Tuesday, February 02, 2021

AstraZeneca, the European Commission and Clause 13.1.(e)

There are better lawyers, and more popular blogs to read for the general take on the EU/AstraZeneca stramash. I just wanted to put down on paper what I think are the more egregious misreadings of the EU/AZ APA that are out there, why they're wrong, and what the actual position is. Usual disclaimer of not being a Belgian lawyer applies, but with the added proviso that in international contract law this doesn't matter very much. Pacta Sunt Servanda and all that, and generally speaking words mean what they say.

Best Reasonable Endeavours

The previous vaccine procurement contract that had been made public contained a "best reasonable efforts" qualification to the obligation by the company to produce vaccines, and it seemed pretty obvious that the AZ APA would contain the same sort of thing. It was a surprise, therefore, to hear the President of the European Commission deny that any such provision existed

Asked whether the quantities were subject to a "best-effort" limitation, von der Leyen responded: "No. There are binding orders and the contract is crystal-clear. AstraZeneca has expressly assured us in this contract that no other obligations will stand in the way of fulfilling the contract."

It was less of a surprise, on reading the contract to see that exactly that "best reasonable effort" language repeated throughout, from the Recitals through to the active clauses.

AZ's obligations

The two potentially relevant clauses covering AZ's obligation to supply the vaccines were 5.1. and 5.4. as below:

5.1    Initial Europe Doses. AstraZeneca shall use its 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... [the redacted schedule of vaccine delivery]/

5.4.  Manufacturing Sites.   AstraZeneca shall use its Best Reasonable Efforts to manufacture the Vaccine at manufacturing sites located within the EU (which, for the purpose of this Section 5.4 only shall include the United Kingdom)...

There has been (and continues to be) a good deal of controversy as to whether manufacturing sites located in the UK can be considered as a part of AZ's obligation to produce the Initial Europe Doses. As a pure matter of construction, I don't think they can be. Where a contract explicitly states that the effect of a specific definition is being varied only for the purposes of one clause, it means just that. When 5.1 states that the obligation is to manufacture within the EU, "the EU" means just that, not "the EU plus the UK", which is only the correct definition for the purposes of clause 5.4.

All good fun, but I don't think in any way relevant to what AZ's obligations were under this contract. They were, as set out in the Recital, to "use its Best Reasonable Efforts to build capacity to manufacture 300 million doses of the vaccine" and, as set out in 5.1., to "use its Best Reasonable Efforts to manufacture the Initial Europe Doses within the EU for distribution."


Did AZ do so? Well, that's a factual question, but the fact that the sites already in production were expected to produce the required number of vaccines on schedule, and that it was unexpectedly low yield from one of the plants that caused AZ to miss its target would strongly suggest that AZ did indeed make its Best Reasonable Efforts to build sufficient capacity, and to make the required number of vaccines, and that it was basically bad luck that has caused the problems. So, any attempt by the EC to sue AZ for damages for breach would, I think, be doomed.  

UK vaccines stocks

This then takes us to the main reason that the EC are so furious. Under a separate contract with the UK, AZ has no current issues with supply. The vaccines ordered by the UK are being delivered by AZ. This has made the EC think that the UK is cheating - taking more than its fair share of the total number of vaccines made by AZ. This wasn't helped by the interview given by the AZ CEO, when he said:

The UK agreement was reached in June, three months before the European one. As you could imagine, the UK government said the supply coming out of the UK supply chain would go to the UK first. Basically, that's how it is. In the EU agreement it is mentioned that the manufacturing sites in the UK were an option for Europe, but only later.

"Aha!" said the EC, "you're saying that the only reason you can't give these vaccines to us is that you promised them to the UK under a previous contract. That's a breach of contract! Look at Clause 13.1.(e)! You need to give the UK vaccines to us instead."

Clause 13.1.(e) is as follows:

(e) 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.

Does the contract signed by AZ and the UK breach this provision? And if so, does that breach entitle the EC to demand delivery of vaccines produced under it?

The UK Contract

Spoiler: no. The first point to look at is about the identity of the parties. The contracting party with the EU is AstraZeneca AB, Az's Swedish registered entity. I would be very surprised if the UK contract was not signed by AstraZeneca UK. There's a reasonable argument to run that contracts entered into by  AZUK are irrelevant to the representation made in 13.1.(e). I'm not sure it's one I'd like to pin all my hopes on though.

The better argument is the factual one: did the contract signed between the UK and AZ impede or conflict with the AZ's obligations under the contract? This gets to the heart of the misunderstanding: the EC are looking at vaccine supplies as a stock: there are so many vaccines and if some are promised to the UK then that means less for us. But really it's a flow: the UK ordered 100 million vaccines, so AZ built up capacity to try to meet that order; then the EU ordered 300 million vaccines, so AZ built additional capacity to try to meet that order.

AZ were obliged under their EU contract to make best reasonable efforts to build the capacity and to make 300 million doses of vaccine for the EU. These efforts, on one reading, were unaffected by the vaccines being produced for the UK and on another reading benefited from them (in that AZ had experience of producing the vaccines, and some pre-existing capacity).

Neither the EU nor the UK are buying vaccines off a shelf, where if someone gets in early they can scoop the lot. Both are investing in manufacturing capacity, and it shouldn't be a surprise that if you get your orders in early, you are more likely to get your manufacturing issues dealt with early too.