The recent and very public skirmish between the European Commission and AstraZeneca over the Covid-19 vaccine demonstrates the difficulties suppliers face when demand for their product exceeds supply. This is often a problem for life sciences companies, particularly those supplying drug products, but rarely is the issue debated so openly and hotly. That the competing customers are the recently divorced UK and EU member states has only added salt to the wound.
In brief: AstraZeneca is manufacturing the vital vaccine in the UK and in Europe. It has faced production delays at some European manufacturing sites but not in the UK, leading the Commission to insist that AstraZeneca must use the UK manufactured products to supply under their agreement. However, reportedly, AstraZeneca has said that its UK supply contract prevents this and its contract with the Commission requires it to make “Best Reasonable Efforts” to supply, which would not extend to breaching its UK supply contract.
With this in mind, what can life sciences companies do if, like AstraZeneca, they are unable to fulfil all their orders?
If a life sciences company simply does not have enough of their product to go around, it will need to prioritise supplying certain customers. This will pose both commercial and legal challenges, which should be considered together. Whilst the legal position might not ultimately affect the priority that a company decides to afford their customers, it will affect any arguments that it may need to deploy when justifying their decision.
Ultimately, it will be an exercise in minimising the risk of aggrieved customers pursuing claims to recover their losses and, as such, minimising financial exposure for committing a breach.
Commercial considerations include how much product is available, and whether a company needs to supply some customers to the exclusion of others. If there is enough to short supply some or all customers, this may be more palatable to customers and preferable contractually. Some customers might even be willing to accept partial or delayed deliveries.
Then, it is important to assess the company’s best customers. It will likely be a toss-up between your most profitable and timely payers vs long-standing or future customers – benefiting one may financially justify breaching obligations to others.
Some contracts may also be more expensive to fulfil (e.g. due to the cost of freight or customs issues), which might influence decisions on who to prioritise. However, it will not necessarily be all about the financial profit as other, less financial, benefits may come into play and make customers more “worthy”.
Contractual and legal considerations
Contractual and legal considerations are also important since a failure to supply, or to supply less than has been ordered, may be a breach of agreement. These include the governing law of an agreement (in an international supply contract the laws of another country may be particularly relevant); the order processes specified in the contract and whether these have been complied with (if not, the relevant orders may not be enforceable); whether there are minimum order or supply thresholds that may be relied upon; and the level of obligation to supply a company is under (e.g. is it an absolute one or is it to use best or even just reasonable endeavours?).
It is also important to consider what the contract says about the consequences of breach. For example, are there limitations or exclusions of liability or a liquidated damages clause that will limit, exclude, or define the extent of financial exposure for breach? Is it possible to terminate the contract? Or, is there is a preferment clause that may set out a priority list of customers in case of supply issues? Finally, is the agreement a “relational contract”, which would make it more likely for a duty of good faith to arise and in itself affect the order of priority? It is also worth remembering that whether the agreement is relational will depend on the facts and relationship between the parties.
The ability of each customer to obtain the product elsewhere (so mitigating their loss), from another supplier for example, may also affect a company’s decision.
Will force majeure help?
There has been discussion about whether the current pandemic will constitute a force majeure event that excuses performance of contractual obligations, including obligations to supply. Whether force majeure will help will depend on the wording of the particular clause and the facts, including not only whether the relevant circumstances constitute force majeure but also whether or not a force majeure event has been declared in accordance with the agreed terms.
In general terms, where a supplier chooses to prioritise some customers above others, it seems likely that there would be challenges to arguing that a force majeure event has occurred.
Having an agreement to keep the terms of the contract confidential is very useful when prioritising contracts because it will be harder for a customer to challenge a decision to prioritise another. AstraZeneca’s contract with the UK has not been made public, making it hard for the EU to challenge AstraZeneca’s claim that it has to fulfil the UK’s order before it can send vaccines manufactured in the UK to the EU.
Whilst the Commission and AstraZeneca agreed to keep their agreement confidential, since the falling out they agreed that a redacted version of the contract could be published. Embarrassingly, the redactions were not wholly effective, meaning that more of the contract was visible than had been intended. However, this may not be relevant now since the entire agreement has apparently been published in the Italian media in any event.
But what if AstraZeneca had not consented to the contract being made public? Confidentiality agreements are notoriously difficult to enforce given the difficulties of establishing breach and, usually more significantly, demonstrating losses that have been suffered as a result of the breach. Where the confidential information has a financial value of itself it is more straightforward, but often the parties are seeking to protect commercial sensitivities rather than income-generating secrets.
Supplying Peter and snubbing Paul?
To minimise their exposure to both lost profits and potential claims by others, life sciences companies should carry out a methodical assessment of their commercial relationships and contracts to weigh up the best course. Careful future planning, regular risk assessment and agility will help smooth the way to minimise exposure when faced with the challenge of demand exceeding supply.
This article was first published in The Pharma Letter, read here.