B e f o r e :
THE HONOURABLE MR JUSTICE FLAUX
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Between:
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ASTRAZENECA UK LIMITED
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Claimant
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- and -
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ALBEMARLE INTERNATIONAL CORPORATION
And
ALBEMARLE CORPORATION
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Defendants
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Mr John Odgers and Mr George McPherson (instructed by Reed Smith LLP) for the Claimant
Miss Sue Carr QC and Mr Andrew Henshaw (instructed by Barlow, Lyde & Gilbert LLP) for the Defendants
Hearing dates: 28-31 March, 1, 4, 6 and 7 April 2011
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HTML VERSION OF JUDGMENT
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Crown Copyright ©
Mr Justice Flaux:
A. Introduction
- The claimant company (to which I will refer as "AZ") is a well-known pharmaceutical company which sells internationally an anaesthetic known as "Diprivan". Until some time in 2009, AZ manufactured the active ingredient of Diprivan, propofol, by distillation of 2,6 Di-isopropyl-phenol ("DIP") at its factory in Macclesfield. The First Defendant ("Albemarle") is incorporated in Virginia and is a subsidiary of the Second Defendant, Albemarle Corp.
- From 2005 until the contract between the parties was terminated in 2008 in circumstances which are in dispute, Albemarle supplied DIP, which it manufactures in Orangeburg, South Carolina, to AZ pursuant to a supply agreement dated 11 April 2005 ("the supply agreement"). This was a successor agreement to a previous agreement between the parties dating from 1994. Under the supply agreement, AZ agreed to buy 80% of its annual requirements for DIP from Albemarle, with a minimum annual off-take of 5 metric tons. Although the supply agreement was not therefore an exclusive agreement, in practice AZ bought all the DIP it required from Albemarle. The reason for the 80% ceiling was that, under EU competition law, AZ was not entitled to commit itself contractually to buying more than 80% of its requirements from one source.
- At the time the supply agreement was entered, AZ was already contemplating the possibility that, during the lifetime of the agreement, it might decide to cease distillation of DIP at Macclesfield and instead purchase propofol direct and, accordingly, the supply agreement included at clause H a provision that in the event that AZ did make that change, Albemarle would have the "first opportunity and right of first refusal" to supply propofol to AZ. The meaning and ambit of that provision are at the heart of the dispute between the parties. In summary Albemarle alleges that AZ was in breach of clause H and that Albemarle, as it was entitled to, terminated the supply agreement for that breach. AZ not only denies that clause H has the meaning for which Albemarle contends, but denies that it was in breach of the provision, on the basis that it afforded Albemarle every opportunity to match the offer of the company with which AZ entered an agreement for the supply of propofol, Sochinaz, a subsidiary of Bachem.
- AZ alleges that far from it being in breach of the agreement, Albemarle was itself in breach of the supply agreement by failing to deliver two orders for DIP placed by AZ on the so-called "consignment stock" basis on 9 November 2007 (as amended on 14 January 2008) and 4 January 2008 (although the claim in respect of the latter purchase order, that the right to delivery accrued before the delivery date of 4 April 2008, was abandoned in closing submissions). Albemarle denies breach on various grounds, including that further delivery would have caused AZ to exceed its entitlement to hold consignment stock at Macclesfield and only pay for it when it was moved out of the storage area. In addition, AZ alleges that following termination of the supply agreement, pursuant to clause D8 Albemarle was obliged to sell AZ DIP safety stock held at Orangeburg. Albemarle denies that clause D8 of the Agreement has the effect for which AZ contends. Both parties contend that the other's claim for damages is capped by a contractual limitation provision (clause M).
- AZ also brought claims against both defendants alleging duress and conspiracy, in inducing AZ to enter into a further agreement entered into in June 2008 (on any view after the supply agreement was terminated whatever the rights and wrongs of the disputes under it) between AZ and Albemarle Corp for the supply of DIP, the terms of which AZ claims were unduly onerous. Those claims in duress and conspiracy were stayed by order of Hamblen J on the basis that that further agreement contained an exclusive jurisdiction clause in favour of the courts of South Carolina. Accordingly, those claims are no longer pursued and Albemarle Corp has taken no further part in the proceedings.
B. The issues at this trial
- By agreement between the parties, the quantum of Albemarle's counterclaim has been hived off for determination, if relevant, at a later date, pursuant to the order of Gloster J at the CMC on 30 July 2010. That learned judge also approved a list of the principal issues, which has since been amended and ultimately agreed between the parties.
- In the light of developments at trial that list of issues seems a little over-convoluted. In my judgment, the principal issues can be summarised as follows:
(1) What if any obligation was imposed upon AZ by clause H of the supply agreement?
(2) When did any such obligation upon AZ accrue and, therefore, when, if at all, was AZ in breach, either as a matter of construction of the agreement or by way of estoppel by convention?
(3) Did Albemarle match the terms of the third party offer from Sochinaz either by its letter of 25 January 2008 or at the meeting on 15 February 2008?
(4) Prior to or at the date when Albemarle purported to terminate the supply agreement on 3 March 2008, was Albemarle in breach of the supply agreement in failing to fulfil the 9 November 2007 purchase order as amended?
(5) Was any obligation upon AZ to accept the offer from Albemarle contingent upon compliance by Albemarle with its obligation under the supply agreement to supply DIP in accordance with the supply agreement?
(6) Was Albemarle entitled to terminate the supply agreement on 3 March 2008 either under clause K or on the basis that such termination was acceptance of a repudiatory breach of contract by AZ?
(7) If Albemarle was not entitled to terminate the supply agreement on 3 March 2008, was Albemarle itself in repudiatory breach of the supply agreement in failing to deliver DIP due for delivery on 22 January and/or 4 April 2008? If so, did AZ accept that repudiatory breach as terminating the supply agreement on 2 or 12 May 2008?
(8) Did clause D8 impose an obligation on Albemarle to sell its contractual stock of DIP to AZ and, if so, did that obligation accrue on one or more of the bases of termination in this case?
(9) What loss was suffered by AZ as a result of any breach of the supply agreement by Albemarle and are any damages for that loss limited or excluded by clause M of the supply agreement?
(10) Is any claim by Albemarle for loss suffered as a consequence of AZ's breach of clause H limited or excluded by clause M?
C. The terms of the supply agreement
- The relevant terms of the supply agreement (as amended by Amendments Nos. 1 and 2) provided as follows:
B-Duration
The definitive contract would commence on September 4, 2005 and would continue thereafter, until:
1. Terminated by BUYER by giving the SELLER no less than 6 months prior written notice, which notice may not be given before March 4, 2008.
2. Terminated by SELLER by giving the BUYER no less than 12 months prior written notice, which notice may not be given before March 4, 2008.
C-Quantities & Forecasting Process
1. At the end of the third quarter of each calendar year BUYER will forecast in writing to SELLER annual requirements for the subsequent year. This forecast will be binding and BUYER agrees to purchase a minimum of 75% of forecast requirements and SELLER agrees to provide a maximum of up to 125% of this forecast.
5. BUYER agrees to buy from SELLER 80% of BUYER's annual requirements for PRODUCT, but BUYER shall not be obliged to buy from Seller more than 80% of BUYER's annual requirements for PRODUCT. The minimum annual off-take in any given year will be no less than 5 MT.
D-Consignment Stock
1. The PRODUCT stock that has been produced by SELLER for BUYER may be stored in Orangeburg, SC (USA) and/or at BUYER's site in Macclesfield (UK). The quantity of stock that would be kept at BUYER's site in Macclesfield is to be agreed annually between BUYER and SELLER, but can never exceed more than six months of expected consumption or 12,000 kg, whichever is lower.
2. This consignment program would only apply if annual binding forecast is equal or in excess of 20 MT and, if consignment stock applies, it would be limited to a maximum of 12,000 Kg of PRODUCT at any one time, unless agreed otherwise in writing by both parties. All quantities of PRODUCT shipped to BUYER in excess of a total uninvoiced quantity of 12,000 Kg of PRODUCT would be invoiced upon shipment. However, PRODUCT which has been rejected by BUYER because it fails to conform to the specifications set forth in the definitive agreement, but which has not yet been returned to SELLER, would not count against this 12,000 Kg limit.
3. For all PRODUCT shipped to BUYER, BUYER would keep such PRODUCT in its inventory until such time as it desires to take the PRODUCT from inventory (but subject to Paragraph 2 above). BUYER would calculate on the last working day of each month the amount of PRODUCT in inventory and that taken from inventory during the preceding monthly period. A written accounting of this quantity would be communicated to SELLER on the same day for invoicing purposes. The accounting would include the preceding month-end balance, current month receipts, billing quantities and ending balances for each purchase order.
4. All PRODUCT shipments and invoicing, whether on a regular or consignment stock basis, will be on a DDU Macclesfield, UK basis. Risk of loss to all PRODUCT shipped to BUYER will pass to BUYER upon delivery at BUYER's Macclesfield UK works. BUYER has the responsibility to insure compliance of all cGMP requirements as mandated by the FDA and the IUK Q7a Guidance for PRODUCT during the period when the product is being held by BUYER prior to use.
PRODUCT will be held in a dedicated storage area at BUYER's Macclesfield site. PRODUCT is subject to invoicing, not-withstanding Paragraph 6 below, as soon as PRODUCT is physically moved out of BUYER's dedicated storage area with the intent to use PRODUCT in production, or when SELLER's drum seal is removed for any reason. Drum content identification and full chemical analysis of the drums can only take place when BUYER has taken title of the goods. A retained sample reflecting the batch(es) shipped will accompany the goods allowing product identification upon receipt in BUYER's warehouse.
5. With two weeks' notice, but not more than once per calendar quarter, SELLER may conduct a physical audit of the inventory of delayed invoice PRODUCT at BUYER's site in Macclesfield, UK.
6. BUYER would give SELLER at least 8 weeks lead-time to organise shipments in a timely fashion.
7. BUYER may discontinue this consignment program at any time upon written notice to SELLER, whereupon BUYER would immediately give SELLER a final accounting of all PRODUCT still in inventory and SELLER would invoice BUYER for same. SELLER may discontinue this program at any time upon not less than sixty (60) days written notice to BUYER, and on the effective date of the discontinuation BUYER would give SELLER a final accounting of all PRODUCT still in inventory and SELLER would invoice BUYER for such PRODUCT in accordance with the terms of this Agreement.
8. In case BUYER or SELLER terminate the supply agreement or when the hardship clause is invoked, BUYER commits to purchase all remaining PRODUCT that is in stock as described in clause C and F (either at SELLER's Orangeburg plant and/or at BUYER's Macclesfield plant under the consignment program).
E-Invoicing
1. For all purchases outside of the Consignment Stock arrangement, SELLER shall submit to BUYER an invoice stating the AstraZeneca purchase order number. Unless stated otherwise on the purchase order payment will be made at the close of the month following the month delivery is made.
2. For all PRODUCT consumed under the Consignment Stock arrangement BUYER will inform SELLER on the 25th of each month of the amount of stock consumed during the period and will issue payment via Self Billing.
F-Stockholding
1. SELLER is required to hold at all times in the USA or at AstraZeneca's Macclesfield site on BUYER's behalf a minimum stockholding in secure and safe locations equivalent to BUYER's forward requirements for 12 months as indicated by estimates provided under clause C.
H-Switch to Propofol
In the event that at any time BUYER reformulates or otherwise changes its Diprivan brand to substitute propofol for the PRODUCT, BUYER will so notify SELLER and will give SELLER the first opportunity and right of first refusal to supply propofol to BUYER under mutually acceptable terms and conditions.
M-Claims
No claims by BUYER of any kind, whether as to the products delivered or for non-delivery of the products, or otherwise, shall be greater in amount than the purchase price of the product in respect of which such damages are claimed; and failure to give written notice of claim within sixty (60) days from the date of delivery, or in the case of non-delivery, from the date fixed for delivery, shall constitute a waiver by BUYER of all claims with respect thereto. In no case shall BUYER or SELLER be liable for loss of profits or incidental or consequential damages.
CONDITIONS OF CONTRACT
2. DELIVERY – Goods shall be delivered on the date or during the period specified in the purchase order and seller shall give reasonable notice of the proposed time and date of actual delivery. The seller shall give notice of any likely delay in delivery as soon as practicable.
All goods must be delivered at the delivery point specified in the purchase order. Buyer may refuse delivery of goods not so delivered or may, at its option, arrange for delivery to the delivery point at the expense and risk of the seller.
8. FORCE MAJEURE
A. Deliveries may be totally or partially cancelled reduced or delayed during any period in which seller is prevented delayed or hindered from manufacturing supplying or delivering by normal route or means of delivery or in which buyer is prevented delayed or hindered from accepting using or selling in the ordinary course of his business the goods to be supplied hereunder through any circumstances beyond their reasonable control including (but without prejudice to the generality of the foregoing) any form of Government intervention strikes lockouts and breakdown of plant.
B. If as a result of any reason or cause mentioned in A above seller's output of the good shall be reduced then the quantities made available to buyer shall not be reduced by any greater proportion than that by which seller's production is reduced and the price specified in the contract & purchase order shall continue to apply. If asked by buyer seller will demonstrate the equity of the apportionment that it has made in relation to its production.
The witnesses
- The principal witness for AZ was Mr Graham Hadfield, Global Supply Manager in Global External Sourcing (GES), who has worked for AZ and its predecessors, starting with ICI, for nearly 40 years. He was responsible for managing the relationship with Albemarle from 2000 until the termination of the 2005 supply agreement by Albemarle in March 2008, apart from a period between February and November 2007, when Dr Gordon Ewart took over that role. For reasons which I will elaborate in my findings of fact hereafter, from the time when Mr Hadfield resumed the role in November 2007, he was engaged upon a strategy essentially devised by one of his superiors in the company, Mr Steve Richmond, who, somewhat surprisingly given his pivotal importance to that strategy, was not called as a witness by AZ, even though he still works for AZ.
- That strategy clearly was to proceed with Sochinaz as supplier of propofol whilst "keeping Albemarle sweet" so as to ensure continuity of supply of DIP until propofol supplied by Sochinaz could come on stream. To that end, Mr Hadfield engaged in some fairly devious tactics to seek to build up a stockpile of DIP. Equally, at a time when his ultimate boss within GES, Mr Marc Jones, had undertaken that, if Albemarle matched Sochinaz's offer, Albemarle would be awarded the propofol business, Mr Hadfield continued to pursue the same strategy, which involved him in what was at best evasive conduct in relation to whether Albemarle had matched the offer.
- I have no doubt that whatever he did, Mr Hadfield did out of a sense of loyalty to the organisation, but it remains the case that in his dealings with Albemarle, he was less than open and honest on occasions. He is clearly an essentially decent man and it was obvious from his oral evidence that he was ashamed of some of the devious conduct in which he engaged. This made him in some respects an unsatisfactory witness. Whilst there is no question of his deliberately lying to the court, he was sometimes reluctant to face up to the reality of what he had done as revealed by internal AZ documents. In relation to those matters, where his evidence was out of kilter with the contemporaneous documents, I have preferred those documents.
- Dr Gordon Ewart worked for AZ from 2000 to October 2007 when he left to join another pharmaceutical company. He worked in GES from late 2006, taking over responsibility for the relationship with Albemarle from Mr Hadfield in February 2007 until he left the organisation on 19 October 2007. I formed a favourable view of him as a witness. By and large, he was honest and fair, both in his evidence and in his dealings with Albemarle. I found his evidence less than impressive and somewhat evasive in two areas.
- One was his maintenance of the position that the decision to proceed with Sochinaz was not made until October 2007, a position which was inconsistent with his own email to Mr Hadfield of 10 March 2008, from which it is quite apparent that the decision was made by Mr Richmond in principle in September 2007, before the ISEP audit took place. The other was the extent to which, in common with several of the other AZ witnesses, he was prepared to toe what can only be described as the AZ "party line" on the issue of "sole supply", a matter to which I return in more detail when I set out the detailed factual analysis hereafter. There were other aspects of his evidence about which I was originally sceptical, specifically the extent to which he and the representatives of Albemarle had discussed clause H of the supply agreement, although ultimately I accepted his evidence about that.
- Overall, apart from those areas of criticism, I consider Dr Ewart to have been an essentially truthful witness. As I said during the course of closing submissions, I suspect that, if he had remained at AZ dealing with Albemarle, the present dispute would not have arisen and Albemarle would have been awarded the propofol business.
- Mr Marc Jones was at the time Vice President of GES and thus the most senior person both to give evidence and to be involved in the decision making process at the time. Although there were certain aspects of events which caused him some embarrassment, overall, as with Dr Ewart, I formed a favourable view of Mr Jones as a witness. He was very fair and candid about his telephone conversation with Mr Steitz of Albemarle, accepting both that he had undertaken that, if Albemarle matched the third party offer, it would get the propofol business and that, in practice, this would have meant Albemarle being the sole supplier. I am also quite sure, for reasons I will come to later, that, if he had ever seen Albemarle's letter of 25 January 2008 or known the true position about that letter or about the meeting on 15 February 2008, namely that Albemarle had matched the offer, he would have felt honour bound to award Albemarle the business.
- Mr Steve Evans was project manager in GES at all material times for this case. He had worked for AZ or its predecessor, ICI, since 1987. His responsibility was to liaise with external suppliers and evaluate potential sources of supply. In a couple of areas his evidence was somewhat unimpressive and a little evasive, namely the party line on sole supply to which I have already referred and the question of the redaction of emails concerning Sochinaz's offer before they were sent to Albemarle. Nonetheless, in my assessment, he was essentially a straightforward witness who was prepared to accept what was revealed by the documents, so far as his own involvement was concerned.
- Ms Andrea Galbraith joined AZ as Global Category Manager in January 2008. As such, she had no involvement with any of the dealings with Albemarle prior to its termination of the supply agreement in March 2008. Her principal role was to secure supply of propofol from Sochinaz. She too had a slight tendency to toe the AZ party line about sole supply, but she was otherwise not a controversial witness and gave her evidence in a straightforward manner. Mr Nicklas Westerholm took over as Head of Global API [Active Pharmaceutical Ingredients] Supply in January 2008 and was then based in Sweden. His involvement was limited and he was also a straightforward witness.
- In a very real sense, the most important "witnesses" for Albemarle were two people who did not give oral evidence. They were the two Albemarle employees who had most of the direct dealings with Mr Hadfield, Dr Ewart and Mr Evans, namely Olav Tavernier and Jan De Tavernier (sometimes referred to collectively during the trial for obvious reasons as "the Taverniers"). They were part of Albemarle's European sales team, based in Louvain-la-Neuve, Belgium. Both have now left Albemarle's employ and, as I understand it, indicated that they would only give evidence for Albemarle if paid substantial sums to do so, which Albemarle, understandably, was not prepared to agree. However, the reason why they are still so important is that Mr Tavernier in particular prepared detailed contact reports of every telephone conversation or meeting he or they had with AZ personnel. All the AZ personnel with whom they had contact who gave evidence (Mr Hadfield, Dr Ewart and Mr Evans) accepted that those contact reports accurately recorded what was said in conversations and meetings and the mood of those conversations and meetings.
- Three witnesses gave oral evidence for Albemarle. First was Mr Dave Clary, at the time Division Vice President of the Fine Chemicals group, based in Baton Rouge, Louisiana. His division was responsible for manufacturing both DIP and propofol. Next was Mr Brian Carter who, at the relevant time, was Business Director of the Fine Chemicals group of Albemarle also based in Baton Rouge, Louisiana. As such he had responsibility for Albemarle's DIP and propofol business. Mr Clary was his boss.
- Both Mr Clary and Mr Carter were impressive witnesses. It was clear that much of the way in which they conducted negotiations with AZ, through the Taverniers, and the tactics they employed in dealing with AZ, were driven by the advice they were receiving from attorneys in the United States as to the meaning of clause H. They both took a hard-nosed tough line in their business dealings, perhaps Mr Carter more than Mr Clary, but despite Mr Odgers' suggestions to the contrary, there is no question of their having deliberately breached the contract. They both considered that the steps they took to limit AZ to 2 metric tons of consignment stock per month constituted an approach which was justified under the contract. The only possible exception was when on 7 February 2008 they instructed Albemarle staff in Europe not to deliver the shipment which would otherwise have been delivered in late February, but for reasons I elaborate hereafter I am not satisfied that amounted to a deliberate breach.
