The parties may imply during negotiations that a contract will be concluded only upon its signing

The parties may imply during negotiations that a contract will be concluded only upon its signing

We analysed the decision in Jamp Pharma Corporation v Unichem Laboratories Limited [2021] EWHC 1712 (Comm), according to which the parties may impliedly agree during negotiations that the contract will be concluded only when it is signed by both parties. In other words, the negotiations may imply that the agreement is "subject to contract", meaning the contract comes into effect only when its terms are set out in a formal document signed by both parties.

Factual background

In early 2019, a Canadian pharmaceutical company ("Jamp") entered into a product dossier, supply and distribution agreement ("Agreement") with an Indian pharmaceutical company ("Unichem").

The key provisions of the Agreement were the following:

  • - Jamp would distribute Unichem's medical products in Canada on an exclusive basis;
  • - The medical products were specified in Addendum No. 1 to the Agreement ("Addendum") and new products could be added thereto by written agreement of the parties;
  • - English law applied and all disputes were to be settled in the High Court of Justice in London.

The Agreement was signed by the director of Jamp and the two signatories of Unichem. At the time of its signing, the Agreement covered only one product — Alfuzosin. In March 2019, the parties began discussing their potential collaboration on another product — Tizanidine.

The correspondence between the parties stemmed from negotiating the terms of supply and the price for Tizanidine. In April, Jamp confirmed the proposed terms and noted that it wished to adopt the same cooperation scheme initially agreed upon in the Agreement and to proceed further by signing the Addendum to include the new product. Unichem thanked Jamp for the confirmation and agreed to adopt the same arrangement as for Alfuzosin. Unichem also requested Jamp "to share the Addendum accordingly."

In May, Jamp sent a draft of the Addendum, noting that it would initiate its signature if Unichem had no further comments. Unichem confirmed the draft, added an additional signatory box for the two signatories on its behalf, and asked Jamp to send the signed Addendum. Jamp replied that it would sign the Addendum.

The parties held two meetings. During the meetings, Unichem informed Jamp that the negotiations on the cooperation on Tizanidine were on hold and that the Addendum would not come into effect without its signature. Jamp provided Unichem with the signed Addendum, which Unichem took with it but did not sign.

It transpired that, unbeknownst to Jamp, Unichem had negotiations with another Canadian company for the supply of Tizanidine in June and signed a contract with that company in July.

When Jamp found out about this, it alleged a breach of contract on Unichem's part and sued for damages.

Positions of the parties

The dispute was whether Unichem was obligated to supply Tizanidine to Jamp, given that the new Addendum was never signed.

Jamp argued that it was objectively clear from the correspondence that the parties had confirmed the terms of the Addendum, even without signing it. In response, Unichem argued that the signing of the Addendum by both parties was a prerequisite for its entry into force. According to Unichem, further meetings between the parties confirmed that the Addendum would not be binding until it was signed by both parties.

Decision

Generally, English law does not require the signing of a contract for it to be legally binding. The main requirement to form a legally binding contract is an offer made by one party which is, in turn, accepted by another party. The offer and acceptance may be expressed in any form. In general, if the buyer sent the seller a draft of the contract, and the seller responded by saying "ok", the contract is considered concluded, even without a formally signed document.

In this case, however, the Court ruled that the Addendum did not become effective until each party signed it.

The Court's decision was based on the following principles:

1. Whether an offer (proposal) specifies a particular method of acceptance depends on its construction. The fact that the agreement envisages a signature by both parties, and leaves space for those signatures, does not of itself constitute a prescribed mode of acceptance: Maple Leaf Macro Volatility Master Fund v Rouvroy [2009] EWCA Civ 1334;

2. Whether there is a binding contract is not conditional upon subjective state of mind of the parties. It depends on what was communicated between them by words or conduct, and whether that leads objectively to a conclusion that they intended to create legally binding relations: RTS Flexible Systerms Ltd v Molkerei Alois Muller GmbH & Co KG [2010] UKSC 14;

3. In determining the intentions of the parties to enter into a contract and whether a particular method of acceptance of an offer has been prescribed, the entire course of correspondence between them must be considered;

4. The subsequent conduct of the parties may be used to prove the existence of an agreement made during the correspondence. However, the court cannot interpret the substance of the agreement based on the subsequent conduct of the parties.

The conclusion was reached based on an objective analysis of the parties' correspondence and the Addendum itself. Specifically, Jamp's correspondence requested that the cooperation concerning the Tizanidine be confirmed "by signing the Addendum." In confirming the draft, Unichem made it clear that for the Addendum to come into effect, it had to be concluded in the same form as the Agreement, that is, it had to be signed by two Unichem representatives.

In March, Unichem made an offer to cooperate on the Tizanidine, in which it stated that the first payment would be made after the updated Addendum was signed. Further, Unichem added that it expected to receive "a draft Addendum to continue the cooperation." In the Court's view, this meant that Unichemintended for the terms of the new agreement in relation to the Tizanidine to be set out in a formal "Addendum" that was to be signed by the parties.

Moreover, the preamble to the Addendum referred to provisions in the Agreement stating that it could only be amended or supplemented in writing. Subsequent events did not prove that the parties had changed their intention. On the contrary, Unichem gave notice in June that the Agreement was suspended and made it clear that the updated Addendum had to be signed in order to come into force.

As a result, Unichem had no legal obligation to supply Tizanidine to Jamp.

Conclusion

The key points may be drawn from the judgment: Firstly, the Court noted that it is not necessary to use "subject to contract" wording to make it clear that the execution of the document was considered obligatory and that otherwise, the arrangements would not be binding.

Secondly, it is important for the parties to make their intentions clear during contract negotiations in order to reduce the risk of uncertainty or disputes.

Thirdly, the decision shows that if the document was not signed by the parties, the correspondence between them may demonstrate their objective intentions and thus may be just as relevant to the dispute as to the (proposed) contractual terms. Therefore, the correspondence should clearly express the parties’ intentions and there should be no room for ambiguity. If you do not want the contract to be binding before all the parties have signed it, it is better to explicitly state this and make it manifestly clear by using the phrase "subject to contract".

Article tags:
Related Services:
English litigation English litigation
We use cookies to ensure that we give you the best experience on our website. If you continue to use this website we will assume that you are happy with it.
Ok