Read the below facts concerning the dispute between Novartis South Africa (Pty) Lt and Hiline Medical (Pty) Ltd and answer the questions raised by this set of facts.
Novartis South Africa (Pty) Ltd (Novartis) is a subsidiary of a pharmaceutical drug manufacturer and supplier based in Switzerland. It operates ‘divisions’ (separate trading entities, but not companies themselves) in South Africa, which in turn supply medicines topharmacies and hospitals. The Sandoz Division supplied generic pharmaceutical products and the Sandoz Specialty Division (SSD) supplied
‘ethical’ or non-generic products.
In 2004 the Medicines and Related Substances Act 101 of 1965 was amended to introduce, amongst other provisions, a prohibition on the supply of medicines according to a bonus or rebate system, or any other incentive scheme. Regulations under the amended Act provided stringent controls for the pricing of medicines and the marketing, sale and distribution of pharmaceutical products. Consequently, Novartis and its divisions had to change their marketing strategies.
The director of the SSD, Mr Ian van der Spuy, and the Business Manager, Ms Annie van Jaarsveld, in consultation with other members of the SSD, came up with the idea of putting the Sandoz brand and logo on packaging for medical devices (not medicines themselves) that would be seen by health professionals. The idea was to market the Sandoz brand (its name), particularly in hospitals, since the medicines themselves could not be advertised. The strategy was approved not only by SSD but also by the executive committee of Sandoz (EXCO), and its chairman, Mr John Hallam.
Van Jaarsveld, with the approval of members of SSD who met on 3 August 2004, approached Mr Martin Lambrecht, a director of Hiline Medical (Pty) Ltd (‘Hiline’), sometime in August 2004 and again in Cape Town in September 2004. She (Van Jaarsveld) suggested that SSD and Hiline enter into an arrangement
in terms of which Hiline would receive a fee for putting Sandoz branding on the packaging of devices supplied by Hiline to hospitals. Lambrecht was amenable to this.
The timing of the approach was fortunate because Hiline was about to put in a bid for the supply of medical devices to Mediclinic, a national private hospital group. If SSD committed to paying a fee for the marketing proposed, Lambrecht would be able to reduce the prices of the items that Hiline was tendering to supply by some R3 million.
Lambrecht’s tender documents had to be submitted to Disa-Med, the procurement department for Mediclinic. The proposed marketing strategy had been discussed with the procurement.manager of Disa-Med, Ms Anita Hamilton. Indeed, it was she who had suggested Hiline to SSD as a potential partner in a marketing arrangement.
The deadline for submitting the tender was 14 October 2004. Lambrecht had, before then, indicated to Van Jaarsveld that unless he had a commitment from SSD, he could not give the discounted prices to Mediclinic. On 14 October, Van Jaarsveld and Van der Spuy went to Cape Town (they were based in the Novartis offices in Johannesburg) with a draft marketing agreement between SSD and Hiline, signed by Van Jaarsveld and Van der Spuy for SSD, offering a marketing fee of R3.5 million for the year 2005. After some amendments effected to it by the SSD representatives at Lambrecht’s request, he orally accepted the commitment.
In the dispute that ensued regarding this agreement, Hiline contended that the terms of the marketing agreement itself in due course formed part of the contract, the balance of which was concluded orally and by email exchange. Lambrecht explained that the full contract could not be concluded on 14 October 2014 because Hiline and SSD had yet to agree upon the exact items on which the Sandoz name would be used and on the details of logos and naming. Moreover, Hiline did not yet know what items tendered for would be accepted by Disa-Med. Addendum A to the agreement presented to Hiline by SSD was headed
‘Marketing Agreement’ and typed below that were the words ‘To be finalized by 30 November 2004’. There was never any formalised addition to the addendum. The marketing arrangements, on Hiline’s version were agreed over the telephone, in emails, and at a meeting on 12 November 2004. The marketing agreement presented to Hiline on 14 October, signed by Van Jaarsveld and Van der Spuy for SSD, was at some time signed by Lambrecht and his brother for Hiline, but Lambrecht could not remember if the document with their signatures on it was ever sent to SSD.
