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10 February 2021
Principles for interpretation of contractual obligations under Belgian law
Astra Zeneca's best reasonable efforts obligation
Problems at AstraZeneca's Belgian production plant
AstraZeneca vaccines produced in the United Kingdom
Penalties and tools at European Union's disposal
On 27 August 2020 the European Commission, on behalf of EU member states, entered into an advance purchase agreement (APA) with AstraZeneca for the production, purchase and supply of the Anglo-Swedish company's COVID-19 vaccine in the European Union.(1) The APA provides for:
The redacted version of the APA, which was recently officially disclosed, does not show the exact timing of the doses, although it has been stated in the media that at least 80 million doses were to be supplied in the first quarter of 2021.
However, in the last week of January 2021, AstraZeneca announced that it would reduce the supply of its COVID-19 vaccine to the European Union in the first quarter to 31 million doses. AstraZeneca referred to a disruption at a Belgian production plant and added that it could not compensate this loss with the doses produced at its UK production sites, which it would first use to meet its obligations towards the United Kingdom. Following some back and forth, particularly regarding AstraZeneca's obligations, both parties agreed to publish a redacted version of the APA and eventually to the delivery of 9 million more COVID-19 vaccine doses, bringing the total to 40 million doses (half of the initially foreseen 80 million doses).
Questions have therefore arisen as to what extent AstraZeneca is under a contractual obligation to supply the European Union with the initially planned 80 million doses in the first quarter of 2021, and what role its UK manufacturing sites should play in this regard. To answer these questions, this article examines the parties' rights and obligations under Belgian law, which is the governing law for the APA (with the exclusive jurisdiction of the Brussels courts).
The Belgian principles for the interpretation of contractual obligations are established in Articles 1156 to 1164 of the Civil Code, read together with the extensive jurisprudence of the Supreme Court.
The interpretation of contractual obligations primarily requires determining the parties' common intention, rather than adhering to the literal meaning of the wording in the contract (Article 1156 of the Civil Code). However, this does not boil down to a principle of prevalence of the actual intention over the expressed intention. The probative value of the contract prohibits an interpretation that is irreconcilable with the wording of the contract. To look for the parties' common intention, the following should be considered:
If the wording of a clause can be interpreted in different ways, it should be interpreted in the manner which is most closely aligned with the content of the agreement (Article 1158 of the Civil Code).
AstraZeneca's manufacturing and supply of the initial Europe doses is subject to a best reasonable efforts commitment.
The central provision in Section 5.1 of the APA in this regard provides that 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", in accordance with a three-pronged delivery schedule (which has been redacted in the disclosed version but apparently provides for the delivery of a first quantity in 2020, a second in the first quarter of 2021 and a third at an undisclosed time).
The 'manufacturing sites' to be used for manufacturing the vaccine for distribution within the European Union are further specified in Section 5.4, which notably states that "manufacturing sites located within the EU (which, for the purpose of this Section 5.4 only shall include the United Kingdom)". This seems to show that references to the European Union in the agreement for any other purpose (ie, other than references to EU manufacturing sites which AstraZeneca will use to manufacture the vaccine) do not include the United Kingdom.
AstraZeneca's best reasonable efforts obligation is also reflected in the APA's preamble, which states that AstraZeneca "has accelerated its manufacturing scale-up concurrently with its conduct of global clinical trials to ensure the broadest possible availability of the Vaccine, as quickly as possible", and that as part of this scale-up, AstraZeneca "has committed to use its Best Reasonable Efforts… to build capacity to manufacture 300 million Doses of the Vaccine… for distribution within the EU".
The concept of best [reasonable] efforts originates from common law but has over the past decade become familiar also in the context of civil law systems, such as under Belgian law. In general, it means that the obligor must take all reasonable steps with diligence and 'leave no stone unturned' to achieve the agreed objective. Section 1.9 of the APA defines this as follows:
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 commercialization 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.
Civil law systems, such as the Belgian one, usually distinguish between an 'obligation of means' (where the obligor should take all reasonable steps to carry out its obligation) and an 'obligation of result' (where the result is guaranteed by the obligor). This is relevant not only for determining the nature of the obligation but also in view of proving breach of contract, which is more cumbersome in the former case. A best efforts clause would usually be understood as an enhanced obligation of means. AstraZeneca is therefore subject to such an obligation and has no obligation of result for the supply of the COVID-19 vaccine doses.
