Issues raised by the case

Formation of contract

Students analysing RTS v Muller may well be confused by the apparently irrational behaviour of the parties in this case. Standard problems set for undergraduates involving the distinction between offers and invitations to treat, equivocal or ambiguous responses to offers, unopened emails and incomplete voicemails encourage law students to believe that a contract has usually been formed; it is just a case of determining when. Many of the judicial pronouncements about offer and acceptance they will be asked to read will lead them to the conclusion that formation problems arise through lack of planning and formality; one might even suggest stupidity and commercial naivety. In line with this approach it was with something of a sense of frustration that the trial judge, Mr Justice Christopher Clarke commented in the

Technology and Construction Court that this was 'another example of the perils of proceeding with work under a letter of intent', while Lord Clarke of Stone-Cum-Ebony warned in his judgment that 'the moral of the story is to agree work first and to start work later'. Socio-legal accounts of the lived world of contract suggest such comments are misconceived. Empirical studies have revealed that many long-term commercial relationships are often not planned in the ways anticipated by doctrinal analysis. This suggests that it might be more prudent to see such cases as the norm rather than the exception and to reconsider the requirements of the formation doctrines as a result (Lewis, 1982). Lord Denning's attempts to do so (see, for instance, Butler v Ex-Cell-O [1979] and Gibson v Manchester Council [1979]) did not always meet with judicial approval, though the fact that three courts in this case applied the same doctrines in three different ways suggests that there is considerable scope for a revisiting of current concepts of offer and acceptance.

Socio-legal studies have found that lengthy negotiations resulting in detailed planned contractual documents are much more likely to take place where high-risk, complex, expensive items such as aircraft are involved (Beale and Dugdale, 1975). But even where large-scale commercial transactions are involved RTS v Muller suggests that approaches to contract formation may be much more haphazard than the courts or even socio-legal scholars anticipate. Describing the formalities of contract formation in complex construction cases involving a plethora of documents such as collateral warranties, novations, parent company guarantees and licences, Hughes and Bradbury (2009) have suggested that the inevitability of last-minute changes in the market place are such that the parties may even execute signature pages in advance of the final agreed version of the contract or transfer the signature page from a previous draft in order to save time. RTS v Muller demonstrates that even when negotiations are detailed, take place over a number of years and involve experienced in-house counsel the exact moment of formation of a contract and the terms on which it is based is extremely difficult to identify.

The Court of Appeal judgment in RTS v Muller presents us with an up-to- date example of the clash of norms between formalist doctrine and what empirical evidence suggests is not an unusual situation in commercial practice. It presents us with an uncomfortable scenario involving a complex commercial arrangement involving millions of pounds in which there is a shared understanding on a range of issues where the Court of Appeal was able to determine that there was no enforceable contract once the letter of intent agreement had expired. It soon becomes apparent that what may seem sensible to a lawyer could equally well be seen as an unnecessary transaction cost in the business sector where time is often of the essence. Extensive negotiations resulting in a diet of clear contractual obligations and responsibilities can be expensive to produce, especially where a valued, long-term commercial relationship exists between the parties and a dispute is seen as unlikely by the parties. Significantly, placing stress on formal rights and obligations may even be seen as a sign of distrust or as commercially naive in an ever-changing market.

It is also the case that whilst contract jurisprudence has long placed a high value on certainty, socio-legal scholars have been keen to emphasize the central importance of flexibility in the commercial sector. It is far from unusual for the parties to a contract to begin to perform their obligations as RTS and Muller did before all the terms of the agreement have been reached. This is, for instance, the problem that occurs in 'battle of the forms' cases. Moreover, research suggests that the parties commonly engage in extralegal adjustments to the original deal which alter performance as the deal progresses. The Supreme Court considered that RTS and Muller had done exactly that in this case when they waived clause 48. Even Lord Clarke of Stone-Cum-Ebony acknowledged in his judgment that the behaviour of RTS and Muller did not represent an unusual way to do business (p. 756).

