Contract Law Case Analysis. RTS Flexible Systems Ltd v MolkereiAlois Muller GmbH & Co KG

The four week period expired and both parties agreed to an extension of the letter of intent terms, while negotiations continued. RTS formed the URS by incorporating section 4 onwards of QK(difference from QJ insignificant). Final negotiations ensued and Müller planned, but didn’t, on forwarding the final contract to RTS for signing within that week. RTS then sent Müller their understanding of the contract schedules which weren’t responded to, however Müller approved plans sent a month later.

The FEI arrived late, an issue for Müller as they’d secured a contract to provide Tesco with 150,000 packs of the new product the week beginning 10th October. RTS said it would do its best to help Müller meet the requirements of the Tesco contract but did not promise the target would be met. To attempt to meet the requirements, the agreed plan between the parties was to vary the delivery plan of components and for RTS to forfeit carrying out certain tests.

The 150,000 packs were produced, although mostly due to manual labour, and the tests were never carried out.

Müller paid RTS 30% of £1,682,000 + VAT just after the project had begun, a further 30% once the machinery had started to arrive and 10% shortly after it had all been delivered. This was not coherent with the original agreed payment plan in QJ.

The dispute between the parties emanated when Müller did not finish the payment installments due to RTS’ machinery falling short of their performance requirements.

Müller submits the final draft never became binding upon the parties as it was not formally executed and signed. It’s Müllers belief that the obligations of the parties are to be found in the documents containing the URS and its appendices regarding the Parent Company guarantee, the Assumptions for FEI and in the documents containing the plans of installation, tests and overall project plan.  They argue that RTS isn’t entitled to payment of the balance of the contract price until they’ve completed substantial performance.

RTS’ primary submission was the LOI incorporated RTS’ standard terms via QJ which included a liquidated damages provision. Their alternative submission is that any new contract has the MF/1 terms incorporated which would also have included a liquidated damages provision.

This condition is important to RTS as it states that Müller will be limited in their claim to damages to 2.5% of the fixed price, rather than the outstanding 30%. In the absence of this limitation RTS may have unlimited liability despite Müller contributing to the performance deficit with the delay of the FEI.

4. What does Mr Justice Clarke decide about the nature of the relationship between the parties in this dispute?

Mr Justice Clarke(JC) decided it’s unrealistic to suppose that the parties didn’t intend to create a legal relationship and their legal relationship didn’t include the MF/1 terms, which was RTS’ submission, because; the LOI indicated that until signature the final terms weren’t applied, the contract sent was designed to operate as a composite whole and some of the schedules were not agreed, the parties didn’t proceed on the basis of the conditions, in particular the payment plan and finally the contract wasn’t executed nor were any counterparts exchanged which was stated in  clause 48 to be necessary for the contract to be effective.

JC decided that, although the contract did not follow the traditional sequence of offer and acceptance, the actions of carrying on with the payments and project were sufficient to conclude that a contract had been entered into, following the previous authority of Trentham.

He therefore held that RTS was to provide the goods and services specified in Müller’s submission, namely the URS and Assumptions for the FEI. Although the Assumptions stated if delivery of FEI was delayed beyond the expected date RTS would not be liable as consequence, the fact that no date had been specified in the LOI so this is redundant. The test plan, specified in Müller’s submission, wasn’t completed by RTS, only once this is accomplished will Müller be compelled to pay RTS as this constitutes achievement of substantial performance. He held there were no contractual limitations on the damages that Müller might recover from RTS, as RTS isn’t entitled to any exclusions or limitations bar what Müller submitted.

JC concluded that the contractual relationship between the parties was RTS to supply the equipment at the agreed price stated in the LOI and Müller’s submission was correct and well founded.

5. What argument does RTS advance in the Court of Appeal about the nature of its business relationship with Müller? How is this argument different from the one it presented to Mr Justice Clarke?

RTS advanced the argument to the CoA that there simply was no contract concluded and that any entitlement they had to receive payment was on reasonable value of services. The alternative submission of RTS was if there was a contract, the MF/1 conditions should have been incorporated to limit their liability. RTS submitted that this was exactly the type of case which Trentham wasn’t as they had planned to enter a binding contract,  and was in fact one similar to British Steel as work was being done pending a contract as negotiations were still ongoing. By following the analysis of Goff J in British Steel “it would be an extraordinary result…if the seller were to assume an unlimited liability for his contractual performance” therefore, it was argued by RTS, JC shouldn’t have reached this decision.

