AZ’s Covid contract – further thoughts

fortressIP Draughts’ last two posts, on the subject of the EU/AZ advance purchase agreement for the Oxford Covid vaccine, have provoked an extraordinary amount of comment and analysis from readers, on the blog itself, and on the Twitter and LinkedIn pages to which the posts were fed. It is great to see so much thoughtful debate about the interpretation of a life-sciences contract!

That debate has raised many interesting points, as a result of which IP Draughts has revised (again) his conclusions about whether AZ is required to divert UK-manufactured vaccine to the EU. He now thinks it is clearer that AZ is not required to divert UK vaccine to the EU.

The following comments come with a massive caveat: the agreement is made under Belgian law and is subject to the jurisdiction of the Brussels courts. IP Draughts is not qualified to comment on Belgian law, and is interpreting the contract as if it were made under English law. This is not a trivial point; choice of law and jurisdiction in a contract can make a big difference to how the contract is interpreted and enforced.

The main reasons for IP Draughts’ change of heart from yesterday, from a 51:49 decision in favour of AZ to something more like 60:40 in favour of AZ, follow. These comments focus mainly on AZ’s obligations with respect to the [300 million] Initial Europe Doses, as defined. There are separate obligations with respect to further supplies at a later date, which don’t seem directly relevant to the current debate.

Emphasis has been added to the quoted text below:

  1. The first sentence of the agreement states that it is for the production, purchase and supply of the vaccine. It seems from European Commission (EC) comments that they have funded the setting up of production facilities in the EU.
  2. Under section 5.1, AZ is required to use Best Reasonable Efforts to manufacture the Initial Europe Doses within the EU.
  3. Section 5.4, headed Manufacturing Sites, requires AZ to use Best Reasonable Efforts to manufacture the Vaccine within the EU. If AZ wishes to manufacture outside the EU, e.g. to accelerate production, there is a detailed procedure in section 5.4 that must be followed. It seems clear to IP Draughts from this and other sections, that the EC has a strong preference for manufacture in the EU. It is also interesting to note that the contract is with AstraZeneca AB, a Swedish company and therefore based in the EU; was the choice of this AZ company at the EC’s request, or selected by AZ to please the EC?
  4. A potential problem with IP Draughts’ conclusion is the fact that section 5.4 states that the UK is treated as part of the EU, but only for the purpose of Section 5.4. IP Draughts is persuaded by readers’ comments on this blog, that the reason for mentioning the UK here is so that AZ doesn’t have to seek approval from the EU if it decideds to supply the EU with product manufactured in the UK. Mentioning the UK does not create any obligation on AZ to supply from the UK, and indeed section 5.1 above states clearly that the Initial Europe Doses are to be manufactured in the EU (and by implication, not in the UK).
  5. AZ gives a warranty in section 13.1(e) that it is not under any contractual or other obligation in respect of the Initial Europe Doses that conflicts with the present agreement or would impede AZ’s fulfillment of its obligation under the present agreement.  Read together with section 5.1, it becomes clear that this is concerned with AZ’s manufacture in its EU plants.
  6. The Best Reasonable Efforts standard is set out in section 1.9. The definition includes familiar references to what another company of AZ’s size and resources would do. IP Draughts doesn’t think a reasonable large pharma company would or should break prior contractual obligations to supply product to major customer A in order to meet an order from major customer B, in circumstances where (a) the intended manufacturing facility for customer B, subsidised by customer B, is experiencing problems, and (b) the alternative supplies would have to be obtained from a manufacturing facility that was subsidised by customer A, and were originally earmarked for customer A. IP Draughts is speculating here about some of the facts.

It is reported that AZ’s CEO has focused on the fact that AZ’s obligations are limited to best efforts (in fact, Best Reasonable Efforts, as definedin the contract). Without knowing the detailed facts about what is happening at the EU manufacturing facilities it is perhaps idle to comment, but it seems plausible that AZ has a good argument why failure to deliver vaccine from the EU plants is not itself a breach of contract.

For the reasons enumerated above, IP Draughts thinks that AZ also has a good argument that the Best Reasonable Efforts obligations do not impose any obligation on AZ to supply product manufactured in the UK and supplied under contract to the UK government.

IP Draughts expects that AZ would have explained its contractual analysis to the EC. Is this the reason that the EC’s focus seems to have changed in recent days, from demands to get supplies manufactured in the UK, to raising queries about whether AZ has diverted EU-manufactured vaccine to the UK?

4 Comments

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4 responses to “AZ’s Covid contract – further thoughts

  1. dxzh

    Revisiting the conclusions one more time as just seen the unredacted version of the AstraZeneca contract (published by RAI on 19 February 2021 – https://www.rai.it/dl/doc/2021/02/19/1613725900577_AZ_FIRMATO_REPORT.pdf).