- In relation to the limited number of areas where Mr Odgers challenged their evidence, such as the instruction and authority given to the Taverniers before the meeting with AZ on 15 February 2008, I was quite satisfied that they were telling the truth and accepted their evidence.
- The final Albemarle witness was Mr John Steitz, Chief Operating Officer of Albemarle Corp. It was he who had the telephone conversation with Mr Marc Jones of AZ on 20 December 2007. Ultimately, although he was cross-examined briefly by Mr Odgers, his evidence did not seem to be controversial and I considered him a straightforward and honest witness.
D. The meaning of Clause H
- Before setting out the chronology of the dispute and my findings of fact, it seems to me that, perhaps somewhat unusually, I should first deal with the central issue of the meaning and ambit of clause H, in effect issues (1) and (2) identified above. This is because, in a very real sense, the parties' respective conduct, particularly in the period from about July 2007 onwards seems to me to have been dictated by their different interpretation of the clause and of what, if any, obligations it imposed upon AZ.
- There is little general guidance in the textbooks on the law of contract on the meaning and ambit of contracts of first refusal. Chitty on Contracts in particular contains a fairly perfunctory passage at paragraph 2-127 dealing with the distinction between options and rights of pre-emption (which is essentially another name for a right of first refusal), but this is of little assistance. However, I agree with Mr Odgers that a convenient starting point is the passage in Halsbury's Laws of England 4th edition volume 9(1), Reissue, at paragraph 641:
641. First refusals.
Similar to the contract of option is the contract of 'first refusal' or 'pre-emption', whereby one person (A) enters into a contract with a second person (B) which provides that if A contemplates entering into a certain defined contract or type of contract with anyone, he will first offer to do so with B. That type of contract differs from the contract of option in that A has made no positive offer; his duty will usually be the purely negative one of not contracting with any third person (C) in the defined respect unless and until he has first offered to do so with B, though that offer may be conditional or assignable; but it is conceivable that his duty may merely be that, if he does so contract with C, he will make that contract subject to B's right of first refusal. Where A in breach of the first refusal contract sells to C, it may be that the first refusal becomes an option.
There may be a contract of option and first refusal, whereby B is given an option and a right of first refusal; or where B is granted an option in return for his granting A a right of first refusal. Similarly, there may be a contract of double option where each grants the other an option on the happening of a certain event.
A difficulty with contracts of first refusal is whether the parties have completed their negotiations and have reached an agreement; if not, there may be no binding contract, merely an agreement to negotiate. On the other hand, there may be a binding provisional or conditional agreement; or a binding collateral agreement not to negotiate with a third party (a 'lock-out agreement'). Where the parties have not completed their negotiations, it seems that a binding 'lock-out' agreement cannot be created by implying a term that A will continue to negotiate with B in good faith; but it may be that an express agreement to use best endeavours to conclude a contract with B is binding, whereas there can be no contract on the basis of such an implied term.
- One of the footnotes to this passage makes the point that the term "first refusal" is not a term of art, citing the decision of the High Court of Australia in Woodroffe v Box (1948) [1954] ALR 474. In that case, the judgment of Fullagar and Kitto JJ makes the point that the meaning of the phrase will always depend upon its context:
"The truth is, indeed, that, in dealing with such a loose and colloquial expression, it may often be a mistake to cling strongly to a preconceived meaning. The safer and sounder course is to regard it as an expression of fairly flexible import, to look at the whole of what the parties to an instrument have said, and in the light of that whole to determine whether they have or have not conveyed an intention that an immediate offer is being made or is to be made."
- Many of the cases in which a right of first refusal has been considered are contracts for the sale of land or leases of land and concern whether the right creates an interest in land, which generally it is considered it does not, because (unlike a true option) it creates no positive obligation on the part of the owner or landlord to sell or lease the property. At most it gives rise to a negative obligation, not to sell without taking certain steps. Correspondingly, in the present case, there is no positive obligation upon AZ to switch from DIP to propofol. The clause is concerned with conferring the relevant right in the event that AZ does decide to make the switch.
- Before considering the parties' rival contentions as to the meaning and ambit of clause H, it seems to me that there are two matters in particular that can legitimately be considered as part of the commercial background against which the provision is to be construed. First, in practice, the process of AZ determining to whom any contract for the supply of propofol would be awarded would never have involved asking Albemarle alone for a proposal or offer, but would always have involved seeking competitive tenders from a number of potential suppliers, including Albemarle, via a request for proposal. Second, once a supplier had been selected, the time between that selection and actual sourcing of propofol in place of DIP was likely to take between eighteen months and three years (as a number of AZ witnesses agreed) because of the time needed to obtain regulatory approval of the supplier and its product worldwide.
- At its most extreme, AZ's case is that clause H is too uncertain as regards both content and duration to be given any contractual effect. It is contended that, if the words "first opportunity" stood alone, they would have no meaning, like the words "first option" in Ryan v Thomas (1911) SJ 55, 364 per Warrington J. The short answer to that contention is that the words do not stand alone, but are accompanied by the words "and right of first refusal". Mr Odgers' argument that these words add nothing to "first option" and have an indeterminate meaning is misconceived and, in my judgment, contrary to authority, for reasons I will come on to shortly.
- So far as uncertainty of duration is concerned, Mr Odgers submits that it is not clear whether the "first opportunity and right of first refusal" is intended to continue indefinitely after termination of the supply agreement, so that it is too uncertain. He relies upon the decision of the House of Lords in Walford v Miles [1992] 2 AC 128, where it was held that an essential requirement for a valid "lock-out" agreement is that it should state for how long it is to last. It seems to me that the short answer to this point is that, whatever rights clause H confers only last for the duration of the supply agreement and cease upon termination. There is nothing in the terms of the agreement to suggest that the rights it confers somehow survive the agreement.
- Mr Odgers also submitted that the fact that the closing words of the clause recognised that the precise terms of any supply contract would require to be agreed between the parties meant that the provision as a whole was too uncertain to have any effect. I agree with Miss Carr that the fact that the precise terms of the contract would still be open for negotiation, once an offer was accepted or matched by Albemarle pursuant to its right of first refusal, does not deprive the right of first refusal of contractual effect: see Smith v Morgan [1971] 1 WLR 803 at 807 per Brightman J, where a similar argument that, because the provision containing the "first option" in that case stated that it was an option to purchase "at a figure to be agreed upon", it was void for uncertainty, was rejected by the learned judge.
- In any event, the submission that the clause is too uncertain to have contractual effect is an unattractive one. 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. For present purposes, it is not necessary to decide whether, as Albemarle sought to contend, the quid pro quo for the rights conferred by the clause was a competitive DIP price. It is enough that, once the clause is in the supply agreement, it should, so far as possible, be given some sensible meaning.
- AZ's alternative construction of clause H is that, at most, it required AZ to give Albemarle an opportunity to negotiate with AZ a contract on mutually acceptable terms for the supply of propofol. Mr Odgers relies upon the fact that this construction is consistent with one of the three categories of right of first refusal recognised by Park J in Speciality Shops Ltd v Yorkshire & Metropolitan Estates Ltd [2002] EWHC 2969 (Ch), that is the third category mentioned at paragraph 28 of the judgment:
"...the landowner is not obliged positively to offer to sell the land to the pre-emption holder, but rather he is obliged to notify the pre-emption holder of the situation, leaving it for the pre-emption holder to make his own offer to purchase the land if he chooses."
- It seems to me that there are a number of problems with this construction. To begin with, since, as the current supplier of DIP, Albemarle would almost certainly always have been included as one of the potential suppliers of propofol in any request for proposal (RFP) process, in practice this limited construction of clause H adds nothing to what would have happened in any event. To the extent that AZ can argue that clause H gives Albemarle a contractual right to have an opportunity to participate in the RFP, (where otherwise there would have been no contractual right to do so even if in practice Albemarle would have been given the opportunity), it seems to me that, if it had been the intention of the parties that clause H should have such a limited effect, it would have been easy to say so in terms. Words such as "[AZ] will notify [Albemarle] and will give [Albemarle] the opportunity to participate in any request for proposal and to negotiate a contract on mutually acceptable terms" would have been sufficient to achieve that effect.
- However, those were not the words used. Not only does clause H talk about "first" opportunity, suggesting that this is an opportunity before anyone else, but, against the commercial background to which I have referred, the right of "first refusal" seems to me most naturally to be referring to Albemarle being offered an opportunity to accept or refuse an offer on terms which AZ is minded to accept from a third party. It follows that, in my judgment, the analogy which AZ seeks to draw with Speciality Shops is not an apt one, as that case is not concerned with competing offers or bids for a supply contract. In any event, in so far as the three categories which Park J identifies are relevant at all in the present context, it seems to me the first category is closest to this case, namely that, where the triggering event occurs, the owner is obliged to offer to sell the property to the pre-emption holder and leave the offer open and capable of acceptance for a specified period.
- I agree with Miss Carr that, as an irreducible minimum, a right of "first refusal" by its nature confers a right to obtain the subject matter of the right, whether it is land or another asset or a service or a business opportunity to enter a contract. In other words, it confers a right to be given an opportunity to match any third party offer which the grantor of the right might be otherwise minded to accept, and, in the event that the grantee matches the offer, to be awarded the business to which the offer relates. That construction of the right of first refusal is supported by a number of authorities, which, albeit all at first instance, seem to me to support Miss Carr's submission about this irreducible minimum.
- First is the judgment of Brightman J in Smith v Morgan [1971] 1 WLR 803, to which I have already referred. The claimant conveyed a property and some land to the defendant and, under the terms of the conveyance, covenanted not to sell a piece of adjoining land without giving the defendant: "the first option of purchasing… at a price to be agreed upon provided that any such offer for sale shall only remain open for a period of three months from the date on which the said offer for sale is made open by the vendor".
- It would appear that the claimant wished to sell the land to someone else, as she issued an originating summons seeking to escape her obligations under this provision. She contended that the provision was not legally binding, since it did not state a price or a method of determining a price, and that it was merely an agreement to agree. Brightman J rejected the argument that the provision was a mere agreement to agree and held:
"[the] obligation on the vendor, should she wish to sell, is an obligation to make an offer to the purchaser at the price and at no more than the price at which she is, as a matter of fact, willing to sell."
- He went on to hold that in putting forward a price, the vendor was obliged to act in good faith:
"The plaintiff must, of course, act bona fide in defining the price to be included in the offer. It is a matter of fact. If the plaintiff is proposing to sell by auction, the price to be specified in the offer to the defendant would be the intended auction reserve. If she is proposing to sell by private treaty the price to be specified in the offer would be the price intended to be named in the estate agent's particulars, or the lower price, if any, to which the plaintiff is, as a matter of fact, prepared to descend on such a sale." (p808G)
- Mr Odgers contended that Smith v Morgan could be distinguished, on the grounds that the relevant provision contained an express covenant to make an offer, an express term absent in the present case. I agree with Miss Carr that there is nothing in this point, since the very nature of a right of first refusal is such that it necessitates the making of a contractual offer to the party who is the grantee of the right of first refusal. If authority were needed for this proposition, it is to be found in the next of the three cases, the decision of Hirst J in Fraser v Thames Television Ltd [1984] QB 44.
- The claimants in that case were three actresses who were members of an all girl rock group called "Rock Bottom" and their composer and manager. They had developed an idea for a television series based on the group and their lives. They approached the defendants, the well-known television company ("Thames"). At a meeting in October 1974, the head of drama at Thames, Verity Lambert, indicated that she was commissioning a scriptwriter to write a first pilot script, on the basis of which Thames and the claimants would have to decide whether to proceed with a full series of six episodes. It was agreed that the claimants would be paid to keep silent (in other words not approach anyone else with the idea) until Thames made its decision in December and that they would not appear in any competing television programme in the intervening period, in effect an option period. The claimants also agreed that if they decided not to proceed with the full series, Thames could do so with other actresses.
- The oral agreement at the meeting was confirmed in a letter from Thames of 16 October 1974, which, so far as material, provided:
"We write to confirm the understanding between us whereby in consideration of the payment by us to you of the agreed sum of [£500] we shall acquire an option on your services in connection with a possible new series of programmes...during the period commencing from the date hereof until 31 December 1974. It is understood and agreed that:... 2. Should Thames decide to proceed with the series you will have first refusal in connection therewith but in the event of your deciding against such a project your decision shall in no way jeopardise Thames' right to undertake the series with three other artistes..."
- The period of the option was extended and, in March 1975, Thames decided to proceed with the series in September. Although by a letter of acceptance in April 1975, the claimants agreed to participate in the series under the terms of the agreement of October 1974, no contractual offer of parts was ever made to the claimants. In the event Thames used the claimants' idea to make two series of a programme entitled "Rock Follies" which starred other actresses including Rula Lenska. The claimants issued proceedings for breach of confidence and breach of contract.
- The learned judge rejected an argument on behalf of the claimants that, they having exercised their right of first refusal, Thames was not entitled to impose any additional terms in relation to other work by the claimants during the making of the series, on the basis that at an appropriate time, detailed working arrangements during the making of the series would have had to be negotiated which had not been worked out at the time of the October agreement. However, he went on to accept the alternative argument on behalf of the claimants:
"..that Thames were at this stage obliged to make the girls a contractual offer of parts, in terms not inconsistent with what had been agreed on October 4 and not less favourable than they were prepared to accept: see Smith v Morgan [1971] 1 WLR 803. I think that Mr Strauss is also right in submitting that they would have been obliged to keep such offer open for as long as was reasonable in the circumstances prevailing at the time. Inevitably time would be needed to try to agree the detailed terms of the engagements (involving no doubt some give and take on both sides if any agreement was to be reached). It was at this juncture, after the making of the contractual offer, that I think it was appropriate to settle these details, including any arrangements as to other work."
- That passage also demonstrates that this case, like Smith v Morgan, is authority for the proposition that a right of first refusal constitutes a right to receive a contractual offer on terms which the party who has granted the right of first refusal is prepared to accept, even though the detailed terms of any contract may require further negotiation and might ultimately not eventuate in a contract at all. As I have already noted, it is also authority for the proposition that the grantor of the right of first refusal is obliged to make a contractual offer, even though there is no express covenant to that effect in the term containing the right of first refusal.
- Hirst J went on to deal with another point which is of particular relevance to the present case, namely the extent to which the making of a contractual offer requires the detailed spelling out of the terms of the offer:
"Mr Harman contended that Thames did in fact make a contractual offer of parts to the three girls by Miss Sadler's approach to the agents in March and by letters. He argued that a contractual offer did not require any detailed spelling out of the terms. I do not accept these contentions. In my judgment a contractual offer must contain at least the salient terms proposed, including most importantly terms as to remuneration."
- The third case is QR Sciences Ltd v BTG International Ltd [2005] EWHC 670 (Ch) (initial judgment) and [2005] EWHC 1500 (Ch) (supplemental judgment), a decision of Park J. The defendant had licensed to the claimant a large portfolio of patents across a number of jurisdictions. The relevant term of the licence provided:
"Cl 14.4 - In respect of the Patents, prior to abandoning any of the Patents which are issued, or any of the Patents at the application stage (other than a superseded application) BTG will not, (in so far as it is able to) assign, withdraw, abandon or cause to allow to lapse any Patent without first offering to assign such Patent to the Licensee."
- In the initial judgment Park J rectified this provision on the grounds of unilateral mistake, so that it granted to the claimant a right of first refusal. He held at paragraph 3 that the effect of the rectified provision was that: "throughout the term of the licence BTG will not assign any patent without first offering to assign such patent to QRS." The defendant had in fact attempted to assign to a third party some of the patents licensed to the claimant, but argued that letters it had sent the claimant (which it was common ground were an invitation to treat and not a contractual offer) had provided the claimant with its right of first refusal.
- Park J rejected that argument, holding that, if a right of first refusal could be satisfied by providing the offeree with an invitation to treat, the right would amount to little more than an agreement to negotiate and thus not be legally enforceable. He concluded that only a contractual offer would suffice to comply with clause 14.4 as rectified (see paragraph 49 of the judgment).
- In his supplemental judgment, Park J expanded on the nature of the right of first refusal at paragraph 6:
"...for an offer by BTG to QRS to be of the sort which will rank under clause 14.4 as BTG "first offering to assign such patent to the licensee", the offer must be not merely in form a contractual offer: it must also be a bona fide offer. That is an expression which I take from the judgment of Brightman J in Smith v Morgan [1971] 1 WLR 803, at page 808. The judge does not quite say "bona fide offer". He says: "The plaintiff must, of course, act bona fide in defining the price to be included in the offer". The meaning is, I think, the same. What is contemplated is that B needs to make an offer at a price which it is willing to accept and, more importantly it seems to me, at a price which, in good faith, it considers to be one which a genuinely interested offeree would be prepared to consider."
- Although QR Sciences was a very different case from the present on the facts, in the sense that, as the learned judge recognised, the relevant contractual negotiations would precede the making of the offer which the right of first refusal required, so that the "contractual offer" had to be one the acceptance of which created an immediately binding contract, in my judgment this case is further support for the principle (recognised by Smith v Morgan and Fraser v Thames Television) that what is required for the grantor of a right of first refusal to comply with its obligation is a "contractual offer", in the sense of an offer which contains the essential terms on which the grantor is prepared to enter into a contract. It matters not that detailed terms may require subsequent negotiation.
- I agree with Miss Carr that, where what has occurred, as in the present case, is that the grantor of the right of first refusal has received an offer from a third party the terms of which it is minded to accept, what is required to comply with the obligation to grant a right of first refusal is that the grantee be afforded the opportunity to match that offer. In my judgment it can make no difference to the substance of the obligation that the grantor is in the position of accepting as opposed to making an offer. All three cases which I have cited make it clear that the grantor is obliged to afford the grantee the opportunity to contract on whatever terms the grantor is minded to accept. If a third party has offered terms which the grantor is minded to accept, the essence of granting the right of first refusal must be the affording to the grantee of the opportunity to match any such offer made by a third party.
- In that context, one of the further issues of construction which arises is whether the grantor is obliged to act in good faith and to provide the grantee with full disclosure of the terms of any third party "deal" which it is minded to accept. Albemarle pleads its case as to good faith and full disclosure in the alternative as express terms of clause H or as implied terms necessary to give clause H business efficacy. Both in its opening and in its written closing submissions, AZ expended much energy in arguing that there was no basis for any implication of terms because Albemarle was seeking to imply wide ranging and overwrought contractual obligations into clause H which could not and should not be implied.
- I accept Miss Carr's submissions that this approach is misconceived because, on analysis, all that Albemarle is relying upon are obligations which are inherent in or incidents of the right of first refusal. Thus, if there is a third party deal with which the grantor is minded to proceed, in order to enable the grantee to exercise its right of first refusal and match that offer, full and fair disclosure of that deal by the grantor is required. That seems to me to be an incident of the obligation on the grantor to act in good faith recognised by both Brightman J and Park J. Furthermore, the passage from the judgment of Hirst J which I cited in paragraph 45 above recognises the importance of providing full details of whatever contractual "deal" is contemplated, so as to enable the right of first refusal to be properly exercised.
- So far as the obligation to act in good faith is concerned, that is not some vague generalised obligation in the current context, but, as the cases I have cited recognise, what is required (consonant with the obligation to provide full and fair disclosure of any deal the grantor is minded to accept) is good faith in setting out the precise terms of the offer the grantee has to match and which the grantor is minded to accept. I agree with Miss Carr that, without good faith in that sense, the grantee will not have the opportunity to which the right of first refusal entitles it contractually, to understand and have the opportunity of matching the third party proposal.
- A further aspect of the obligation on the grantor to act in good faith concerns the effect of the closing words of clause H: "under mutually acceptable terms and conditions". As already discussed, what those words recognise is that, even after the grantee has accepted the "contractual offer" or, in the present case, matched the third party offer the grantor is minded to accept, it may still be the case that no binding contract is entered, because for example, there is some insuperable difficulty between the parties as regards the detailed specification of the propofol to be supplied. However, in my judgment what the grantor is not entitled to do is to act in bad faith in relation to such detailed negotiations, declining ultimately to enter a contract with the grantee and then enter into a contract on essentially the same terms with a third party.
