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Locke Lord QuickStudy: A Tale of Two Contracts, a Sting in the Tail

Locke Lord LLP
April 28, 2021

In late March, the EU’s complaint that AstraZeneca breached its obligations to supply Covid-19 vaccine was widely publicised.  To add insult to injury, the EU was reportedly upset that AstraZeneca did not suffer the same vaccine supply failures in its contract with the UK, resulting in its threat to impound vaccine destined for these shores.

Health Secretary, Matt Hancock, displaying his usual humility and sensitivity, declared "They have a ‘best efforts’ contract and we have an exclusivity deal ….Our contract trumps theirs — it’s very straightforward."  Perhaps uniquely, this led the UK press to report on the comparative terms of AstraZeneca’s EU and UK vaccine supply contracts.  

But just how accurate are the comments from politicians and commentary from journalists?  This article aims to set the record straight, based on the published, albeit redacted, copies of both contracts.  This might be timely, since the EU has just announced it is suing AstraZeneca for breach of contract.

Claim 1 – the UK signed its contract first

Much has been made of the widely reported fact that the UK signed its vaccine supply contract materially earlier than the EU.  The time difference usually given is three months. But is this really true? 

The EU entered into its ‘Advance Purchase Agreement for the production, ‎purchase and supply of the Cov-19 vaccine in the European ‎Union’ as of 27th August 2020, which is also the Effective Date.‎  The contract was released for publication the preceding day.

Far from being signed three months earlier, the UK Government did not enter into its ‘Supply Agreement for AZD1222' with AstraZeneca until 28th August 2020, one day later.

So, in terms of signing the contracts, the UK does not seem to have stolen any great march on the EU and the timing of the contracting process does not appear to explain why the UK supply chain has operated more smoothly, although there may have been other timing factors at play.

Claim 2 – ‘The EU has only a best efforts contract, we have exclusivity’

This is the predominant feature of the comparison between the contracts and also the key to whether the EU will succeed in suing AstraZeneca.

Matt Hancock’s best efforts comment suggests that while AstraZeneca only has to try or try hard to supply the EU on time, it has to actually succeed in doing so for the UK.  If true, this could explain why the UK has been broadly getting its vaccine requirements when expected while the EU has not. 

The Health Secretary also appears to confuse or equate the UK position with having ‘an exclusivity deal’.  Taking this smaller (but erroneous) point first: the only exclusivity in the UK’s contract with AstraZeneca is the exclusivity of the English courts to settle disputes and the exclusivity of VAT from payments!  The contract is expressly non-exclusive for the UK, as it has to be to allow it to purchase other vaccines, and silent as to exclusivity on AstraZeneca.  Silence does not denote exclusivity and AstraZeneca is free to supply its vaccines to any other person, such as the EU. 

Turning to the far more important issue of ‘efforts’, the first point is that despite what Hancock says, both contracts contain and apply a near identical definition ‘Best Reasonable Efforts’ concerning AstraZeneca’s obligations.  This is defined as the ‘activities and degree of effort a company of similar resources would ‎use at the relevant stage of development, having regard to the urgent need ‎for a vaccine to end a global pandemic which is ‎resulting in serious public health issues, restrictions on ‎personal freedoms and economic impact, across the ‎world but taking into account efficacy and safety'.‎

So on the face of it, the UK contract may be no better than the EU one.  However, might there may be a distinction as to where and how the definition Best Reasonable Efforts (referred to below as BRE) applies in the two contracts?

BRE in the EU Contract

The core obligation of the EU contract is clause 5.1, where AstraZeneca agrees to manufacture and deliver 300 million doses of vaccine in instalments by certain (redacted) dates, one in 2020, another in Q1 2021 and the remainder by an undisclosed date.  This core requirement is subject to BRE. 

It is both fundamental and obvious that BRE is not an absolute obligation.  The facts, according to the Financial Times and the Times respectively, that AstraZeneca is likely to deliver no more than a third of the 300 million doses to the EU by the end of June, has so far delivered only 31 million out of 120 million and warned it will only deliver 70 million out of 180 million scheduled for delivery this year, does not necessarily place it in breach of contract.