The tender by Hiline, in which the prices had been reduced by some R3 million, was in due course accepted by Disa-Med. Hiline proceeded as if there were a contract with SSD, as did SSD.
By February of the following year, Hallam had second thoughts about the feasibility of the contract. On 4 March 2005 Hallam wrote a letter to Hiline stating that there was no contract between Novartis and Hiline and that the invoice (with the Sandoz logo already printed on it) that Hiline had submitted to it for the first monthly payment, would not be paid.
Hiline treated Novartis’s conduct as a repudiation of the contract between them and instituted action in the Gauteng Local Division for damages for breach of contract. Hiline alleged that the agreement was reached on 12 November 2004 at a meeting held in Cape Town with Lambrecht and his brother Phillip, and Van der Spuy and Ms L Biel, the product manager of SSD, for SSD. At that meeting, it was alleged, the parties reached agreement on the Hiline products that would bear the Sandoz logo, and on putting the logo on Hiline’s delivery vehicles. The written part of the agreement on marketing activities comprised three emails: one from Van Jaarsveld, sent on 30 November 2004 to Lambrecht; a response from the latter later in the same day, and a further email from her to Lambrecht, also on the same day.
The first email asked for details of Hiline’s registration number and banking account and set out the Hiline products on which Sandoz logos would be advertised. It was confirmed that the logo would be put on the Hiline invoices as well. Van Jaarsveld also advised that a new vendor application form should be completed by a representative of SSD and sent to her by fax. Van Jaarsveld also said in that email that she intended to send a draft agreement for Lambrecht’s attention and that of Hiline’s attorney, Mr Adriaan Hoeben of the firm Sonnenberg Hoffman and Galombik in Cape Town.
Lambrecht responded saying that the detail for the logo on the invoices that Hiline used had changed. He attached a document confirming the details of the marketing activities. The third email confirmed details and said that Van Jaarsveld would be seeing SSD’s attorney, Mr Neil Kirby of Werksmans attorneys, the following day and did not want to ‘get any of the detail wrong’.
Hiline argues that the marketing agreement on which it relied, comprising both written and oral agreements, was concluded in the meetings and by the exchange of emails, ending on 30 November
2004. The material terms of the agreement were that Hiline would perform marketing activities for SSD at a fee of R3.5 million for the year 2005, payable in monthly instalments on receipt of an invoice issued by Hiline to SSD.
Novartis defences to Hiline’s claim are that no contract had been proved. They argue that the document signed on 14 October 2004 was inchoate and lacked exigible content because the parties had intended to conclude a contract only when one was drafted by an attorney; and none of the representatives of Novartis who purported to bind it had authority to do so.
The terms of the written document
The preamble stated that the agreement, dated 1 January 2005 to 31 December 2005, was between Hiline and SSD; that Hiline is a medical supplies company; and that SSD manufactures and sells pharmaceutical products.
It was followed by a heading ‘Sandoz [SSD] obligations’, and continued:
‘A. Marketing Fee
Sandoz agrees to pay Hiline a marketing fee of R3.5 million per annum. This will be paid as a fixed monthly marketing fee on receipt of a tax invoice from Hiline, confirming marketing activities carried out during the previous month.
Sandoz confirms that should the marketing activities under this agreement be challenged with possible litigation, Sandoz undertakes responsibility of defending this action in total.’
Under the heading ‘Hiline Medical Obligations’ the document continued:
‘A. Marketing Activities
1 Hiline agrees to adhere to the marketing activities as outlined in Addendum A. 2 These activities will be confirmed by a tax invoice on a monthly basis.
3 Should Hiline be in a position not to provide these marketing services, Sandoz will be timeously advised.
4 Hiline agrees that all marketing activities contemplated above, will be in accordance with the Novartis
Code of Conduct (supplied by Sandoz).
Payment of marketing fee will take place thirty (30) days from receipt of tax invoice.’
There followed various general provisions which included a clause stating that the agreement could not be amended or modified except by a written instrument signed by both parties; 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’. Addendum A, headed marketing agreement, stated no more than that it would be ‘finalized by 30 November 2004’. Addendum B, that dealt with SSD products, listed four drugs.