Whether AstraZeneca's problems at the Belgian production plant would violate its best reasonable efforts manufacture and delivery obligation is a question of fact. It would be up to the European Commission to prove that AstraZeneca did not use its best reasonable efforts to manufacture and supply the amount of doses stipulated for distribution within the European Union.
The European Commission and EU member states would have grounds to state that AstraZeneca did not comply with its best reasonable efforts obligation only if the commission could show that AstraZeneca did not undertake or use all activities and degree of effort that a company of similar size, infrastructure and resources would undertake or use to scale up its manufacturing capacities at the Belgian production plant. Also, given the unprecedented speed of developing a vaccine against COVID-19, it might be difficult to claim that AstraZeneca did not comply with its best reasonable efforts.
However, in addition to what applies with respect to the Belgian production plant, the parties apparently agreed that the UK manufacturing sites are also considered 'manufacturing sites located within the EU' used for the production and delivery of AstraZeneca's vaccine doses to the European Union. For that reason, AstraZeneca should in principle also rely on these sites to meet its supply obligations under the APA. In other words, its best reasonable efforts obligation under Belgian law applies to all of its production plants in the European Union and the United Kingdom.
For that reason, it is doubtful that AstraZeneca could invoke the existence of competing obligations towards third countries (eg, the United Kingdom) as justification to supply the United Kingdom first and to postpone the delivery of the agreed vaccine doses to the European Union. This would not fall under a best reasonable efforts defence under Belgian law and has apparently been excluded by the APA.
Under Section 13.1(e) of the APA, AstraZeneca expressly warranted with respect to the European Union that:
it 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 fulfilment of its obligations under this Agreement.
If supply was jeopardised by production problems at an EU manufacturing site, it seems that AstraZeneca would be unable to invoke the existence of contractual obligations towards the United Kingdom to refuse to rely on other production facilities (eg, in the United Kingdom) which are also covered by the APA to meet its best reasonable efforts supply obligation towards the European Union.
Although the parties, for all practical purposes and given the urgency of the matter, must find an amicable solution, it is worthwhile looking into their options under Belgian law in the absence of such solution.
One option for the European Commission would be to notify AstraZeneca of its intention to terminate the APA because it considers AstraZeneca's lack of supply to constitute a material breach and request AstraZeneca to fix such material breach, in application of Section 12.3. AstraZeneca could either agree to fix such material breach or dispute the existence thereof, including by stating the measures that it has taken or will take to continue fulfilling its contractual obligations.
In the absence of a satisfactory outcome, the European Commission would have to trigger the application of the dispute resolution mechanism in Section 18.5 – first through good faith negotiations, and perhaps ultimately through court proceedings before the Brussels courts. The competent courts are the Brussels (Dutch or French-language) Court of First Instance, although AstraZeneca, being a commercial undertaking, could also be sued before the Brussels (Dutch or French-language) Enterprise Court.
As for proceedings on the merits, the European Commission could first seek the forced execution of AstraZeneca's obligations. However, proceedings on the merits usually take up to one year or more and it is hoped that the pandemic will be over by then. Alternatively, the commission could seek the resolution of the contract based on AstraZeneca's material breach, including the reimbursement of the funds already paid to AstraZeneca and compensation for any other damage resulting from its alleged breach of contract.
If the European Commission seeks a short-term solution or wants to put pressure on AstraZeneca, it could start preliminary injunction proceedings, which are usually dealt with in a matter of weeks. Theoretically, the court could impose an obligation to supply vaccines (eg, in accordance with the APA) under a financial penalty (eg, per day of delay). This would be difficult if the basis was solely AstraZeneca's manufacturing issues at its Belgian production plant. Assessing whether AstraZeneca has thereby breached its best reasonable efforts obligation would risk exceeding the boundaries of a prima facie assessment. In addition, imposing an obligation to supply vaccines is difficult if the other party cannot produce these vaccines. A clear-cut violation by AstraZeneca of its obligations (eg, by prioritising its supply obligations to the United Kingdom over its obligations to the European Union) would in any instance be required. Even then, a number of further issues might be expected, not least a reaction by the United Kingdom.
For further information on this topic please contact Christophe Ronse or Kirian Claeyé at ALTIUS by telephone (+32 2 426 1414) or email (email@example.com or firstname.lastname@example.org). The ALTIUS website can be accessed at www.altius.com.
(1) The European Commission's press release is available here.
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