28th January 2021
Over at the Financial Times I have done a brief summary post on the ‘best efforts’ clause that features in the current public row between the European Commission and AstraZeneca – please click and read here.
This post sets out the ‘workings out’ for that summary, based on the information available to me this morning.
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First, what is the public row?
The inkling of the row was on (Friday) 22nd January 2021: EU hit by delay to Oxford/AstraZeneca vaccine delivery.
The European Commissioner responsible in respect of the vaccine tweeted:
During today’s Steering Committee with Member States on the #EUVaccinesStrategy, @AstraZeneca representatives announced delays in the delivery of vaccines compared to the forecast for the first quarter of this year. /1
— Stella Kyriakides (@SKyriakidesEU) January 22, 2021
Here, note two things.
First, the information comes from AstraZeneca – in effect, the European Commission is being formally notified of a delay.
Second, the delays are against a ‘forecast’.
As we will see below, both of those things may be significant.
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We now move to (Monday) 25th January 2021, and to the published remarks of the commissioner.
In particular, this passage:
‘Last Friday, the company AstraZeneca surprisingly informed the Commission and the European Union Member States that it intends to supply considerably fewer doses in the coming weeks than agreed and announced.
‘This new schedule is not acceptable to the European Union.’
Here note the following.
First, the ‘forecast’ is now a thing which was ‘agreed and announced’.
Second, the information coming from AstraZeneca is described as ‘surprising’.
Third, the reference to a ‘new schedule’.
We will come back to these details.
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Now the interview with the CEO of AstroZeneca at la Repubblica dated (Tuesday) 26th January 2021 (and I rely on that site’s English translation).
The CEO is quoted as saying in part of his response to a question as to whether there is a feasible basis for a potential legal action against AstraZeneca:
“I can only tell you what’s in their contract. And the contract is very clear. Our commitment is, I am quoting, “our best effort”.’
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Now back to the European commissioner, on (Wednesday) 27th January 2021 and further published remarks:
‘The view that the company is not obliged to deliver because we signed a ‘best effort’ agreement is neither correct nor is it acceptable.
‘We signed an Advance Purchase Agreement for a product which at the time did not exist, and which still today is not yet authorised. And we signed it precisely to ensure that the company builds the manufacturing capacity to produce the vaccine early, so that they can deliver a certain volume of doses the day that it is authorised.’
Note here the ambiguous sentence about what was signed.
Did the commission not sign an agreement with a ‘best effort clause’?
(Which was my first impression.)
Or did the commission sign a ‘best effort’ agreement but this does not remove the obligation of AstraZeneca to deliver the vaccine?
(Which is also a possible meaning of the statement, but not a meaning that would be immediately obvious to most people.)
Also note the express reference to this being an ‘Advance Purchase Agreement’.
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The advance purchase agreements are part of the European Commission’s vaccine policy announced last June.
In a detailed paper, both the nature and structure of these agreements are set out:
‘These agreements will be negotiated with individual companies according to their specific needs and with the aim of supporting and securing an adequate supply of vaccines. They will de-risk the necessary investments related to both vaccine development and clinical trials, and the preparation of the at-scale production capacity along the entire vaccine production chain which is required for a rapid deployment of sufficient doses of an eventual vaccine in the EU and globally. The conditions of the contract will reflect the balance between the prospect of the producer providing a safe and effective vaccine quickly and the investment needed to deploy the vaccine on the European market.’
The agreements were therefore (and were intended to be) balanced allocations of risk between the commission and the supplier.
These agreement would thereby not be bog-standard standard-form supply contracts, but agreements alert to and mindful of the particular risks in respect of the manufacture and the supply of the vaccine.
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The agreement between the commission and Astra Zeneca is not in the public domain.
But what is in the public domain – helpfully – is a redacted version of an advance purchase agreement between the commission and another supplier.
The link to this agreement was (I am told by the commission press office) published on 19th January 2021 and so was published before this row.
This means that the redactions would not be informed by the subsequent row.
The agreement is here.
Of course, this is not the agreement between the commission and AstraZeneca, and it would only be sight of that contract that would mean you could say what was agreed with absolute confidence.
But, that said, a careful reading of this published contract is revealing.
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Before we look at the contract, an assumption: the advance purchase agreement with AstraZeneca will be substantially similar to the published contract.
The contracts will not be absolutely identical, because there will be negotiated commercial and other terms (which are probably the redacted parts of the published contact).
And I think it is safe to assume that the agreement will not be on AstraZeneca’s own terms, given the importance the commission placed on the advance purchase agreements being a careful balance for all concerned.
Therefore I am assuming that the the advance purchase agreement with AstraZeneca and the published contract will have many identical and similar terms, even if not absolutely the same.
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If we look at the published contract, and search, you will quickly find that ‘reasonable best efforts’ is a defined term.
(Some commentators, who have also seen the agreement, start and then sadly finish with just this definition – but as you will see, a defined term is only one step in understanding what is going on.)
The definition of the term is detailed, and indeed rather elaborate:
The size and scope of the definition tells us two things.
First, the parties did not want to leave it to the court (which in this case is the Belgian court) to construe what is a ‘reasonable best effort’ – the parties have defined it for themselves.
And second, such a detailed and elaborate definition in respect of a key component of the contract is likely to have been used in all the advance purchase agreements, not just the published one.
The fact it is not redacted in the published contract also indicates it is not a bespoke definition for just that particular contract.
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But.
Any defined term is only as important as the operative provision in which it is used.
(This is where some other commentators have not taken the further step.)
A defined term does not exist in a vacuum.
‘Reasonable best efforts’ is not a free-floating term, to be produced like a joker in a card game.