Novartis is arguing that interpretation of a contract is an entirely objective process: in deciding what a contract means, a court must have regard to the words used and construe them objectively. Novartis argues further that the purpose of Addendum A was to provide clarity and certainty as to the marketing activities to be performed by Hiline. When completed it would define its obligations. To allow for the substitution of an oral agreement or one concluded by the exchange of emails, without a formal amendment to the document to which A was an addendum, would be ungrammatical and would be in disregard of the purpose to be served by the addendum. The plain meaning of clause II A 1, cited above according to Novartis was unambiguous: Addendum A would be the source of Hiline’s obligations. There could be no other. Reference to another document was impermissible. Nothing was set out in Addendum A: thus, it contended, the contract had no exigible content.
Furthermore, Novartis argued that what is meant by the words in Addendum A, ‘To be finalized by 30 November’? They could mean only that Addendum A had to be completed by a written instrument defining the marketing activities. And that was in turn precluded by the provision of the document that it was the sole memorial of the agreement. Parol evidence was impermissible to add to the document, it was contended, and Addendum A could only have been completed with a written instrument signed by both parties.
Lambrecht wanted to ensure that any agreement reached would not be in contravention of the Act and wanted to check it with Hiline’s attorney. That he did – asking Hoeben to give comments on the lawfulness of the ‘proposed agreement’. Hoeben responded on 28 October 2004, dealing primarily with the regulatory regime, but he also expressed the view that the proposed agreement with which he had
been provided needed significant changes and additions in order to get clarity on the marketing activities. Lambrecht’s wanted a commitment from SSD before he reduced the prices in the tender to Disa-Med and that the marketing activities had still to be finalized before 30 November. He wanted still to get legal advice and to see the terms on which the tender would be awarded before taking the steps to agree on the marketing activities. Hiline’s case is that the contract relied upon was concluded only on 30 November 2004. As of 14 October, therefore, he would not have told Hoeben that the agreement was concluded. He did not think it was.
Novartis places considerable emphasis on the parties’ respective dealings with their attorneys, and draft agreements that were prepared for them to sign. Hiline did not dispute that it wanted an attorney to draft a contract to govern the relationship with SSD. Lambrecht wanted the assurance that their venture was lawful. There were meetings between their respective attorneys in Cape Town. Mr Neil Kirby of Werksmans attorneys went to Cape Town to meet Hoeben. It was agreed that a colleague of Kirby, with expertise in the drafting of contracts, would draft the agreement. In fact, there were regular exchanges between Van Jaarsveld, Kirby and Hoeben about getting the agreement finalized. It became apparent that the attorney’s draft would not be completed before the end of 2004, but it was anticipated that Kirby would attend to it early in 2005 when business resumed after the festive season.
Lambrecht and Van Jaarsveld were taxed with the question why they wanted a contract drafted by an attorney if, as Hiline argued, one was already in place. Van Jaarsveld had written several emails to SSD indicating that the delay was hampering the project. On 8 December 2004, for example, she said, in an internal email:
‘We cannot finalize our legal agreement until such time that all advertising activities are completely final, and I am getting really worried about the delays and cost implications with the backwards and forwards and constant tweaking of artwork.’
She also wrote to Hoeben on the same day stating that there had been ‘delay finalizing our agreement’. She added:
‘Remember when you said the most important and most difficult part would be the listing of marketing/advertising activities? And how vehemently I disagreed?? . . . I won’t argue with you again!!’
. . . Neil will send a draft agreement to you, probably early in January 2005.’
Lambrecht and Van Jaarsveld said that they had anticipated a second agreement that would supersede the current one. They had hoped to have a contract drafted by a lawyer. And since that did not materialize the contract concluded on 30 November 2004 remained in force.
And complaints about the artwork were of no moment to Hiline: it was entirely up to SSD to determine how they wanted their logos and name to appear on packaging and vehicles. In fact, SSD had prepared and approved the artwork for packaging, Hiline invoices, and for Hiline delivery vehicles by the time SSD repudiated the contract.
