The European Union has launched legal action against AstraZeneca claiming that the coronavirus vaccine manufacturer has failed to comply with its obligations under the vaccine supply contract.
The dispute stems from the vaccine advance purchase contract the EU Commission signed last August for 300 million doses of the Oxford-AstraZeneca vaccine, with an option for 100 million more. Whilst AstraZeneca admitted earlier this year that its supplies would be reduced because of production problems. It has responded that the Commission’s claim is “without merit” and has said that it would “strongly defend itself in court”.
So what lessons can be learnt from this current case?
Contracting parties are important
Many press articles on the subject simply refer to ‘AstraZeneca’. However, the EU contract was entered into by AstraZeneca AB, a company incorporated in Sweden having its registered business address in Stockholm. Whereas the UK contract was entered into by AstraZeneca (UK) Ltd, a company incorporated in England.
Unless the Belgian courts which will be hearing the case decide that the two entities should be treated as one and the same, the commitments assumed by AstraZeneca AB in the EU contract cannot be inferred as applying to AstraZeneca UK and vice versa. This highlights the importance of ensuring that the contracting party in a supply contract is capable of giving the supply commitments being sought, otherwise the only remedy might be contractual damages, which is likely to be far less satisfactory than performance of the contract.
Territories should be clearly defined
The EU contract obliges AstraZeneca to use “its Best Reasonable Efforts to manufacture the Initial Europe Doses within the EU…”. Post Brexit it is clear that the EU does not include the UK. However, if the contract were signed prior to 31 January 2020 or if it referred to Europe rather than the EU, the meaning would not be so clear and could lead to protracted arguments as to how the territory should be interpreted.
What is being warranted?
It is well reported that the AstraZeneca contracts include words requiring the supplier to use ‘best reasonable efforts’. This qualifying language reduces the supplier’s commitment from an absolute obligation to a less stringent requirement. Whilst it may be reasonable for a supplier to avoid absolute obligations in certain circumstances, it is important for the parties to consider which commitments should be absolute and which can be qualified. For example, it might be appropriate for a supplier to give an absolute commitment to operating a certain number of manufacturing plants with defined capacities, but it might be reasonable for an obligation to source raw materials to be qualified.
Liability exclusion clauses and waivers
The extracts of the EU contract which have been published have the liability clauses heavily redacted. However, clauses dealing with liability for delays in supply contracts are often the most hotly contested. Suppliers generally want to avoid liability for delivery delays, whereas customers can seek service credits and liquidated damages for failures to meet agreed timetables.
Without having sight of the EU and UK contracts, it’s not possible to comment on how the issue of liability is dealt with in the two documents. But if a supplier were party to two contracts and only had sufficient capabilities to fulfil one of those contracts, it would likely look at its potential profit and liability under each contract when deciding where to direct the majority of its efforts. For this reason it is important that supply contracts contain provisions which incentivisestrong performance and impose sufficient sanctions for non-performance to avoid the supplier favouring another contract in the event of shortages or other supply constraints.
Kathryn Rogers, Partner, Cripps Pemberton Greenish