It will be used, and its effect limited, in particular provisions.
And a search of the published contract shows that this detailed and elaborate definition is used only once (at least in the not-redacted text).
This is article 1.3 of the published agreement:
Here we will see that ‘reasonable best efforts’ is used for two things:
‘(i) to obtain EU marketing authorisation for the Product and (ii) to establish sufficient manufacturing capacities to enable the manufacturing and supply of the contractually agreed volumes of the Product to the participating Member States in accordance with the estimated delivery schedule set out below in Article I.11 once at least a conditional EU marketing authorisation has been granted.’
This means that ‘reasonable best efforts’ is only relevant for two specific purposes.
If the published contract is similar to the AstraZeneca contract, then it would be the second limb of this provision which would be relevant.
AstraZeneca would have an obligation to use ‘reasonable best efforts’ to ‘establish sufficient manufacturing capacities’ for the manufacture and supply of the vaccines ‘in accordance with the estimated delivery schedule‘.
Note the mention of the schedule, which ties in with the commissioner’s published remarks.
And note also the mention of ‘to establish sufficient manufacturing capacities’ – which would not mean, say, a diversion of what is manufactured once there are capacities.
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And there is more.
If we now look at what happens with delays to the ‘estimated delivery schedule’ we go down to article 1.12 of the published agreement:
Here – significantly – both parties explicitly agree in article 1.12.1 that there is a risk of delays in production.
And in the event of such a delay there is an obligation under article 1.12.2 on the supplier to notify the commission and to provide a revised schedule.
Going back to what has happened in the last week, and assuming the contract with AstraZeneca is on similar terms to the published contract, we can see this is exactly what happened.
AstraZeneca informed the commission that it could not keep to the estimated delivery schedule on Friday 22nd January 2021 – and this accords with the mentions of ‘forecast’ and ‘schedule’ by the commissioner.
There was then push-back (to say the least) from the commission, and AstraZeneca – as described by the CEO – sought to rely on the estimated delivery schedule being subject to the ‘best efforts’ provision.
And the commission responded by denying that that ‘best efforts’ provision covers the delay – presumably because AstraZeneca has the capacity but is diverting it from the EU.
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Of course, without the actual contract entered into with AstraZeneca we cannot be certain.
But it is telling how neatly the details provided in the public row fit with the steps of the terms of the published contract.
Unless there is something significant about which we do not know, it is more likely than not that the details provided in the public row mean that the contract with AstraZeneca are materially the same as that in the public contract.
If the reasoning in this post is correct then the following two things can be contended.
First, the remark of the commissioner that ‘[t]he view that the company is not obliged to deliver because we signed a ‘best effort’ agreement is neither correct nor is it acceptable” is capable of giving a misleading impression – for the agreement did have a ‘best efforts’ provision.
And second, the existence of that ‘best efforts’ provision may not be that helpful to AstraZeneca, if the correct construction of the contract is that it does not cover diverted capacity as opposed to lack of capacity – and so citing the ‘best efforts’ provision will not be enough to meet the commission’s complaint.
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The moral of the story, of course, is that such public supply contracts should be published as a matter of course – and there is no good reason for such contracts not to be published.
The benefit of access to public money should be the burden of transparency.
But that is a far wider issue to which this blog may return.
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The duty to “enable the manufacturing and supply of the contractually agreed volumes of the Product” in accordance with the “estimated delivery schedule set out below in Article I.11” is conditional on “once at least a conditional EU marketing authorisation has been granted.’”
When was the EU marketing authorisation granted?
It is interesting that the reasonable best efforts clause also takes into account ‘the contractor’s commitment to other purchasers of the product’. A problem for the EU is that if the contract is in place and if the AZ contract with the UK is a commitment to the UK to supply a certain no of doses per week (or something similar), it would seem to me that AZ would have a defence to any claim that AZ should breach the commitment to the UK to make up some of the difference in the schedule with the EU.
Of course, the UK could probably look at its supply schedule and voluntarily decide to allow AZ to give the EU some of that supply without affecting the vaccination roll-out in the UK – and politically that may be an astute thing to do … but that’s a political rather than a legal decision.
Well spotted – and I considered that point
The definition is, of course, not an operative provision – and so taking that part of the definition at its highest, it would still be subject to the operative clause being about establishing capacity. I am sure, however, AZ’s lawyers will do as much as they can to say otherwise!
It is going to be an interesting ride and I believe that the UK Government would be well advised to stay out of it – simply saying that they have received their assurances is probably as far as they should go. Leave the dispute to the EU and AZ … but I fear that the current journalist/politicians will not be able to do that.
Is the subsequent part of the clause “establish … to enable … the supply” relevant? Would this enablement of supply be contingent on the contractor’s commitments to other purchasers of the “enabled” supply? And what is the upshot if it is determined to be in direct conflict with the earlier U.K. agreement?
The AZ contract with the UK Government will be under English contract law. It’s difficult to see how a Belgian court decision would be enforced if it conflicts with a contract drawn up under English law to supply the UK government from facilities in Britain with a company head-quartered in the UK.
AZ’s obligation to enable the manufacturing and supply of vaccines for the EU is qualified by “the contractor’s commitment to other purchasers of the product”, a broad term (it doesn’t even stipulate “prior” commitments) which would presumably cover AZ’ agreement to: a) supply a specific quantity to the UK – and seemingly, nothing contractually precludes AZ utilising EU facilities for this purpose; b) Exclusive use of UK facilities for UK vaccines for a period.
I am not surprised that the threat of legal action against AZ has been quietly dropped and replaced with EU internal regulation about “transparency” over the export of vaccines.
Isnt the issue covered in the Recitals, K 2nd para etc. Accepted limited liability by both parties due to uncertainties.
