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The legal opinions in this article are the author’s own, not WorldCC’s, and this is not legal advice.

When a subject-to-contract label is added to the content of a letter or e-mail, the label makes it explicitly clear that the content is not legally binding between the sender and the recipient of the letter or e-mail until a contract is executed by both parties. The “use of subject-to-contract label in negotiations effectively means that (a) neither party intends to be bound either in law or in equity unless and until a formal contract is made, and (b) each party reserves the right to withdraw until such time as a binding contract is made.”1 This reflects the general principle that even if the parties have expressed their intent to sign a contract during the course of discussion or negotiation that has a subject-to-contract label, a binding agreement will not be formed based on the mere discussions unless a contract is executed by the parties.

 

Subject-to-contract label can even be implied depending upon the objective intentions of the parties if such intentions can be clearly established from parties’ communications. The case2 of Jamp Pharma Corporation (a Canadian pharmaceutical distributor) versus Unichem Pharmaceuticals (an Indian pharmaceutical company) involved a dispute over an unsigned addendum which illustrates how subject-to-contract could be implied. The dispute between the parties involved a question of whether a binding agreement was reached between them based on their negotiation e-mails about adding a second product into their existing agreement.

Based on negotiation e-mails exchanged, an addendum to include a second product to the agreement was prepared and signed by Jamp and sent to Unichem for their signature. Unichem did not sign the addendum and, in fact, made a separate deal with another Canadian party for marketing the second product in Canada. Jamp claimed that a binding agreement for the second product was reached which they claimed Unichem had beached, and therefore Jamp was entitled to damages.

The English High Court settled this dispute in favor of Unichem, finding that an unsigned addendum to an existing agreement did not lead to a legally binding contract, although neither the parties’ discussions nor the addendum itself was specifically labelled as subject-to-contract.

THE CONTRACT AND BACKGROUND FACTS

In early 2019, Unichem and Jamp had entered into a product dossier, supply and distribution agreement (the “Agreement”) under which, Jamp was solely authorized to distribute products supplied by Unichem, in Canada. Article 1.9 of the Agreement stated: “For the purposes of the agreement, Products shall initially mean the products set forth in Annexure 1. Thereafter, the Parties may by mutual consent expressed in writing add any product to Annexure 1.” Annexure 1 then listed only one product, the drug Alfuzosin. Article 11.9 of the Agreement stated, in part: “Amendment/Waiver/Remedies: This Agreement may not be amended, nor any provision waived, except by written instrument.

After communications were exchanged on the possibility of including an additional drug (Tizanidine) into the Agreement and its pricing, Jamp, via their e-mail dated 10 April 2019, expressed their intention to include Tizanidine into the Agreement and proposed to sign an addendum. Unichem, via their e-mail dated 15 April 2019, thanked Jamp for having confirmed their offer for Tizanidine, and requested Jamp to share the addendum. In May 2019, Jamp sent Unichem a draft addendum to which Unichem added two Unichem signatories and requested Jamp to provide a partially executed copy of the addendum for Unichem’s signature. Jamp responded to Unichem confirming that they would sign the addendum.

Thereafter, at two meetings held in June 2019, Unichem informed Jamp that the discussions to add Tizanidine to the Agreement were “on hold” and that the addendum needed to be signed by Unichem if it was to be binding. However, as stated above, Unichem did not sign the addendum provided by Jamp. In fact, Unichem was negotiating with another Canadian company to distribute Tizanidine and they eventually signed a contract with that company in July 2019. In response, Jamp, claiming that Unichem was stalling on what had been mutually agreed, brought proceedings against Unichem seeking damages for breach of contract. Unichem denied that a binding contract existed, claiming that the agreement was conditional on its terms being set out in a formal, signed addendum.

COURT RELIED ON LEGAL PRINCIPLES TO MAKE A RULING

To arrive at a fair ruling, the High Court referred to the following legal principles:

  1. It is a matter of construction whether an offer requires an acceptance to be communicated in a specified way. Merely because an agreement envisages signatures and leaves space for those signatures is not a "prescription” that the agreement can only become binding on actual signatures.

