The facts of RTS v Muller
Muller is a producer of dairy products for the retail food industry and is famous for the fruit and cereal 'corner' yoghurts which appear on many supermarket shelves and are much loved by one of the authors. RTS was an engineering company which supplied automated packaging equipment to the food industry. Muller wanted to install two automated food packaging lines in its factory and sought out RTS with a view to negotiating a 'design, build and install' contract. In other words, it involved the design of a customized machine which would meet the very specific needs of a particular business. Contrary to the discrete contracts on which we often focus in our teaching, the parties never thought that there would be a single moment of performance evidenced by delivery. Performance was assessed over time and according to whether the equipment built and installed passed a series of factory tests based on speed, reliability and integration with other equipment.
Muller and RTS initially made contact with a view to striking a deal for the supply of customized machines in 2000. Discussions continued in subsequent years, particularly from December 2003 onwards. It was understood that RTS was not to be the sole supplier of equipment but was to be in charge of constructing the packing lines as a complete engineering installation with the equipment from other suppliers integrated into the equipment it was to supply. The parties exchanged frequent 'quotations' which appear to have dealt with the technical engineering specifications required for the project. In August 2004, Muller raised the issue of contract terms and asserted that it wished to contract on its terms but RTS recommended that Muller should use MF/1. This is a standard form contract issued originally by the Institution of Electrical Engineers, now merged with the Institution of Incorporated Engineers to form the Institution of Engineering and Technology (IET). Muller sent a list of amendments to MF/1 to RTS. RTS rejected these amendments.
The parties edged very slowly towards a deal. Muller told RTS in February 2005 that it had been awarded the contract. It then issued a letter of intent to RTS. This set out the contract price of approximately ?1.6 million and asked RTS to commence work on the project. The letter asserted that a formal contract would be presented for signature in due course based upon Muller's amendments to MF/1. The letter of intent was to govern dealings between the parties for the four-week period up to the detail of the main contract being agreed. This period was later extended until May and it was not until July that the parties reached an agreement about the amendments to MF/1 ('the MF/1 conditions'). Clause 48 of MF/1 was particularly relevant as it was a 'subject to contract' clause. It asserted that no contract could come into existence until it had been signed and exchanged with the other party. No signed exchange ever took place.
Around August 2005, the parties agreed to change the arrangements for the delivery and installation of the automated food packaging lines in the hope that by doing so Muller would be in a position to fulfil an order it had just received from a national supermarket chain. This appears to have put pressure on the parties and their business relationship. In November 2005, this strained relationship was evident as a dispute arose about the performance testing of the automated lines because the new machinery did not, in Muller's view, meet the quality standards it required. Muller had already paid 70 per cent of the agreed price but at this stage declined to pay anymore. RTS claimed the outstanding 30 per cent of the contract price based either on the agreement made in July or in the alternative on a quantum meruit for work done. This claim was countered by one from Muller for ?3 million for damages because the equipment RTS had supplied did not, in the company's view, reach the performance standard it thought it was paying for. RTS's counter to this was that MF/1 and the amendments agreed to it limited its liability for delay to pre-agreed 'liquidated' damages of 3.5 per cent of the total price and its liability for the equipment's failure to pass performance tests to 2.5 per cent of the contract price. Muller argued against the incorporation of MF/1 because it wanted to claim damages that were potentially higher than the amounts allowed by the liquidated damages clauses.