Surely too the EU lawyers would have asked for details as to total numbers of vaccines to be supplied by AZ under these earlier contracts .
If AZ argued for confidentiality a total figure could have been given and annexed to the agreement by way of definition .
British lawyers could also have stipulated beforehand for their client’s orders to be serviced before all others but here again no real transparency.
I think there is a comma missing between “unknown factors” and “which may delay or render impossible” which completely changes the meaning. It seems that the delay and render impossible here relates exclusively to unknown factors and not all the factors in the list.
What an intelligent and elegant gesture your final paragraph describes. Even if the government could only offer a token amount. However, I am not holding my breath!
“Diverted capacity as opposed to lack of capacity”
Did the manufacturers of the vaccine not state when production first began that, in effect, there would be no jockeying for position allowed, no trading? That distribution would be handled fairly? We know that Israel paid well over the odds for its abundant supply. Where does this unseemly row between the UK’s and Europe’s supply leave third world countries? The entire planet requires this vaccine. A first-come first-served rule is both perplexing and disturbing.
Looking at Article 1.3, a key part could be the use of the conditional word “once” for the applications of *‘reasonable best efforts’*
(ii) to establish sufficient manufacturing capacities to enable the manufacturing and supply of the contractually agreed volumes of the Product to the participating Member States in accordance with the estimated delivery schedule set out below in Article I.11 once at least a conditional EU marketing authorisation has been granted.’
Does that mean once authorization has been granted (tomorrow?) only then does the reasonable best efforts clause apply to establish manufacturing capacities to fulfill the order? Wouldn’t that imply a tying of production plants to order fulfillment?
I’m sure that’s how most people will have interpreted it.
I would agree that those words are key. I read it as an obligation to create manufacturing capacities before the approval date (as per the stated purpose of the contract), to be ready to manufacture and supply from the approval date. If so, before the approval date, it would be permissible to deliver any doses produced to locations with earlier approval, certainly as long as it did not affect the capacity to deliver per schedule.
If hypothetically the product were never approved in EU, or were approved very late, but received timely approvals elsewhere, what would be the outcome? The only reasonable interpretation would seem to be that the capacity could be put to use for other markets.
In the reasonable best efforts clause, it references “commitments to other purchasers”.
If the UK has bought rights to the first 100m doses from specific UK based plants, and the substance of the EUs position is that stock should be diverted to meet lack of production capacity, is the reasonable best efforts clause a valid defence for Astrazenica?
With regards to the reasonable best efforts definition, the last sentence says “the contractor shall not be required to take any actions inconsistent with past practice, ordinary course of business, prudent and reasonable business behaviour…”
I would have thought that would protect AZ from fulfilling any pre-existing commitments in other contracts.
It would seem to be the epitome of unreasonableness to expect a supplier to break existing commitments in order to meet a new contract that was limited by ‘reasonable best efforts’.
in clause 1.14.1 AZ warrants “it is not under any obligation, contractual or otherwise, to any third party
in respect of the delivery of the Initial European Doses or that conflicts with or is inconsistent
in any material respect with the terms of this APA or that would impede the complete
fulfillment of its obligations under this APA.”
That clause appears limited to the “Initial European Doses”. I don’t know what that might refer to, but could it be those that are manufactured within the EU?
If that’s the case, then perhaps there is a question around any doses previously manufactured within the EU sent to the UK. But given the delay in approving the AZ vaccine, you have to wonder how reasonable it is for AZ to just sit on millions of doses in case there’s a future manufacturing problem.
That could potentially be a separate question to whether the EU has any rights to the vaccines that are not part of the “Initial European Doses”.
Lots of questions and not many answers. As DAG has noted, the contract really should be made public.
Thanks you, David, brilliantly researched and reasoned, and the closest analysis that can be made without sight of the contract.
I suspect the real nub of the question may be your tentative conclusion that ‘the correct construction of the contract is that it does not cover diverted capacity as opposed to lack of capacity ‘. If that is correct (and you have certainly made a plausible case for it), then the question is how, assuming there is not enough capacity to meet all contractual quantities, the available product is to be directed (i.e. who gets what).
AZ suggests it should be by order in time of the contracts being signed (‘first come, first served’) but that would be unusual in a sale of goods setting and would have to be spelled out explicitly.
Another possibility is that particular facilities were intended to supply the product for different buyers, with each buyer bearing the risk that his allocated production facilities might incur delays; this is the reading the UK seems to advocate, the idea being that production of UK facilities gives priority to UK buyers. Again, that would seem to require explicit contract provisions; if it were merely AZ’s ‘intention’ to link particular facilities with particular buyers, rather than a contractual term accepted by the buyers, that would not in my view be enough.
If neither of those two possibilities is addressed in the contract, then perhaps the correct answer is for AZ to allocate available product amongst all the buyers whom it has promised to supply, pro rata according to their contracted volumes?
All of this of course depends on what the contract actually says (as opposed to what we guess that it might say), so I hope it will be sorted out via legal channels (where some reasonably defensible outcome can be arrived at by applying the rules of construction) rather than political channels (which in current circumstances are not functioning particularly well).
AZ’s supply contract with the UK Government will be under English contract law, and it’s going to be more immediately enforceable than any contract with the EU under what is probably Belgian contract law.
In any event, this is now in the field of politics, not the law. The immediate problem is the shortage of vaccines in Europe over the next few months and any short term resolution will be at governmental level. None of this is going to resolve production difficulties. The UK government is answerable to its own electorate and if the current, very public vaccination targets were to be missed because of the diversion of UK produced vaccines it would be politically disastrous.
