Butler Machine Tool Co Ltd v Ex-Cell-O Corp

In the case of Butler Machine Tool Co Ltd v Ex-Cell-O Corp (England) Ltd 1 WLR 401 (CA), Lord Denning advocated an alternative approach to the traditional mirror-image rule for contract formation. Discuss whether you consider the courts should adopt the traditional approach or that of Lord Denning when deciding whether a contract has been formed.

To answer the question I will divide the essay into three sections; the first focusing on the traditional approach and its merits and detractions, the second concentrating on the alternative approach and its positive and negative aspects before finally considering the wider picture and which approach I believe the courts should adopt. The Traditional Approach The traditional approach to deciding whether a contract has been formed is to look at offer and acceptance.

An offer can be defined as an “expression of willingness to contract on certain terms, made with the intention that it shall become binding as soon as it is accepted by the person to whom it is addressed” and acceptance as “a final and unqualified expression of assent to the terms of an offer. ” The court will objectively analyse the negotiation that lead to the acceptance to assess if a contract had been made and if so what terms it was made upon. One key aspect of this traditional approach is the mirror-image rule, which allows for no modifications of an offer for acceptance to be complete.

Any attempts to amend the offer (excluding noted exceptions to the rule, such as that empty term will be disregarded and that an additional term for the benefit of the offeror) will result in a counter-offer that cancels out the original offer; this was decided by Lord Langdale in Hyde v Wrench and it remains good law to this day. This method is favoured as it improves certainty for the parties to a contract, the knowledge that they will not be contractually bound until there is equivalent offer and acceptance, and also for the courts themselves as it provides set rules to follow.

To some extent it also enshrines the idea of freedom of contract, as it allows parties to decide of their own free will what will be exchanged, although this is negated somewhat by the objective approach taken by the court in determining if a contract has been formed as this does not take into account the subjective intentions of either party. Some criticism can be levelled however; in New Zealand Shipping Co Lord Wilberforce claimed that this approach was used “often at the cost of forcing the facts to fit uneasily into the marked slots of offer, acceptance”.

Additionally it can be described as ‘reasoning backwards’, in that the court can essentially decide what it wishes the outcome to be and then manipulate the negotiations to conform to the predetermined ideal of offer and acceptance. The Alternative Approach The alternative approach to contract formation was suggested by Lord Denning in the case of Port Sudan Cotton Co v Chettiar, in which he stated “I do not much like the analysis in the text-books for inquiring whether there was an offer and acceptance, or a counter-offer, and so forth.

I prefer to examine the whole of the documents in the case. ” This was an obiter dicta comment however, and he went on to use the traditional method for the ratio decidendi. He first employed the approach in Gibson v Manchester City Council, with Denning dismissing the traditional form of contract analysis as antiquated and finding it more useful to identify a general agreement, “It is a mistake to think that all contracts can be analysed into the form of offer and acceptance.

I know that in some of the textbooks it has been the custom to do so, but as I understand the law, there is no need to look for strict offer and acceptance. You should look at the correspondence as a whole. ” The approach did not receive much support, as Dennings decision to uphold the contract in question received a dissenting judgment from Lane LJ. The Gibson case was later appealed to the House of Lords, who rejected Dennings approach entirely and created precedence for future cases to resume following the traditional method.

Denning used his alternative approach only once more, in the case of Butler Machine Tool Co Ltd v Ex-Cell-O Corp (England) Ltd. This dealt with a battle of the forms; the colloquial term for when both parties employ standard form contracts and then disagree about whose standard terms take precedence, over the price of machinery that had been subject to a price variation clause in Butler’s contracts.

The Court of Appeal ruled unanimously in favour of the defendant, however neither of the other two judges (Lawton and Bridge LLJ) agreed with Dennings reasoning, preferring the traditional approach wherein the final counter offer before performance of the contract cancels all previous offers. His approach here was also criticised by academics, as it was believed it would not prevent parties from trying to ‘get the last blow in’, and that it was impractical due to the classification of three new terms (material differences, material points and residual terms) which would further complicate proceedings.

Although there is considerably less evidence as to how well this method may work due to the House of Lords adherence to the traditional approach it does appear to have merit in a case such as Butler, where the negotiation over terms has been convoluted to the extent that ascertaining offer and acceptance definitively is realistically impossible. It may therefore be more suitable in complex cases to attempt to identify when a general agreement was formed: this was suggested by Treitel when he considered The Satanita, a case that is considered a definitive example of how offer and acceptance are not always sufficient analytical tools.