What research suggests, and RTS v Muller provides an example of, is that parties who do not plan are not necessarily naive or acting irrationally when they begin and continue to perform without a formal contract in place to reflect shared understandings or assumptions. Socio-legal accounts of contract suggest that it is good relations and profit margins rather than legal rights and duties that are uppermost in the minds of contracting parties (Macaulay, 1963). Drawing on such accounts, it has been argued by relational contract theorists that co-operating in the course of a long-term commercial relationship is more likely to lead to mutual wealth maximization than not co-operating. This idea of 'solidarity' reflects the importance of seeing commercial agreements as being geared towards mutual futures, interdependence and a plethora of shared goals. It is not contended that in accepting these ideals, the parties abandon their own interests. It is intelligent rather than blind trust which is most effective in such contexts. In the words of classical economics, co-operation and flexibility promote utility maximization rather than undermine it (Macneil, 2001). In this case it is clear that Muller trusted RTS enough to forward the company 70 per cent of the agreed price and to proceed to do business with it without a signed contract in place. Indeed, it seems likely that the reason this case was brought to trial was the problem of too much trust. The critical mistake made appears to be that Muller paid 70 per cent of the price but had got far less than 70 per cent of the work completed. This left the company vulnerable if quality issues arose. A far better approach would have been to link staged payments in percentage terms to the work completed and judged acceptable. Moreover, as the deal progressed, Muller seems to have become distracted from finalizing a formal deal by its desire to fulfil the highly lucrative order with a major supermarket chain.

Significantly, neither RTS nor Muller appears to have been overly concerned about the absence of a contract for most of their relationship. They did not, as is often suggested by doctrinal lawyers, need a fully negotiated contract in order to plan their relationship or enhance their trust in the other party. If the machines produced by RTS had reached Muller's quality standards the potential lack of a contract would, like many of the other business deals discussed by empirical studies, have remained under the legal radar. The parties only turned their attention to the need for a contract which favoured them on breach when the machines designed by RTS did not meet the quality threshold expected by Muller. The parties did not denounce the importance of the contract; they spent a lot of time negotiating contract terms but only started arguing about what had been agreed when both sides needed to minimize their losses: in RTS's case by restricting the amount claimed in damages and ultimately rejecting liability and in Muller's case by seeking to recover damages from RTS. This raises some important issues about the lived world of contract which have been the subject of much debate between socio-legal scholars and 'new formalists' (see, for instance, Bernstein, 1992). The latter have drawn on empirical studies of the commercial world to argue that much socio-legal work has neglected the importance that legal rules can play in planning for, and dealing with, the aftermath of an unsuccessful relationship. It is argued that while techniques such as blacklisting within an industry may be as effective as litigation when bringing a recalcitrant contractor to account, contract law is particularly valuable when it comes to the endgame. Work in this genre encourages us to recognize that disputing contractors may be less worried about their reputations in a buoyant market in which it is easy to find people to contract with or even in a depressed market where there is little likelihood of future contracts but serious problems with cash flow. In these situations, a resort to law allows each party in a dispute to claim contested resources in line with clearly defined and public rules. As the new formalists have suggested, it was mainly during the endgame of the relationship that RTS and Muller made reference to formal contract norms in an attempt by both parties to use the courts to minimize their losses.

These alternative accounts of what binds the parties together in a commercial relationship explain the difficulty that the courts often have in containing commercial behaviour within the doctrinal handcuffs available to judges. More particularly, they explain the convoluted efforts of the judge at first instance to fit the events surrounding the issuing of the letter of intent into the structure of offer, counter offer and acceptance in the Technology and Constriction Court in attempting to explain the behaviour of RTS and Muller by reference to formalist expectations. Viewed from a socio-legal perspective, this case provides an example of the fact that contracts are far from being the static agreements suggested by the formalist approach in which all rights and obligations can be determined at the 'moment of responsibility' when an acceptance exactly matches an offer. Commenting on Anglo-American approaches to contract formation, Macneil has argued that contract formation is much more akin to a dimmer switch, whereby contractual obligations slowly evolve, than to the instant on-off creation of liability envisaged by doctrine (Macneil, 2001). In short, contract formation in the commercial sector is complex and messy; behaviour and express intentions are often indeterminate. Agreements commonly arise from an extensive and tangled trail of correspondence and negotiation involving conduct, written documents and discussions in which mirror image theory or fresh consideration may play little part. As Atiyah (1989) suggested some decades ago, there is a clear danger that doctrine has become too pragmatic and divorced from more abstract concepts of agreement.

 
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