- Equally, because clause H does not impose a binding obligation on AZ to enter a contract for the supply of propofol, if during the detailed negotiations, in all good faith it decided not to enter such a contract at all because, for example, it decided to continue distilling DIP at Macclesfield and not source propofol direct after all, it could not be criticised. What it could not do is break off negotiations with Albemarle on the basis it did not want to enter a contract after all and then, weeks or months later, enter a propofol supply contract with Sochinaz or someone else after all.
- Another issue which arises in relation to the construction of clause H is when the obligation arises and, thus, when it can be said, if AZ has not complied with the obligation, that AZ is in breach of clause H. AZ's primary case on this was that any obligation under the clause and hence breach of that obligation would only occur when AZ was about to enter into a supply contract for propofol with a third party, here Sochinaz.
- A moment's thought reveals that, if this were right, it would have the effect of depriving clause H of much of the purpose and effect which I have held it has. That is because the commercial reality is that AZ would not commit finally to a supply contract with a potential supplier until all the necessary worldwide licences and approval for supply by that party had been obtained, a process which could take anything from eighteen months to three years. The proposition that it would only be at the end of that process that AZ was obliged to approach Albemarle (or in breach for failing to do so), carries with it the necessary concomitant that, if Albemarle then matched the third party's terms, AZ would have to go through the whole process of obtaining licences and approval all over again. This simply makes no commercial sense and is therefore a construction which the court should reject, unless driven to it because no other construction is feasible.
- Fortunately, in my judgment, there is another, more commercially sensible construction which can be given to clause H, in relation to when the obligation upon AZ arises. Because, for the reasons I have already given, a right of first refusal constitutes a right to receive a contractual offer on terms which the party who has granted the right of first refusal is prepared to accept, where the grantor is minded to accept a third party offer, the obligation to enable the grantee to match the offer must arise before the offer made by the third party is accepted. In other words the grantor is in breach if it accepts the third party's offer, without enabling the grantee to match it. What this means, in the present case, is that AZ was in breach of clause H at the latest on 11 October 2007, when it informed Albemarle that it would not be awarded the propofol business and, on the same day, informed Sochinaz that it would be established as the "single source" for propofol, without having afforded Albemarle the opportunity to match Sochinaz's offer.
- One of the areas of dispute both contemporaneously and at trial concerned this issue of "single source" or "sole supply" and whether, in the event that Albemarle matched a third party offer, it was entitled to be the exclusive or sole supplier of propofol. AZ sought to make much of this issue in its evidence and submissions. In particular, Mr Hadfield in his evidence (reflecting some of his later contemporaneous communications in 2007 and 2008) sought to draw a distinction between "single sourcing" or "sole supply" on the one hand and exclusivity or exclusive supply on the other. As I have already indicated, this was a distinction which a number of other AZ witnesses also sought to draw, as did Mr Odgers, in support of a contention, that because Albemarle wanted exclusivity, it never matched Sochinaz's offer.
- I should say at the outset that I was unimpressed by this distinction. The reality is that, because it would take AZ anything between eighteen months and three years to get all the necessary regulatory approvals worldwide for a supplier of propofol, AZ was only ever going to use one supplier (barring some catastrophe with that supplier that necessitated a switch mid-contract). The formal contractual position may have been that (a) because of EU regulations, AZ could not commit contractually to purchasing more than 80% of its requirements from one source and (b) AZ corporate policy was not to enter "exclusive" contracts expressly so described, but the practical reality is that this was exclusive supply.
- This is demonstrated by the fact that it was not until AZ was looking for a pretext to contend that Albemarle was not matching the Sochinaz offer, that AZ sought to draw a distinction between "sole supply/single sourcing" and exclusive supply. Thus, when, in response to Dr Ewart's email of 11 October 2007, telling Sochinaz that it would be established as the "single source" for propofol, M. Rosset of Sochinaz said they would like to thank AZ "for having chosen Sochinaz as your exclusive supplier of Propofol", no one at AZ batted an eyelid or thought to correct what, on the case adumbrated by Mr Hadfield and adopted by Mr Odgers, was a major misunderstanding on the part of Sochinaz. The truth is that, at the time, no distinction such as is now sought to be drawn, was ever drawn.
- In terms of construction of clause H it is not strictly necessary to decide whether, as Miss Carr submits, it is an incident of the right which I have held that the clause confers, that Albemarle should be entitled to be exclusive or sole supplier of propofol. This is because Sochinaz's offer was for exclusive or sole supply and, at its lowest, the clause entitled Albemarle to match the Sochinaz offer. The nature of the entitlement was aptly described by Miss Carr as standing in Sochinaz's shoes, reflecting Mr Clary's evidence:
What...we thought we were entitled to was to stand in place of the other supplier to get the benefit of whatever commitment had been made to the other supplier, and also to assume whatever commitments they had made.
- However, if I had to decide the point I would conclude that, whilst clause H did not necessarily entitle Albemarle to insist upon being exclusive supplier (subject always to the terms of the third party offer which Albemarle was seeking to match), at the very least it entitled Albemarle to provide the bulk of AZ's requirements for propofol. Were it otherwise, the purpose and effect of clause H could have been thwarted, by AZ simply appointing Albemarle one of two non-exclusive suppliers and then taking all or most its requirements from the other supplier. At one stage, this was the course which Mr Hadfield and Mr Evans were discussing in the event that AZ was obliged to accept Albemarle as a supplier of propofol.
- Whilst the construction of the contract cannot be determined by reference to the subjective views of the parties, it is striking that, in his evidence, Mr Marc Jones accepted that this two supplier approach would not result in a meaningful contract for Albemarle. He accepted that, if Albemarle matched Sochinaz's offer, it would be entitled to be awarded a contract for the bulk of AZ's propofol requirements, which in practice would mean sole supply under a contract which provided for Albemarle to supply a minimum of 80% of AZ's annual requirements.
E. Detailed findings of fact
(i) The first Request for Proposal in 2006
- As early as 10 May 2006, Mr Hadfield of AZ informed Mr Willemen of Albemarle that AZ had decided to shut down its Macclesfield facility and eventually to move to the purchase of generic propofol, to be supplied to AZ's Italian site. The timing of the shutdown was not known, but Mr Hadfield guessed it could be around a year. AZ then sent out a Request for Proposal (RFP) to potential suppliers of propofol, including Albemarle, imposing a deadline for receipt of proposals of 31 July 2006. This assumed the commencement of deliveries in 2009. Mr Hadfield's evidence was that, at this stage, the principal purpose of this RFP was to explore whether it was possible to obtain DIP at a hypothetical price of US$50 per kg. He accepted that this was an unrealistic price but this RFP was essentially a feasibility study carried out to test the water and see what prices came out.
- Before Albemarle submitted its response, there was a meeting between the parties on 19 July 2006 at which Albemarle was told that AZ was likely to go for single sourcing. When Mr Hadfield was asked about this in cross-examination, he said that whilst AZ might well have done, he didn't believe they would have contracted on a basis which allowed exclusivity. This was essentially the beginning of the theme in his evidence of exclusive versus sole supply, which for reasons I have already given, was in truth a distinction without a meaning.
- On 31 July 2006, Albemarle submitted its written proposal to AZ. This quoted a price of US$435 per kg DDU Milano based on 100% supply, estimated to be 12 to 14 metric tonnes per year. Although this was not the highest price quoted, it was twice that of two other quotes received by AZ: $224 from Clariant and $202 from Sochinaz, as Mr Hadfield informed Mr Tavernier at a meeting on 17 August 2006. Mr Hadfield said that it would be difficult to take Albemarle forward as a supplier of propofol and that AZ felt its price was disproportionate compared with its DIP pricing. Mr Hadfield said that other suppliers had supplied a breakdown of their cost structure, whereas Albemarle had refused. Mr Tavernier said it was a good faith price indication, based on most recent price feedback from global markets. Mr Hadfield accepted in cross-examination that he did not raise the issue about sole supply at that meeting.
- In subsequent meetings and phone calls AZ queried the Albemarle quote but Albemarle remained adamant that it was a real market price. At this stage, because AZ had not been able to find any price at less than $200 per kg (let alone the target price of $50 per kg), this "wiped out the cost drivers for the change" from DIP to propofol, as Mr Minster (Mr Hadfield's boss) put it in an email. The project to move to the purchase of generic propofol was put on hold by AZ but was revived in about May 2007.
(ii) The second Request for Proposal and the AZ decision to proceed with Sochinaz
- On 21 May 2007, Dr Ewart (who had by this stage taken over Mr Hadfield's role) told Mr Tavernier that AZ's plan was to "commoditize" propofol by having several approved suppliers. This is odd, since it is clear from a number of internal AZ documents at around this time, that this was not in fact AZ's plan at all. On the contrary, Mr Richmond of AZ was seeking to introduce a "lean" supply strategy, reducing the number of suppliers overall. This is clear from an internal report from Mr Evans dated 16 May 2007. This referred to GES finding and implementing external sourcing of propofol at a target price of at or below $200 per kg. It went on:
"The switch to the new supplier needs to be carefully managed in line with the current supplier Albemarle. The last binding forecast AZ needs to submit within the current contract is in September 2007. In March 2008 either party could end the contract."
- That demonstrates both that AZ was only contemplating one supplier of propofol and that it had in mind appointing someone other than Albemarle, no doubt because of the price which Albemarle had quoted in the previous RFP. In cross-examination Dr Ewart accepted that AZ had this lean strategy and said that, whilst cost was important, it was not the "number one driver", which was leverage over the wider relationship with any particular supplier. It is clear that from an early stage AZ favoured Sochinaz as supplier of propofol, in part because it was a subsidiary of Bachem with whom AZ had a long-standing relationship for the supply of goserelin and, as Dr Ewart put it in an internal email of 5 June 2007: "AZ are their No 1 customer". As Ms Galbraith said, in a later internal email, of the fact that AZ would be the primary customer of the Bachem group: "Lots of lovely leverage".
- At a meeting at Macclesfield on 15 June 2007 between AZ management (including Dr Ewart and Mr Richmond) and Bachem management (including Thomas Fruh, the CEO), principally to discuss the extension of the existing goserelin contract (which was in fact extended for five years on 20 June 2007), Mr Richmond discussed the AZ supplier strategy and how the supply of propofol would be "a good way to bring Bachem/Sochinaz closer to AZ". Towards the end of the meeting, Dr Ewart also spoke about the potential supply of propofol by Sochinaz. His own minutes of the meeting describe this as: "include Sochinaz in 2007 RFP to reduce[d] supply base".
- Another internal document disclosed during the course of the trial described the strategy as being to "establish and maintain a small [number] about ten basic suppliers who are able and willing to supply about 90 per cent of our bulk drug category". It seems clear that Bachem/Sochinaz was thought of as one of those suppliers, but Albemarle was not. Dr Ewart accepted in cross-examination that, under this outsourcing strategy, Albemarle was not a preferred supplier.
- Towards the end of June 2007, AZ did indeed send out another RFP for the supply of propofol, asking for a quotation for long term supply at volumes of 16, 12 and 6 metric tons per annum. The deadline for receipt of proposals was 20 July 2007. Dr Ewart sent this to Mr Tavernier as an attachment to an email dated 26 June 2007 headed "Confidential: Bachem/Sochinaz –AstraZeneca Propofol Sourcing" which of course inadvertently told Albemarle the identity of Sochinaz as a potential supplier, something which Mr Tavernier picked up and passed on in an internal Albemarle email.
- Mr Tavernier then had a telephone discussion with Dr Ewart on 17 July 2007, a few days before the deadline for submissions of proposals. Dr Ewart said the previous Albemarle offer of $435 per kg was out of line and AZ was looking at pricing of $200 to $250 per kg, possibly lower. He said that AZ's Diprivan business was under pressure and AZ management was convinced that its competitors were sourcing in that price range. Mr Tavernier defended the Albemarle price as a true market value in view of both European and US market conditions.
- On 20 July 2007, Albemarle put in its written proposal which quoted prices of $435 per kg for an annual volume of 6 to 11.9 metric tons and of $385 per kg for an annual volume of 12 to 20 metric tons. This offer was on the basis of continuing the "majority supply" position of a minimum of 80% of AZ's requirements as under the current supply agreement. The quotation which AZ received from Sochinaz at the same time was for prices between 166 and 176 Euros per kg (depending on annual volume), equivalent to about $220-$230 per kg.
- A meeting then took place at Macclesfield on 25 July 2007 between Dr Ewart, Mr Evans and the Taverniers to discuss the Albemarle quote. Dr Ewart explained that AZ had four or five offers from Western suppliers, with some of whom AZ had an established relationship, and that Albemarle's prices were higher than those of the others. He also said that, if Albemarle were to offer $250 per kg, it would be the candidate of choice considering the advantages it offered, even though it would not fit the lean supply strategy.
- Albemarle did not take up that suggestion of offering $250 per kg. Albemarle's approach was clearly informed by its understanding of the meaning of clause H. Mr Carter explained in evidence that Albemarle's strategy of maintaining prices in the range it had quoted the previous year, even though it was aware that other potential suppliers would quote lower prices, was influenced by what it had been advised by its American attorneys was the correct construction of clause H. This was that the clause would give Albemarle two bites of the apple or cherry, in the sense that, if its first price proposal were not acceptable to AZ, AZ would have to give Albemarle the opportunity of matching the offer of any third party whose offer AZ was otherwise minded to accept. On that construction of the clause (which is coincidentally the one which I have found is the correct one), it would have made no commercial sense to start with a lower quote, because Albemarle would end up as Mr Carter put it "starting a bidding war with ourselves".
- Mr Clary gave evidence to similar effect. He explained the commercial thinking behind Albemarle's tactics very cogently as follows:
"My concern about the 250 price that [Dr Ewart] had mentioned was that, you know, he didn't say "We would immediately sign you up", it was a softer assurance like "You would be a leading candidate" or words to that effect. I was afraid that if we came in and dropped our price by a third to 250, as a good purchasing man he would say "Well, that was easy, I waved competition in front of them and they came down a third, I wonder what else is possible" and that he would take our new price to all the other suppliers, and say "I like your offer but now Albemarle is down lower, you need to be lower still" and then he would come back to us and say "Now the market is 150, what else can you do?" So I thought our best chances of maximising a price were to have some chance at the highest -- the higher price that we offered, and failing that, to match whatever price they took from another supplier, rather than starting a bidding war in advance of the end of the RFP."
- This explains why (although Albemarle ended up matching the Sochinaz price of about $220) it did not immediately take up AZ's suggestion and offer $250. Like Mr Clary, Mr Carter felt that Albemarle might be driven lower and, at least at this stage, that it could do better, as he set out in an overview document he prepared, dated 26 July 2007. Albemarle's understanding of what clause H meant also clearly influenced the SWOT (Strengths, Weaknesses, Opportunities, Threats) Review Mr Carter conducted on 1 August 2007 in advance of a further meeting between the parties scheduled for 14 August 2007. This categorised the lengthy qualification process of 18-24 months for any supplier of propofol as a "strong lever" which gave the opportunity to put AZ in a "time box" in relation to DIP supply.
- What Mr Carter had in mind, as he candidly accepted in evidence, was that, if AZ chose another supplier of propofol, because of the time needed to have that supplier qualified worldwide, AZ would still need to distil DIP to make Diprivan for a substantial period of time. If Albemarle then terminated the supply agreement in March 2008 with effect from March 2009 (the earliest date it was entitled to terminate under the contractual termination provisions), it could demand a higher price for the continued supply of DIP. As the SWOT review put it: "[we] can profit on either product".
- In cross-examination, Dr Ewart accepted that the meeting on 25 July 2007 was the closest he had got to giving Albemarle any details of third party offers. He said that he would not have done so because that would be to give Albemarle an unfair advantage in the RFP process, which he thought it would be unethical to do, although, somewhat inconsistently, later in his evidence he said he would have provided Mr Tavernier with details of Sochinaz's offer if he had asked for them. Since what he was describing at this earlier point of his evidence was what the position would be in a normal RFP process with a number of potential suppliers, I did have some doubt whether he had really considered the potential application of clause H at all.
- Later in cross-examination, Dr Ewart insisted that he had had discussions with Mr Tavernier about the nature of the contractual obligations, although he said that he may not have expressly mentioned clause H. I was originally a little sceptical about that evidence, mainly because there does not seem to be any mention in any of Mr Tavernier's careful and detailed notes of meetings and telephone conversations with Dr Ewart of discussion of the terms of the contract. However, given that Dr Ewart volunteered that, during the discussions, Mr Tavernier had explained to him Albemarle's understanding of the clause, that it gave Albemarle two bites of the cherry, it seems to me on reflection that Dr Ewart is unlikely to have made that up or misremembered it, and some such discussion of the contractual obligations as Dr Ewart described did take place.
- On 8 August 2007, AZ management, including Mr Evans and Dr Ewart, attended what was described as a "propofol supplier selection review meeting" at which the advantages and disadvantages of Albemarle and Sochinaz as suppliers were discussed. It was recognised that both suppliers would require a QA and ISEP (Quality Assurance and Integrated Supplier Evaluation Protocol) audit. Mr Evans had in fact already arranged for an audit of Sochinaz's site to take place on 18 and 19 September. At the meeting, it was recognised that, in terms of the regulatory submissions required, Albemarle was the easier, but in terms of cost, Sochinaz was cheaper. The minutes of the meeting conclude: "Sochinaz are the preferred supplier, pending the outcome of the ISEP and QA Audit, assuming Albemarle do not come back with a lower priced proposal".
- On 14 August 2007, the scheduled further meeting between the parties took place at Macclesfield, attended by Mr Tavernier and Mr Carter for Albemarle and Dr Ewart and Mr Richmond for AZ. Mr Richmond explained in some detail AZ's new lean supply strategy, in particular that in order to outsource all commercial production of APIs, AZ intended to work with a small group of preferred suppliers who would supply present and future APIs. Mr Richmond said that Albemarle was not on this list of preferred suppliers or even on a list of second league such suppliers.
- Dr Ewart said that Albemarle's offer remained of interest to AZ and asked Albemarle not to withdraw it. He explained that, at a meeting the previous week (presumably a reference to the meeting of 8 August 2007), AZ had listed Albemarle as third out of four in a list of possible suppliers, due to the perceived high price it had quoted. Dr Ewart did not reveal who the other three names were, but in his note Mr Tavernier says he assumes that numbers 1 and 2 were Bachem/Sochinaz and Clairant.
- No further meeting between the parties took place until 27 September 2007, after the QA and ISEP audit at Sochinaz had taken place. At the meeting on 27 September 2007, Dr Ewart and Mr Evans attended for AZ and the Taverniers for Albemarle. Dr Ewart referred to AZ having been quite pleased by the audit at their preferred supplier (which he did not name but which Albemarle assumed, correctly, was Sochinaz). He indicated that AZ was more likely to single source, which would be best both in terms of optimisation of the supply chain and from the regulatory perspective. In fact, as he accepted in cross-examination, the decision had already been taken to put only one company not two on the regulatory filing, so that in reality propofol was going to be single sourced. Similarly, Mr Evans fairly accepted when asked in cross-examination about this meeting that: "submitting one supplier for regulatory approval was the plan".
- Dr Ewart said Albemarle was perceived as the second candidate but its price was higher than AZ's internal manufacturing cost of propofol. In view of the long term cooperation, if Albemarle wished to do so, AZ was open to a revised offer from Albemarle, which Dr Ewart indicated should be in the range $200 to $250 per kg to be competitive. Giving Albemarle in effect one last opportunity to make a competitive offer was evidently how AZ viewed its obligation under clause H.
- There was some discussion at the meeting on 27 September 2007 about AZ's DIP requirements for the rest of the year and the forecast for the following year, which AZ had to send by the end of that month. AZ was to hold an internal meeting the following day. AZ's perception was that the current supply agreement would allow them to source DIP into 2009. On 28 September 2007, Dr Ewart sent Albemarle AZ's 12 month forecast for 2008 which was for 1,708 or 1,709 kg per month, totalling 20.5 metric tons for the year, with the forecast for 2009 also being 20.5 metric tons.