Just possibly, there may be some wriggle room in the UK production volumes to allow some supply to the EU, but I suspect that won’t be until March at the earliest given current commitments and the volumes will be small.
The Commission are likely to insist that the contract is under the law of a member state.
AZ is Anglo-Swedish so if they get the choice they might prefer Swedish law, or possibly Irish law as the model is relatively close to English law
The APA is expressly under Belgian law
Bearing in mind the wording of this provision: –
“however, that the contractor may, inter alia, reject its acceptance if it sees a potential risk of undermining the public’s confidence (in the relevant country or more broadly, in Europe given cross-border social media reach) in the safety and efficacy of potential vaccines without the approval of the Commission.”
which is itself part of an operative provision of the APA, would the German Government’s decision not to licence it for over 65s and so prohibit its use for older people be a problem for the EU and Germany? Combined with the press briefing about this to Handelsblatt last week, this begins to look rather difficult …
One more excellent contribution to making sense of what seems at first sight like incomprensible behaviour by the European Commission.
The EC is normally so anchored in the minutiae of legal agreements that one has to assume that their lawyers have assured them that they’re on rock solid grounds here. In this regard, your highlighting of a ‘reasonable best efforts’ being undermined by any diversion of supply from Belgium to the UK is particularly pertinent.
However, given that the AZ UK production plants seem to be ahead of the Belgian ones (as a function of the much earlier agreement between the company and HMG), then it seems odd that supplies should have been ‘siphoned’ from the EU to the UK, rather than vice versa. So timing is surely relevant here – surely at the time any such diversion took place, the UK was still in transition out of the EU? Furthermore, up to now, the Oxford/AZ vaccine has not been been EMA approved for EU use – is this not also relevant?
All in all, the EU appears to be behaving oddly here and the words ‘panic’, ‘chickens’ and ‘headless’ come to mind for some reason.
Still, the detail here is superb and greatly appreciated.
Thanks, David. As you say in the FT, it can be so difficult to get accurate information about this sort of contract due to “commercial confidentiality” (which boils down to private companies not wanting everyone else to know what they are doing for public bodies, on what terms, and how much they are being paid). Frankly I am amazed that a redacted version of the Curevac advance purchase agreement has already been published so openly. I agree with your suggestion that there should be a requirement for all significant contracts with public authorities (over a financial threshold, say) to be published. Not least so we can see who is being awarded these contract, for PPE for example, and to check that the requirements of public procurement regulations are being observed.
You mention the Belgian courts, which have jurisdiction under Article 1.21.2(b) of the Curevac APA (and presumably also the AstraZeneca APA, if, as seems reasonable to assume, it is on broadly similar terms). More than that, the Curevac APA is governed by Belgian law (Article 1.21.1), so query if the civil code of Belgium modifies or supplements what is spelled out in the contract to any material extent. For example, there may be a general obligation to act in good faith.
My reading of Article 1.3 is a “reasonable best efforts” (as defined) obligation on AstraZeneca to (i) obtain regulatory authorisation and (ii) establish sufficient manufacturing capacity to deliver the agreed amounts of vaccine on the estimated delivery schedule, as set out in Article 1.11. However, that estimated schedule may be modified unilaterally by AstraZeneca delivering a notice under Article 1.12.2, which in particular may arise if (as Article 1.12.1 anticipates) the timeline for scaling up its production is delayed, or if timely production is not “feasible”. Article 1.12.2 requires the new delivery schedule to be provided “as soon as reasonably possible” (after when is not specified, but one assumes after the delay becomes apparent) and for the new delivery schedule to be “as close as possible” to the original estimated schedule.
That may be where the real argument lies: should AstraZeneca have notified its customer of the revised and delayed schedule sooner? And could AstraZeneca do better? (Given they will be making money when they deliver product, it seems unlikely that AstraZeneca would not have used its “reasonable best efforts” to build up production capacity as fast as it could.)
If the fact is that AstraZeneca intended to satisfy the UK contract with facilities in the UK (and can still do so) and to satisfy its EU contract with facilities in Europe (but the latter are not creating vaccine doses quickly enough yet) then I don’t see that this contract requires AstraZeneca to divert product from the UK (and potentially breach a contractual obligation there) to meet the EU contract. To me, Article 1.12 seems specifically intended to give the supplier a mechanism to adjust the delivery schedule, as a safety value to deal with issues that crop up in the supply chain.
(For the legal contract geeks, here is a link to Ken Adams, who thinks casuistic distinctions between different standards of “efforts” or “endeavors” provisions are baloney. https://www.adamsdrafting.com/distinguishing-between-different-efforts-standards-makes-no-sense/ That rubs up against the problem that lawyers and judges do indeed make such distinctions.)
The concept that pharmaceutical production is delineated along national borders has been abandoned decades ago. (Possible exception,opium turned into morphine and similar.) A commitment using the ” but we make it in another jurisdiction” would be given short shrift in court, I believe.
If there was a contractual commitment to prioritise UK deliveries and that was not divulged during negotiations ith the Commission that would be even worse.
It’s not a good look for AstraZeneca, either way.
Thanks, Bjorn. It is not so much a question of delineating production along national borders as the practical question of where the production facilities are, what capacity they have, and what contractual obligations need to be met.
The situation appears to be a supplier that has installed enough capacity to meet one contract, and then needs to increase capacity to meet a second contract, but (despite its best efforts) the increased capacity is not ready on time, so the supplier exercises a contractual provision which (subject to some conditions) permits it to adjust the delivery schedule. The customer stamping its foot does not make the product appear from the factory any quicker.