AstraZeneca has said it will strongly defend itself and will no doubt argue that making new vaccines in large quantities, filling vials and supplying them to 27 EU countries is a very difficult exercise.‎  So the question will be, did it use BRE?

The starting point for assessing this must be the wording of the BRE definition in the contract.  Did AstraZeneca do everything a multinational pharmaceutical company would have done to make and distribute this vaccine, in the relevant circumstances of the pandemic and the need for the vaccine to be safe and effective? 

This has to be analysed under the proper law of the contract, expressly chosen to be Belgian law, subject to the UN Convention on Contracts for the International Sale of Goods.  The Convention does not assist here, so we fall back on Belgian law.  That law does not typically use BRE type language, which is imported from common law jurisdictions such as England and the US, but Belgian legal commentators such as Denis Philippe suggest it may draw on the English law meaning, see http://www.interleges.com/wp-content/uploads/2018/01/Best-Efforts-Clauses-Common-Law-and-Civil-Law.pdf.

In English law contracts, as most people know, this type of obligation is generally to use either best or reasonable endeavours.  BRE is therefore a fudge, perhaps half way between these two.  In addition, as Ben Symons of 36 Group Chambers has pointed out: recent English case law shows there isn’t a great deal of difference between the two expressions, although ‘best endeavours’ is sometimes interpreted to mean a party has to incur expenditure making the task less profitable or even unprofitable, but it is ultimately a matter of interpretation of the contract in each case. 

Denis Philippe has also added a Belgian law gloss to this in a 36 Group podcast, describing BRE as an upgraded obligation of means that can be usefully articulated as ‘did AstraZeneca leave no stone unturned?' in manufacturing this vaccine.

Such a test is likely to include:

  • a quantitative test - how much did AstraZeneca do and how quickly? and
  • a qualitative test – how much skill, care, expertise and experience did AstraZeneca apply to its development, manufacturing and other supply chain activities?

BRE in the UK Contract

Despite Matt Hancock’s bombast, BRE is also a feature of the UK vaccine contract, but applies within a different contractual scaffold.  The core obligations are found in clauses 3.2, 5.1 and 6.  Clauses 3.2 and 5.1 require AstraZeneca to ‘ensure’ that 100m doses of vaccine are supplied to the UK Government in ‎accordance with clause 6.  So this looks at first sight like an absolute, and not a BRE, obligation.‎

However, clause 6.1 provides for a redacted preliminary delivery schedule, containing quantities and timing ‎of instalments initially as estimated by ‎AstraZeneca.  AstraZeneca has to update and notify the UK of its most accurate estimates of this schedule, regarding both anticipated quantities and ‎timing, using BRE to keep as close as possible to the ‎original version.  AstraZeneca then has to notify a firm, ‎final ‎delivery schedule for each instalment at least thirty days before delivery, and only then becomes bound to deliver that instalment on that notified date. ‎ 

There is a redaction of no more than a few words at the end of clause 6.1, but unless that alters the meaning, the overall effect of the clause is that AstraZeneca is, similar to its position in the EU contract, under an obligation to use BRE – BRE to keep as close as possible to its originally anticipated delivery schedule, which is quite different by to it being subject to an absolute obligation to meet that schedule.  This is further mitigated by clause 6.3, where AstraZeneca is not liable even to meet its subsequent firm delivery date where the delay is less than a working week or is caused by regulatory delays, again so long as AstraZeneca has used BRE to avoid delay.

Conclusions

It will come as no surprise that where politicians are involved, spin will get in the way of the facts. 

Despite the messaging from the UK’s Health Secretary, the truth seems to be that there is not that much difference in the UK’s and the EU’s rights under their contracts with AstraZeneca.  Both contracts set a general standard for AstraZeneca to use BRE to fulfil its core obligations and BRE is likely to be interpreted in similar ways.

It may therefore simply be that AstraZeneca has found it easier to establish its UK supply chain, which calls for only one third as many doses as its EU equivalent, for a variety of reasons.

Finally, it remains to be seen whether the EU’s decision to sue AstraZeneca for failure to supply vaccine is primarily political or based on sound legal advice.  If the former, it might be at risk of jabbing itself in the foot. 

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