As contract lawyers we are well used to incorporating the ‘subject to contract’ label on emails and other documents when negotiating commercial agreements on behalf of our business clients. The term indicates that a final, legally binding agreement has still to be arrived at. But what happens if, during discussions leading to a contract, the ‘subject to contract term’ is not used in paperwork? Will the parties be bound by terms that they have not actually agreed? Jamp Pharma v Unichem is a 2021 decision of the English High Court that dealt with this question. It has highly persuasive authority in the Bahamas and demonstrates that even where the parties haven’t used ‘subject to contract’ the courts won’t automatically assume a legally binding contract exists – . ParrisWhittaker is a specialist contract and commercial law firm in the Bahamas. We advise national and international businesses in the shipping and other industries on all contractual and related matters.
Why Use The Subject to Contract Label?
Using the term assists businesses to explore possible contract terms without inadvertently committing themselves to a deal they are unhappy with. The label shows immediately that no binding agreement has been reached, and minimises the possibility of risky and expensive contract disputes. Your lawyers should take great care to insert the term on any document that isn’t intended to be legally binding, and to remove it when the intention is to enter a formal contractual relationship.
Having said this, you should note that use of the phrase is not always an automatic get-out for a party that does not want to be contractually bound. When deciding on the existence of a contract the courts will always look objectively at the facts. The test of whether a contract exists is not simply whether the term ‘subject to contract’ has been used or not. Instead the courts ask whether a reasonable person, taking into account all the circumstances of the case, would believe that there was an intention to form a contract.
The Jamp Pharma Case (2021)
In 2019 Jamp Pharma, a Canadian pharmaceutical manufacturer and distributor entered a distribution agreement (the ‘Agreement’) with an Indian laboratory, Unichem. The Agreement gave Jamp exclusive rights to distribute Unichem’s products throughout Canada.
Products covered by the Agreement were to be set out in an annex. Initially the annex listed just one product – the drug Alfuzosin. Subsequently the parties started discussions about adding a second drug, Tizanidine to the annex. It was these discussions that ultimately led to confusion and costly litigation.
During negotiations to add Tizanidine to the Agreement Jamp produced a draft addendum to the Agreement. This envisaged Jamp becoming exclusive Canadian distributor for Tizanidine.
There followed two meetings between the parties where, despite the draft addendum, Unichem indicated in general terms that in their view discussions on extending the Agreement to cover Tizanidine were on hold. Even though Jamp gave Uniuchem a signed addendum, Uniochem did not at this point sign it.
It transpired that Unichem was, unknown to Jamp, discussing a distributor deal with a different Canadian company – and a contract with this company was formally signed in July 2019.
Jamp argued that Unichem had reneged on what in its view was a binding contract. and issued proceedings claiming damages for breach of contract. In its defence Unichem claimed that there had never been an executed agreement in relation to the Tizanidine drug.
The High Court Decides
The Agreement was subject to the laws of England and Wales (even though the parties were Indian and Canadian) so it fell to the English High Court to decide matters. Following a close examination of the emails that had passed between Jamp and Unichem the High Court found that there was no legally binding agreement in place that Jamp could rely on. For a contract to exist the interactions between the parties must objectively display an intention to create legal relations. It doesn’t matter what the parties themselves believed. Here the judge decided that the dealings between the parties showed that Tizanidine would not become part of the distributorship deal until both parties had executed the draft addendum. This never happened. The absence of the term ‘subject to contract’ from key correspondence did not automatically mean the parties had entered a formal contract.
Comment
The Jamp case shows that there is no requirement for the phrase ‘subject to contract’ to be used to avoid committing yourself to a contact before you are ready. In our view this makes complete sense. The thinking is that it would be unfair to infer a contract where all outward signs are that the parties had not reached agreement – irrespective of whether ‘subject to contract’ appears on documentation or nor. That said, it’s crucial during contract negotiations to be absolutely clear about your intentions. A good lawyer will always use ‘subject to contract’ where appropriate to avoid uncertainty and costly legal disputes like in Jamp.
CONTACT US
If you are entering a commercial contract and need advice please schedule a meeting with a lawyer at ParrisWhittaker today.