The details of the contract will be very important if it ended up in court (which I think would probably be a Belgian one in this case). However, this is not a game where financial compensation for not meeting the terms of a contract is going to make any difference to the immediate problem, which is the critical shortage of vaccine supplies over the next few months. If it does end up in court, it will take many months or years to be heard and, in the meantime, it will not produce one extra shot of vaccine.
This is now firmly in the area of high decibel politics, with acute pressure on European politicians, with the relatively slow roll-out of vaccinations in the EU. None of the high profile claims by politicians are going to change the speed of vaccine delivery, but it might just put pressure on to divert where vaccines go. Slowing down the export of the BioNTech Pfizer vaccines is one way of course (which would also hit a number of other countries, like Canada as well as the UK). The other tack is to put pressure on the UK government to divert some of the locally manufactured AZ vaccines into the EU. That might be wise for Johnson to consider, but the volumes over the next two months will be marginal compared to the EU population of 465 million.
What I don’t expect is the EU commission to accept that its relatively slow and ponderous decision making process, which is risk averse, and based on consensus, is flawed in this sort of crisis. If the UK had been part of the EU consortium, then there would have been no investment in UK capacity until the contract was signed with AZ on the 27th August. Indeed, there may have been no UK manufacturing capacity at all (as direct national negotiations were not allowed). It’s difficult to see how that would have helped.
I would say the actual contract interpretation is a side show. It’s going to be horrendous for AZ if they find they are treated as the whipping boy, and will probably regret making any forecasts to the EU at all. It’s a product where they are tied into a no-profit clause, due to the partnership deal with the Jenner Institute in Oxford. Rather than being seen as a saviour, they are now being painted as the villain by the EU Commission, and that could have a heavy impact on their commercial prospects in the future. There’s not even a healthy profit to be had (unlike Pfizer’s deal with BioNTech).
I hope the other deals that AZ have agreed across the world with India, South Africa, Brazil and others don’t turn into this sort of acrimonious public relations disaster.
Thanks, Steve. You make a very good point about the AZ/Oxford “no profit” partnership which had previously eluded my attention (is a copy of that agreement available? I doubt it). That changes the commercial calculus for AZ, but AZ agreed to manufacture the vaccine for its own good reasons – perhaps some combination of altruism, positive PR, and access to the product for the hoped-for post-pandemic future when the “no profit” provision seems to fall away – and presumably it is still motivated to go through with its part for those reasons.
And also about the difference between legal rights and responsibilities (who is contractually obliged to do what, and on what terms), the practical and ethical position (notwithstanding the legal obligations, what “should” one do, and what is in fact possible), and optics and politics (in this case, a blame game).
Perhaps it would suit AZ (and perhaps the EU and Oxford) to waive the commercial confidentiality and publish the contracts so we can all see what each is obliged to do? And for AZ to explain a little more clearly that it is trying to act as a “good citizen” but can’t just magic vaccine out of thin air.
In the meantime, the German regulator has ruled that the AZ vaccine is not suitable for over 65s (or, at least, they are not yet satisfied with current available data).
Would be interesting to compare and contrast the AZ-EU contract with the AZ-U.K. contract, although this is unlikely possible given the reluctance of the U.K. govt to provide contract transparency elsewhere. How do adjacent “best efforts” contracts get prioritised when total supply is limited?
FT Lex yesterday noted how vaccine research investment per capita is far lower for EU cf both U.K. and USA. Is this a legally relevant point, given the defined list of “best efforts” potential factors?
Regards
Belgium indeed appears to have a very generous and broad general good faith obligation—https://www.actualitesdroitbelge.be/droit-des-affaires/droit-des-obligations/l-execution-de-bonne-foi-des-conventions-et-l-abus-de-droit/la-bonne-foi-et-ses-fonctions-en-matiere-contractuelle
(I merely googled this; I am way out of my depth in Belgian contract jurisprudence)
However, I think I can say that we must be very careful not to apply common law contractual concepts to a civilian system. It may be that the breach of this good faith obligation, which msut be read in light of current social mores and trends, could be something which would never constitute a breach of contract under English & Welsh law.
In context it seems that the defined phrase “reasonable best effort” in an Advanced Purchase Agreement with a new purchaser means that the contractor has a duty to install “sufficient manufacturing capacities” to meet the “estimated delivery schedule” to both any prior and the new purchaser. If the new agreement would oblige the contractor to divert manufacturing capacities to satisfy the new purchaser ahead of the prior purchaser, it might constitute the wrong of inducing a breach of a third-party contract.
Interestingly, recital L states that “In the case of delays to the anticipated availability of the Product, the contractor aims to allocate the doses of the Product fairly across the demand of doses, which the contractor has or will contractually commit to towards its present and future customers, as such doses become available”.
Sadly I know nothing about the status of recitals in Belgian law.
I don’t know either (I am again really out of my depth here), but I would guess, given that the Civil Code’s provisions on contractual interpretation at Art 1156 et seq, they have quite an influence because they indicate the intentions of the parties, which are very determinative. See below, quoting from the Belgian goverrnment’s online Code Civil. I haven’t looked at the jurisprudence, but there’s a handy website you can browse how the courts have interpreted each provision, if you can scrape by in either French or Dutch, eg https://juricaf.org/recherche/%221156+du+code+civil%22/facet_pays:Belgique
Art. 1156. On doit dans les conventions rechercher quelle a été la commune intention des parties contractantes, plutôt que de s’arrêter au sens littéral des termes.
Art. 1157. Lorsqu’une clause est susceptible de deux sens, on doit plutôt l’entendre dans celui avec lequel elle peut avoir quelque effet, que dans le sens avec lequel elle n’en pourrait produire aucun.
Art. 1158. Les termes susceptibles de deux sens doivent être pris dans le sens qui convient le plus à la matière du contrat.
