The High Court has recently considered contract formation in Rotam Agrochemical Co Ltd v GAT Microencapsulation GmbH (formerly GAT Microencapsulation AG [2018] EWHC 2765 (Comm).  

Background

The parties had entered into negotiations about a joint project to produce an agricultural herbicide in capsule suspension formation, CS-CLO. The Claimant (C) was an agrochemical company that produced agricultural herbicides. The Defendant (D) had developed a particular formation of the active compound within CS-CLO. The parties entered into a confidentiality agreement in July 2009 and negotiations continued.  

In December 2012, D sold its business, which included an exclusive licence to use the data and technology relating to CS-CLO.  As a result, C brought a claim against D for:

• breach of a collaboration agreement, which it alleged had been agreed orally on 30 August 2010;
• breach of a draft written data transfer agreement, which it alleged was binding on the parties (despite being in draft) ; 
• unjust enrichment; and
• breach of duty.  

Decision

C only succeeded in its claim for unjust enrichment.  In reaching this decision the court provided a helpful reminder of the approach it will take when considering the point at which commercial negotiations will become a binding contract.

Breach of collaboration agreement

The court found that when viewed objectively, there had not been an intention to create legal relations or agreement on all the essential terms.  It was clear on the facts that the parties had intended that any binding agreement would be in the form of a written contract.  In particular, they had been proceeding with negotiations on the basis that significant arrangements would be embodied in a formal written contract, with draft contracts being prepared in parallel to the discussions. The minutes of various meetings contained footnotes that formal agreements would be required for there to be formal relations and nothing was said to the contrary.   It was also clear that the parties did not conduct themselves in subsequent correspondence as if a binding contract had been made.

Finally, the court held that the alleged agreement did not include issues that the parties had considered to be essential before there was a binding contract. This included the profit share arrangements and which party would bear the risk of a patent infringement claim.

Breach of data transfer agreement 

The court looked to the prior dealings between the parties and found they indicated a joint and communicated understanding that agreements would not be binding until signed by both parties. This was despite evidence that neither party appeared to have issues with the draft agreement.

Practical considerations

This case provides a helpful reminder of factors that the court will take into consideration when determining whether a contract has been formed.  In particular:

• Where parties agree that they will only be bound when a written contract is signed, the court will not easily infer acceptance, at an earlier point;
• Where significant and essential contractual terms remain to be negotiated, it is less likely that the court will find an agreement to have been reached; and
• Where complex contracts are anticipated, the court will be less likely to find that an agreement has been reached until a final draft has been produced for both parties to consider/ execute.

It is therefore of paramount importance that parties to any negotiations clearly set out their contractual intentions at an early stage and that contemporaneous records are maintained, and monitored, as the matter progresses.

For further information, please contact Andrew Bayley and Kirsten Oakes