Pharmapac v HBS Healthcare: How Businesses Can Approach Unclear Contract Terms in Commercial Contracts

The COVID-19 pandemic is (mercifully) largely a thing of the past. However, the courts are only beginning to unpack the various impacts of the crisis on commercial contracts and their terms.

A recent case highlighting this area is the High Court decision in Pharmapac v HBS Healthcare [2022] EWHC 23 (Comm). This decision reflects on the legal position around when delivery will amount to a condition of a contract and the circumstances in which an innocent party will be held to affirm a contract. Business owners who regularly execute commercial contracts for the purchase and/or sale of goods should therefore ensure that those contracts are clear and that they are properly performed in practice.

Factual Background

The claimant, Pharmapac, is a UK-based healthcare product manufacturer and distributor. Early in the pandemic, a customer approached Pharmapac with an order for one million disposable facemasks at a cost of £0.40 per unit. Pharmapac, wishing to source a supply, turned to the defendant, HBS Healthcare, a wholesaler of medical supplies which had a shipment of disposal facemasks arriving from India. HBS Healthcare was willing to sell these masks at £0.30 per unit. An agreement was made at a face-to-face meeting, followed by a confirmatory email, for the supply of five million masks. Pharmapac paid for the first 2.5 million masks up front. The masks were to be delivered in weekly intervals in ten shipments of 500,000, beginning on 16 March 2021.

The first shipment of 500,000 masks arrived but, as India had by that stage imposed an export ban on PPE, no further shipments arrived. HBS Healthcare reassured Pharmapac that the export ban would be lifted in “a matter of days”, but offered to return the money it held on account until the masks arrived. This offer was made on 23 April 2021, but by the time Pharmapac accepted it on 3 June 2021 the masks were on their way. Accordingly, HBS Healthcare sought to withdraw the offer to return the outstanding monies (which amounted to £720,000).

Pharmapac sought to accept HBS Healthcare’s repudiatory breach and sued for the outstanding money. HBS Healthcare counterclaimed for an order that Pharmapac accept delivery of the remaining 4.5 million facemasks, which by then were worth about 10% of what Pharmapac had initially agreed to pay.

The Court’s Decision

Taking into account the context of the contract, which was entered into in March 2020, right at the start of the pandemic, the Court held that time was of the essence for the performance of a contract for the supply of five million facemasks. The court further held that HBS Healthcare who delivered the first weekly tranche of 500,000 facemasks but not the remainder was in breach of contract. However, in the light of the reassurances given by HBS Healthcare that delivery was ‘on the way’ it held that Pharmapac had a reasonable time to accept the repudiatory breach and was entitled to do so on 3 June 2021. Accordingly, the claim for repayment of the £720,000 succeeded, and the counterclaim for specific performance was dismissed.

Why Pharmapac v HBS Healthcare Matters

This decision is important for business owners for two reasons:

• it is an example of a case when the Court will construe time as being of the essence of a contract notwithstanding the fact that it is not expressly referred to in the agreement; and

• the Court finds that an innocent party who delays in accepting a repudiatory breach of contract will not be held to have affirmed it even whilst it is ‘chasing’ for performance if the context is that the defendant is repeatedly reassuring the claimant that the goods are on the way.

It is useful to look at these issues separately. Turning first to the issue of time being of the essence, it is important to remember that whether time is of the essence in a specific commercial contract has to be construed against the entire factual background (as set out in Spar Shipping AS v Grand China Logistics (Group) Co Ltd [2016] EWCA Civ 982). In this case time was held to be of the essence in an agreement made by email for the supply of facemasks at the beginning of a global pandemic. However, if the specific dates for delivery are important it is always better to make this explicitly clear in the contract itself. This will be particularly important for the purchaser.

The second issue concerns the question of the circumstances in which an innocent party will be held to have affirmed a contract notwithstanding a repudiatory breach. In this case only the first tranche of half a million facemasks was delivered and HBS Healthcare was in breach from the last week of March. On 23 April HBS Healthcare offered to return the £720,000 ‘held on account’ to Pharmapac but the latter continued to chase for delivery. HBS gave multiple reassurances that the face masks which had been held up in India (due to the export ban on PPE) would arrive soon. Relying upon these reassurances Pharmapac did not accept HBS Healthcare’s offer to return the money until 3 June, by which time the face masks had arrived but Pharmapac no longer wanted them (the price having dropped substantially). HBS Healthcare put up a very powerful argument that HBS Healthcare had affirmed the contract; nevertheless the Court held that Pharmapac was entitled to a reasonable time to consider its position before accepting HBS Healthcare’s repudiatory breach. The important point here is that a party who decides not to accept a repudiatory breach must do two things: firstly, reserve its position; secondly, not take too long to decide. Where a business considers that there may have been a breach that it may wish to accept, it should promptly seek legal advice to ensure it does not inadvertently affirm the contract.

If you would like any further information or advice on these issues, please contact James Milliken from the Commercial team.

*This information is for guidance purposes only and does not constitute, nor should be regarded, as a substitute for taking legal advice that is tailored to your circumstances.