- On 3 October 2007, Dr Ewart sent MM. Rosset and Besancon of Sochinaz an email raising various queries including whether the prices Sochinaz had quoted could be fixed for three years and whether they would be willing to reduce the price further for a five year commitment. At the end he stated: "For info there is now only Sochinaz and the incumbent (for DIP crude) remaining in contention and our intention is to be single sourced." M. Rosset sent a detailed reply on 6 October 2007, in which, amongst other things, he confirmed that Sochinaz's prices were valid for three years and that for a five year contract Sochinaz would be willing to keep that price level for the two additional years and absorb any cost increases.
- On Friday 5 October 2007, Dr Ewart sent Mr Tavernier an email asking for an update on whether there would be any movement on Albemarle's proposal by the end of Tuesday 9 October, as he wanted to be in a position to finalise AZ's decision by the end of the following week. Mr Tavernier telephoned him on Monday morning to ask for more time but Dr Ewart insisted that he had to have a response by Thursday 11 October at 5pm at the latest as he had been instructed to close the RFP that week.
- Having discussed the matter internally, Albemarle prepared a strategy to withdraw its original offer and make a revised offer open until 25 October 2007 of $440 per kg for North America and Japan and $315 per kg for all other global regions, whilst indicating that Albemarle would serve 12 months notice of termination pursuant to clause B2 on 4 March 2008. Mr Carter considered the average price under the revised offer of about $365 per kg a very competitive one. As he put it in cross-examination:
"Might I note that this price was about a 20 per cent advantage to the rest of the propofol market who was buying [a] generic version of propofol -- or supplying a generic version of propofol in the market. So a very competitive price for AstraZeneca."
- At a meeting at Macclesfield between Dr Ewart, Mr Evans and Mr Tavernier on 11 October 2007, Mr Tavernier withdrew the original offer and made a presentation of the revised offer. However, Dr Ewart indicated that this was not of interest, at which point Mr Tavernier indicated (in accordance with the internal Albemarle strategy previously agreed), that Albemarle would therefore be terminating the supply agreement by giving 12 months notice with effect from 4 March 2008. That Albemarle would not be awarded the propofol business was confirmed by Dr Ewart in an email that afternoon.
- At about the same time on 11 October 2007, Dr Ewart sent an email to M. Rosset stating:
"Further to our discussion earlier, previous email correspondence and audits I am pleased to announce on behalf of [AZ] that the ongoing propofol supply will be awarded to Sochinaz…..The decision to move away from our incumbent source of [DIP] has not been an easy one . However, after our visit/discussions recently and specifically the excellent relationship with Bachem/Goserelin, [AZ] are extremely confident (all risks considered) that establishing Sochinaz as the single source (previously indicated) for propofol supporting our Diprivan brand is a positive step forward".
- M. Rosset responded to that email within some twenty minutes, copying his reply to Mr Evans and Mr Richmond as well. He stated:
"Thank you for your written confirmation below. We would like to thank you for having chosen Sochinaz as your exclusive supplier of propofol in [the] near future."
- Dr Ewart copied this exchange to management within AZ extensively. It is a striking fact, as I have already noted earlier, that despite the distinction that AZ now seeks to draw between single sourcing or sole supply on the one hand and exclusivity on the other, absolutely none of the recipients of M. Rosset's email raised any query whatsoever about his statement or responded to him suggesting that he had got the basis for the appointment wrong. Mr Evans in particular struggled to deal with this in his evidence. Whilst accepting that he had read the email, he said that he hadn't picked up on the use of the word "exclusive". It seems to me that the reason why neither he nor anyone else picked up on this is simple: in practice this was a distinction without a difference, for the reasons I have given earlier.
- The position as at 11 October 2007 was thus that, at the end of the RFP process, AZ had decided to accept Sochinaz's offer and it had done so without giving Albemarle details of that offer or affording Albemarle the opportunity to match that offer. Given my conclusion as to the correct construction of clause H, it must follow that, as at that date, AZ was in breach of the clause. In one sense it is therefore academic whether AZ had already made its decision to award the propofol contract to Sochinaz before that date, but that is an issue I shall address briefly, since it was dealt with in the evidence.
- Despite the valiant attempt by Dr Ewart to maintain in cross-examination that the decision to proceed with Sochinaz rather than Albemarle was not made internally at AZ until the time when he was instructed to send emails to Sochinaz and Albemarle on 11 October 2007, just before he left AZ to take up employment elsewhere, in my judgment it is clear that more senior management than Dr Ewart, specifically Mr Richmond, had taken the decision at an earlier stage, certainly not long after the 14 August 2007 meeting and, in any event, by early September 2007.
- That emerges from the telling email Dr Ewart sent to Mr Hadfield, with whom he remained in contact after he left AZ, as they had become friends, on 10 March 2008 where he refers to the fact that he had held back on telling Albemarle it had been unsuccessful until just before he left, the explanation for which he gave as "Initial timings would have had this message given early September, but I held off until October to see the ISEP of the new source completed successfully". He had evidently had a row in the office with Mr Richmond about this.
- That the decision to proceed with Sochinaz was made in September 2007 also emerged from a document disclosed late in the day, evidently prepared by Mr Richmond, for presentation to Bachem/Sochinaz at the meeting in June 2007, which talked about a strategy of achieving a manageable number of preferred suppliers capable of meeting 90% of AZ's pre-patent needs and that the selection of suppliers to attain that strategy was to be complete within GES by September 2007. In cross-examination, Mr Jones accepted that that was the strategy. Mr Evans also accepted in cross-examination that the decision to proceed with Sochinaz had been made in principle before the ISEP audit took place in September 2007.
- Accordingly, in my judgment, the reality is that, despite Dr Ewart's attempts to explain this away, AZ's internal position by early September 2007 was that it was going to proceed with Sochinaz as supplier, provided the ISEP audit was successfully achieved and, once the audit had taken place on 18 and 19 September to AZ's satisfaction, in effect the die was cast.
(iii) Communications between 11 October 2007 and 19 December 2007
- The decision to inform Albemarle on 11 October 2007, immediately after the revised offer was presented, that AZ was not interested and would not be awarding the propofol business to Albemarle seems to have genuinely taken Albemarle's representatives by surprise. It is apparent from the internal Propofol Offer Plan prepared by Mr Carter before the meeting of 11 October (evidently to assist Mr Tavernier in any negotiations) that what he contemplated was that the revised offer (with or without a threat to terminate the supply agreement in March 2008) would prompt negotiations with more senior management within AZ, because of the time box that he had described in his SWOT review.
- Once AZ had indicated that Albemarle would not be awarded the propofol business, Albemarle consulted its lawyers. On 26 October 2007, it sent a letter (signed by Mr De Tavernier but clearly drafted by Albemarle's lawyers) addressed to Mr Richard Lower (who had taken over at AZ upon Dr Ewart's departure the previous week, although in the event, it was Mr Hadfield who resumed responsibility for the relationship with Albemarle as supplier account manager with GES). That letter stated, inter alia:
"The email stating that AZ will not be awarding the propofol business to Albemarle without allowing us to exercise our right of first refusal is a breach of our mutual understanding and agreement. We are requesting that AZ rectify this situation within thirty (30) days after your receipt of this message, and we are specifically asking you to please provide us a copy of the final proposal/agreement for propofol that AZ has elected to pursue, so that we may review it and determine if we wish to exercise our right of first refusal. In the event AZ fails to timely remedy this breach, we will have no choice, but to consider our other options under the agreement. Such other options may include the possibility of terminating the agreement."
- Mr Hadfield's reaction to this, in internal communications within AZ, was that his and Dr Ewart's view was that AZ had complied with its obligations under clause H and that, at some stage, Albemarle would try to hold AZ to ransom, for example by terminating the supply agreement, so that it was important to get regulatory approval for Sochinaz as quickly as possible. It was essentially from this point on that what might be described as a tactical game between the parties began.
- On the one hand, Mr Hadfield was seeking to build up a stockpile of DIP at Macclesfield against the eventuality of early termination of the supply agreement by Albemarle, whilst so far as possible not disclosing to Albemarle that this is what he was up to. In parallel with that strategy, Mr Evans and others were endeavouring to get regulatory approval for Sochinaz as quickly as possible. On the other hand, Albemarle (and specifically Mr Carter and Mr Cleary in the United States) was intent on a course of limiting, so far as possible, the supply of DIP to AZ by way of consignment stock, at what it regarded as a preferential rate under the supply agreement.
- Mr Clary explained the tactic clearly in cross-examination:
Q. The reason why that [the reference to termination] was included was to make AstraZeneca aware that Albemarle would do what it could to restrict AstraZeneca's continuity of supply?
A. Not exactly. …we at no time had an interest in interrupting [DIP] production for AstraZeneca, but if the contract ended and AstraZeneca needed DIP beyond that, the pricing would have been higher than the contract pricing. This was to add an economic incentive if they didn't feel they could get the regulatory transition done before the contract ended, to source the propofol from Albemarle.
MR JUSTICE FLAUX: So in other words, if you gave notice to terminate with effect from 4 March 2009, they would know that if they couldn't get their regulatory approvals in place so as to start purchasing propofol from whoever they selected, they would have to buy DIP from you at a non-preferential rate after the termination of the contract?
A. Which might offset some of the perceived cost savings it had buying lower priced propofol.
- This tactic in fact began on 22 October 2007, before the letter of 26 October was sent, when internal emails within Albemarle make clear that, as AZ had had 13 metric tons of consignment stock of DIP in inventory at the end of September, any order for consignment inventory replacement should be rejected, as AZ should be working off their current inventory. On 9 November 2007, AZ placed a purchase order for 6,176kg of DIP on a consignment stock basis (since the stated price on the order was zero), for delivery on 22 January 2008. Orders were usually placed in 6 metric ton lots, equating to a full container load of 32 drums, which was preferable for both parties to a partial container load, which would require additional dunnage within the container. This particular purchase order appears to have been a routine one. Orders were placed on an approximately quarterly basis and the previous order had been in September 2007.
- Although internally Albemarle employees were told not to confirm the purchase order and there was talk of a response to be drafted by attorneys, that does not seem to have happened and the order was not queried at the time. I should say immediately, before looking at any of the detail of the tactical manoeuvring on both sides which went on, that I accept the evidence of Mr Carter and Mr Clary that in seeking to limit supply of consignment stock of DIP to AZ, they were not seeking to deliberately starve AZ of DIP and disrupt its production of Diprivan. Furthermore, I accept that on the basis of the US legal advice they were receiving, they genuinely thought that they were acting strictly within the terms of the contract.
- Although, for reasons I will elaborate later in the judgment, I consider that, in failing to deliver under this purchase order, Albemarle did not act entirely within the terms of the contract and that in declining to deliver the quantities which AZ ordered, Albemarle was in breach of the supply agreement, there is no question of that breach being deliberate or flagrant. Indeed, Mr Odgers accepted in closing submissions that Mr Clary had misguidedly acted on the advice of Albemarle's US attorneys as to the construction of the contract and was not cynically and deliberately breaching it.
- On 16 November 2007, AZ sent its reply to Albemarle's letter of 26 October 2007. Although signed by Mr Hadfield, that letter also has all the hallmarks of having been drafted by lawyers, headed as it is "Without prejudice save as to costs." The letter set out AZ's position that, by inviting Albemarle to participate in the RFP process and in its dealings with Albemarle between July and October 2007, AZ had afforded Albemarle the rights given to it by clause H. In particular, the letter asserted that AZ had "disclosed as much information as possible to Albemarle (without breaching its obligations of confidentiality) in order to provide Albemarle with the opportunity to make a competitive tender."
- Miss Carr put to Mr Hadfield in cross-examination that, as he was constrained to accept, AZ had not in fact provided Albemarle with any information about the Sochinaz offer. In particular, it had not disclosed the actual price being offered, whether the proposal was for sole supply, whether there would be an option for consignment stock and so forth. He agreed that all these matters could in fact have been disclosed, without any difficulty and without breaching confidentiality, and, ultimately, he accepted that the assertion that as much information as possible had been provided was simply incorrect.
- On 27 November 2007, Albemarle responded to AZ's letter. Again though signed by Mr De Tavernier, it was clearly drafted by US attorneys. It requested from AZ within the 30 day period set out in the letter of 26 October a copy of the final third party proposal or agreement to supply propofol that AZ had elected to pursue, so that Albemarle could exercise its right of first refusal. It concluded:
"As we previously advised you, in the event [AZ] fails to timely remedy this breach, we will have no choice, but to consider our other options under the agreement. Such other options include the possibility of terminating the current agreement. This certainly is not our preferred course of action, as we still hope that we will be able to continue our long-term relationship with [AZ]."
- Mr Hadfield's perception, as expressed in an internal email to Mr Garton and Ms Hagspiel, was that Albemarle was trying to get a seat back at the table with a view to securing the propofol business. He stated: "we do not intend antagonising them as we want them to supply [DIP] until such time as it suits AZ for them not to do so". Accordingly, in a letter dated 29 November 2007, Mr Hadfield responded to Mr De Tavernier's letter offering to meet to discuss AZ's requirements for propofol. Mr Hadfield continued:
"For the avoidance of doubt, this meeting is intended to allow Albemarle the opportunity to exercise its rights under clause H of our agreement, without prejudice to the fact that [AZ] maintains that it has already afforded Albemarle such rights."
- Mr Hadfield accepted, in cross-examination, that this meeting was only arranged in order not to antagonise Albemarle and ensure that it continued to supply DIP. It is quite clear that neither Mr Hadfield nor his senior colleague Mr Richmond had any genuine intention of awarding the propofol business to Albemarle. As Mr Hadfield said in evidence, the business decision to proceed with Sochinaz had been taken. He accepted that he was trying to meet concerns that AZ had not complied with clause H, but had no intention of switching to Albemarle.
- That the real motive for not antagonising Albemarle, by continuing discussions with them, was not to switch the propofol business to Albemarle, but to ensure normal supplies of DIP under the supply contract for as long as possible, emerges from an exchange between Mr Hadfield and Mr Richmond at around this time. Mr Hadfield had told Mr Richmond about Albemarle's letter and request for a meeting, to which Mr Richmond's reaction was: "I do not want to award this contract to them unless it's 100% necessary. We will, I'm sure, receive much better service from Bachem." He then asked Mr Hadfield and Mr Evans to accelerate the establishment of supply from Bachem.
- Mr Hadfield responded:
"Steve, we are on the same page. Bachem will be much better for us. We've issued a firm response but will meet with Albemarle as requested. At least whilst we are talking deliveries should continue. Plan to drag this process out for as long as possible / suits AZ whilst bearing in mind an ability to demonstrate first right of refusal [Some text redacted]. Steve is working hard on accelerating the project: we will detail this under separate cover. It's an interesting situation, if Albemarle close the door on AZ it will be difficult for them to reopen it."
- Mr Richmond's response was:
"Very good point about them not wanting to close the door on AZ. Do we have any other products we could dangle as a carrot to keep them interested? If it helps draw things out you could arrange another meeting with me after your meeting. I don't think I am available until about the third week of Jan!".
- Mr Hadfield accepted in cross-examination that it was "perhaps not" totally honest and open to have given Albemarle the impression that there could be productive meetings with a view to Albemarle getting the propofol business, and that it was not until Mr Marc Jones of AZ became involved towards the end of December (a matter to which I will come in the next section of the judgment), that there was any suggestion that the business decision might be changed.
- In fact, having considered all the correspondence (both internal and external to AZ) and seen and heard Mr Hadfield give evidence, I have considerable doubts whether, even after Mr Jones intervened, Mr Hadfield ever had any genuine intention, if he could help it, of awarding the propofol business to Albemarle. I suspect that the truth is that he remained of the same view as Mr Richmond, that the business would not be awarded to Albemarle unless that were 100% necessary. That seems to me to be the only explanation for his attempts at the time to resist any suggestion that Albemarle had matched Sochinaz's offer, but I will come to the detail of all that later.
- The meeting Mr Hadfield had promised took place at Macclesfield on 7 December 2007, between Mr Hadfield and Mr Evans for AZ and Mr Tavernier and Mr De Tavernier for Albemarle. This was a short meeting after a social lunch and opened with Albemarle asking if the propofol business was still available. Mr Hadfield's note of the meeting said that AZ did not provide a direct answer. He said in cross-examination that the direct answer, saying "no it's not available at all", would have antagonised them further. Albemarle was insisting on seeing the terms of the third party offer which AZ had accepted, in order to exercise its rights under clause H. Mr Hadfield indicated that this would not be possible because of confidentiality, but the Albemarle representatives suggested that the information could be shared via an independent third party or by way of direct communication between the officers of the two companies. Mr Tavernier repeated this suggestion in an email of 11 December 2007, in which he also said Albemarle required the information by 19 December 2007 at the latest.
- Although it was agreed in due course that a confidentiality agreement should be put in place, I have no doubt that, so far as Mr Hadfield was concerned, this issue of confidentiality was another delaying tactic. I was unconvinced that any confidentiality agreement was required, as the name of the third party would be blanked out and, in any event, Dr Ewart had already disclosed inadvertently that it was Sochinaz. Mr Hadfield accepted in cross-examination that, if Albemarle was right in its interpretation of clause H, there was nothing inherently unreasonable or difficult about its request to see the third party offer or about AZ complying with that request. He said that, if he'd been in Albemarle's shoes, he would have been pushing for the same thing.
- Mr Hadfield's real intentions in raising this issue of confidentiality emerge clearly from an internal memorandum he prepared on 12 December 2007 headed: "Albemarle Change of Supplier Issue". This was one of the documents about which he was evidently embarrassed in cross-examination, but it essentially speaks for itself as to the tactics AZ was adopting. It states the "goal" as "to exit DIP supply agreement with Albemarle" and "to source generic propofol from Sochinaz." Under "Tactics and Options" items 3 and 4 are: "Drag things out as long as possible" and "Insist (AZ's) CDA [Confidentiality Agreement] is signed before disclosing anything - this will be a real test. They will not want to sign it without major changes." Item 6 is: "Build up stock-transfer from consignment quantities of [material] to AZ owned stock". As Mr Hadfield accepted in evidence, this was a reference to the idea of an internal transfer of stock (which is what AZ sought to do a little later), but he had concerns about it, because if Albemarle saw a significant increase in demand, it might think AZ was seeking to build up stock.
- On 18 December 2007, Mr Hadfield telephoned Mr De Tavernier and said that, after internal discussions between all the different stakeholders at AZ, AZ recognised that there was a serious problem between it and Albemarle. In order to find a solution, AZ proposed a telephone call between Marc Jones, Vice-President of GES, and John Steitz, chief operating officer of Albemarle, to discuss the DIP/propofol negotiations. This was essentially the escalation of the problem to more senior management in AZ which Mr Carter had wanted. As one of his colleagues, Mr Ron Gardner, put it in an internal email: "I believe this negotiation is beginning to turn in our favor, our aggressive actions and tactics are now driving AZ, so I want to keep moving forward and keep the pressure on them."
(iv) The telephone conversation between Mr Jones and Mr Steitz
- It is evident that Mr Marc Jones was asked by others in AZ to become involved, because the relationship with Albemarle was deteriorating. Mr Jones said in evidence that, when he got involved, he made it very clear to his staff that, until the issue of the right of first refusal had been resolved, AZ could not award the business to anyone else. He said that it then became clear that his staff had given an indication to Sochinaz that they would be getting the business. Mr Jones was evidently very concerned that no contractual commitment should have been given to anyone else. This may be the explanation for the telephone conversation Mr Hadfield said he had, at some stage in December, with either the managing director or sales director of Sochinaz, in which he said that, unfortunately, AZ was not in a position to pursue a contract with them due to some legal complications with the existing supplier.
- Mr Jones telephoned Mr Steitz on 20 December 2007. By the end of the trial, the position with their evidence is that there was little if anything between them as to the content and tenor of their discussions. AZ's pleaded case that, during the conversation, Mr Steitz, by asking for the third party offer, somehow indicated that any further communications over and above the offer which shed light on the deal with Sochinaz need not be produced (thereby giving rise to an estoppel) was effectively abandoned, since it was not put to him in cross-examination. In any event, the conduct of AZ in subsequently sending not only the offer but emails which were fine tuning the offer was wholly inconsistent with any common understanding or agreement capable of giving rise to an estoppel or waiver.
