was a contract, essentially on MF/1 terms. Subject to the three points, on this basis Müller’s submissions have been rejected and RTS’ alternative case has been accepted. The Court concludes that, in principle, Müller should pay part of RTS’ costs. A fair proportion would be 60 per cent. Accordingly, other things being equal, the Court would have ordered Müller to pay 60 per cent of RTS’ costs at first instance. 13. The three points are these. The first point relates to issue 1.3. The judge ordered RTS to pay the costs of issue 1.3, which essentially asked what were the consequences of the variation agreed on 25 August 2005. The judge answered the question in his judgment and in the schedule to his order. He held that RTS should pay the costs of this issue whatever the result of the main issue. This Court sees no reason to interfere with that conclusion. 14. The second point relates to issue 1.1.6, which raised the impact of the Unfair Contract Terms Act. For the reasons given in his judgment on the costs of this issue (at page 34 of the transcript for 10 June 2008) the judge held that RTS Page 5 should pay these costs in any event. Again this Court sees no reason to interfere with that conclusion. 15. The third point relates to the costs referable to the inadmissible evidence in RTS’ witness statements. Again, this conclusion is not affected by the conclusions reached by this Court in its judgment and this part of the judge’s order should be restored. 16. There have been no Part 36 Offers which are relevant to the appeals to the Court of Appeal or to this Court. The Court has concluded that the fairest approach is to treat the costs in this way. RTS has ultimately succeeded in what was its alternative argument at each stage, namely that there was a contract on MF/1 terms. For that reason Müller should pay part of its costs. Those costs should however be reduced both in the Court of Appeal and in this Court for the reasons stated above. In the Court of Appeal the no contract point, which RTS raised and has now lost, plainly took up a significant amount of time. Moreover, the fact that RTS took and succeeded on that point in the Court of Appeal meant that Müller had to appeal to this Court, where RTS persisted in advancing it. In order to reflect what this Court regards as the overall success of RTS on the one hand and these considerations on the other, it has concluded that that Müller should pay 40 per cent of RTS’ costs in the Court of Appeal and in this Court. 17. RTS paid Müller £65,000 on account of the costs of the three points referred to above in accordance with para 4 of the order of the judge. RTS seeks an order for repayment of that sum, but the Court has concluded that, in the light of its conclusion that that part of the order should stand, it would not be appropriate to order repayment. 18. The remaining question is whether the Court should make an order for an interim payment of the costs that it has ordered Müller to pay RTS 40 per cent of its costs in the Court of Appeal and in this Court. It has concluded that it should do so and that an interim payment of a total of £80,000 would be appropriate.