Hiline argued that the structure of the separate divisions itself gave rise to the inference that Van der Spuy, at least, had actual authority to conclude the marketing agreement. That document recorded that it was concluded on behalf of SSD by Van der Spuy and Van Jaarsveld. Van Jaarsveld was mandated by the SSD Management Committee, at its meeting on 3 August 2004, to approach Hiline. And even before then, she and Reinhold Just, who was on the EXCO, had consulted with their attorney Kirby to get advice on the legality of the venture that the SSD had approved.
On 22 October 2004, the management committee of SSD met, and it was minuted that Hiline would be paid R3.5 million and that the marketing activities would be finalized by 30 November 2004. At the EXCO meeting of November 2004 it was minuted that the ‘JV campaign [the joint venture between SSD and Hiline] utilising a Surgical Supplier has been initiated and vetted in depth by Kirby of Werksmans, from a legal point of view.’ It would be implemented from January 2005. Hallem chaired that meeting. Van Jaarsveld and Van der Spuy would have been present although the minute in the record does not reflect who was there.
A positive performance appraisal of Van Jaarsveld was done by Van der Spuy early in February 2005. It was noted that she ‘did a good job keeping Sandoz on the map’. Hallam approved the appraisal. This, as Hiline argued, was irreconcilable with her having acted without authority. And Hallam, when meeting Mr J Ludorf of Mediclinic in February 2005 indicated that SSD had a contract with Hiline.
Novartis relied on a document setting out the manner in which contracts could be authorized within the company. Neither Hallam nor Van der Spuy had that authority in terms of this document. Van Jaarsveld was not aware of its existence and Hallam said it was not followed in general. He accepted also that he had decided
to treat the marketing agreement as binding. And when he made that decision in November 2004 it was a ‘Sandoz’ decision, that he did not refer for approval to the directors of the Novartis board: despite that he accepted that it was an authorized decision.
Van Jaarsveld wrote to Kirby of Werksmans on 15 February 2005, asking again when he would furnish the agreement that was being drafted by his colleague, and said that Hallam had requested a written legal opinion ‘on the current agreement with Hiline being binding. He said he had no doubt that it would be, but he would like expert opinion on this. He knows that they have lowered tender prices on the R3.5 mill from Sandoz.
Kirby responded with a letter written on 23 February, addressed to Novartis, stating that his view was that ‘a partly-written partly-oral agreement currently exists between Sandoz and Hiline, which is regulating the relationship between the parties;’ he further advised that Hiline would be entitled to rely on this agreement to enforce the obligation to pay the amount of R3.5 million.
On 25 February Van der Spuy and Van Jaarsveld met with Kirby to discuss the opinion. The only matter they asked to be corrected was to make clear that the R3.5 million was payable in monthly instalments and not as a lump sum, as Kirby had indicated. Kirby issued a revised opinion correcting the manner of payment. None of the Sandoz representatives suggested that the agreement was unauthorized. Hallam terminated Kirby’s mandate on 2 March 2005 and asked for a return of his file. When asked by the board why he had done this, he responded ‘he did not tell me the story I wanted to hear and secondly, I just felt that we should try to see if there was another way that we could address the matter
1. Was there a valid contract between Novartis South Africa (Pty) Ltd and Hiline Medical (Pty) Ltd. (15 marks)
In answering this question, you should among other things consider whether there was a valid offer and acceptance, the contractual capacity of the parties, the parole evidence rule and the interpretation of the terms of the contract.
2. Assume that there was a valid contract between Novartis South Africa (Pty) Ltd and Hiline Medical (Pty) Ltd, what should be the consequences of the refusal by Hallam to pay Hiline? (10 marks)
Answers to Above Questions on Law Case Study
Answer 1: A valid contract is one that is binding and enforceable. There are certain important requirements of a contract to be considered as valid, and it is that there must be certain elements that must be present in a contract. These include offer, acceptance, consideration, authority and capacity, intention to create legal relation and certainty. In the given case scenario of Novartis South Africa Pty Ltd and Hiline Medical Pty Ltd, there has been an agreement entered into between them and the terms and compliance are specified in the document which states that…
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