Art. 1159. Ce qui est ambigu s’interprète par ce qui est d’usage dans le pays où le contrat est passé.
Art. 1160. _ On doit suppléer dans le contrat les clauses qui y sont d’usage, quoiqu’elles n’y soient pas exprimées.
Art. 1161. Toutes les clauses des conventions s’interprètent les unes par les autres, en donnant à chacune le sens qui résulte de l’acte entier.
Art. 1162. Dans le doute, la convention s’interprète contre celui qui a stipulé, et en faveur de celui qui a contracté l’obligation.
Art. 1163. Quelque généraux que soient les termes dans lesquels une convention est conçue, elle ne comprend que les choses sur lesquelles il paraît que les parties se sont proposé de contracter.
Art. 1164. Lorsque dans un contrat on a exprimé un cas pour l’explication de l’obligation, on n’est pas censé avoir voulu par là restreindre l’étendue que l’engagement reçoit de droit aux cas non exprimés.
Especially if you read it together with this:
“1.14 The contractor warrants to the Commission and the participating Member States that
…
as of the date hereof, it is not under any obligation, contractual or otherwise, to any third party in respect of the delivery of the Initial European Doses or that conflicts with or is inconsistent in any material respect with the terms of this APAor that would impede the complete fulfillment of its obligations under this APA”
AZ’s argument seems to be that they have a rock-solid prior commitment to supply the UK, which takes priority over their commitments to the EU. But (again, if the contract is the same) this states that they don’t have prior commitments inconsistent with fair allocation of demand.
I haven’t been able to find the detail of the particular case: it’s widely reported that the UK contract delivery is said to be unaffected while the EU one is diminished, but I haven’t been able to work out whether production capacity built with the intention of meeting the EU contract has been diverted by AstraZeneca to deliver the prior UK contract, or whether the EU commission complaint is that production capacity (whysoever built) is a common resource on which all contracts should have equal claim?
I get the distinction between establishing capacity and the subsequent product, but I’m intrigued as to me from the position of an undeniable layman it looks like there’s a bit left off the end. Essentially, isn’t the phrase “to establish sufficient manufacturing capacities” inextricably linked to the phrase that comes after it: “to enable the manufacturing and supply of the contractually agreed volumes of the Product to the participating Member States in accordance with the estimated delivery schedule […]”? At my naive reading of that sentence in everyday English I’d think that maybe if you’d established manufacturing capacity for some other function (like supplying someone else’s contract) there’d be argument to claim that your best efforts had sadly fallen short even though the capacity was there, because that establishment of capacity wasn’t for the reason specified and so wasn’t part of your best efforts.
Might we expect legal fisticuffs about disentangling and determining how much and which bits of AstraZeneca’s operations are considered to be carried out in the fulfilment of different contracts? Or doesn’t it work like that?
Curious that AZ seems to have gone out of their way to make it difficult for regulators to approve this vaccine. The FDA as I understand it is refusing to look at it, while EMA have complained about sloppy and incomplete submissions. This lack of competence would seem directly contrary to their obligation under “reasonable best effort” – such submissions to regulators and the trials behind the submissions are extremely routine. I wonder whether the reaction of the German authority to recommend against deployment with over-65s is indirectly a warning shot to AZ legal advisors – after all over-65s are most at risk and most in need of a vaccine.
The problem is the trial data is a bit sloppy, and you need to ask Oxford why that is, not AZ.
The FDA, rightly or wrongly, are saying they need better data and as AZ are now involved in the trial protocols they will get it.
It also keeps the cheaper AZ vaccine out of the US market….
This is the only bit which I am unsure about:
And note also the mention of ‘to establish sufficient manufacturing capacities’ – which would not mean, say, a diversion of what is manufactured once there are capacities.
‘Sufficient capacities’ are not easy to define, in particular in a context in which all sides know that it is likely that there will be demands made by other states (and bodies, like COVAX) of AZ’s capacities, and likely that similar contracts with similar terms may have been signed with other states. It is also likely that AZ will find itself overstretched.
I wouldn’t like to predict how it would be decided (and hope that a political solution – with a global dimensions – can be found, which will avoid the need for litigation.
Sir,
two critical points missing in your analysis:
i) assuming your right that the contracts are all similar, then why would AstraZeneca only reduce its supplies to the EU?
But more importantly,
ii) the fact that AstaZeneca does not agree to make their agreement with the EU public speaks volumes.
Faithfully,
Hakan Lucius
It is quite normal for contracts to include a confidentiality clause which prevents either party from divulging it publicly. You should note that there is already internal wrangling between parts of the EU apparatus because it appears that the contract is only available internally on a “need to know” basis, presumably to keep the contents confidential as otherwise it would be impossible to comply with the confidentiality clause.
David,
I’m not sure I agree with your argument that the reasonable best efforts obligation does not apply to diverted capacity. Even if this argument is right, however, where will it get the Commission?
There will still be no breach of contract. The contract is very clear that the delivery schedule is only an estimate. It does not hold the contractor to this schedule. If there is a delay, the only obligations on the contractor that I can see are to inform the Commission as soon as reasonably possible, explain the delay, and submit a revised delivery schedule which is as close as possible to the estimated delivery schedule taking into account the reasons for the delay. The reason for the delay appears to be problems at the Belgian site and the new schedule should take into account how quickly those can be remedied. AZ cannot reasonably be asked to remedy the delay by breaching its contract with the UK, assuming that (as we are told) this contract gives the UK priority over UK-produced vaccine.
In short: even if you completely ignore the reasonable best efforts provision, what is there in the APA which obliges the contractor to supply on a particular date?
