The recent disagreement between AstraZeneca “AZ” and the EU Commission “EU” regarding the supply of Covid19 vaccinations provides valuable lessons for parties concluding commercial contracts. We have set out below some of the key areas of the dispute.
The issues we cover are just as applicable to companies agreeing terms between themselves as they are to an international dispute of the kind we are seeing between the EU and AZ.
Governing Law
The governing law of the contract between the EU and AZ is the law of Belgium. We have considered the position in relation to all of the points below as though the contract had been concluded under English law. Our comments are qualified accordingly. Despite the above, there is a lesson to be learned regarding the choice of law and jurisdiction of any contract.
The governing law of a contract can have a major effect on its terms and is not always governed by the place in which the contract is concluded. This principle is neatly demonstrated by the debate regarding the seemingly contradictory phrase ‘Best Reasonable Efforts’. The requirement to use ‘best endeavours’ is interpreted and enforced differently across different jurisdictions. A party which agrees to be bound by a clause, thinking its effect will be limited in the legal system in which it is used to doing business, may be surprised when it becomes enforceable under the chosen law of a contract. It is therefore important that parties choose and understand the law to which their contract will be subject.
Best Endeavours
An obligation to use ‘best endeavours’, perhaps paradoxically, may soften a party’s obligations rather than tighten them. For example, a contract may require one party to ‘deliver ten lemons by the 10 May 2021’. The above obligation is absolute and unqualified. If the lemons are not delivered in time the party will be in breach of contract. This can be contrasted with an obligation that requires a party to ‘best endeavour to deliver ten lemons by the 10 May 2021’. In this scenario the party will only be in breach of contract if they fail to use ‘best endeavours’ to deliver the lemons.
The English courts have produced a substantial volume of case law interpreting both ‘best endeavours’ and ‘reasonable endeavours’ style clauses (and almost everything in between). The difference between the respective clauses can be broadly stated as follows; a reasonable endeavours clause only requires a party to take a reasonable course of action (from a selection of all reasonable actions) whilst a best endeavours clause requires a party to take all reasonable lines of action to fulfil its obligations.
The phrase used in the AZ/EU contract is ‘Best Reasonable Efforts’. However in England, at least, “best” and “reasonable” are contradictory terms and “best reasonable” on its face is anomaly.
Case law in the UK has shown that a ‘best efforts’ clause will require a party to take all reasonable courses of action to achieve the obligation in question, this may include operating at a loss of profit. It has been confirmed, however, that that the obligation is only to take all reasonable actions. There is a limit to a party’s obligations. We note that AZ appear to have specifically excluded any requirement to operate at a loss by agreeing to supply the doses at no profit and no cost to AZ.
Furthermore, the parties in the AZ/EU contract have chosen to depart from the basic legal position by defining the phrase ‘Best Reasonable Efforts’. When applied to AZ the definition broadly requires AZ to act in a similar way to a company of similar size and resource of AZ, but taking into account the urgent need to end the COVID-19 pandemic. Interestingly, AZ is required to consider the need to end the pandemic globally rather than within the EU only. Since the EU is asking AZ to supply it with doses manufactured outside of the EU and intended for use elsewhere this may well be relevant.
The courts have also confirmed that the obligation should be interpreted with regard to the clause and the wider contract in which it sits. The clauses to which the dispute primarily relates read as follows:
Within the recital:
AstraZeneca has committed to use its Best Reasonable Efforts (as defined below) to build capacity to manufacture 300 million Doses of the Vaccine, at no profit and no loss to AstraZeneca, at the total cost currently estimated to be [Redacted] Euros for distribution within the EU [Redacted]
And, clause 5.1:
AstraZeneca shall use it Best Reasonable Efforts to manufacture the Initial Europe Doses within the EU for distribution, and to deliver to the Distribution Hubs, following EU marketing authorization, as set forth more fully in Section 7.1 approximately [Redacted] 2020 [Redacted] Q1 2021, and (iii) the remainder of the Initial Europe Doses by the end of [Redacted]
It is clear that, had the term not been defined, AZ would be required to pursue all reasonable courses of action to fulfil the obligations quoted above. We anticipate that the redacted parts of the clauses contain quantifiable delivery dates for each batch of the vaccine. Interestingly, it does not appear that the delivery dates were linked to the vaccine approval date, despite such date being some five months after the contract was signed.
As the parties have instead chosen to define the term, as explained above, this obligation appears to have been significantly watered down. The definition requires AZ only to act in a similar way to a similar company in its position, whilst having regard to the pandemic. To us it appears as though defining the term has brought it within the realms of a ‘reasonable endeavours’ style clause. AZ would only therefore be in breach of its obligations if it fails to act reasonably.
The EU’s argument
A key area of contention is whether AZ can be compelled re-direct vaccines produced in the UK to the EU. AZ argues that each contract and supply chain is separate and that, as redirecting the UK produced vaccine would put it in breach of its UK contract, it cannot be so compelled. By contrast the EU has emphasised its position that as AZ is contractually allowed to produce vaccines in the UK it should do so to fulfil the obligations described above.