- Mr Jones agreed that the conversation, which lasted about fifteen minutes, was pleasant and professional. It had begun with his referring to the need for Albemarle to supply AZ with DIP. Mr Steitz referred to clause H and said something to the effect that Albemarle would live up to the terms of the supply agreement, but expected AZ to do likewise. He needed to see the terms of the third party offer, in order to decide whether to match it. Mr Jones then agreed that he would send a copy of the third party offer, but that a confidentiality agreement would have to be signed first, which is what he had been advised internally.
- In cross-examination, Mr Jones agreed that the aim was to give Albemarle the clear details or key terms of the Sochinaz offer so that Albemarle could match it, if it wished to do so. Although at various points he said there were five or six key terms so far as he was concerned, when I clarified this with him, it emerged that, in reality, there were only four: price, sole supply, a five year agreement with a fixed price and shipment terms. Mr Jones accepted that he had made it clear to Mr Steitz that, if Albemarle matched the third party offer as regards the key terms, Albemarle would get the business and AZ would contract with Albemarle on those terms. Mr Jones also candidly accepted that, in practice, for this to be a meaningful contract, it would be on a sole supply basis; that is, effectively, that Albemarle would supply a minimum of 80% of AZ's requirements for propofol. He also fairly accepted that this would not be achieved by AZ entering into two contracts, one with Sochinaz and one with Albemarle. At the end of the phone conversation, matters were left on the basis that once a confidentiality agreement was in place, AZ would send Albemarle the third party offer.
(v) From 20 December 2007 to 23 January 2008
- Following the telephone agreement between Mr Jones and Mr Steitz, on 21 December 2007, Mr Hadfield sent Albemarle a copy of a draft confidentiality agreement and suggested that they try to bring this to a speedy conclusion, after AZ personnel returned from the Christmas/New Year break. Ultimately, as a consequence of Albemarle's holiday arrangements and commitments, there was some delay in Albemarle coming back to say that it would sign the confidentiality agreement.
- Immediately after New Year, on 2 January 2008, Mr Hadfield was on the phone to Mr Tavernier, concerned about the fact that AZ had not received any written confirmation that the 9 November purchase order would be honoured. Mr Tavernier passed this on internally to Mr Carter whose response, in an internal email the same day, was that the order had not been confirmed and that: "our expectations are to have the contract breach resolved before resupplies continue". Mr Carter said that he had been willing to move the resupply to Albemarle's premises in Antwerp, but AZ did not want that change of route, so the material would remain at Orangeburg. Mr Carter concluded by saying he believed AZ had about 7.5 metric tons in stock, which was close to four months inventory.
- When asked in cross-examination about the fact that this amount of stock was less than AZ's maximum consignment stock of 10.25 metric tons, Mr Carter said:
"Under the rights of the contract, that was the maximum obligation we had under the terms of the contract, we had a maximum obligation to supply up to 10.2 tonnes of consignment stock, the contract actually states that we are to maintain 12 months of storage between Orangeburg and Macclesfield, which we had complied with...And again, to key in on the point of 7.5 tonnes, this is four months of inventory for AstraZeneca under a routine operation, so we felt very confident that we were living by the terms of the contract, and not jeopardising the disruption of supply."
- This was making the perfectly valid point that the DIP which AZ already had was enough (on the basis of the forecast requirements of 1,708kg per month), for four months of production, and that there was no question of Albemarle deliberately jeopardising AZ's production. Elsewhere in his evidence, Mr Carter accepted that, if AZ had ever asked to be supplied on the basis of regular shipments, for which it paid up front, Albemarle would have been obliged to supply on that basis, but at this stage, AZ had never asked to be supplied on that basis.
- Obviously, the tactical game on both sides to which I have referred was in play here. This is demonstrated by the email which Mr Hadfield sent to Mr Richmond on 4 January 2008, in which he said: "I'm loving the Albemarle problem, any excuse and I'm on to them!" which rather betrays his attitude to Albemarle at this time. Also on 4 January 2008, Albemarle put in another purchase order for 6,176kg of DIP on a consignment basis, to be delivered on 4 April 2008, all about a month earlier than a quarterly purchase order would normally be placed. Mr Tavernier instructed Albemarle staff not to enter the order in the system or respond to AZ, saying he or Mr De Tavernier would respond to AZ the following week.
- In a telephone conversation on 7 January 2008, Mr Tavernier indicated to Mr Hadfield that Albemarle probably would sign the confidentiality agreement and would reply formally the following day. Mr Hadfield pressed Mr Tavernier about the delivery of the 9 November purchase order for DIP, which was due for delivery on 22 January 2008, and indicated that time was running out, if Albemarle was to airfreight the material. Mr Tavernier indicated that it depended how urgent AZ was for stock and perhaps it could be delivered a few days late by sea. Mr Hadfield responded that, under normal conditions, there would be goodwill, but Albemarle had used all that and AZ expected delivery on the required date.
- Mr Tavernier also said that Albemarle wanted to do a physical stock check of the consignment stock at Macclesfield on Friday of that week (11 January), a right Albemarle had under clause D5 of the supply agreement, but which it had not previously exercised. Albemarle clearly wanted to satisfy itself that AZ did not have more than the amount of consignment stock permitted by clause D2 as amended and that AZ was not seeking to stockpile consignment stock above that limit. As Mr Tavernier said in an email to Mr Hadfield: "the audit is to verify the stock level in your warehouse".
- On 8 January 2008, Mr Huub Cuijpers, managing director of Albemarle EUMEA sent an email to Mr Hadfield attaching the signed confidentiality agreement. That agreement covered "details of [AZ's] proposed requirements for propofol (including any information relating to offers for such business) and any information relating to [AZ's] plans, and its Affiliates' business activities and operations, technology and products and their manufacture."
- The covering email stated that Albemarle had signed the confidentiality agreement on the basis that:
"we will be given a copy of the entire offer that you have received from the competitive source of propofol (i.e. genuine photocopies of the originals, but with all references to the supplier obliterated) …
we will be given a reasonable time (estimated at 30 days) to complete our review of the offer and to come back to you with any counterproposal
we have [AZ's] assurance that the information that we will be provided is complete and accurate, that it contains all of the material promised by Marc Jones to John Steitz, that it represents a bona fide and legitimate third party offer from a qualified supplier of propofol which currently has all the necessary approvals and the means (including production capacity, permits and the like) necessary to manufacture and supply to [AZ] its entire requirements for propofol, and that the information you will provide us will be sufficient for us to exercise our right of first refusal to supply propofol as provided in clause H.
If you are in agreement, please have an authorized representative of [AZ] sign the Confidentiality Agreement in the space provided and return an executed copy to me for our files. …"
- Mr Jones duly signed the confidentiality agreement and Mr Hadfield sent it back, as he accepted in evidence, without demur or qualification, thereby accepting Mr Cuijpers' understanding and giving the assurance Albemarle was seeking. On 9 January 2008, Mr Hadfield then sent an email enclosing confidential information which he said contained a copy of the offer and three pages of emails "fine tuning the offer". These three pages consisted of the exchange between Dr Ewart and M. Rosset of Sochinaz referred to in paragraph 90 above.
- The offer and the emails as disclosed had a number of redactions from them. What had been redacted from the email of 3 October 2007 from Dr Ewart to M. Rosset included not only any references to Sochinaz or Sochinaz employees, but also the whole sentence: "For info there is now only Sochinaz and the incumbent (for DIP Crude) remaining in contention and our intention is to be single sourced". The evidence from AZ about the redaction process was, to say the least, unsatisfactory. Mr Hadfield claimed that a decision had been taken not only to redact what was confidential, but anything which AZ did not regard as part of the offer. Mr Evans also sought to claim that single sourcing was not part of the Sochinaz offer.
- In my judgment, this explanation is unsustainable, since the fact that Sochinaz was going to be the sole supplier was part of the basis on which the offer was accepted in principle on 11 October 2007. In that context, it is striking that the emails which were exchanged between AZ and Sochinaz on 11 October 2007 (from which it was clear Sochinaz was to be the sole or exclusive supplier) were not amongst those vouchsafed to Albemarle, even in a redacted form.
- Miss Carr pressed Mr Hadfield very hard in cross-examination about this redaction process, suggesting that it was an attempt to deliberately conceal material information. Although Mr Hadfield was clearly embarrassed, he would not accept that there had been a deliberate attempt to mislead. As to who was involved in the process, it is clear that Mr Hadfield, Mr Evans and Mr Richmond were. Mr Evans claimed that he alone had done the redactions and had then had a meeting with Mr Hadfield, Mr Richmond and Mr Jones, for them to check that he had redacted what needed to be redacted. Since his evidence was that he only showed them the redacted versions and not the unredacted originals, it is difficult to see how they could have checked whether he had redacted what needed to be redacted. Mr Hadfield did not think Mr Jones had been involved in the process of redaction. Mr Jones' own evidence, which I accept, was that he only ever saw the redacted copies of the emails and did not compare those with the unredacted copies. He agreed that it was strange to have redacted the "single sourced" point, which suggests he would not have permitted it if he had seen the unredacted version.
- Mr Odgers sought to defuse the impact of any suggestion that there had been an intention to deliberately mislead by submitting that, in fact, Albemarle was not misled because, when it sought to match the offer, it did so on the assumption that the offer was on the basis of sole supply. There is obvious force in that point, but it remains the case that this redaction was of something which was a relevant aspect of what had been agreed in principle with Sochinaz. On that basis, it should clearly have been disclosed to Albemarle.
- Mr Evans essentially took the blame for the redaction from the emails, but it seems likely that Mr Hadfield and Mr Richmond were also involved in the decision as to what to redact. Ultimately though, it may not matter which individuals at AZ were involved in the decision. What matters is that, whoever it was, I consider that the redaction was deliberate, in the sense that the AZ decision to be single sourced was not something which those at AZ responsible for the redaction wanted to disclose to Albemarle. That is further demonstrated by the failure to include the email exchange between AZ and Sochinaz on 11 October 2007, as part of what was disclosed to Albemarle.
- As to why this was the case, one can only deduce that, despite Mr Jones' agreement with Mr Steitz that, if Albemarle matched the third party offer, it would get the business, those below Mr Jones in GES, and specifically Mr Richmond and Mr Hadfield, were still determined, so far as possible, to ensure that Albemarle did not. Not disclosing that AZ was intending to be single sourced would leave it open to AZ to suggest, in subsequent discussions with Albemarle, that no decision as to whether to be single or multi-sourced had yet been made. This was, of course, one of the points made by Mr Hadfield later, as to why Albemarle had allegedly not matched the Sochinaz offer, as discussed below. The reality is that, as Mr Jones accepted, AZ would always have chosen single sourcing for business such as the propofol business.
- On 9 January 2008, the same day as the information was provided by AZ to Albemarle, Mr Hadfield contacted Mr Tavernier, expressing concern about the delivery of DIP due on 22 January 2008. Mr Tavernier suggested, in an internal email, that perhaps 2 metric tons of DIP could be air freighted to AZ. Mr Carter was against this idea. His attitude was that Mr Hadfield should be concerned. Albemarle had been working on the right of first refusal for three months and AZ was finally offering a look at the third party offer. Once Albemarle was satisfied with the information provided, Albemarle could release material. Mr Carter at that stage was making the point that AZ did have three months inventory in consignment.
- On 11 January 2008, the Taverniers attended the Macclesfield plant to audit the consignment stock. As recorded in Mr Tavernier's Contact Report, AZ had not resumed production after the traditional end of year shut down. According to the Contact Report, the total consignment stock shown and verified at Macclesfield was 32 drums, 6,194kg. This is puzzling, given that there had been no production since before Christmas and that Mr Tavernier also says that, as at the end of December 2007, the consignment stock was 7,937.50kg. Mr Carter said that he had internal questions about this as well.
- However, the Contact Report does not seek to resolve the anomaly of what had become of the best part of 2 metric tons whilst the plant was not operational and Mr Tavernier did not give evidence, so that this remains a mystery. Either way, the amount of consignment stock was well within the limit under clause D1 for consignment stock, which was no more than six months of expected consumption or 12,000kg, whichever was lower. On the basis of the forecast for 2008 provided by Mr Hadfield on 28 September 2007 of 20,500kg, the maximum which could be held as consignment stock was thus 10,250kg.
- During the audit, Mr Tavernier indicated to Mr Hadfield that 2 metric tons would be delivered by air freight around 22 January with a full container load of 6.2 metric tons to follow later. AZ was asked to send an amendment to the 9 November 2007 order to include the additional 2 metric tons to be sent by air, which it duly did on 14 January 2008. Albemarle's pleaded case that AZ thereby amended and extended the delivery date for delivery of the original 6 metric tons was wisely abandoned by Miss Carr in closing submissions.
- Albemarle was concerned that the terms of the third party offer, as disclosed by AZ on 9 January 2008, were unclear. In particular, as Mr Clary said in evidence, they wanted to make sure they had all the information about the offer, because they could not understand the level of redactions. Accordingly, on 14 January 2008, Mr Tavernier sent Mr Hadfield an email in these terms:
"For our clarification, we would appreciate it if you could confirm that the information provided by [AZ] represents:
1) Albemarle has received a copy of the entire offer that you have received from the competitive source of propofol;
2) [AZ] gives the assurance to Albemarle that the information is complete and accurate …;
3) The information represents a bona fide and legitimate third party offer from a qualified supplier of propofol which currently has all the necessary approvals and the means (including production capacity, permits and the like) necessary to manufacture and supply to [AZ] its entire requirements for the supply of propofol; and
4) The information provided to Albemarle is sufficient for Albemarle to exercise its right of first refusal to supply propofol as provided in clause H of the DIP agreement.
Based on the above and our review, [AZ] was ready to enter into a final agreement with the company which had provided the offer, to be its sole supplier of propofol under the following terms and conditions:
a) Up to 6 tons: Euro 176.00/kg net
6 -12 tons: Euro 171.00/kg net
Over 12 tons: Euro 166.00/kg net
b) Payment Terms: 30 days net date of invoice.
c) Propofol so supplied will meet the attached specification.
d) Product to be shipped DDU with a minimum order size of 1,000 kg.
e) Five year supply agreement, starting upon the receipt of regulatory approval.
f) Pack size alternatives: 6, 12, 25 and 30 kg.
Could you please confirm that all of the foregoing paragraph is accurate and complete, so Albemarle can determine if Albemarle will exercise its right of first refusal. If this is not correct, please advise as to any corrections that may be necessary."
- Mr Hadfield responded to Mr Tavernier the same day, saying that two important points were missing from Albemarle's list, consignment stock and price stability of five years. It is striking that, whilst from this email it is clear that Albemarle thought AZ was prepared to accept the third party offer, on the basis that the third party would be sole supplier, Mr Hadfield did not raise this in his response, given his subsequent stance that AZ had not yet decided whether to be single or multi sourced. In any event, whatever Mr Hadfield's views, as I have already noted, Mr Jones, with whom as I see it the ultimate decision as to whether Albemarle had matched the Sochinaz offer should have rested, accepted in evidence that so far as he was concerned, there were four key terms: price, sole supply, a five year agreement with a fixed price and shipment terms.
- It is striking that, at the same time as Mr Hadfield was having that exchange with Mr Tavernier, representatives of AZ (including Mr Evans and Ms Galbraith) were attending a two day meeting on 14 and 15 January 2008 with representatives of Sochinaz, at the latter's premises, during the course of which there was a detailed discussion about quality assurance, regulatory issues, logistics and ISEP Audit responses, as well as a tour of the plant. Mr Evans accepted, in cross-examination, that this meeting was proceeding very much as if the deal with Sochinaz was on. As he said, his position as project manager was to progress the project as quickly as they could. Ms Galbraith agreed in evidence that this was a positive meeting about moving the project forward, organising future supply and sorting out commercial terms.
- On 15 January 2008, there was an internal debate within Albemarle about the 6.2kg shipment in fact due for delivery in a week's time. Mr De Tavernier was concerned that if this were not supplied promptly, AZ would fall below the minimum stock level of 7,000kg required to comply with its insurance policy. In fact although this email suggests there was some minimum consignment stock level under the supply agreement, there was not in fact any such minimum. Mr De Tavernier asked Mr Clary in the United States for the green light to ship the next 20 foot (6,200kg) container. The response from Mr Carter was that, for the foreseeable future, Albemarle would supply DIP on a monthly basis to comply with its contractual requirements, but would not deliver more than was required under the contract, a reference to the consignment stock limit, which as I have said was 10,250kg at that stage.
- This was confirmed the following day, 16 January 2008, by Mr Clary who told Mr De Tavernier that Albemarle would start monthly ocean shipments, with deliveries timed so that, at the end of each month, AZ would have the consignment stock limit of six months of forecast requirements or 12 metric tons, whichever was the lower, on hand. In accordance with those instructions from the United States, on 16 January 2008, instructions were given within Albemarle to change the quantity of the order to 1,708kg to match AZ's January forecast (as set out in the forecast provided by Mr Hadfield on 28 September 2007 in accordance with clause C1 of the supply agreement).
- In evidence, Mr Clary said that he thought the 2 metric tons per month Albemarle was prepared to deliver was comfortably above the forecasted needs for each month (which were of course 1,708 or 1,709kg per month). Mr Carter explained in evidence that he thought that what Albemarle was prepared to do, namely supply DIP as consignment stock on a monthly basis, to meet whatever AZ's requirements were for the next few months, but so that the amount which AZ had in consignment stock did not exceed six months of expected consumption, was within the terms of the contract.
- Given that, at the time of this internal exchange on 15 January 2008, the consignment stock had stood at 7,937.50kg on 19 December 2007 (when the plant closed for the Christmas/New Year break), that, as at the time of the audit a few days earlier, production had not resumed at the plant since the break and that the maximum consignment stock that could be held was 10,250kg, with 2 metric tons about to be air freighted, there was some justification for Mr Carter's approach at that stage. In any event, as I have already indicated, having seen and heard both Mr Clary and Mr Carter give evidence, I am quite satisfied that neither of them had any intention of starving AZ of DIP. As Mr Clary put it, it was never intended to embargo supply of DIP.
- The decision to ship about 2 metric tons of DIP for arrival in mid-February and thereafter to supply approximately 2 metric tons deliveries in accordance with AZ's monthly consumption forecast was communicated by Mr Tavernier to Mr Hadfield on 17 January 2008. This provoked an angry response that failure to deliver in accordance with the purchase order would be a breach of contract and that AZ would take seriously Albemarle's failure to deliver the full 8 metric tons [i.e. 2 metric tons by air and 6 metric tons in accordance with the original purchase order] on time.
- It is evident that Mr Hadfield appreciated at this stage that, if Albemarle was intent on supplying only 2 metric tons per month, when AZ's monthly forecast requirement was for 1,708 or 1,709kg (leaving entirely to one side whether Albemarle was contractually entitled to take that position), the plan he had, to build up stock against the eventuality that Albemarle would indeed give 12 months notice to terminate the supply agreement on 4 March 2008, would be thwarted.
- It was no doubt in order to seek to build up a stockpile of DIP that, on 18 January 2008, Mr Hadfield sent Mr Cuijpers an extraordinary email which stated:
"I confirm AZ has an immediate need for 12 [metric tons] of DIP. Upon receipt, this material would be consumed within a period of 4 to 6 weeks if not sooner. I would be happy [to] purchase this outright or alternatively have it as consignment stock whichever suits Albemarle."
- In cross-examination, Mr Hadfield accepted that this was the first occasion upon which AZ had suggested outright purchase rather than purchase on a consignment stock basis. Having said that, it is clear from clause E1 that it was always open to AZ to purchase outside the consignment stock arrangement, in which case Albemarle would have submitted an invoice for payment at the end of the month following delivery. More surprising is the assertion that there was an immediate need for 12 metric tons of DIP, which would be used within 4 to 6 weeks. Given that the forecast usage for 2008 was 1,708 or 1,709kg per month and that there is no suggestion production had escalated (indeed, quite the contrary, a week before this email was sent, production had not yet recommenced after the Christmas/New Year break), this assertion was simply untrue, as Mr Hadfield was constrained to accept, however reluctantly, in cross-examination.
- The reality is that 12 metric tons represented something like seven months of DIP usage and it would appear that, with the amount already in consignment stock and on order, what Mr Hadfield was really seeking to do was to build up a stockpile of DIP to cover the eventuality that Albemarle terminated the supply agreement and, so far as possible, to ensure AZ had enough DIP in stock to continue manufacture of Diprivan until the regular supply of propofol by Sochinaz commenced, once regulatory approval had been obtained.
