‘Subject to client approval’ disclaimer has teeth

Frequently used legal phrases such as “subject to my client’s approval” are not meaningless boilerplate used by counsel to “protect their backsides.” To the contrary, these terms are meaningful stipulations of counsel’s limited authority that must be taken into account.

That’s one of the more important findings in last week’s ruling in Apotex v. Allergan, wherein the Federal Court of Appeal heard arguments from Apotex regarding a settlement that the company says it never actually agreed to.

The negotiation involved patents around gatifloxacin, an antibiotic sold in eye drops. Allergan alleged that Apotex had violated its patents, and a settlement between the parties would prevent Apotex from selling the drug commercially. In April 2012, both sides agreed to these terms, but the settlement didn’t mention the geographic scope of the deal.

When Apotex clarified that the settlement was limited to Canada, Allergan kept mum — neither agreeing nor disagreeing — and instead seemed to gloss over the issue with encouraging e-mails that suggested the parties “get the ball rolling” on formal documents.

That ball never got rolling, as Apotex felt that a major sticking point had not been resolved. Twenty-three months of negotiations followed, until 2014, when Allergan sent revised terms. Apotex’s counsel said they would “recommend” that their client accept the revisions, but never explicitly agreed to the offer on behalf of their client.

When Allergan went to Federal Court to have the settlement enforced, though, the court granted the motion, ruling that Apotex had already agreed to settle twice: first in April 2012, when basic terms (not including geographic scope) had been reached; and again in 2014, when lawyers stated that they would recommend the deal.

The motions judge was convinced that Apotex was holding up the settlement with non-essential issues. Moreover, the judge found that Apotex’s counsel were authorized to act on behalf of their client and that language around “recommendations” amounted to hollow statements used by counsel to “protect their backsides.”

Justice David Stratas, writing on behalf of a unanimous appeal court, disagreed on both points. The court found error with the lower court’s assessment of what was essential, which had relied on statements that Allergan had made about Apotex’s “fussing” and “wordsmithing.”

As the decision states, “. . . the Federal Court appears to have been distracted by Allergan’s subjective view of the importance of certain terms that had to be negotiated out, rather than keeping to an objective assessment of the matter from the standpoint of a reasonable businessperson.”

The subjective feelings of the parties were irrelevant, the court states. On the other hand, from the perspective of a reasonable businessperson, the geographic scope of an agreement was indeed an important matter.

“We must view the emails and drafts objectively from the standpoint of a reasonable businessperson, not subjectively,” Stratas writes. “Viewed in that way, the scope of the restrictions upon Apotex was not at all minor. It was a substantial part of the consideration that Allergan was to receive under the contemplated agreement.”

As for the “recommended” agreement in 2014, the court finds that, so long as advisers are clear about the limits to their authority, a client cannot be bound by suggestions made on their behalf:

“. . . counsel for Apotex stated that he did not have authority to bind his client; he would have to check with his client. So while Allergan was willing to agree to the draft that was circulated on January 13, 2014, Apotex’s position was unknown.”

Andrew Brodkin, the Goodmans LLP lawyer who represented Apotex before the appeal court, says the decision is a big relief for lawyers involved with negotiations.

“I received a number of calls after the [lower-court ruling] — people saying, ‘My god, how are we supposed to negotiate if we tell the other side that we don’t have formal instructions, and the court nonetheless finds that discussions carried out in that context result in a binding settlement?’

“That puts lawyers in a very, very hard spot,” he says.

If the courts were to dismiss conditional statements that express limited authority, such as “pending approval from my client,” it would be almost impossible to engage in open-ended negotiation.

“[The lower-court judge] just said that was careful lawyering,” says Brodkin, “but Justice Stratas and the rest of the panel, they came to the exact opposite view, which is that it’s the necessary language that you have to use if you’re a lawyer and you don’t have instructions.

“Lawyers have to be able to engage in negotiations without a fear that their negotiations will be treated as a binding contract.”

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