There are of course problems with the alternative approach, the predominant one being that it may undermine the certainty of the law as it relies solely on judicial interpretation and there is no substantial case law to follow. It also risks objectivity, as looking at the negotiation in its entirety may lend itself to a more subjective view, although it is worth noting that Denning wanted to examine the behaviour of the parties (as opposed to what was said) which implies that it would be viewed from the perspective of the reasonable man and therefore still objective.

Which Approach Is Preferable? There is no doubt that the traditional method of offer and acceptance is somewhat flawed; however its relatively successful application over the years suggests that for the majority of cases it is fit for purpose. With regard to the minority of cases a more liberal approach may be more useful, as although Dennings approach was rejected in the seventies the more recent Supreme Court case of RTS Flexible Systems Ltd v Molkerei Alois Muller Gmbh appears to use a comparable method.

In the case the claimant had commenced work on the defendant’s factory after a letter of intent; this was to be followed by a formal contract however the latter never materialised and the work was completed under a draft contract within the letter. When the claimant sued for damages the court had to decide if a contract had existed between the parties, and in doing so they at no point identified an offer or acceptance, instead finding what Lord Clark termed an “essential agreement”.

Whilst it does not directly cite Dennings approach it is sufficiently similar to suggest that the Supreme Court may be willing to take a more liberal approach to analysing contract formation. For guidance in ascertaining which model may perform better it is also prudent to look beyond the British procedure; the majority of European countries function on the system of offer and acceptance but include what had been named a ‘knock out rule’ which excludes any term that cannot be harmonized and substitutes instead one derived from wider trade practice of rules of law.

This method can also be seen in the International Institute for the Unification of Private Law document Principles of International Commercial Contracts, which stipulates that a contract can be upheld, “where both parties use standard terms and reach agreement except on those terms, a contract is concluded on the basis of the agreed terms and of any standard terms which are common in substance”.

This approach appears particularly useful in a battle of the forms scenario, as it is entirely possible that the parties may not place equal importance on every term and that those of less value can be dismissed. A comparable attitude has also been adopted in the United States, where the Second Restatement of the Law of Contracts states that shared agreement to a contract is generally in the form of offer and acceptance, but that “A manifestation of mutual assent may be made even though neither offer nor acceptance can be identified and even though the moment of formation cannot be determined”.

The Uniform Commercial Code (UCC) even contains specific stipulations for a battle of the forms in paragraph 2. 204, which follows the standard specification of offer and acceptance with the following “An agreement sufficient to constitute a contract for sale may be found even if the moment of its making is undetermined. Even if one or more terms are left open, a contract for sale does not fail for indefiniteness if the parties have intended to make a contract.

Although the US appears to have thoroughness to its codification that may make it worthwhile imitating in the interest of balance it is of note that the UCC also stipulates that the first party to submit a form is preferential, and though this reverses the common law presumption it still leaves legality up to chance and encourages ineffective business practice. Overall it shows that at an international level it has been recognized that the model of offer and acceptance is not always sufficient and subsequent.

It emerges that a hybrid of the two approaches may be the ideal, although it must be noted that (despite the Muller case) courts have maintained a rigid adherence to the traditional method in more current cases. This can be demonstrated by Tekdata Interconnections Ltd v Amphenol Ltd, a more recent battle of the forms in which Dyson LJ commented that “The rules that govern the formation of contracts have been long established…that has the great merit of providing a degree of certainty which is both desirable and necessary in order to promote effective commercial relationships”.

In light of such sentiment it may be necessary for the traditional method to be the default approach, however it does appear that there needs to be some prearrangement for a more liberal method when required, and I believe the best solution would be to allow for judicial discretion in deciding if a case would benefit from such an approach.

Although this leaves the system open to some level of uncertainty (and is admittedly also debatable with regard to the Rule of Law, as theorist AV Dicey believed discretion lead to arbitrary decisions) it can be argued that it provides the judiciary with little more discretion than they already possess and would allow them to address the nature of complex cases more adequately.

In conclusion it appears there are positive and negative aspects of both the traditional and alternative approach to contract formation. As one does not appear to be markedly better than the other perhaps a more just approach may be for the courts to use the traditional method of identifying offer and acceptance where possible, and when it proves otherwise employ an alternative method and look for a general agreement.