But the definition of ‘reasonable best efforts’ includes taking account of “contractor’s commitments to other purchasers of the Product” and, as I understand the situation, the commitment to the UK had already been entered into by a contract made three months before the EU’s contract, so how is there any breach by AZ or indeed any diversion of capacity. It would obviously be different if capacity were diverted AFTER entering into the contract with the EU.
Having said that, “vaccine nationalism” is, in principle, extremely unattractive and in any event short sighted.
Not noted in the previous comments but I would also flag the last part of the best efforts definition starting with “provided however” which, at least as an argument by the lawyers, would significantly limit the costs and efforts needed to be undertaken by the contractor in order to fulfil the best effort requirement.
What are the likely consequences for the EUs (perceived) attacks on AZ? Specifically in regards to securing new contracts as more vaccines (Novavax and J&J) are demonstrated that could help plug the vaccine gap.
My initial feeling is that it would lead to extreme caution on both sides, lots of legal wrangling and therefore even more delays eg EU will be one of the last rich customer to sign agreements with most new suppliers.
Question from a lay person
If AZ has made commitments to both the EU and UK independently neither of which it can meet without adversely impacting the other until production is ramped up. This seems to be an issue that can only be resolved in a timely fashion through a negotiation, AZ / EU and AZ / UK.
Surely even if the EU can get a Belgium court to quickly rule in their favour that best efforts would necessitate diverting supply from the UK to the EU to meet their commitment. The UK would take similar steps assuming their contracts are similar in nature to state that redirecting from the EU to meet UK commitments is necessary. Would a Belgium Court ruling have a material impact on the British manufacturing plants of AZ?
Won’t AZ have all sorts of other commitments to other countries that have contracted to buy its vaccine? It seems unreasonable (ie a continuation of Brexit rancour) that the EU is concentrating the debate on the seeming contractual conflict with the UK without considering the potential consequences on supplies from AZ to other countries such as India.
Sorry, I should have read on after replying to Evan above saying “The German Government has debunked the over 65s story – see https://fullfact.org/health/german-astrazeneca-8-percent-handelsblatt,” which article I read this morning.
Amused by the prospect of hundreds of people (lawyers and others alike) poring over the redacted AZ contract that has now been published, and which in some ways is quite different to the Curevac one (although there are similarities: they are both advance purchase agreements for pharmaceuticals, after all).
What we can see seems very light on details of exactly what should be delivered and when. There is an estimated delivery schedule at the end of Schedule A, but the operative provision in Section 8.1 simply says that AstraZeneca will notify the customer when product is expected to be available.
There are some suspicious redactions, immediately before the definition of “Initial Europe Doses” in the recitals, which may conceal a date, and in Article 5.1 – “to manufacture the Initial Europe Doses within the EU for distribution, and to deliver to the Distribution Hubs [incorrect cross reference, should be Section 8.1 not 7.1] approximately [redacted] 2020 [redacted] Q1 2021, and (iii) the remainder of the initial Europe Doses by the end pf [redacted]”
With the (iii) left hanging there, it looks like three amounts adding up to the initial 300 million doses, with three different expected delivery dates, (i) a first amount by a date in 2020, (ii) a second amount by a date in Q1 2021, and (iii) the rest by the end of another date – another quarter of 2021?
Perhaps we will all need to become experts on the Belgian legal principles of “goede trouw” and “inspanningsverplichting”.
Apologies, as a legal layman (who does however have an interest in, and knowledge of, the production of biologicals), I would be interested to hear your insight into the (now public) clause on manufacturing sites. It reads to me as clearly giving permission for AZ to produce across the EU and UK to meet the contract (a sensible move given the potential for supply from individual sites to weaken); ditto for AZ to be able to seek approval to produce outside the EU, but I see no *requirement* for AZ to do so, other than as part of their Best Reasonable Efforts. Which do seem considerably more vague than in the APA for Curevac.. but would it ever be regarded as a necessary part of ‘Best Reasonable Efforts’ to break the terms of another, prior, contract?
It seem to boil down to whether AZ is required, as part of their Best Reasonable Efforts, to divert production from the UK which would cause them to be in breach of the UK contract. They would clearly in in breach if they failed to divert any *surplus* from UK plants to the EU. But I find it hard to believe that they are required to disrupt other supply chains, and leave themselves open to legal action from other authorities, simply to deliver a Best Reasonable Effort to the EU?
This is all in 5.1 -> 5.4 which could have been drafted better. What is clear is that ‘Best Reasonable Efforts’ applies to 5.1 which is the manufacture of the 300m Initial Doses. The contract says the Initial Doses are to be manufactured in the EU, not including the UK.
Per 5.1 AZ (Sweden not UK) are actually, when making ‘Best Reasonable Efforts’, forbidden to supply the EU Initial Doses from the UK. This is almost certainly to do with the EU requiring total control over the process and Initial doses – and note the contractor is AZ AB in Sweden, so they control the contractor too.
After AZ has supplied the Initial Doses, 5.4 allows AZ to supply Optional and Additional doses from sites including the UK without asking the EU for permission.
As you are aware of the production of these biologicals, I am unaware of any previous attempt to manufacture these in the hundred of millions of doses. Other pharmas are also having problems with their manufacturing processes. It is incredibly brave of AZ to take on a contract to supply them at all. And all at no profit.
Getting just 100g of the starter materials for the manufacture of this vaccine would normally take many months, with no guaranteed yield at the end of it. The supply chain that AZ has set up is truly remarkable.
AZ could make Best Reasonable Efforts and fail. This is how novel this technology is.
What is interesting is the commitment to: “use BRE to build capacity to manufacture…..” Which provides a wide interpretation of the contractual commitment and can be said to mean the provision of new capacity above that already in existence. To add to the uncertainty is the requirements for the manufacturing facilities to effectively be EU approved (see 1.26). Any approval of UK facilities would have lapsed no later than 1 January 2021.