    Section 15.1(e) provides an unqualified waiver and release of any claim against AstraZeneca AB arising out of or resulting from “any delay in delivery of the Vaccine”. Pretty remarkable that this Section was not mentioned by the EC in their press conference as an absolutely fundamental weakness of the supposed commitment in the contract. Highly disingenuous on the part of the EC?

    Plus in Schedule A, Oxford Biomedica and Cobra Biologics in the UK are mentioned as potential drug substance manufacturing companies and Wockhardt in the UK is mentioned for drug product manufacturing – no mention of AstraZeneca being a hands-on manufacturer. It seems AstraZeneca AB is to have a commitment to use “Reasonable Best Efforts” in negotiating the manufacturing contracts with third party suppliers/CMOs for the Initial Europe Doses (rather than there being an intention for the manufacturing to be carried out by AstraZeneca AB itself). This further weakens the EC’s position as AstraZeneca AB commitment is effectively limited to and dependent on the terms any CMO is able or prepared to offer to AstraZeneca AB regarding delivery and (lack of) priority of the Initial Europe Doses.

    If the contract were terminated, there is further weakness in the EC’s position in Section 12.2(c)(ii) which provides that AstraZeneca AB is to use “Reasonable Best Efforts” to assign rights to the EC under AstraZeneca AB’s contract with the CMO “to the extent permitted under the contract between AstraZeneca and such CMO”. There is an implicit recognition here that EC’s rights against the CMO are limited to those AstraZeneca has managed to negotiate under its contract with the CMO, with no comeback on the part of the EC, in this case if there is no right to assign the contract to the EC.

    AstraZeneca AB’s role as an unpaid middleman in the manufacturing process is emphasised by it only recovering the amounts “without markup” which it pays to the third party CMOs – see Section 1.15(f) of the “Cost of Goods” definition. AstraZeneca is clearly not intending to take on risk in relation to its non-profit role in arranging the manufacturing. No wonder AstraZeneca’s position is that the EC should not have a moral or legal case against it for any issue with a failure to deliver the Vaccine.

  2. dxzh

    Hi Mark,

    Very enjoyable blog.

    Agree with reasoning as to why Section 5.1 obligation is limited to manufacturing in EU (i.e. not UK).

    I know you mentioned in passing the potential importance of the identity of the contracting Party in your point 2. However, it is also very relevant to your point 5. The scope of the warranties and in particular the Section 13.1(e) warranty is significantly limited by the warrantor, being the Swedish sub only. It clearly does not extend to its listed parent AstraZeneca PLC, or other “Affiliates” of AstraZeneca AB – in contrast, say, to the confidentiality provisions which apply to information disclosed by the Affiliates of the Parties, as well as the Parties themselves.

    As regards the “Best Reasonable Efforts” definition, the comparator company is only AstraZeneca AB (the admittedly large Swedish sub), not the parent PLC or wider AstraZeneca group. So the legal obligation while significant is not nearly as substantial as might first appear given the comparator for legal purposes is only by reference to a part of the AstraZeneca group.

    One last point in the Agreement to mention in support of your point 6 is Section 7.4(a), the first sentence of which uniquely overrides the rest of the Agreement.

    Section 7.4(a) states that “The Parties agree that, notwithstanding any other provision of this Agreement, and while AstraZeneca acknowledges its obligation is to supply the Vaccine Doses at no profit, AstraZeneca shall not be requested or required to supply the Vaccine Doses at a loss. …”

    In this context “a loss” would appear to be undefined and likely to extend beyond the limited liabilities expressly covered by the “Cost of Goods” definition (perhaps a Belgian lawyer might argue differently). Astrazeneca AB (the Swedish sub) is, I assume, unlikely to own, control or possess the UK’s vaccine doses, or materials in any UK manufacturing site, or to be contracting with the UK government itself – that said, if it did, this overriding provision would on balance seem to prevent it being obliged to supply those vaccine doses if it resulted in any extra costs (not covered by the Agreement) or associated damages or commercial losses due to that reallocation.

    All the best

    Derek

    • Thanks, Derek, all very interesting points, particularly the fact that while many of the clauses refer to Affiliates of a party, the ones you mention don’t.
      The more I look at the choice of AstraZeneca AB, the more I think the EC has missed a trick. If I had been advising and had failed to advise on the risks associated with contracting with AB rather than plc, I might be worried about my PI insurance!

      • Further to this, by way of an additional note on contractual partner, this is not unique to only the EU supply agreement.
        The UK procurement contract was with AstraZeneca UK Ltd, as opposed to the plc being signatories to the contract.

        Also of relevance to the warranty. Only referring to obligations of AZ AB, contractual or otherwise, which are in possible conflict.
        The obligations of the Ltd or the plc, whether in conflict or not, are not applicable to this warranty on AB.

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