In Maple Leaf Macro Volatility Master Fund & Anr v Rouvroy & Anr3                       two parties had objectively intended to enter into a binding contract. Although the participation of a third party in the contract to lend money to the appellants (Rouvroy and another) had been a condition of its becoming binding, the absence of third party’s signature did not make the contract non-binding. The Court found that although the third party did not sign, they had accepted the terms of the contract by having agreed to lend money to the appellant through a different contract. This meant that the requirement for the third party to participate in the original contract no longer applied. The court held that the signatures were best evidence of what had been agreed but were not themselves conditions of the agreement.

  1. The question of whether a binding contract exists is not based upon parties’ subjective state of mind but upon whether what was communicated between them by words or conduct leads objectively to a conclusion that they intended to create legal relations and had agreed upon all the terms which they objectively regarded (or the law required) as essential for legally-binding relations.

RTS Flexible Systems Limited versus Molkerei Alois Müller GmbH UKSC 144 involved a draft contract that contained a clause 48 stating that the contract would not become effective until each party had signed a counterpart and exchanged it with the other. Clause 48, viewed as equivalent to a subject-to-contract clause, raised the question before the English Supreme Court: was a binding agreement reached after the Letter of Intent had expired? The Letter of Intent wherein the full contract price was stated was to be followed by a full contract that was never executed by the parties as originally contemplated. And yet, based on the Letter of Intent, the work started and progressed substantially.

The Court held that the parties agreed to waive the requirement of clause 48 considering that a price had been agreed; a significant amount of work had been carried out; negotiations for the long form contract were so well advanced that there were only a few non-essential terms outstanding; and the subsequent agreement to vary the contract was reached without any suggestion that the variation was agreed subject-to-contract. Court’s clear conclusion from the facts was that the parties had agreed to waive the subject-to-contract clause, namely clause 48. As per Court’s observation, any other conclusion did not make any commercial sense.                                                                                         

  1. An inquiry in determining the true meaning of the words (that they convey) in a contract must consider the relevant background against which the parties to the contract have used the words. The entire course of correspondence between the parties must be considered to determine the contractual intention and whether a particular mode of acceptance has been prescribed.

The well-known principles of interpretation of documents are contained in Investors Compensation Scheme Ltd v West Bromwich Building Society.5 As per Lord Hoffman: “Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.”

  1. Subsequent conduct of the parties is admissible to prove the existence of a contract, and its terms, although not as an aid to its interpretation.

In Reveille Independent LLC v Anotech International 6 the respondent (Reveille Independent LLC) performed its obligations under a deal memo prepared by the respondent but remained unsigned by the respondent, although it was expressly stated in the memo that it would not be binding on the respondent until signed by the respondent. This deal memo was intended to be replaced by long form agreements. The appellant (Anotech International) argued that while the respondent performed its expected obligations it did so with the clear knowledge that it had not signed the deal memo and in the expectation that there would be long form agreements.

However, the Court found that the appellant’s actions were such as if they were bound by the deal memo and representing themselves to the respondent as one of their licensees. They also worked and communicated with others as if a deal was in place. The Court concluded that by this conduct the parties were not merely acting in anticipation of a contract which was never made but were acting pursuant to a binding contract, the terms of which were set out in the deal memo. The Court held that the respondent's failure to sign the deal memo was at the expense of certainty as to the precise date the contract was formed. However, the respondent performed all its obligations as set out in the deal memo with the appellant's involvement and to its benefit.

DECISION

Jamp’s primary argument was that an agreement was reached via the e-mails of April 2019. However, the judge’s conclusion, which took precedence, was based on the chain of e-mails, specifically the ones stated below including the e-mails of 10 and 15 April.   The judge ruled that, in relation to the Tizanidine issue, before a binding agreement could legally exist, the parties to the contract had to conclude and sign the formal addendum to the Agreement. Furthermore, Jamp’s e-mail dated 10 April 2019 demonstrated Jamp’s intention to state the terms of the new agreement related to Tizanidine in a formal addendum signed by both parties.  In other words, in the absence of the signed addendum the e-mails alone did not create a binding agreement for Tizanidin.

