Disagreements between businesses are often settled in the courts through judicial means or legal action. What can organisations do to prepare for any potential disputes?
Litigation and arbitration, and indeed less formal dispute scenarios, are not uncommon in the pharmaceutical industry. Since 2020, and over the pandemic, we saw a period of cooperation, rather than competition, between commercial entities which we had not seen for decades. Companies worked together, agreeing not to achieve full commercial value on projects, instead working towards the greater good of survival against a virus which attacked us all. As a consequence, our expectation in the disputes industry, now that the waters have calmed and we feel a sense of "business as usual" return, is that we will see an increase in disputes. Not only will the "normal" pre-pandemic disputes come back to life, but there is potential for a new breed of dispute born out of the spirit of cooperation.
What form will the disputes take, and what can a pharma business do to ready itself as best as possible, should it see a dispute coming down the line?
Predictions – majoring on force majeure
As well as the usual contract breach issues, pricing disputes, and regulatory skirmishes, increasingly (rather later than some commentators anticipated), we are seeing force majeure arguments cropping up. Force majeure is most certainly not a new issue – it has been around for decades. But now, following the pandemic, the withdrawal of companies from Russia, and the war in Ukraine, we are expecting to see more and more force majeure arguments.
Under English law, force majeure is a contractual remedy entitling a party to suspend or excuse performance if particular events arise. In other words, in certain circumstances, you can legitimately not perform your side of the bargain and not be in breach of contract for failing to do so.
Force majeure is a contractual remedy, and as with any contractual claims, what the contract says is key. If you are considering whether you might be able to rely on a force majeure clause to excuse your current situation, the first step should be to look at the contract.
If there is no force majeure clause, you cannot claim force majeure. In some jurisdictions, force majeure is a principle of general law, so you do not have to have a specific clause in your contract, but in England & Wales, it must be in your contract.
Use the contract as your guide – it will list out what counts as force majeure, so you need to check that and match it with your situation on the ground.
The force majeure clauses begin with wide drafting such as “any circumstances beyond the reasonable control of a party", and then focus in on (hopefully) the specific scenario in which you find yourself. Usually, force majeure clauses have a process attached to them setting out, for example, steps you may need to take in order to mitigate or minimise the impact of the situation, and also requirements on notifying the other party.
Under English law, the contract is key, so if you do not follow the process, your attempt to rely on the force majeure event may not be effective, and you may find yourself on the hook for failing to perform.
The worst plan of action is to do nothing. It is risky to sit on what you consider to be a valid force majeure clause and a force majeure event and assume that you will be entitled to suspend performance – some kind of action is usually required.
Similarly, do not call force majeure and suspend or stop performing your side of the bargain if you are not entitled. Suspending or stopping performance when you are not entitled could be a repudiatory breach, which could justify the other side ending the contract and claiming damages.
Predictions – trying to terminate
When problems arise, what may once have seemed a good bargain may no longer be so attractive. A commercial arrangement no longer being appealing is not generally grounds to end the arrangement and simply move on. So how can you terminate a contract and walk away in as low risk a way as possible?
Under English law, there are usually rights to terminate spelt out in the contract itself and termination rights are also available at common law. Both should be considered on each occasion that this issue arises, as it is important to pick the route which is most advantageous. For example, relying on a contractual termination right may not always entitle you to claim damages from the other side, and it is a trap which parties can easily fall into.
For contractual rights, how the terms are interpreted against the factual background you are facing will be key. For example, the agreement may set out what counts as ‘material breach’, and that if a breach can be fixed, a notice must be served requiring a specific cure within a particular time before the contract can be terminated. The contract is key, and any notice requirements should be strictly followed.
For contractual rights, how the terms are interpreted against the factual background you are facing will be key. For example, the agreement may set out what counts as ‘material breach’, and that if a breach can be fixed, a notice must be served requiring a specific cure within a particular time before the contract can be terminated. The contract is key, and any notice requirements should be strictly followed.
It is a very risky strategy to terminate or suspend performance without checking that you are entitled to. There are back up positions if you make a mistake, for example, if – unknown to the terminating party – there was a breach justifying termination at the time, the terminating party may be able to rely on it later. Similarly, facts that were known, but not referred to at the time, might possibly be relied on later. Given the dangers around termination, we expect to see this continuing to be a key part of disputes between pharma businesses.
How to prepare
Preparation for a dispute can start at the time you enter your contract negotiations, when everyone is in the honeymoon period. This starts with making sure you have a written contract. The contract must be clear, and it should include worked examples of any complex calculations. If you can, have someone who is not involved in the project sense check the proposed contract wording – often those closest to the negotiations have acquired knowledge which is needed to understand the contract terms. A court or arbitral tribunal will not have that knowledge when it comes to resolving a dispute, and will not generally take it into account when asked to reach a decision.
Do what you can to ensure that the contract is followed in practice. If it needs to be amended, follow any amendment requirements (usually any changes need to be in writing signed by authorised representatives). It is also important to consider due diligence on your counterparty before you do business with them, and include a jurisdiction and applicable law clause.
These are clauses which spell out where and how you want any disputes to be resolved, and which law is to apply to your relationship. If you do not agree at the outset where your disputes are to be resolved (e.g., the English Courts or a Hong Kong seated arbitration), that will potentially be something else to argue about with your opponent when the relationship sours. This is particularly a risk in international contracts.
If at a later stage you find yourself approaching a potential dispute situation, it is advisable to take a step back and consider the wider picture.
The first thing to do is check the contractual documents, including any purchase orders, delivery notes, and invoices. In particular, you should consider what the obligations of the parties are, and whether they have been met. If they have not, what does the contract say you can you do about it? Are there any relevant limitations or exclusions of liability? Are there any rights to terminate or suspend?
A good next step is to check whether there are any clauses which set out how notices have to be served (these clauses tend to be towards the end of an agreement).
Additionally, are there any escalation processes setting out the steps to be taken, before a formal litigation or arbitration can be started?
Be commercial and crunch some numbers – how will the situation impact your profits and, as far as you can, estimate how it might impact the other side’s profits. For example, we have seen parties say it is worth them breaching a contract and facing the potential claims for lost profits from the other side, rather than performing, because the costs of performing their obligations are so high. That can place you in quite a strong negotiating position if it is possible for the contract to continue.
It can be helpful to step back and think about what you want to achieve with regards to this counterparty on this dispute, and how this fits with any wider relationships between the businesses. Another thing to consider is whether there is any insurance available to you, either for the claim itself or the legal fees involved, and in reality, is the opponent worth pursuing, or will this be good money after bad?
Get advice early
Asides from the contract itself, the most important thing is to seek advice from your lawyers early – you might be able to see a dispute off quicker at that stage or avoid taking any steps which you later regret.
Do not underestimate the potential time and effort which will be required if you find yourself in litigation or arbitration, as well as the costs. Disputes are an inevitable part of business. Whilst we predict there will be an increase in the number of claims, preparations can begin early in order to place you in the strongest position to be able to resolve the issues, and reduce any impact on your business.
This article was first published in European Pharmaceutical Contractor. The online edition can be accessed here.
International Clinical Trials, August 2022, pages 65-67. © Samedan Ltd
Catherine Penny