The EU relies on the provisions of clause 5.4 to support its contentions:
AstraZeneca shall use it Best Reasonable Efforts to manufacture the Vaccine at sites located within the EU (which for the purposes of this clause 5.4 only shall include the United Kingdom)…
As several commentators have noted, whilst this clause clearly allows AZ to use doses of the vaccine produced in the UK to fulfil its obligations it does not compel it to do so. However, we must also consider the effect of the clauses described above. AZ has committed to use ‘Best Reasonable Efforts to supply the vaccine within a certain time frame. If it is the case that AZ is required to take all reasonable actions to do so, the combined effect of the clauses will be that
- AZ can use doses manufactured in the UK to fulfil its obligations, and
- AZ must (assuming it is reasonable to do so) use those doses to fulfil its obligations.
In defence, AZ will argue both that:
- As considered above, the definition of ‘Best Reasonable Efforts’ requires only a reasonable course of action, not all reasonable courses, and
- Using the UK vaccines in breach of its UK contract would not be reasonable.
In response to the 2nd point the EU has pointed to the following warranty given by AZ to the EU:
It (AZ) is not under any obligation, contractual or otherwise, to any Person or third party in respect of the Initial Europe Doses or that conflicts with or is inconsistent in any material respect with the terms of this Agreement or that would impede the complete fulfillment of its obligations under this Agreement (our emphasis added).
Clearly, if AZ is required to use doses produced in the UK to fulfil its obligations to the EU, AZ’s obligation to supply doses made in the UK to the UK would impede its obligations under the AZ/EU contract. Therefore, despite AZ not being in breach of its main contractual obligations it may well be in breach of this warranty. The effect of this is discussed below.
According to reports, AZ has forecasted that it will now supply 100 million doses in the first two quarters (30 million in quarter one, and 70 million in quarter two) significantly less than the 180 million vaccine doses originally expected in this period. AZ claim it has fully complied with its agreement. There is likely to be an element of politics and posturing in the EU position, not least as it is understood the EU has chosen not to exercise an option for a further 100 million shots that it was entitled to under the agreement, and there does not currently appear to be a shortage of AZ doses in the EU (partly due to delayed and limited approvals of the AZ vaccine and due to a drop in public confidence meaning doses have not been used).
Remedies
Without considering any political (or non-contractual) remedy, in order to obtain any remedy from AZ the EU will be required to show that AZ is in breach of contract. As we have discussed above, that may not be easy.
Even if AZ can be shown to be in breach, the EU must still consider whether the breach entitles it to obtain the remedy it requires. Under English law the remedy for breach of contract is generally damages. Where the term breached is of sufficient importance to the contract it may be considered a ‘condition’ of the contract. Breach of such a clause may give the other party the right to terminate the contract. Breach of any other term (likely a warranty) only entitles the innocent party to damages. This would be the remedy the EU is entitled to for breach of the warranty described above.
Legal Proceedings
It has been widely reported that the EU has now taken steps to formally issue legal proceedings against AZ. According to an EU official, “EU states have to decide if they [will] participate. It is about fulfilment of deliveries by the end of the second quarter”. Most EU states support the legal action.
Whilst a claim for damages may provide some negotiating leverage, it appears that what the EU actually desires is the supply of the vaccines (specifically those we are told are available, having been manufactured in the UK). If this is the EU’s aim it will not be interested in an award of damages. English law does however provide for the provision of equitable remedies such as injunctions and orders for specific performance. Orders such as these may require a party to do, or not do, a specific thing.
These remedies are discretionary, the court will only award them where an award of damages would not be sufficient. This kind of remedy is awarded rarely and only where the court considers it just to do so. It is important to remember that these remedies are not awarded as a legal right, the court is more concerned with the fairness of any award. It is here that the EU may try to introduce the moral arguments that have been the topic of many an armchair debate over the past week.
Parties who disagree about the terms of a contract which binds them may instead look for a solution outside of their strict legal rights. The EU has certainly threatened to flex its political muscles and AZ will no doubt be eager to avoid nationalisation of the vaccine. The current threat of legal action and a claim for damages will provide further motivation for both sides to come to an agreement. The parties may take this opportunity to re-negotiate their contractual obligations, and perhaps make them more certain, in light of the changed situation.
There is also a PR angle to situation, with criticism of AZ by the EU being potentially damaging to AZ, although on the other hand it is regularly noted that AZ are supplying their vaccine at cost, and in the UK at least have been very successful, and therefore the EU position may not have public support and may put off pharmaceutical companies being as generous with pricing in the future.
Conclusion
The key lesson for parties negotiating contracts is that if one party requires the other to do something within a certain time frame the obligation should be expressed with sufficient certainty to make it enforceable. The effect of ‘best endeavours’ style clauses is often to soften a party’s obligations, “best reasonable efforts” (particularly as defined in the AZ agreement) will reduce that obligation even further. Care is therefore required to ensure that clauses which are of the utmost importance are drafted accordingly.