- The response to this email, in fact from Mr Tavernier, was the predictable one that the quantity of consignment stock could not exceed six months expected consumption or 12 metric tons, whichever was the lower, and that since, as per the AZ forecast, the expected consumption over the next six months was 10,248kg, it was not appropriate to resupply with quantities which would bring the consignment stock over that level. The email did not refer to the possibility of AZ buying outright outside the consignment stock arrangement. Mr Hadfield picked up on this in his response, which pointed out that the contract did provide for Albemarle to "ask [AZ] to pay for any overage" (clearly a reference to the second sentence of clause D2) which he noted Albemarle had chosen not to do.
- In an email on 21 January 2008, Mr Tavernier pressed Mr Hadfield for further information about the "large, unforecasted, potential upside requirement of 12MT". In what was clearly an irritated response, Mr Hadfield pointed out that Albemarle had the material in stock, so there should be no problem in supplying it as consignment stock or straight purchase. He went on to complain about the fact that the 2 metric tons by air and 6 metric tons by sea were due for delivery the following day, 22 January, and that failure to deliver would be a breach of contract by Albemarle. His information was that the 2 metric tons had not yet left the United States.
- This was not because of any attempt by Albemarle to put the air freighting of the consignment on hold (as Mr Hadfield clearly thought at the time, as appears from his email to Mr Tavernier on 22 January) but because the freight forwarders, Kuehne & Nagel, failed to put the consignment on board the aircraft, although it had been at Atlanta airport in time for a flight to Manchester. In the event the 2 metric tons was not delivered at Macclesfield until 28 January 2008.
- It is against this somewhat inauspicious background of none of the total of 8 metric tons having been delivered on 22 January 2008, that the following day, 23 January 2008, Mr Hadfield sent an email to Mr De Tavernier replying to the request in the latter's email of 14 January 2008 for clarification in relation to the third party offer. Mr Hadfield prefaced the email by saying: "In view of everything that has taken place and the commitment we gave when signing the CDA it is with reluctance that I reply to this request for further information. However in the honest and open spirit that AZ has operated throughout, I reply as follows." He then set out the requests and his answers in italics.
- I have already set out the requests at paragraph 148 above, so only set out Mr Hadfield's answers:
"1) AZ has disclosed the entire offer from the competitive source of propofol, save that certain parts of the text of offer have been redacted in order to maintain the confidentiality of the offeror.
2) [S]ave as set out in (1), so far as [AZ] is aware, the information provided is complete and accurate in terms of the offer received from the competitive source of propofol. …
3) [I]t is confirmed that the supplier has all the necessary approvals and means to manufacture [AZ's] entire requirements for propofol. However, it should be noted that whereas the supplier has the capacity to make AZ's entire propofol requirements no commitment or final decision about the amount of business they would receive from AZ has been taken or communicated.
4) As previously stated, AZ maintains that it has already afforded Albemarle its rights under the supply agreement. It is clear that the parties have differing views on this point. It is [AZ's] opinion that the meetings and negotiations which have previously taken place relating to the supply of propofol were sufficient to extinguish [AZ's] obligations under the agreement. The information now disclosed has been provided as a gesture of goodwill in response to Albemarle's concerns."
- In response to Albemarle's request for confirmation that its paragraphs a) to f) were accurate and complete, as regards the terms and conditions upon which AZ was prepared to enter into an agreement with the third party to be its sole supplier of propofol, Mr Hatfield replied:
"…If the above is a true copy of the information provided under CDA it is correct subject to answers given to the previous questions. However I recall a choice of either a three or a five year [agreement] is contained in the offer and when appropriate AZ would take a decision on the duration and likewise whether to single, dual or multi source this product."
- I agree with Miss Carr that, in view of the terms of what had been agreed in principle between AZ and Sochinaz in October 2007 (including the stated intention in the email of 3 October 2007, redacted in the copy sent to Albemarle, that AZ would be single sourced), together with Mr Jones' evidence that AZ would always have single sourced this business (let alone the two day meeting with Sochinaz on 14 and 15 January 2008, clearly with a view to cracking on with regulatory approval as quickly as possible), the suggestion by Mr Hadfield in this email that AZ had yet to take a decision on whether to single, dual or multi source propofol, was simply untrue.
- Likewise, Dr Ewart had sought and obtained Sochinaz's agreement to fix the prices for five years (as set out in Mr Rosset's 6 October 2007 email disclosed as part of the confidential information) and stated in an internal email to a number of AZ personnel, including Mr Hadfield: "Price has been agreed to be fixed for five years with Sochinaz". In view of that, Mr Hadfield's suggestion that the duration had yet to be decided was, as Miss Carr put to him in cross-examination, deliberate obfuscation on his part.
- Quite understandably, Mr Hadfield had the utmost difficulty, in cross-examination, in justifying what he had said to Albemarle. When Miss Carr put that there was nothing "open and honest" (the words with which he prefaced his email) about his answers he said:
A. I understand exactly what you are saying and what you are pointing to.
Q. And yes or no?
A. I haven't been deliberate -- I honestly believe I haven't been deliberately misleading them. If I have, it's an oversight on my part.
- I am afraid to say that, having considered all the evidence, I have taken a different view, both in relation to these answers and in relation to Mr Hadfield's claim a few days later, that the Albemarle letter of 25 January 2008 did not match Sochinaz's offer. I consider that there was indeed deliberate obfuscation on Mr Hadfield's part. As to the motive for it, I suspect it was part of an overall objective (shared it would appear by Mr Richmond with whom Mr Hadfield appears to have worked closely) to ensure that the propofol contract was not awarded to Albemarle unless, as Mr Richmond had put it, this was "100% necessary".
(vi) The letter of 25 January 2008: matching the Sochinaz offer
- At all events, following the supposed clarification in Mr Hadfield's email of 23 January 2008, Mr Cuijpers of Albemarle sent a letter to Mr Hadfield on 25 January 2008 stating that Albemarle wished to exercise its right of first refusal by accepting the offer. The letter was in these terms:
"Thank you for your confirmation that the terms of the offer as described in our previous correspondence were complete and accurate.
In accordance with the terms of our DIP contract, we would like to exercise our right of first refusal and we are accepting the offer as provided by [AZ].
As was detailed in our previous correspondence, that offer was:
Based on the above and our review, [AZ] was ready to enter into a final agreement with the company which had provided the offer, to be its sole supplier of propofol under the following terms and conditions:
a) Up to 6 tons: Euro 176.00/kg net
6 -12 tons: Euro 171.00/kg net
Over 12 tons: Euro 166.00/kg net
b) Payment Terms: 30 days net date of invoice.
c) Propofol so supplied will meet the attached specification.
d) Product to be shipped DDU with a minimum order size of 1,000 kg.
e) Five year supply agreement, starting upon the receipt of regulatory approval.
f) Pack size alternatives: 6, 12, 25 and 30 kg.
g) A consignment program and a safety stock program will be offered to [AZ].
[In other words the terms and conditions set out in the email of 14 January 2008 together with the additional provision about consignment and safety stock.]
As to the subject of sole supplier, in the information provided nothing was mentioned to indicate that the offer was for 'single dual or multi source this product' as mentioned in your comment. During previous meetings and at the time [AZ] decided not to consider Albemarle any longer as potential Propofol supplier, [AZ] advised Albemarle that [AZ] had decided to proceed with another company as sole supplier for Propofol. Based on this understanding and since only one offer was provided, it is clear that this offer was of the selected sole supplier. Albemarle agrees, following our DIP agreement, to accept the offer as per the above.
Regarding the duration and validity of the agreement, [AZ] had asked for an offer for a five year period from the other supplier. The other supplier subsequently confirmed a five year period. This last offer was provided to Albemarle to allow us to make our decision to exercise our first right of refusal. There's nothing in the documentation that indicated that this was not to be a five year contract or that this five year term was later removed from the offer or rejected. The offer for our consideration was a five year offer.
We kindly request you for a signed confirmation to avoid any further issues, in light of [AZ's] comment that: "It's [AZ's] opinion that the meetings and negotiations which have previously taken place relating to the supply of propofol were sufficient to extinguish [AZ's] obligation under the agreement". In light of this comment, we are confident that you understand that we cannot proceed further without a signed confirmation.
As we have no wish to have this matter delayed further and as it is our intention to finally and amicably resolve this situation, please return the executed document to us on or before the designated date. Please execute the duplicate original and return the same to us for our files by no later than Feb 1st 2008."
- Mr Hadfield's immediate reaction internally to AZ was to send an email to Messrs Jones, Westerholm and Richmond, saying that Albemarle was accepting the offer and claiming the right to be sole supplier. He described the letter as contentious and as asking AZ to sign it by 1 February. He did not plan to share it outside GES until they had had a chance to discuss and agree a way forward and he had got an extension from Albemarle.
- In my judgment, this offer from Albemarle clearly did match the offer from Sochinaz. As regards the two respects in which it is alleged that it failed to do so, sole supply and duration of the agreement, I consider that there is nothing in either, for the reasons I have already given. In summary, not only had Sochinaz and AZ agreed that Sochinaz would be the sole supplier but, as Mr Jones said, AZ would always have proceeded on the basis of single sourcing for the propofol business. Similarly, it is clear that Dr Ewart had agreed with Sochinaz that there would be fixed prices under a five year agreement. Mr Jones' evidence again was that this was one of the key terms so far as he was concerned.
- In this context, it is striking that two of AZ's witnesses accepted that this letter had matched the Sochinaz offer. First Mr Evans, faced with the Morton's fork that if, as he asserted, single sourcing was not part of the Sochinaz offer, the fact that Albemarle's letter had not got the basis of sourcing right did not mean that Albemarle hadn't matched Sochinaz's offer, said that he agreed with Miss Carr. In fact, as I have already held, I do not accept the assertion that single sourcing was not part of the offer. I consider that single sourcing was part of Sochinaz's offer accepted by AZ, so that in that respect as others, Albemarle did match the offer.
- Second, and perhaps more significantly, when Mr Jones was shown the 25 January letter in cross-examination, he accepted that it had matched the Sochinaz offer on his four key terms: price, sole supply, a five year agreement with the price fixed and shipment terms. He said that he did not remember ever having seen the letter and suggested that the impression he was receiving from Mr Hadfield was that, although things were getting closer, they kept changing. If, as appears to be the case, Mr Jones did not see the letter at the time, that is regrettable, since in the light of his evidence when cross-examined about it and his very candid evidence about what he and Mr Steitz had agreed on 20 December 2008, I suspect he would have insisted that Albemarle had matched the Sochinaz offer and that AZ was accordingly "duty" or "honour" bound to accept Albemarle's offer (his description of how he viewed matters if there had been two identical offers).
- Although Mr Hadfield did not accept either contemporaneously or in evidence that in its letter of 25 January 2008 Albemarle had matched Sochinaz's offer, in my judgment it necessarily follows from the conclusion I have already reached that the points raised by Mr Hadfield about sole supply and duration of any agreement in his email of 23 January were deliberate obfuscation on his part and that he must in fact have appreciated that in truth the letter of 25 January 2008 did match the Sochinaz offer.
(vii) AZ's reaction to the letter of 25 January 2008
- On 27 January 2008, Mr Hadfield forwarded to Mr Evans (who was away from the office on sick leave) Albemarle's letter of 25 January 2008, under cover of an email stating: "Hope the attached doesn't cause you a set back. The fact that Albemarle want to go ahead doesn't entirely surprise me but I am surprised about how they feel they can just impose things on us".
- Mr Evans responded the following day in these terms:
"I was hoping they would tell us to get stuffed, as that was by far the easiest way forward. From a regulatory position we can not register alternative sources in all markets, countries like China and possibly Japan will only accept one source. But most will accept alternatives…. I would suggest we go for submission with Sochinaz as soon as we can [in] the US and EU areas. They do not have a JDMF or JPAL accreditation, therefore if we had to dual source we could take Albemarle material in that market, although this is a long term decision as it would take 2 years to gain approval and we could not change our minds as you can only have one live change at a time……I assume we want to preserve our relationship with Bachem."
- In a sense, this speaks for itself in terms of Mr Hadfield and Mr Evans' attitude being by this stage that they wanted to continue with Sochinaz and did not want to deal with Albemarle. Mr Evans accepted in cross-examination that there would have been issues from a validation point of view with having two suppliers and AZ didn't want to dual source, the whole plan being to single source.
- Mr Hadfield's response to the email demonstrates that what he was interested in knowing was not whether they could dual source but how much DIP AZ needed before the switch to propofol supplied by Sochinaz could take place. He said:
"As you will have picked up we got 2 [metric tons] in yesterday. My question is what is the qty you need to make the switch to Sochinaz. I recall 18 [metric tons] being mentioned before Xmas and as I think they could pull the plug at any time this is an important consideration".
Mr Hadfield and Mr Evans were not asked about this in evidence, but it is striking that neither of them suggested, in this exchange, that Albemarle had not in fact matched the Sochinaz offer. Indeed, Mr Evans' discussion, however reluctant, about dual supply, seems predicated upon Albemarle having matched.
- In any event, that Mr Hadfield did appreciate that in truth Albemarle had matched the Sochinaz offer is borne out by his complete inability, during the days and weeks which followed the receipt of the letter of 25 January 2008, to articulate any coherent reason why Albemarle had, according to AZ, failed to match the offer. Thus, Mr Tavernier recorded, in a Contact Report, a telephone conversation with Mr Hadfield on 4 February 2008, in which, in response to Mr Tavernier saying that the objective was to work out an acceptable heads of agreement to be finalised by the beginning of the following week, Mr Hadfield said that AZ could not confirm AZ's agreement or sign the letter as some items in the letter were not in order, in particular that (a) whereas Albemarle had stated that it accepted AZ's offer, AZ had only provided information and not an offer, and (b) AZ did not feel Albemarle's offer fully met the third party offer received (in respects which Mr Hadfield did not specify). However, AZ was open to discussing an agreement in line with the commercial part of Albemarle's offer. Mr Hadfield said he would call back later in the afternoon to confirm a possible meeting.
- Mr Hadfield repeated, in an email to Mr Tavernier later the same day, that Albemarle's acceptance of the offer on 25 January 2008: "was not an acceptance of an offer but an offer in itself." Frankly, on the basis of what I have concluded is the correct construction of clause H, that is a completely nonsensical piece of hair-splitting. On any view, however the letter of 25 January was categorised, Albemarle had matched the offer from Sochinaz, for the reasons I have given. As in the case of the phone conversation the email asserted that "the offer you have made does not meet the third party offer" without condescending to give any reasons why that was said to be the position.
- I suspect that the real explanation for the absence of any reasons is that Mr Hadfield was struggling to contradict the obvious point that, whether AZ liked it or not, the letter did match the Sochinaz offer. Other contemporaneous material suggests that the real internal view within AZ was that Albemarle had matched the offer, but that AZ was determined to continue with Sochinaz whilst talking to Albemarle to "keep them sweet" and ensure supplies of DIP. From electronic diary entries of Mr Hadfield's disclosed late in the trial, after he had given evidence, it emerged that, on the morning of 4 February 2008, Mr Hadfield had a meeting with Mr Jones and Mr Westerholm to agree a way forward and Mr Hadfield then had a meeting with Mr Hopton and Ms Galbraith between 10.30 and 11 to share this with them.
- Following that meeting, at 11.16 on 4 February 2008, Mr Hopton sent an email to Mr Garton and Ms Hagspiel to update them on the latest position. He referred to the fact that only 2 metric tons of DIP had been received in January and that the 6 metric tons had not been sent. Under the heading "Relationship" he said: "We have received an offer matching the price and requesting we sign by 1st Feb, we did not do so." Then under the heading "Current Tactics" he said: "Continue with Sochinaz" and "Talk to Albemarle to get supply and maintain the relationship sufficiently to do so".
- Although Mr Jones was rather vague in evidence about whether these "current tactics" had been discussed with him, in my judgment it seems likely that they were. As he accepted in cross-examination, he was dependent on Mr Hadfield for information and did not see the core documents, specifically the actual letter from Albemarle of 25 January 2008. It seems probable that Mr Hadfield did not disclose to Mr Jones that the letter had in fact matched the Sochinaz offer as regards all the key terms as well as price, otherwise it is inconceivable that Mr Jones would not have said something to the effect: "in view of what I discussed with John Steitz, we are honour bound to accept the Albemarle offer and proceed with them". At all events, whoever was involved in this tactical decision apart from Mr Hadfield, it appears that he and others within AZ were intent on a course which would involve maintaining Sochinaz as the supplier of propofol whilst seeking to devise a strategy to secure supply of DIP by Albemarle for as long as the supply agreement continued in force.
(viii) The transfer of consignment stock
- In that context AZ made a decision to transfer consignment stock held at Macclesfield into AZ ownership. It appears from an internal email from Mr Hadfield to Ms Coltart and Mr Hopton, in fact sent on 24 January 2008, that this had been discussed with and agreed by senior management within AZ, so that although Mr Hadfield was the only witness who could give direct evidence about it, it would be wrong to make him a scapegoat for what appears to have been a joint management decision. Nonetheless, it appears that Mr Jones did not know about it and, when he found out subsequently in about June 2008, he demanded an explanation from Mr Hadfield.
- On 29 January 2008, Mr Hadfield sent Mr Tavernier and Mr De Tavernier an email in which he stated:
"On another subject and in case I forget, I am told that by the end of the month, all we will have left in the consignment stock is one of the batches delivered on Monday. It's the smaller box of 580 kilograms. Please update me as to when you will be completing the purchase order."
Mr Hadfield accepted in cross-examination that what he had omitted to tell Albemarle in this email was that the reason for being left with only 580kg at the end of the month was because AZ planned to make an unprecedented transfer of stock out of consignment into AZ's separate premises.
- In principle it seems to me that, given the terms of clause D4, there was no reason why AZ should not have transferred stock from consignment into AZ ownership, provided that this was disclosed to Albemarle so that it could invoice AZ for such stock transferred. In so far as there was anything wrong with what AZ did, it is because it would appear that it did not intend to be entirely frank about the stock transfer, which only emerged because, at the end of January 2008, AZ sent to Albemarle a stock consignment report for the thirteen month period from January 2007 to January 2008, which included for the first time a row described as "Transfer to AZ" which showed 5,613.50kg transferred to AZ in January 2008. This was apparently (according to that summary) the total consignment stock at the beginning of January of 7,357kg less the quantity used in January of 1,743.50kg. It follows that only the air freighted quantity delivered at the end of the month of 1,935.50kg was shown as consignment stock. Unusually, this document was approved by Mr Hadfield before it was sent out.
- Ms Elke Manshoven of Albemarle spotted what AZ was up to the moment she received that report. On 5 February 2008, Mr Tavernier telephoned Mr Hadfield about this. Mr Hadfield said there was certainly a good explanation and AZ was not playing games. Yet again, Mr Hadfield told Mr Tavernier that Albemarle had not matched the third party offer but, as Mr Tavernier put it in an internal email: "he could not state what's the main issue aside from the silly example of 'we accept their offer'." On DIP supply Mr Tavernier informed him that 2 metric tons would arrive at the end of February and 2 metric tons at the beginning of March.
- In an email at 13.23 on 6 February 2008, Mr Hadfield sent Mr Tavernier an explanation of the "transfer to stock" which purported to come from AZ's technical people but which was frankly gobbledegook, as Mr Hadfield accepted when I put that to him. In cross-examination, Mr Hadfield accepted that he had misled Albemarle about this. Although, in an email on 7 February 2008 to Mr Tavernier, he said he was pleased "we didn't try and hide" the "Transfer to AZ field", it clearly had been his intention to do so.
- Thus, in an internal email to Mr Evans at 13.50 on 6 February 2008 (just after the so-called explanation was sent to Mr Tavernier), Mr Hadfield referred to having included the row "Transfer to AZ" in the report sent to Albemarle as a "major own goal" which he had put a lot of time into trying to retreat from. He said that Albemarle had homed in on it and said AZ was building stock and did not need any more DIP. He continued that Albemarle kept trotting out that Marc Jones had said to John Steitz that all they needed to do was match the offer, and that they did not listen when Mr Hadfield said their quote did not match and that AZ hadn't expected Albemarle to be in breach of contract when the discussion between Mr Jones and Mr Steitz took place, a reference to the fact that Albemarle had not delivered any of the 9 November purchase order apart from the 2 metric tons which had been air freighted. I will deal in due course with the issue of whether AZ was entitled to make its compliance with its obligations under clause H contingent upon Albemarle's compliance with its delivery obligations under clause D.
