Right of first refusal or simply opportunity to negotiate?
ASTRAZENECA UK v ALBEMARLE INTERNATIONAL (Part 1) [2011]
This decision looked at the circumstances in which an exclusion clause applies to a deliberate breach of contract and demonstrates that great care is required when drafting and agreeing a ‘right of first refusal’.
facts:
- A had an agreement with AZ to supply a chemical “DIP” which AZ distilled to manufacture the anaesthetic, propofol. AZ claimed that A had deliberately breached the contract by rationing supplies of DIP to AZ. AZ, relying on the High Court’s decision in NETTV v Mar [2009], argued that the contractual exclusion clause did not protect A because A had committed a deliberate breach of contract.
- AZ had reserved itself the right to source propofol directly in the future rather than distilling it from DIP. This right was subject to A having the “first opportunity and right of first refusal to supply propofol to [AZ] under mutually acceptable terms and conditions”.
- AZ entered into negotiations with both A and another supplier, Sochinaz, for the supply of propofol and awarded the business to S. A claimed that AZ breached the right of first refusal by awarding the business to S despite A having, eventually, matched S’ offer.
- AZ countered that the right of first refusal was either too uncertain to have effect or was simply an opportunity to negotiate.
decision:
- On the facts, the Judge held that there had not been a deliberate breach by A. Specifically, A genuinely believed (albeit mistakenly) that it was acting within its contractual rights.
- Looking at the effect of the exclusion clause, the Judge concluded that even if A had committed a deliberate breach of contract, the decision in NETTV was wrong and that he would “decline to follow it”. He described the judgment as not properly representing the current state of English law. Whether an exclusion clause applied to a given breach was a matter of construction (albeit strict construction). Contrary to NETTV, exclusion clauses are not subject to a presumption that they do not apply to liability caused by deliberate breaches.
- The Judge stated that “Where parties have troubled to put a specific clause in their contract, then so far as possible, the court should strive to give it some meaning commercially”.
- He held that the right of first refusal clause was neither uncertain (the wording “under mutually acceptable terms” did not prevent the right of first refusal having contractual effect) nor simply limited to an opportunity to negotiate or participate in a competitive tender.
- The right of first refusal afforded A the “opportunity to accept or refuse an offer on terms which AZ is minded to accept from a third party” and to be awarded the business where it matched the offer (which on the facts, the Judge considered A had done).
- In order for A to be able to properly exercise this right, AZ was under an obligation to provide in good faith “full and fair disclosure” of the third party terms which A had to match.
points to note:
- Deliberate breaches do not encompass instances where a party takes a deliberate decision to take a particular course of action where it genuinely believes it is acting in accordance with its contractual rights. This obviously restricts instances of deliberate breaches. In this particular case it appears that A acted after having received legal advice.
- The Judge’s remarks in this case were not essential to his judgment. However, if this case rather than NETTV is correct, the Courts will continue to apply the usual rules of construction to decide whether or not a particular breach is subject to the protection of contractual exclusions/limitations.
- Accordingly, a standard, comprehensive exclusion clause may exclude liability for deliberate breach. Therefore, a contracting party wishing to ensure that the other party’s liability is not limited or excluded for deliberate breach of contract may wish to state that position clearly and expressly in the exclusion clause.
- The term ‘first right of refusal’ is not a term of art and its interpretation will depend upon the surrounding context. Contracting parties should try to be as be as clear as possible about precisely what rights they intend to grant particularly where the intention is only to afford an opportunity to negotiate or submit an offer.
- It is difficult to see how AZ could have provided sufficient details of the third party offer without breaching confidentiality obligations owed to the third party.
- Given the wording of the clause this decision is surprising in our view given the clear requirement for ‘agreement’ to be reached between the parties, but it does highlight the dangers inherent in clauses such as this. The decision on this aspect also contrasts with the recent Barbudev case and illustrates that different cases are not always entirely consistent.