High Court judgment illustrates that contract negotiations may be impliedly "subject to contract"

The High Court has held that parties' agreement on the substantive terms of an unsigned addendum to an existing agreement did not give rise to a legally binding contract, despite neither the parties' discussions nor the addendum itself being expressly "subject to contract": Jamp Pharma Corp v Unichem Laboratories Ltd [2021] EWHC 1712 (Comm).

Sir Ross Cranston in the Commercial Court noted that there is no requirement to use the "subject to contract" label to indicate that a contract is not intended to be binding without a formal executed agreement. He held that in this case, based on an objective interpretation of the parties' email exchanges and the addendum itself, the parties had demonstrated an intention that they had to conclude and sign the formal addendum for a binding agreement to come into existence.

The decision is of interest as an example of a case where, despite the absence of any "subject to contract" label, the court found that the parties did not intend to contract without a formal signed addendum.

While the judgment relies on established legal principles, it illustrates the importance of the parties clearly stating their intentions throughout contractual negotiations to mitigate the risk of contractual uncertainty or future disputes, including by using the "subject to contract" label where appropriate. It also demonstrates that, where a formal contract is ultimately not signed, the parties' correspondence can be as significant to the dispute as the (proposed) contract terms themselves, and accordingly should be drafted with due care.

Background

The claimant, Jamp Pharma Corporation ("Jamp"), is a Canadian-incorporated manufacturer and distributor of pharmaceutical products. The defendant, Unichem Laboratories Limited ("Unichem"), is an India-based pharmaceutical company which develops and manufactures a range of pharmaceutical products and licenses their sale and distribution worldwide.

In early 2019, the parties entered into a Product Dossier, Supply and Distribution Agreement (the "Agreement") which was governed by the law of England and Wales. Under the Agreement, Jamp was authorised on an exclusive basis to distribute "Products" supplied by Unichem in Canada. The Agreement stated that, "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, being a drug known as Alfuzosin.

In March 2019, the parties began to discuss Unichem supplying an additional drug, known as Tizanidine. Following an exchange of emails on pricing, Jamp advised Unichem in April 2019 that it was "fine with the commercials for the project" and "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". Unichem thanked Jamp for confirming the offer, and confirmed that the rest of the terms would be the same as with Alfuzosin.

In May 2019, Jamp sent to Unichem a draft written addendum to the Agreement, providing for the supply of Tizanidine (the "Addendum"). Unichem responded that the Addendum was acceptable but that it had added two Unichem signatories to the signature blocks on the document. It requested that Jamp provide partially executed copies of the Addendum for Unichem's signature.

The parties held two meetings in June 2019. In those meetings (as the court later found), Unichem told 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. Jamp also provided a signed copy of the Addendum to Unichem, which Unichem took away from the meeting but did not sign.

In fact, Unichem had been engaged in discussions with another Canadian company for the supply and distribution of Tizanidine and, in July 2019, Unichem signed a contract with that company. In response, Jamp claimed that Unichem was going back on what had been mutually agreed and subsequently brought these proceedings to seek damages for breach of contract. Unichem denied that there was any binding contract on the basis that the agreement was conditional on its terms being set out in a formal, signed addendum..

Decision

The High Court (Sir Ross Cranston) held that, as a matter of construction of the relevant emails, there was no legally binding agreement between the parties.

The judge summarised the legal principles, which were generally not in dispute, as follows:

• It is a matter of construction whether an offer is conditional on it being accepted in a prescribed way. The mere fact that an agreement envisages the parties' signature and includes signature blocks does not of itself constitute a prescribed mode of acceptance (Maple Leaf Macro Volatility Master Fund v Rouvroy [2009] EWCA Civ 1334).
• The question of whether there is a binding contract does not turn on the parties' subjective state of mind but on whether what they communicated, 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 Systerms Ltd v Molkerei Alois Muller GmbH & Co KG [2010] UKSC 14).
• The inquiry when construing a contract concerns what the parties, using the words they have against the relevant background, would reasonably have been understood to mean. The entire course of correspondence has to be considered when determining contractual intention and whether a particular mode of acceptance has been prescribed.
• The parties' subsequent conduct is admissible to prove the existence of a contract and its terms, although not as an aid to its interpretation. For example, the subsequent dispatch of a new set of terms may be difficult to reconcile with the acceptance of earlier terms.

Jamp's primary case was that the parties had reached agreement via their emails in April 2019. The judge however concluded that, construed objectively, these emails proceeded on the basis that for a binding agreement to come into existence, the parties had to conclude and sign the formal Addendum. The words that the parties had used were not simply expressing their desire as to how the transaction they had agreed would manifest but, rather, meant that the signature of the Addendum was a condition to any binding agreement coming into effect. In particular:

• In a counteroffer in March 2019, Jamp had referred to an "amendment" and to proceeding with an "Amendment and conclude" – anticipating that a deal would be effected on concluding an amendment to the Agreement.
• Unichem's "revised offer" in March 2019 contemplated a first milestone payment "upon signing off an addendum" and concluded that Unichem looked forward to receiving "the draft addendum to proceed in this project".
• Jamp subsequently referred to retaining the same structure as with the Agreement, adding that Jamp would like to "proceed further with only signing of Addendum towards the current agreement for new products" and stating that Jamp would share "the Addendum copy for you to review and conclude". In the judge's view, this demonstrated that Jamp intended for the terms of the new agreement in relation to Tizanidine to be set out in a formal "Addendum", that the Addendum was to be signed, and that the offer was conditional on the signed Addendum.
• Unichem then responded "please share addendum accordingly", which the judge considered demonstrated an objective intention for the terms of the agreement to be set out in an addendum and that "accordingly" the addendum would need to be signed by the parties to be effective, as with the Agreement itself.

In the alternative, Jamp had submitted that agreement was reached in the parties' May 2019 exchanges. However, the judge concluded that the May emails were part of a picture where the parties premised what they said and did on there being a written addendum setting out their respective contractual obligations regarding Tizanidine, which needed to be signed by both sides if it were to be binding.

Citing RTS Flexible Systems, the judge noted that it was clear that there is no requirement to use the phrase "subject to contract" to indicate that an agreement will not be binding unless there is a formally signed contract. The Addendum as a whole and in context indicated that Tizanidine would not be added as a Product to the Agreement until both parties had executed it. The Addendum's recitals referred to it as the First Amendment to the Agreement, and 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 as a matter of construction that the Addendum was to be an amendment to the Agreement and its execution a precondition to achieve this" in line with article 11.9.

None of the subsequent events suggested that the parties had changed their objective intention that the Addendum needed to be signed to become binding. In particular, Unichem had advised Jamp that the deal was on hold and said nothing to suggest that the Addendum did not need to be signed.

Accordingly, there was no binding contract between the parties as to the supply and distribution of Tizanidine, and Jamp's claim was dismissed.