- In a later email of 3 June 2008 to Mr Jones, Mr Hadfield provided an explanation for his having transferred consignment stock to AZ in these terms:
"This was done partly as I was concerned about Alb trying to snatch the stock back and also to support a claim that demand was increasing. I informed Alb that the flag 'transfer to AZ' was to show the material was required for tender business."
- What seems to emerge, from that subsequent explanation to Mr Jones about this transfer, is that even more consignment stock than the 5,613.50kg inadvertently disclosed in the stock consignment report was transferred. Mr Hadfield says in that email that a total of 12,194.5kg was transferred from consignment stock, 8,323.5kg in January 2008 and 3,871kg in February 2008. These quantities are difficult to reconcile with the fact that the closing stock as at 19 December 2007 was 7,357kg and only the 1,936kg air freighted was ever delivered after that date. Even without any consumption at all, that only totals 9,293kg and at first blush, the figure of 12,194.5kg suggests that AZ had more DIP in stock than it disclosed to Albemarle. However, Mr Hadfield did not deal with this issue in his witness statement and was not cross-examined about this email, so it would be wrong to make anything much of it.
(ix) The meeting of 15 February 2008 and events leading up to it
- A meeting was arranged to take place in the week of 11 February 2008, ultimately on Friday 15 February 2008. Pending the outcome of that meeting, Mr Carter did not want to make any deliveries of DIP to AZ. To that end, on 7 February 2008, Mr Carter sent instructions within Albemarle, to ensure that the resupply of DIP which was currently on the water (which Mr Carter and Mr Clary accepted in cross-examination was a reference to the 2 metric tons which had been shipped for delivery at the end of February), was not delivered to AZ. In order to achieve that, the order was changed from a consignment order to an inter-company shipment within Albemarle and diverted to Albemarle's premises in Antwerp, but the critical point is that the shipment was stopped.
- Both Mr Clary and Mr Carter accepted in cross-examination that delivery of that quantity of 2 metric tons in February 2008 would not have taken AZ over the consignment stock limit (although in the light of Mr Hadfield's email of 3 June 2008, setting out the amounts he had "transferred" from consignment stock, that concession may not have been correct). Mr Clary's evidence was that this shipment was stopped because they considered that the most likely outcome was that Albemarle was going to cancel the contract. Mr Carter maintained in cross-examination that he thought he was entitled under the supply agreement to control shipments in this way. As I have already indicated, he was wrong about that and Albemarle was already in breach for failing to deliver the full amount of the 9 November 2007 purchase order as amended.
- However, I accept Albemarle's evidence that this was not a deliberate breach of contract on its part and that Mr Clary and Mr Carter were acting on US legal advice. When this was put to Mr Clary by Mr Odgers, at Miss Carr's prompting at the end of cross-examination, Mr Clary's evidence was:
Q. Mr Clary, it is the situation, is it not, that by not delivering the 2 tonnes that were intended for delivery in February, Albemarle deliberately breached the 2005 agreement?
A. No, it is not the case.
Q. Albemarle knew that there was no justification in law for not delivering that 2 tonnes?
A. In my reading of the contract there was also no obligation to deliver.
Q. And it is the case, is it not, that one of the reasons, at least, that the February delivery was not made was in order to profit from a much higher sale price thereafter?
A. That if AstraZeneca was in breach of the agreement they should not benefit by the favourable pricing, right, that we would sell it at a higher price.
Ultimately, as I have said, Mr Odgers accepted in closing that Mr Clary had been acting on the advice of US attorneys and had not deliberately breached the supply agreement.
- On 11 February 2008, prior to the meeting which had been arranged, Mr Tavernier sent Mr Hadfield proposed draft heads of agreement, which he stated were generally based on the 25 January 2008 letter, which Mr Hadfield had indicated needed to be modified. He asked Mr Hadfield to review and return a marked up copy, if possible before the meeting on Friday, so that Albemarle could be prepared to review the comments and be fully prepared to negotiate a final propofol agreement.
- AZ seeks to contend that, because the draft heads of agreement stated under "Quantity" that Albemarle would supply 100% of AZ's annual requirements, Albemarle was only prepared to proceed on the basis of exclusivity which did not match Sochinaz's offer. In my judgment that is a bad point for a number of reasons. First, the email made it clear that the heads of agreement were a draft for discussion and invited AZ's comments, which were never provided. It would have been perfectly straightforward for AZ to go back and say the offer from Sochinaz was not 100% exclusivity but sole supply, which in practice would mean 80% minimum as per the DIP supply agreement, in which case it is quite clear Albemarle would have agreed this. However, as will be seen shortly, AZ had no intention of negotiating heads of agreement because it had no intention of awarding the propofol business to Albemarle.
- Secondly, as I have already said more than once in this judgment, the distinction which AZ has sought to draw in this case between exclusivity and sole supply or single sourcing is one without any real difference. It is an artificial distinction which is unsustainable on the evidence of AZ's own most senior witness, Mr Jones. Furthermore, it is quite clear that Albemarle was well aware in reality that whether it was described as "exclusivity" or "sole supply" Albemarle could never expect more, contractually, than 80% minimum of AZ's requirements.
- Thus, when Mr Odgers put to Mr Clary in the context of the letter of 25 January 2008 that what Albemarle expected was an exclusive supply contract, Mr Clary's response was:
"No, that was not my expectation for, among other reasons, the EU competition rules. My understanding was that you could not commit to sourcing all of your product from a single supplier, at least in the circumstances I was aware, but my understanding was that in practice AstraZeneca was going to sole source and that this other offer was one that was the company they were going to sole source from."
Similarly, in relation to the "100% exclusivity" in the heads of agreement, Mr Clary's evidence was that, as he put it, this would not have lived through to a final contract with AZ, but the provision was included to express the intent that Albemarle would be sole supplier. It was not trying to change the position from the letter of 25 January 2008.
- Thirdly, even if there were any substance in the difference between exclusivity and single sourcing/sole supply, at the meeting on 15 February 2008 (as he had been instructed by Mr Clary before the meeting) Mr Tavernier did make it clear that Albemarle was agreeing to match the Sochinaz offer in all respects, including basis of supply, a matter to which I turn in more detail below. This ties in with Mr Clary's evidence that Albemarle thought it was entitled to stand in the shoes of the third party:
"[what] we thought we were entitled to was to stand in place of the other supplier to get the benefit of whatever commitment had been made to the other supplier, and also to assume whatever commitments they had made."
- Before the meeting took place, on 12 February 2008 Mr Hadfield sent an email to Mr Tavernier rejecting the heads of agreement. He stated:
"Whereas it is AZ's desire to move to heads of agreement as quickly as possible this will not happen until Albemarle get things back on an even keel and as such the heads of agreement submitted with the e-mail below is rejected. Notwithstanding the inappropriate construction, Albemarle does not match the third party offer. Further in view of all of Albemarle's actions AZ needs Albemarle to demonstrate a period of stability and unaffected supply".
- Once again, Mr Hadfield did not condescend to identify in what respects Albemarle had not matched the third party offer. Mr Hadfield was pressed in cross-examination as to why, if, as he insisted, his instructions were that if Albemarle matched the offer, AZ would contract with Albemarle, he had not told Albemarle what it was about its offer that did not match the third party offer. He was simply unable to offer any answer, other than that it could have been handled better. In my judgment, though he would not accept it when Miss Carr put it to him in cross-examination, the real explanation was that there was a lack of genuine willingness to proceed to a full agreement with Albemarle.
- Mr Clary's evidence was that, before the meeting on 15 February 2008, the Taverniers were given instructions about what they could agree at the meeting, which included conceding the issue of exclusivity. As Mr Clary put it in cross-examination:
"What I was concerned about was that AstraZeneca was looking for any pretext to say that our offer didn't match the competitive offer, and so Jan and Olav had discretion to agree to almost anything reasonable to make sure there could be no allegation made that we were refusing to meet the competitive offer. What I was looking for, in addition to whatever was in the contract, was an assurance of some sort from AstraZeneca that, as I said, we would be registered, that they would actually buy some product from us; and that was a risk, I knew that was a risk."
- It was suggested by Mr Odgers that this evidence of giving the Taverniers a wide authority before the meeting, was something that only came up in cross-examination, the implication being that Mr Clary had made it up to suit Albemarle's case and to counter the suggestion made by Mr Hadfield in his witness statement that, although the Taverniers had agreed at the meeting to match the Sochinaz offer, he was not convinced they had authority to make that agreement, because what was said was a throwaway comment. In my judgment, that criticism of Mr Clary was unwarranted. This was something which was referred to in his witness statement, but even if it had not been, I am satisfied that the Taverniers were given authority before the meeting to agree whatever was necessary to confirm that Albemarle was matching Sochinaz's offer.
- At the meeting on 15 February 2008, Mr Hadfield identified for the first time the respects in which it was alleged that Albemarle had failed to match the third party offer. Some of these, as Miss Carr rightly pointed out in cross-examination were simply nonsense in terms of not matching. Specifically, availability of free qualification samples and pack size were matters which, as I see it, were simply Mr Hadfield trying to find any pretext for arguing that the offer had not matched. Mr Tavernier's contact report records the other two aspects in respect of which the offer was said by Mr Hadfield not to match as "fixed pricing for five years was unclear" and "single sourcing: competitive offer doesn't limit nor requires AZ to take any volumes - in view of recent behaviour in the DIP supply AZ does not wish to commit to a single sourcing from Albemarle and AZ wants to have the freedom to operate as they wish".
- So far as the point about fixed pricing for five years was concerned, that was simply not true, as the letter of 25 January 2008 made clear that Albemarle was matching what it considered was a five year offer from the third party, which was of course in fact the case. Again this was an example of Mr Hadfield finding any pretext, whether good or not, to argue that the Albemarle offer did not match. In any event, even if there had been any force in the point, the contact report indicated, as Mr Hadfield accepted, that Mr Tavernier immediately confirmed in the meeting that "price will remain firm for 5 years as per our offer".
- In relation to the point about single sourcing, in my judgment this was also untrue. For the reasons I have already given, not only (as Mr Jones accepted) would AZ always have single sourced the propofol business, but in fact, contrary to what Mr Hadfield asserted, the offer from Sochinaz was to be sole supplier (in fact exclusive supplier, which AZ had never contradicted). In any event, even if there had been anything in this point, as AZ's own PowerPoint presentation after the meeting (which Mr Tavernier attached to his contact report) stated in terms: "Albemarle's offer doesn't match 3rd party offer - AZ has disclosed shortcomings. Albemarle verbally indicate they'll match." In cross-examination, Mr Hadfield accepted that, at the meeting on 15 February, there was nothing which Albemarle had said it couldn't match. In so far as Mr Hadfield sought to suggest in his witness statement that what was said by Mr Tavernier was a throwaway comment not to be taken seriously or somehow not authorised, I reject that suggestion. Mr Hadfield would never have recorded it in the PowerPoint presentation unless it was to be taken seriously.
- Furthermore, Mr Evans' evidence in cross-examination belies any suggestion that anyone at AZ genuinely thought that what Mr Tavernier had said about matching the third party offer had somehow been said without authority:
Q. It is not fair, I suggest, for you now to suggest that you thought it was clear that they didn't have authority to say what they did. They never said they didn't have authority, did they?
A. No, they never said that, no.
Q. They were, in your view, puppets. Puppets don't act without their strings being pulled, do they?
A. That is in my statement, yes.
Q. So is the truth, Mr Evans, that you had every reason to believe they would only say that which they had been authorised to and instructed to say?
A. Yes.
- Given that Albemarle had matched the offer, the obvious question is why AZ did not proceed with negotiations either at the meeting on 15 February 2008 or immediately thereafter. It seems clear that the answer is that Mr Hadfield attended the meeting with the intention (probably on instructions from his superiors in AZ), that even if Albemarle did match the Sochinaz offer, he would not negotiate any sort of deal or agreement in principle with Albemarle. Mr Tavernier's contact report records Mr Hadfield as saying that "he was not empowered to negotiate the HOA yet". The reasons given by Mr Hadfield for this were twofold. The first reason was that the offer did not match and I have already set out that the points taken were either untrue or mere pretext for arguing the offer had not matched.
- The second reason was that AZ was concerned about Albemarle's behaviour, in not supplying the full amount of the DIP to be delivered under the 9 November purchase order, and wanted to establish a "period of stability" until May 2008 during which Albemarle would supply DIP and AZ would conduct an audit at Orangeburg, before proceeding to "contract discussion on the supply of propofol". Whilst it is understandable commercially that AZ wanted to secure supplies of DIP, this was a clear example of moving the goalposts from the position accepted by Mr Jones in the telephone conversation on 20 December 2007. Furthermore, unless AZ is right in its argument that Albemarle's compliance with its delivery obligations was a condition precedent to AZ's compliance with its obligations under clause H, this refusal to negotiate was a further breach of clause H.
(x) Events leading up to termination of the supply agreement by Albemarle
- Following the meeting, Mr Evans sent an email setting out various technical details that had to be complied with. However, these had never been disclosed to Albemarle on 9 January as part of the third party offer it had to match. Mr Hadfield would not accept in cross-examination in terms that there was no question of these technical questions being in any way a reason for saying Albemarle had not matched the Sochinaz offer, vouchsafing only the begrudging "perhaps so".
- However, Mr Evans was much fairer and accepted that these technical questions, raised after the meeting, were not matters which meant that Albemarle had not matched the offer, just things that he needed answers to in order to move the project forward. This is obviously right and any such technical issues could easily have been ironed out with goodwill and good faith on both sides. Any use of them to argue that the offer had not been matched is merely another example of AZ seeking to use any pretext to contend that Albemarle had not matched the offer, notwithstanding that AZ, at least in the person of Mr Hadfield and Mr Evans, was well aware that it had.
- The reality is that the point made by Mr Hadfield at the meeting, about the need for a period of stability during which Albemarle would supply DIP as requested by AZ at least until May 2008 before AZ would come back to any question of negotiating heads of agreement, was another example of the tactic identified by Mr Hopton in his internal email of 4 February 2008 of, so far as possible, keeping Albemarle "on side" for the supply of DIP until the supply of propofol by Sochinaz had been arranged.
- What in fact happened after the 15 February meeting is that, although Albemarle was pressing for another meeting, Mr Jones proposed an approach of not communicating with Albemarle for a month, in effect to encourage Albemarle to resume supplies of DIP in accordance with the purchase orders. Pursuant to what Mr Jones had instructed, Mr Hadfield sent an email to Mr De Tavernier on 22 February 2008 in these terms:
"Re your voicemail, during the next four weeks we are carrying out a strategic review of the product and portfolio. As Albemarle are fully aware of AZ's requirements, during this period AZ will not be entering into further communication."
- That approach was confirmed by a letter from Mr Jones to Mr Cuijpers on 27 February 2008 stating that if the deliveries under the two outstanding purchase orders were received and the breach of contract by Albemarle (in not delivering DIP) were rectified, AZ would be happy to reconsider Albemarle's request for a further meeting. What the instructions Mr Jones gave and this letter reveal is a hardening of his approach from what he had undertaken to Mr Steitz. As Mr Jones put it in cross-examination: "I felt I was being blackmailed, so I don't tend to go and have meetings with people who are blackmailing me".
- However, when in response to that, Miss Carr asked him whether it would still not have been sensible to look at the detail to see if Albemarle had not matched the Sochinaz offer, he said that Mr Hadfield and Mr Westerholm were very clear to him that Albemarle had not matched it. For reasons I have already given, that advice was wrong: Albemarle had matched the offer. It is a matter for conjecture whether Mr Jones would have adopted the same somewhat hard line approach, had he been given the right internal advice, that the offer had been matched. In the light of his evidence about what he had undertaken to Mr Steitz, I rather doubt it. I suspect if he had known that Albemarle had matched the offer, matters would have been conducted by him very differently after the meeting of 15 February 2008.
- Whilst Mr Jones' attitude may have been understandable, by reference to the wrong advice he had been given, the only justification for Mr Jones reneging on what he had undertaken to Mr Steitz would happen if Albemarle matched the offer, would be if AZ could establish that any obligation on its part to comply with what I have held were its clear obligations under clause H was contingent upon Albemarle fulfilling its obligations in respect of delivery of DIP.
- Given the attitude adopted by AZ after the meeting on 15 February 2008 of not being prepared to talk to Albemarle for a month, AZ's pleaded case that Albemarle had failed to mitigate its loss by failing to progress technical discussions with AZ about the supply of propofol was clearly hopeless and was, rightly, abandoned.
- In the light of AZ's negative response at and following the meeting on 15 February 2008, Albemarle wrote to AZ on 3 March 2008 terminating the supply agreement with immediate effect in accordance with clause K and Condition 7.1 as amended by that clause. On the following day, Albemarle served proceedings on AZ, issued in the courts of South Carolina, alleging breach of contract by AZ. Albemarle's case is that it was entitled to terminate on the basis that AZ had failed, even within the extended period Albemarle had afforded since October 2007, to remedy its breach of clause H.
(xi) Events after Albemarle's termination
- One consequence of termination was that AZ only had enough DIP in stock at Macclesfield to continue production of Diprivan until later in 2008, exactly when is not entirely clear, as it depends upon how much DIP AZ in fact had at the time of termination and what its actual and expected consumption was. However, clearly AZ had a potential problem and, in order to address that problem, AZ had to accelerate the process of qualifying Sochinaz as a supplier of propofol. In fact, AZ placed its first order for supply of propofol with Sochinaz on 22 April 2008, the propofol being delivered at a later stage in July 2008. Mr Westerholm confirmed in evidence that he had probably approved this purchase and it was a purchase of actual product, not merely a test purchase.
- Nevertheless, AZ still had a need for supplies of DIP to continue production. Albemarle was sceptical as to how urgent this need was, but in an email on 10 April 2008, Mr Carter indicated that Albemarle would be willing to sell AZ DIP not at the rate under the supply agreement but at its list price of $1,200 per kg. Mr Carter was not prepared to move on this price, as he indicated in an email of 14 April 2008, particularly given the short time frame set by AZ for the purchase, and also said that due to the litigation between the parties, AZ would have to make pre-payment.
- Mr Jones protested to Mr Steitz about this price in an email on 18 April 2008, but in his reply on 21 April 2008, Mr Steitz suggested that to resolve concerns about the pricing, the parties implemented the proposed mediation process to establish future agreements for the supply of both DIP and propofol but until such agreements were reached, any sales of DIP would be on the terms offered by Mr Carter. It was not suggested to any of the Albemarle witnesses that this was not its genuine list price for customers who bought small quantities and were not in a long-term agreement with Albemarle or that it was some sort of "dishonest" price.
- On 2 May 2008, AZ sent a letter to Albemarle stating that, although Albemarle's termination in its letter of 3 March 2008 was wrongful, AZ regarded the supply agreement as terminated. The letter went on to request that Albemarle immediately deliver the quantities outstanding under both the 9 November 2007 purchase order of 6,170kg and the 4 January 2008 purchase order of 6,176kg, due for delivery on 22 January and 4 April 2008 respectively. The letter also requested that Albemarle immediately deliver, pursuant to clause D8, approximately 20 metric tons of DIP at the contract price, in other words the safety stock held at Orangeburg. AZ concluded that continued refusal to supply DIP on this basis would be regarded as deliberately calculated to disrupt AZ's operations and reserved its rights.
- On 12 May 2008, AZ sent another letter again requesting delivery of the outstanding purchase orders and the safety stock under clause D8 and said again that the continued refusal was deliberately calculated to disrupt AZ's operations. AZ reserved its right to take action to protect its position and enforce its rights. In his response, Mr Carter disagreed with AZ but, given that the parties were by now in litigation, it is not necessary to set out the detail of what was contended on both sides thereafter. Suffice it to say that on 23 June 2008, AZ did purchase 9,253kg of DIP from Albemarle at the list price of $1,200 per kg, for delivery on or before 27 June 2008, pursuant to a written sales agreement.