This argument differs from the one advanced previously to the High Court as the main thrusts of RTS’ submission to JC was form MF/1 was incorporated into a quotation so had limited their liability for damages, and their alternative submission was the LOI incorporated the MF/1 conditions and so again their liability for damages was limited.

The alternation in RTS’ submissions was, that they had changed from submitting there was a contract which incorporated certain conditions to limit their liability and then arguing there was no contract at all so they had no liability and any payment was based on quantum meruit. This proved to be successful at the CoA as the judges allowed the appeal.

6. Is the reasoning adopted by the Court of Appeal formalist or realist in nature?

In the CoA’s judgment they reasoned that the previous judge had misconstrued some of the conditions and relied too heavily upon the previous judgment of Lord Steyn in Trentham, which was in fact found to be not applicable in this case. They found British Steel  to be the leading case and decided that RTS’ appeal should be allowed and no contract came into existence after the expiration of the LOI.

Waller LJ found that the factors which influenced Goff J in British Steel as indicating no contract apply with “equal force in the factual matrix of this case”. This devotion to the formal material of precedent displays a formalist approach and more specifically a textual-formalist approach.  

Waller LJ indubitably has an allegiance to formalism as the purposive-formalistic approach is also apparent in the judgment. He found that that the provision which states that no contract will be entered until signing should take effect. This is a stringent application of contractual principles illustrating the purposive-formalistic approach.

This ideal-typical judicial approach has been combined with the contractual philosophy of market-individualism in this judgment as Waller LJ found there was no contract, not so that RTS could escape from a bad bargain, but to maintain clarity of the law.

Although the formalistic approach is clear, there is much criticism over the rigidity of this type of approach and caused much debate among judges. This case would be a prime example of this as in the Supreme Court, a realist approach is used.

 7. What decision does the Supreme Court reach? Is the reasoning of the Supreme Court formalist or realist in nature?

The Supreme Court reached an alternative decision than both of the lower courts previously. Using the less-conceptual approach of backwards reasoning to determine the outcome, the judges set aside the order of the Court of Appeal finding there was a contract formed, and differed from the High Court judgment to include the MF/1 terms. Clause 48 which contained the subject to contract provision disapplied, exceptionally, here as parties had “steamed ahead with performance”.

The approach used by the SC differs from the CoA’s formalistic style. The SC took a realist approach in their judgement, similar to that used by Lord Denning in Butler and Gibson. Backwards reasoning and realism were both executed here, which are theories entwined with each other as they are both result-orientated. That is, SC decided what conclusion they wish to reach based on principle and manipulated the facts and their reasoning to verify this. An example being, the SC looked at the fact that the parties agreed to vary the agreement when the FEI was delayed and deduced that there was no suggestion from either party of there being no contract to vary, inferring that the parties had entered a contract which was agreed.

Although the SC used a realist approach, due to referencing the cases of British Steel, Galliard Homes, Pagnan and Trentham the SC judgment could further be described as “weak realist”, as fidelity to the cases is accorded to some but has no overriding value.

Two realist philosophies of market-individualism and consumer-welfarism dominate contractual thinking and both exist in the SC’s judgment. The paternalistic theory of consumer-welfarism is displayed through the backwards thinking approach, as the outcome of the judgment was decided before reasoning, based upon fairness. The competitive theory of market-individualism is shown through the SC holding the parties to their freely made bargains  by ruling that there was a contract based on terms agreed during negotiations previously. This theory encourages the economically efficient use of resources in society.

Bibliography

Cases

British Steel Corporation v Cleveland Bridge and Engineering Co Ltd [1984] 1 ALL ER 504

Butler Machine Tool Co. Ltd v Ex-Cell-O Corporation (England) Ltd [1979] 1 All ER 965

G Percy Trentham Ltd v Archital Luxfer [1993] 1 Lloyds LR 25

Galliard Homes Ltd v J Jarvis & Sons Plc (1999) 71 Con LR 219

Gibson v Manchester City Council [1979] 1 All ER 972

Pagnan SpA v Feed Products Ltd [1987] 2 Lloyd’s Rep 601

RTS Flexible Systems Ltd v MolkereiAlois Muller GmbH & Co KG [2008] EWHC 1087 (TCC)

RTS Flexible Systems Ltd v MolkereiAlois Muller GmbH & Co KG [2009] EWCA Civ 26

RTS Flexible Systems Ltd v MolkereiAlois Muller GmbH & Co KG [2010] UKSC 14

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