A Contract Is The Sum of its Parts

In the recent Supreme Court of Appeal decision of Novartis South Africa (Pty) Ltd v Maphil Trading (Pty) Ltd (20229/2014) [2015] ZASCA 111, the court was tasked with deciding whether taken together a written document, oral agreement and certain emails constituted a valid contract. In practice it is often the case, particularly for instance in due diligence exercises, that a practitioner is presented with contracts that have not been signed by all the parties and appear to still require agreement on certain matters – this case demonstrates that the formal documents may only tell part of the story.

Background

During September 2004, Novartis (a subsidiary of a pharmaceutical drug manufacturer and supplier based in Switzerland) met with Maphil (a company that supplies medical and hospital equipment) and suggested that the two companies enter into an arrangement in terms of which Maphil would receive a R3.5 million marketing fee (for the year 2005) for putting Sandoz branding on the packaging of devices supplied by Maphil to hospitals. On 14 October 2004, representatives of Novartis and Maphil met to discuss the marketing agreement. The marketing agreement was signed by Novartis on 14 October 2004 and was orally accepted by the representative of Maphil on the same day. The full terms of the contract could not be concluded on 14 October 2004, as the parties had yet to agree on the exact items on which the Sandoz name would be used and the details of the logos and naming. Addendum A to the agreement was headed “Marketing Agreement” and typed below that were the words “To be finalized by 30 November 2004”.

The facts presented by Maphil are important in understanding the judgment of Lewis J.A. Maphil’s argument was that there were two components to the contract: firstly, the partly written marketing agreement signed by Novartis on 14 October 2004, and secondly, a subsequent partly oral and partly written agreement in terms of which the marketing activities were agreed (as contemplated by Addendum A). In respect of the second component, Maphil alleged that, at a meeting held on 12 November 2004, agreement was reached with Novartis on the Maphil products that would bear the Sandoz logo, and that the logo would be put on Maphil’s delivery vehicles. Furthermore, three emails were exchanged between the parties on 30 November 2004 in terms of which Novartis set out the Maphil products on which the Sandoz logo would be advertised and confirmed that the logo would also be put on the Maphil invoices. Maphil responded confirming the details of the marketing activities. Importantly, both parties thereafter started to perform their obligations in terms of the agreement – Novartis by preparing and approving the design of the logo to be put on the packaging, Maphil invoices and Maphil delivery vehicles, and Maphil by applying such logo to the agreed products.

On 4 March 2005 Novartis wrote to Maphil stating that there was no contract between them and that Novartis would not be paying Maphil’s invoice. Maphil treated Novartis’ conduct as a repudiation of the contract between them and instituted an action for damages for breach of contract.

Was there a valid contract?

Novartis raised the following defences in its plea: no contract had been proved; the document signed on 14 October 2004 was inchoate and lacked exigible content; and the parties had intended to conclude a contract only when one was drafted by an attorney.

Novartis placed considerable emphasis on the parties’ respective dealings with their attorneys and draft agreements that were prepared for them to sign. However, according to evidence led on behalf of both Novartis and Maphil, the parties had anticipated a second agreement that would supersede the current one and Lewis J.A. held that the parties regarded the initial agreement as binding and took steps to implement it on that understanding.

As is typically the case in commercial agreements, the marketing agreement signed by Novartis on 14 October 2004 contained a “whole agreement” clause (stating that the agreement could not be amended or modified except by a written instrument signed by both parties and that the agreement, including addenda, constituted the “entire agreement and understanding between the parties…and shall supersede all prior oral or written negotiations, agreements or understandings between the parties with respect to the subject matter of this Agreement”).

The court a quo held that the subsequent agreement on marketing activities was not precluded by the whole agreement clause – that provision referred to prior oral and written agreements, not to those agreed subsequently and to which Addendum A expressly referred. Accordingly the agreement was not inchoate since the marketing activities were in fact agreed by 30 November as contemplated. The court a quo also relied on the dicta in CGEE Alsthom Equipments et Enterprises Electrique, South African Division v GKN Sankey (Pty) Ltd 1987 (1) SA 81 (A) where Corbett J.A. held that the existence of outstanding matters does not necessarily deprive an agreement of contractual force and that the parties may well intend by their agreement to conclude a binding contract, while agreeing, either expressly or by implication, to leave the outstanding matters to future negotiation with a view to a comprehensive contract. In the event of agreement being reached on all outstanding matters, the comprehensive contract would incorporate and supersede the original agreement. If, however, the parties should fail to reach agreement on the outstanding matters, then the original contract would stand.

On appeal Lewis J.A. found that the “whole agreement” provisions expressly excluded any addition or variation to the signed marketing agreement and that agreement expressly provided in Addendum A (“To be finalized by 30 November 2004”) that the marketing activities had to be finalised in the future. Lewis J.A. held that “in agreeing such activities in a meeting and by way of email the parties did exactly what they contemplated in agreeing to the content of the document”. Nothing in the document required that the future agreement must comply with any formality nor was there any a statutory requirement that particular formalities be adhered to. Since the terms of the contract satisfied the other requirements for contractual validity, the parties were free to conclude their contract in any manner they chose. Accordingly, Lewis J.A. found that the material terms of the contract had in fact been agreed on 30 November 2004.

The Novartis case has important practical implications for both business people and attorneys, especially in this day and age, where the overwhelming majority of business communications and decisions take place via email. It is also important to note that the judge found that the main issue in the Novartis case was not what the parties intended their contract to mean (as Novartis had asserted), but whether they intended to bind themselves contractually. In this case, in determining whether the parties intended to bind themselves contractually, the court examined all the facts proven that show what their intention was in respect of entering into a contract – “the contemporaneous documents, their conduct in negotiating and communicating with each other, and, importantly, the steps taken to implement the contract.”