Standard form contracts

The classical contract model developed at a time when most negotiations were conducted face-to-face by two parties. Doctrines associated with this model and its neoclassical offshoot continue to influence the modern law of contract despite the fact that a considerable number of legal agreements are now standard form contracts containing express written terms prepared in advance of negotiations and exchange by people who have not met. Standard form contracts probably account for the bulk of inter-business agreements and bring a number of benefits to businesses, most notably the avoidance of repetitive negotiations about a standard term or common procedures. RTS v Muller involved a particularly important standard form contract known as the MF/1 contract produced by the IET and widely used in the engineering industry. Engineering contracts can be among the most complex and demanding that are put in place, and often require input from a range of specialists, including engineers, scientists and project managers. The importance of this standard form contract in framing expectations was accepted by Lord Clarke of Stone-Cum-Ebony in the Supreme Court when he opined:

It is important to note the references to MF/I 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. (p. 759, emphasis added)

The IET produces several model contracts and commentaries which are designed for use in home and overseas contracts for mechanical and electrical plant, goods and consultancy. The forms are produced by a joint negotiating committee whose members represent the various professions and trades in the electrical and mechanical engineering industries. These model contracts cover such issues as patents, assignment and sub-contracting, site conditions, variation orders, access to premises for inspection of plant, liquidated damages, currency of payment, dispute resolution procedures and confidentiality. The basic object of contracts governed by such terms is to enable the purchaser at an agreed date to take over and operate the plant which has been completed and tested in accordance with the technical specification that forms part of the contract. In practice, the contracts are highly technical and the time required for completion may be lengthy as plant is tested and re-tested to ensure it is fit for purpose. Because of the unique technical specifications needed for each new deal, there is a greater need for the contracts to be tailor-made whilst being modelled on the general conditions. In contrast to practice in other industries, such as construction, it is common for large-scale operators to produce their own 'in-house' models which follow the appropriate recommended model. These contracts become customized only after a careful process of incorporation, variation and addition of terms to suit the parties' project. While RTS was familiar with the industry model forms used in this way on a regular basis, Muller was not. This explains why Muller did not immediately accept the example of a previously customized contract that RTS offered as a model for its contract with Muller.

The incorporation of terms relating to the limitation of liability were at the heart of the dispute in RTS v Muller and this issue is an important subject for debate within the industry. Mechanical engineering is a high-tech world where very expensive capital equipment is designed and installed, often using state-of-the-art technology. Unlike a number of standard form contracts which might be offered on a take-it-or-leave-it basis, there is a need for engineering contracts of the type in RTS v Muller to be governed by a bespoke technical specification and adapted contracts modelled on the general conditions. These contracts become bespoke only by a careful process of incorporation, variation and addition of terms to suit the parties' particular project. This explains why RTS and Muller were in negotiations for so long before and after the letter of intent was issued and why the contractual negotiations proved to be so complicated.

The losses caused by indirect and consequential damages can also be crippling where production is held up as a result of poorly designed or installed goods. Despite the potential losses for the purchaser, engineers have traditionally claimed the necessity to limit their liability in contracts because the alternative would be that they would have to increase their price significantly to cover the increased cost of insurance. It has been argued by the IET that it is more convenient for the purchaser to take out the level of insurance required because the contractor has no control over the purchaser's investment decisions, the use to which the machine is put or the anticipated return. While the company commissioning the plant has years to recover its investment, the contractor has just one opportunity to do so in the contract price. It has been claimed that the expectation that the insurance burden will be carried by the purchaser rather than the engineer has reached the status of a 'universal philosophy worldwide' in the electrical and engineering plant industry (Gaitskill, 1997, p. 263). It follows that the industry is extremely sensitive to challenges to this order of things.

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