The Headlines
Press and television news has been full in recent days of the dispute between AstraZeneca and the European Commission over supply of vaccines to the European Union. Indeed, the press has been particularly excited by demands that vaccines manufactured in the United Kingdom should be sent to the European Union and that AstraZeneca has a legal obligation to supply such a vaccination.
AstraZeneca in its turn has denied the same and has referred to its contract as being a “best efforts” contract based upon a schedule for deliveries.
This is an important and high profile news story. Best efforts contracts are common in supply arrangements but the question is what is the legal position based upon what we currently understand. On 29 January 2021 a redacted version of the contract was published.
Based upon the European Commission’s statement, the European Commission has been notified of a delay in performance of the contract; the delay being a delay compared to the forecast that was laid out within a contract. Both of these are particularly significant.
The European Commission in turn has suggested that the new schedule that has been provided is not acceptable to the European Union, however, the situation is not as straightforward as it may seem.
In response to AstraZeneca asserting that it is complying with its contract by reasonable best efforts, the European Commission on 27 January stated: “the view that the company is not obliged to deliver because we signed a best effort agreement is neither correct nor is it acceptable”. Of course, what is acceptable is different to what is correct or lawful.
The contract
This contract is an unusual species of contract being an advance purchase contract. The agreement being made in advance, for example, of development of vaccinations or the authorisation for their usage are a supposed balanced risk between supplier and purchaser and therefore, do not fall into the realm of standard form supply contracts. They are inherently more uncertain that many other contracts can be.
The contract is based on Belgian law and that must be noted – the intricacies of Belgian law are another important matter. However we can form a view.
Best reasonable efforts are defined as “in the case of AstraZeneca, the activities and degree of effort that a company of similar size with a similarly-sized infrastructure and similar resources as AstraZeneca would undertake or use in the development and manufacture of a vaccine at the relevant stage of development or commercialisation, 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.”
In short, reasonable best efforts is quite complicated to understand hence why a dispute has arisen even beyond the normal grandstanding. We are used to seeing Best Endeavours clauses, or Reasonable Endeavours clauses. Here, however, we have a “hybrid” clause but which is inherently vague and uncertain.
Reasonable efforts
The one thing that is clear in this argument is that there is no precedent to determine what best reasonable efforts, that would be undertaken in a global pandemic, are.
Those best reasonable efforts are critical at present when considering the “Initial Europe Doses” – those are what are potentially delayed. In respect of these AstraZeneca committed at clause 5.1 to use those best reasonable efforts to manufacture those within the EU for distribution. The EU there means the EU 27 countries and does not include the UK.
Manufacture of the vaccine as defined is referred to at clause 5.4 and for that clause alone EU is said to include the UK. We therefore have a contract where the initial doses the EU has ordered are to be manufactured in the EU, and the vaccine is to be manufactured in the EU and UK. To say the drafting is unhelpful seems a fair comment; however that clause 5.4 seems to apply to later doses of the vaccine, not the initial doses Europe is demanding now.
Ultimately, therefore, it appears probable that Best Efforts alone do not absolve AstraZeneca of responsibility for supply; however it must use its Best Reasonable Endeavours to manufacture the doses in question in the EU, and appears to be doing so. The European Commission argument therefore seems far less certain that it is arguing.
What appears clear is, however, that Best Efforts remains an extremely loose and nebulous term, beyond the mere every reasonable effort and which therefore would create some potential issues; however, further, that in common with many contracts, provisions in regarding to timing and abilities to vary the terms of the contract are crucial.
Supply
AstraZeneca has provided the notice it is required to of difficulties in supply and therefore seems to be following process.
What has caused most comment seems to be whether AstraZeneca should or must divert supplies being made in the UK and provided to the UK to the EU. On this contract that is not open and shut for anyone. Neither the Best Reasonable Endeavours clause being debated in the media nor the contract has itself expressly required any supply to be diverted. The argument seems to centre on whether in the context of the pandemic and the issues it is defined to cause; Best Reasonable Endeavours means AstraZeneca supplying less products to another party suffering the same consequences from the pandemic or not.
From a lawyer’s perspective given the obligations regarding location of manufacture for the Initial Europe Doses is it does not have to go that far – the contract requires Best Reasonable Endeavours to manufacture in the EU 27 countries and in that context AstraZeneca seems to have a sound argument that it must do that and diversion of supplies made in other locations, at least for initial doses may not be required. Of course the redacted sections including for time of delivery as well as the specific orders could affect that and we could only reach a final view then. Neither party has any knock-out blow disclosed today however.
A timely reminder to all
It seems improbable that this dispute will find itself in a litigation and if were litigated, appears to be a matter which would fall to the Belgian Courts to determine; it serves as a timely reminder, however, of the need for careful examination of all terms of the contract upon a dispute arising in regard to it and that parties’ views upon what provisions of a contract determine a dispute or are even directly relevant can be very different to those which actually will determine liability.
The terms of an international supply contract are inherently and inevitably complex; indeed, the advance purchase agreements may be some of the most complex that one can envisage given the sheer number of uncertainties at the time of execution. What is not in doubt, however, is the importance of a party properly understanding both the full extent of its obligations; the circumstances in which it can vary or avoid any obligations; and the consequences of any breach of the same, as well as understanding what conduct would or would not amount to a breach of the same.
The final point is, however, of course, whether an obligation upon a party to exercise its Best Efforts to comply with one contract would require it to breach another contract.
In English law, it is difficult to envisage any circumstance where a Best Endeavours obligation would require a party to engage in any form of conduct that was unlawful; albeit negotiating a variation to the terms of other obligations would be a different matter. One can envisage a situation where a party is to required at least explore the possibility of varying other contracts, even if it must ultimately comply with them if no variation can be agreed.
Clarification of terminology
Best Endeavours in English law "means what the words say; they do not mean second-best endeavours". There is no absolute obligation involved but those best endeavours “must at least be the doing of all that reasonable persons reasonably could do in the circumstances".
Reasonable Endeavours in English law are less burdensome, commonly thought to be "what would a reasonable and prudent person acting properly in their own commercial interest and applying their minds to their contractual obligation have done to try".
Best Reasonable Endeavours seems closest to All Reasonable Endeavours in English law – a compromise meaning “a middle position somewhere between the two, implying something more than reasonable endeavours but less than best endeavours".
Ultimately an endeavours clause should always be considered in light of any specific obligations identified in the contract and will normally give way to those obligations, hence the view above.
A final word…. for now?
As to this dispute, in all probability it will never see a court determine it – the uncertainties and risks for both parties are probably too great. However it does highlight how all contracts can fall into disputes even where parties think terms have been drafted perfectly.
The team here at Shakespeare Martineau has lawyers with considerable experience on international supply contracts having arbitrated international supply disputes in London, Switzerland and Hong Kong.
Contact us
For further advice regarding possible disputes or with concerns over any contract, contact Daniel Jennings or another member of the litigation & dispute resolution team in your local office.
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