Looking through the whole contract there does not appear to be any hard and fast delivery dates, only estimates. There are total contractual quantities. I think we are in for a lot of arguments.
However in the end a compromise will have to be reached. Blocking Pfizer exports may not be possible, because it would hit other countries. The Pfizer vaccine for all countries except the USA comes from Belgium. Also the EU contract is with AZ in Sweden and therefore the UK government is not a party to the contract under any circumstance.
In the AZ contract there are commitments regarding both ‘The Vaccine’ and ‘Doses’ where a dose is a predefined volume of vaccine, see the definitions.
From a production perspective a vaccine is manufactured to be used to produce doses, these production steps need not be performed in the same production centre, or country, as the manufacture of the vaccine.
Now looking at the contract
5.4 refers to the manufacture of the vaccine which may be produced in the EU27 plus UK.
5.1 refers to the doses which should be produced in the EU27.
From a production perspective this would imply that vaccine may be manufactured in the UK before being shipped to the EU27 for bottling etc.
Now looking at Best Efforts my layman’s interpretation is that if the contract can not be fulfilled from EU vaccine manufacturing sites then vaccine should be shipped from the UK for bottling in the EU.
If this interpretation is, more or less, correct then AZ probably have a conflict between the UK and EU contracts.
Good post, made me rethink my interpretation of 5.1 and 5.4.
Regarding conflict being between U.K. and EU contracts depends if AZ has made a BRE to manufacture the entire volumes of Vaccines within the EU to meet the schedule then there is no conflict.
5.4 does not reference commitment to a share of capacity at the sites, I’d argued it is firstly a reference to permissible locations of manufacture. As far as we know a BRE is being made to manufacture at U.K. sites, a commitment to % of production 5.4 it is not. AZ is under obligation to secure what it can but breaking another contract surly does not fall under BRE.
There’s still more to come with this, without sounding too obvious this a political posturing from the commission to deflect blame.
Thanks for your comment.
I believe though that the following should also be taken into consideration
1) 13.1e where AZ state there are no conflicting contracts which would prevent them fulfilling this contract.
2) it has been reported in both the FT and Irish Times that 4 million doses have been exported from Europe to the UK https://www.irishtimes.com/business/health-pharma/supply-of-covid-vaccine-doses-held-up-by-manufacturing-delays-1.4430676?mode=amp
If these reports are correct surely this breaks the BRG clause?
I certainly agree that it would be very interesting to read some informed comments regarding clause 13.1(e).
I suspect the whole debate regarding ‘best reasonable efforts’ was just a ‘red-herring’.
Did the AZ lawyers really fail to see the implications regarding 13.1(e)?
At least one EU official has cited 13.1(e) at the link below.
Given the resulting political row this weekend; I suspect this row was all engineered with the assistance of British Intelligence.
Think about it.
https://www.politico.eu/article/eu-astrazeneca-coronavirus-vaccine-contract-dispute/
Good points, I believe the answers rely on detailed information on how AZ has acted that we do not yet know fully.
1) In regards to 13.1(e) I believe my previous remarks that if AZ BRE plan was that all initial doses could be met at EU facilities then there is no conflict.
2) Well the report states “using a continental facility initially because it has booked capacity there “which we wanted to use rather than waste””
If we take that comment at face value the use of the facility had no impact on delivery of EU’s initial doses. Eg was it using U.K. vaccine material and bottling in the EU (We are lead to believe this phase of the manufacture process is not a limiting factor) in the EU as an example.
I wouldn’t be surprised if the 3 months advance start in U.K. can be demonstrated as something that benefitted the EU’s program rather than hindered it.
Perhaps it should be remembered that this is a contract entered into between the European Commission and a company incorporated in a member state, Sweden, subject to the law of Belgium. I don’t think we know whether there was a parent company guarantee but subject thereto, perhaps the parties to the contract should negotiate in good faith as envisaged in the dispute resolution clause.
It should be self-evident that ‘best reasonable efforts’ is inclusive regarding acts of God and prior commitments, etc. and that 5.1 is stating preferences.
This delivery timeline must be against prior commitments otherwise this agreement is ‘null and void’, i.e. a case for ‘breach of contract’. It seems clear that the issue is solely one of ‘prior commitments’ because it is ‘breach of contract’ to over-commit hence ‘best reasonable efforts’ etc.
Cut the BS and take a look at Clause 13.1.(e)
If 13.1.(e) had acknowledged ‘prior orders’ then there would be no debate.
Forgive me if I am wrong, but you seem to assume that article 1.12.2 is dependent on (or limited by) article 1.12.1.
But article 1.12.2 starts with “If there is a delay” and not with “If there is such a delay” and that may just possibly found an argument that article 1.12.2 is independent.
Of course the context provided by other provisions in the contract may undo this argument!
Interesting context to the discussion now that CNN have got a redacted version of the UK contract and it too includes “best reasonable efforts” wording, and notes it was signed one day before the EU contract
https://edition.cnn.com/2021/02/17/europe/uk-astrazeneca-vaccine-contract-details-intl/index.html
Please also take into consideration the new statement of the only production facility of the european supply chain(Belgian plant) :
“We have complied with all the contractual requirements we have with AstraZeneca,” Thermo Fisher’s vice president for the EU, Cedric Volanti.
How does this fit with the “best reasonable effort” commitment to setup production lines able to make 100.000.000 vaccine doses in the first quarter?
https://www.reuters.com/article/us-health-coronavirus-eu-astrazeneca-idUSKBN2AA24Q