The e-mails considered by the court to arrive at the above DECISION are described below:

  • Jamp’s e-mail dated 15 March 2019 within which Jamp made a counteroffer on the Tizanidine price concluded with this comment: “Request you to review and let us have your feedback to proceed further with Amendment and conclude.” This reflects an anticipation that a deal would be effected only upon concluding an amendment to the Agreement.
  • Unichem’s response e-mail dated 27 March 2019 (labelled as “revised offer”) specifying the first milestone payment as “25% upon signing off an addendum” concluded that they looked forward to receiving “the draft addendum to proceed in this project”.
  • Jamp’s response e-mail dated 10 April 2019 that requested Unichem to retain the same payment structure as that of Alfuzosin, stated “would like to retain the same structure that we signed as a standard draft and proceed further with only signing of Addendum towards the current agreement for new products.” The e-mail concluded as:

Kindly confirm and based on your feedback, I shall be sharing the Addendum copy for you to review and conclude.”

  • Unichem’s e-mail dated 15 April 2019, which confirmed that terms would be same as that of Alfuzosin, also requested Jamp to “share the addendum accordingly”.

Jamp’s secondary argument was that, if the agreement had not been reached in April 2019, it did reach in the May 2019 exchanges. However, the judge concluded that the May 2019 e-mails were consistent with their understanding, that is, there would be a a written addendum to the Agreement setting out their respective contractual obligations regarding Tizanidine, which needed to be signed by both sides if it were to be binding.

The judge, citing the case of RTS Flexible Systems, noted that there was clearly no requirement to use the phrase subject-to-contract to indicate that an agreement would not be binding unless there was a formally signed contract. The addendum as a whole and within context indicated that Tizanidine would not be added as a product to the Agreement until it had been executed by both parties. The addendum’s first recital referred to article 11.9 of the Agreement itself which provided that it may not be amended except by written instrument. The judge commented that it could not be clearer that the addendum was intended as an amendment to the Agreement and its execution was a precondition to achieve this in accordance with article 11.9.

The judge further noted that none of the subsequent events suggested that the parties had changed their objective intention and did not require the addendum to be signed to make it binding, particularly because Unichem (during the June 2019 meetings) had advised Jamp that the deal was on hold from their side and had said nothing to suggest that the addendum was not required to be signed.7

SIGNIFICANCE OF THE COURT DECISION

Mere absence of the subject-to-contract label in negotiations does not necessarily displace the parties’ intention as to for a binding contract to form that must be in writing, in a prescribed form, and signed by the parties, especially when such intention has been objectively articulated and neither parties’ behavior nor any events suggest a departure from that intention.

Subject-to-contract may just be implied.

The significance of this is really very simple. At the very beginning of any negotiation process, the parties should make their intent very clear, by specifically stating the basis (i.e., the conditions) upon which they intend to bind themselves contractually. If a formal contract is not finally executed and a dispute arises on contract’s existence, parties’ communication trail could be no less significant to the dispute than the contemplated contract terms themselves. The court decision demonstrates the benefit of retaining communications relating to negotiations, because the contents of the communications might play a vital role in revealing parties’ intentions.

ABOUT THE AUTHOR

Pallab Mukherjee, a Chartered Engineer and having a master’s degree in Construction law & Arbitration, is a commercial management expert having more than 30 years of diverse experience across Middle East and India in various industry sectors including Oil & Gas and Petrochemicals; had played pivotal roles in commercial management transformation projects. He actively promotes the profession of contract management and authors essays on contract law. He is a public speaker, mentor, and coach.

END NOTES

  1. Marking your letter “subject to contract”: what does the label mean? Recent English Court of Appeal judgment, Article published in online JDSUPRA March 11, 2021. Bryan Cave Leighton Paisner
  2. Jamp Pharma Corp v Unichem Laboratories Ltd [2021] EWHC 1712 (Comm)
  3. Maple Leaf Macro Volatility Master Fund & Anr v Rouvroy & Anr [2009] EWCA Civ 1334; [2010] 2 All ER (Comm) 788
  4. RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH & Co KG [2010] UKSC 14; also read Case Comment: RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH & Co KG [2010] UKSC 14 (UK Supreme Court blog, 18 March 2010)
  5. Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896
  6. Reveille Independent LLC v Anotech International (UK) Ltd [2016] EWCA Civ 443

See Lexology commentary (07 July 2021), Herbert Smith Freehills LLP titled High Court judgment illustrates that contract negotiations may be impliedly “subject to contract”

Content reflects views and opinions of the author and do not necessarily reflect the views and opinions of World Commerce & Contracting.

Pallab Mukherjee, Head of Compliance & Corporate Governance, Bahrain National Gas Company (B.S.C)


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