Formation & Interpretation of Contract : Whether an agreement was formed where negotiations were not marked ‘Subject to Contract’ (Jamp Pharma Corp v Unichem Laboratories Ltd – 2021)
In a claim relating to alleged repudiation of contract, the High Court considered the effect of marking correspondence ‘Subject to Contract’ during negotiations and in correspondence.
In Jamp Pharma Corp v Unichem Laboratories Ltd , the parties had entered into an agreement for the supply of pharmaceuticals in Canada. Further negotiations were held between the parties regarding the supply of an additional drug. An addendum to the agreement to this effect was drafted but not signed. During negotiations, correspondence had not been marked ‘subject to contract’.
Jamp claimed that their negotiations had resulted in a binding agreement which was not ‘subject to contract’, but Unichem disagreed on the basis that the addendum had not been signed, and such agreement would only become binding at that point.
The High Court considered, amongst other issues, the absence of the phrase ‘Subject to Contract’ and the parties’ intentions in creating a legal agreement.
‘Subject to Contract’ is generally used to indicate that parties do not intend to form a legally binding agreement, but equally the drafting of an agreement to be signed by both parties does not necessarily indicate that such agreement is to be treated as ‘subject to contract’.
In reviewing the parties’ correspondence in negotiations, the court found that a binding agreement would come into being only when the addendum was signed, even if all key terms had been agreed. Not using ‘subject to contract’ in their correspondence did not determine the outcome of the claim, and the court could not find any evidence that either party intended to create a legally binding agreement before the addendum was signed.
Advice and action
This decision is a useful reminder of the effects of the phrase ‘subject to contract’ and how it should be used in contractual negotiations. Parties should be aware that a court will consider their wider correspondence and the intentions of the parties in a claim, and absence of ‘subject to contract’ did not necessarily mean that a binding agreement was formed.
The wider correspondence was sufficient evidence that the parties envisaged a binding contract only when the addendum was signed.
The High Court could not find any evidence that either party intended to create a legally binding agreement before the addendum was signed. Absence of ‘subject to contract’ did not necessarily mean that a binding agreement was formed.