- In so far as Albemarle sought to contend that AZ failed to mitigate its loss by entering that agreement, that was not a point pursued in closing. It would have been hopeless because, in the limited time available, given the need for regulatory approval, there was no one else who could supply DIP to AZ. In a very real sense Albemarle had AZ across a barrel and could charge a much higher price than the preferential price under the supply agreement, as Mr Carter had anticipated in his SWOT review would be the case, if the agreement were terminated before the switch to propofol. In those circumstances, the allegation of failure to mitigate was a somewhat bold one.
- So far as the negotiation of final terms of contract between AZ and Sochinaz are concerned, a first draft of a supply agreement was prepared by Albemarle's in-house lawyers and Ms Galbraith of AZ negotiated with Sochinaz the terms of that agreement over the ensuing months until November 2008. There was some suggestion in cross-examination of Ms Galbraith that AZ had failed to disclose all the relevant negotiations, but I was unimpressed with that suggestion. As she explained, her computer had crashed and the recovery process undertaken by the IT specialists had only recovered some of her emails and files.
- AZ sought to make much of the fact that the propofol supply agreement with Sochinaz contained a provision (said by Ms Galbraith to be standard to its supply agreements in accordance with the new template or what was described elsewhere as AZ's "commercial framework") that stated in terms that supply would be on a non-exclusive basis and that AZ would have the right to engage other suppliers in its sole discretion. I was unimpressed by this point. In an email during the negotiation process, Ms Galbraith said this to Sochinaz:
"...would like to confirm AZ would never approach an alternative supplier unless Sochinaz were absolutely unable to supply material replacement."
- Ms Galbraith accepted in cross-examination that, although the template supply agreement discouraged exclusivity, she would have regarded herself as bound by the assurance she gave in this email. This indicates that, in practice, AZ was not concerned about the fact that Sochinaz was sole supplier and would, barring a catastrophe, supply all AZ's requirements for propofol. That assurance also corresponds both with what had been agreed in October 2007, that Sochinaz would be sole supplier, and with Mr Jones' evidence in cross-examination that the propofol business would always have been single sourced.
- To the extent that Mr Jones was saying something different in his memorandum of 7 July 2008 where he says: "AZ cannot enter into a majority supply agreement with one supplier and must be dual sourced for this product", it seems to me that care has to be taken in placing much reliance on this, a statement after litigation with Albemarle had commenced. That statement is inconsistent with what he told Mr Steitz, which he accepted when I put it to him, would mean that if Albemarle matched the Sochinaz offer, it would be entitled to supply a minimum of 80% of AZ's requirements. It is also inconsistent with his evidence that this business would always have been single sourced. In any event, any reliance by AZ on the final form of supply agreement with Sochinaz or on what Mr Jones said in July 2008, cannot change the fact that, for the reasons I have given, Albemarle had matched the Sochinaz offer, either in its letter of 25 January 2008 or at the meeting on 15 February 2008.
- In December 2008, before AZ finally signed off on the supply agreement with Sochinaz, AZ's US attorneys sent Albemarle a letter purporting to afford Albemarle a final chance to match the Sochinaz offer. As Miss Carr rightly pointed out, this exercise was clearly lawyer driven and did not emanate from the AZ personnel responsible for the propofol project. It purported to give Albemarle seven days to respond and I agree with Miss Carr that, in the circumstances, this was clearly unreasonable. In the circumstances, any suggestion that Albemarle failed to mitigate its loss by not taking up the offer is hopeless. Furthermore, it was never put to Albemarle's witnesses in cross-examination, particularly Mr Carter, that Albemarle had acted unreasonably in failing to accept this offer.
F Discussion of the issues
Issue 1: What obligation was there upon AZ under clause H of the supply agreement?
- I have already set out in detail my conclusion on this issue. What the clause means is that, where AZ had decided to switch to generic propofol rather than distilled DIP and was minded to accept a third party offer, in this instance from Sochinaz, AZ was under an obligation to disclose to Albemarle full details of that offer and afford Albemarle the opportunity, if it wished, to match that offer. In the event that it did so, AZ was obliged to accept Albemarle's offer rather than that of the third party. This conclusion is of course subject to issues 4 and 5: whether the obligation under clause H was contingent upon Albemarle's own compliance with its obligations to deliver DIP under the supply agreement and whether Albemarle was in breach of those obligations.
Issue 2: When did the obligation under clause H accrue?
- Again, I have dealt with this point in detail earlier in the judgment. I consider that the only sensible commercial construction of the clause is that the obligation on AZ to provide Albemarle with details of any third party offer and with the opportunity to match that offer arose when AZ was minded to accept the third party offer, which was in reality at some point in early September 2007, but in any event on 11 October 2007. It follows that AZ was in breach of its obligations under clause H on 11 October 2007 at the latest. In those circumstances, Albemarle was entitled under clause K of the contract to send AZ the letter of 26 October 2007 giving AZ 30 days in which to remedy that breach.
- Even if that analysis were wrong, I agree with Miss Carr that this is a case in which there was an estoppel by convention stopping AZ from contending that whatever the rights and obligations under clause H were, they had not arisen by 11 October 2007 at the latest. Quite apart from Dr Ewart's evidence that he had drawn Albemarle's attention to clause H during discussions in June and July 2007, AZ's letter of 16 November 2007 in response to Albemarle's letter of 26 October 2007 proceeded on the basis that the rights and obligations under clause H had already arisen, in fact in 2006.
- Similarly, the letter from AZ of 29 November 2007 referred to the proposed meeting as being "intended to allow Albemarle the opportunity to exercise its rights under clause H ...and is without prejudice to the fact that [AZ] maintains that it has already afforded Albemarle such right". Mr Hadfield accepted in cross-examination that this opportunity was being afforded because he believed the rights under clause H had been triggered. Both the notes of Mr Tavernier of the subsequent meeting on 7 December 2007 and Mr Carter's evidence about it are to the effect that it proceeded on the explicit basis that Albemarle's rights under clause H had arisen.
- In the circumstances, were it necessary to do so, I would accept Miss Carr's submissions that it was simply not open to AZ to contend now that Albemarle's rights under the clause (and correspondingly AZ's obligations) did not accrue until some later date, when the contract with Sochinaz was actually entered. Accordingly, it is not necessary to consider Albemarle's fall-back position that, if it is wrong on the timing issue, AZ was in breach when it first contracted with Sochinaz for the supply of propofol in April 2008. Were the point to become relevant, whilst it may be correct in principle, it is difficult to see how it assists Albemarle given that it had purported to terminate the supply agreement for breach of clause H a month earlier, on 3 March 2008.
Issue 3: Matching the offer
- The third issue is whether Albemarle did in fact match Sochinaz's offer. Again for reasons which I have already elaborated in my analysis of the facts, I consider that Albemarle's letter of 25 January 2008 did match the Sochinaz offer. The suggestion by Mr Hadfield contemporaneously, that it had not matched on the points of basis of supply and duration of the agreement, was deliberate obfuscation on AZ's part, to find a pretext for contending that the offer did not match, and there was no substance in those points. They were not improved by being repeated in AZ's case at trial and remained, in my judgment, no more than such pretexts, in circumstances where AZ knew in fact that the Sochinaz offer had been matched.
- Even if there had been any merit in those points, which there was not, they evaporated completely when, at the meeting on 15 February 2008, Mr Tavernier indicated, as he had been authorised to do by Mr Clary, that Albemarle would match the third party offer. The other suggested respects in which the offer had not been matched (either as raised by Mr Hadfield at the meeting or raised subsequently by reference to Mr Evans' technical queries) were wholly without substance and rightly characterised as nonsensical.
Issue 4: Prior to 3 March 2008, was Albemarle in breach of the supply agreement in failing to fulfil the 9 November 2007 purchase order as amended?
- Logically, the next issue to be considered is whether, as at 25 January 2008 or 15 February 2008 or, at the latest, the date of termination of 3 March 2008, Albemarle was in breach of its obligations under the supply agreement to deliver DIP to AZ pursuant to AZ's purchase orders by the designated delivery date, which, in the case of the relevant purchase order of 9 November 2007, was 22 January 2008. If Albemarle was in breach then the next issue will be whether AZ was thereby relieved of its obligations under clause H, because performance by Albemarle of its obligations to deliver was a condition precedent to any obligation of AZ under clause H.
- On the basis that, whether correctly or wrongfully, the supply agreement was terminated on 3 March 2008, AZ no longer pursues its additional pleaded case that Albemarle was also in breach in failing to deliver the second purchase order due for delivery on 4 April 2008. I am not surprised that argument has been abandoned. The suggestion that AZ had some sort of accrued right to performance, in circumstances where the date for performance had not arisen as at the date of termination, always seemed to me to fly in the face of the fundamental principle that termination of the contract brings to an end the parties' obligations as regards future performance.
- So far as the first delivery order is concerned, AZ's case is very simple. Under Condition 2 of the supply agreement, Albemarle was obliged to deliver DIP: "on the date or during the period specified in the purchase order". By the purchase order of 9 November 2007, as amended on 14 January 2008, 8,106kg of DIP was to be delivered by the delivery date of 22 January 2008. In the event, only 1,936kg (the air freighted quantity) was delivered, in fact slightly late, on 28 January 2008. AZ therefore contends that Albemarle was in breach of contract in failing to deliver 6,170kg under the purchase order on the delivery date or at all.
- In defending this claim, Albemarle points out, quite rightly, that the supply agreement contemplates the possibility of two categories of order: (i) consignment orders which, at the time of order and delivery, are invoiced on a zero basis and which are held as consignment stock at Macclesfield and, under clause D4, only subject to invoicing when moved out of the storage area with the intent to use the product in production or when the drum seal is broken and (ii) regular stock which is invoiced upon shipment and paid for at the end of the month following that in which delivery is made (see the opening words of clause D4 and clause E).
- Albemarle then goes on to say that it is necessary to know, when the purchase order is placed, into which category the order falls, because a purchase order issued on a consignment stock basis, stating a zero price, cannot have given rise to a right to shipment on a non-consignment basis. However, that argument is predicated upon the assumption, made by Mr Clary and Mr Carter at the time and explained in their evidence, that if AZ places an order on the "wrong" consignment basis because that order will take AZ over the maximum consignment stock limit of 12,000kg or, on the present facts, 10,250kg, Albemarle is entitled to refuse to deliver the DIP at all.
- That seems to me to be fallacious for two reasons. First, in so far as the consignment stock limit is relevant to determining whether AZ is entitled to more consignment stock, that question must be determined at the time of shipment, not at the time of the purchase order, which may be months earlier. It is only if the consignment stock shipped takes AZ over the maximum that the permitted limit will be exceeded. Second, following on from the first reason, it is clear from the second sentence of clause D2: "All quantities of PRODUCT shipped to BUYER in excess of a total uninvoiced quantity of 12,000 Kg of PRODUCT would be invoiced upon shipment" that if, at the time of shipment, the effect of a purchase order on a consignment basis is to take AZ over the maximum limit, the remedy of Albemarle is not, as Mr Clary and Mr Carter thought, to refuse to ship the excess quantity, but to invoice for the excess quantity on shipment or as soon as Albemarle discovers the order would take AZ over the consignment stock limit.
- In other words, even though Albemarle may well have been right that the effect of delivering the full 8,106kg on 22 January 2008 would have been to take AZ over the 10,250kg consignment stock limit (on the basis that, as at that date, the consignment stock was about 6,000kg, having been 6,194kg at the time of the audit), Albemarle was not entitled to refuse to deliver, on this hypothesis, the excess over 4,250kg. Rather, what Albemarle was entitled to do and should have done, is to say that AZ was only entitled to 4,250kg on a consignment stock basis and invoiced AZ immediately in respect of the excess. What Albemarle was not entitled to do was to refuse to deliver a proportion of the order at all or to limit the quantities delivered to 2 metric tons a month as Mr Carter sought to do.
- It follows that Albemarle was in breach in failing to deliver all the quantity under the 9 November 2007 purchase order as amended. In those circumstances, it is not necessary to consider in any detail the effect of Mr Hadfield's transfer of stock out of consignment stock at the end of January 2008, so as purportedly to show only 1,935.5kg of consignment stock. As I have already indicated, although Mr Hadfield's conduct was devious and his explanation of what was going on was mendacious, in principle I see no reason why AZ should not choose to end the consignment stock arrangement in respect of part of the consignment stock and pay for that proportion, which will then become part of the stock owned by AZ. In the present case of course, Mr Hadfield's "explanation" did not tell Albemarle clearly or at all that that was what AZ was doing, so that Albemarle could invoice for that stock transferred.
- Accordingly, it would have been a moot point, if it had been relevant, whether that purported reduction in consignment stock was effective to require Albemarle to deliver the full amount the subject of the purchase order as consignment stock. Since, for the reasons I have given, Albemarle was not entitled to refuse to deliver any of the quantity, but only to invoice for the quantity that would have taken the consignment stock above the limit of 10,250kg, and that what Albemarle in fact did was to refuse to deliver more than the 1,936kg air freighted, it is not necessary to decide the point.
Issue 5: Was AZ's obligation under clause H contingent upon Albemarle's obligation to deliver DIP under the supply agreement?
- The next issue arises on the basis that, as I have found, Albemarle was in breach in failing to deliver the total amount of the purchase order on the delivery date of 22 January 2008. From this, it follows that Albemarle was in breach at either of the dates upon which Albemarle matched the third party offer, 25 January 2008 or 15 February 2008.
- In those circumstances, AZ contends that its obligation under clause H was contingent upon performance by Albemarle of its obligation to deliver DIP. In other words, it contends that it was not obliged to award the business to Albemarle even if Albemarle matched the Sochinaz offer, because by 25 January 2008 (in fact from 22 January onwards), Albemarle was in breach of its delivery obligations. Accordingly, AZ contends that because Albemarle was itself in breach, Albemarle was not entitled to terminate the supply agreement on 3 March 2008 for AZ's breach.
- The first thing to note in relation to this contention is that there is nothing in clauses D or H or Condition 2 which expressly makes performance of one obligation contingent upon performance of the other. Whilst it is clear that, for performance of a provision in a contract to be a condition precedent to the performance of another provision, it is not necessary for the relevant provision to use the express words "condition precedent" or something similar, nonetheless the court has to consider whether on the proper construction of the contract that is the effect of the provisions: see DRC Distribution Ltd v Ulva Ltd [2007] EWHC 1716 (QB) paragraph 39.
- I agree with Miss Carr that, in the absence of an express term, performance of one obligation will only be a condition precedent to another obligation where either the first obligation must for practical reasons clearly be performed before the second obligation can arise or the second obligation is the direct quid pro quo of the first, in the sense that only performance of the first earns entitlement to the second.
- In the present case, there is absolutely nothing in clause H to suggest that performance of AZ's obligations under it was contingent on performance by Albemarle or to suggest that Albemarle would not be entitled to exercise the rights clause H gave it, unless it had complied fully with its delivery obligations in respect of DIP. It would have been very easy for AZ to insist upon some express provision to that effect, but in the absence of such a provision, in my judgment, there is nothing to link performance of the one obligation with performance of the other.
- Mr Odgers seeks to overcome this in two ways. First, it is contended that the wording of clause H: "[AZ] reformulates or otherwise changes its Diprivan brand to substitute propofol for the PRODUCT" contemplates that the product (DIP) is being provided by Albemarle under the supply agreement. In my judgment, this point is hopeless. Clause H is dealing with which ingredient AZ wants to use in its drug, Diprivan, and has nothing whatsoever to do with Albemarle's delivery obligations under the supply agreement.
- Second, it is contended that Albemarle's willingness to supply DIP to AZ in accordance with its obligations must have been taken for granted when agreeing to give Albemarle the opportunity to supply propofol, and that the parties cannot have contemplated that if Albemarle was wrongfully refusing to supply DIP, AZ should still be obliged to use it to supply propofol. In my judgment that is no more than an assertion which reflects AZ's internal attitude at the time - namely, why should it contract for propofol with a party which was refusing to supply the quantities of DIP which AZ wanted to build up before supply of propofol commenced in earnest.
- However, there is simply nothing in the contract to suggest, either expressly or by implication, that any entitlement under clause H was contingent upon supplying whatever DIP AZ asked for. The reality is that, whilst AZ undoubtedly became disenchanted with Albemarle towards the end of January 2008, because Albemarle would not supply the DIP it wanted, there was no contractual term or linkage which justified translating that disenchantment into a refusal to accept an offer from Albemarle which otherwise matched the offer from the third party.
Issue 6: Was Albemarle entitled to terminate the supply agreement on 3 March 2008 either under clause K or on the basis that such termination was acceptance of a repudiatory breach by AZ?
- Albemarle's case on this issue is straightforward. By 11 October 2007 at the latest, AZ was in breach of clause H and, by its notice in the letter of 26 October 2007, Albemarle gave AZ a 30 day notice under clause K to rectify its breach. Although thereafter AZ afforded Albemarle the opportunity to consider the details of the Sochinaz offer to decide whether to match it, when Albemarle did in fact match it on 25 January 2008 and/or 15 February 2008, AZ refused to agree that the offer had been matched and thus refused to award Albemarle the propofol business. Accordingly, the breach committed by AZ as at 11 October 2007 remained uncured within thirty days or at all and Albemarle was entitled to terminate the supply agreement under clause K on 3 March 2008, in respect of that unremedied breach. In the light of the findings of fact I have made, that conclusion seems to me to be inevitable.
- AZ did have a pleaded case that, by continuing negotiations after 26 October 2007, Albemarle somehow waived any right to rely upon the thirty day time limit in the letter of 26 October 2007 or to terminate the supply agreement on the basis set out in that letter. Wisely, that case was not pursued at trial, as it was utterly hopeless. In the absence of some express statement or representation that the letter of 26 October 2007 would no longer be relied upon, the mere fact that Albemarle agreed to negotiate under clause H beyond 25 November 2007 does not in any sense amount to a waiver by Albemarle of its entitlement to terminate the supply agreement under clause K for failure to remedy the breach of clause H within the 30 day period.
- In the circumstances, given my conclusion that Albemarle was entitled to terminate the supply agreement under clause K for failure to remedy the breach of clause H within 30 days of 26 October 2007, it is not necessary to consider Albemarle's alternative case that, by 3 March 2008, AZ was in repudiatory breach of the supply agreement by failing to agree in principle that Albemarle should be awarded the propofol business. However, to the extent that the point might arise in a higher court, I am firmly of the view that a failure to comply with clause H is not a repudiatory breach of the supply agreement, in the sense that such non-compliance did not deprive Albemarle of substantially the whole benefit of the supply agreement, applying the well-known test of Diplock LJ in Hong Kong Fir Shipping v KKK [1962] 2 QB 26 at 66. The supply agreement is essentially about the supply of DIP and, however Albemarle may have regarded clause H in subjective terms, it was about something which would happen in the future and which was not central to the DIP rights and obligations under the agreement.
Issue 7: Was Albemarle itself in repudiatory breach of contract in failing to deliver DIP in accordance with the purchase orders?
- Given my firm conclusion that Albemarle was entitled to terminate the supply agreement as at 3 March 2008 pursuant to clause K, this issue does not strictly arise since, as AZ accepts, it would only arise in the event that Albemarle was not entitled to terminate as at 3 March 2008.
- Mr Odgers submits that nonetheless, in that event (namely that Albemarle was not entitled to terminate as at 3 March 2008), Albemarle was in repudiatory breach of the supply agreement essentially on three grounds. First, it is contended that the fulfilment of Albemarle's delivery obligation was so essential to the nature of the supply agreement that its non-performance of that obligation amounted to a substantial failure to perform the contract at all. In that respect AZ contends that the delivery obligation was a condition of the contract in a strict sense. It relies upon the well-known statement of principle by Fletcher Moulton J, dissenting in the Court of Appeal in Wallis, Sons & Wells v. Pratt & Haynes [1910] 2 KB 1003 at 1012. His judgment on this point was upheld by the House of Lords [1911] AC 394:
"There are some [obligations] which go so directly to the substance of the contract or, in other words, are so essential to its very nature that their non-performance may fairly be considered by the other party as a substantial failure to perform the contract at all. On the other hand there are other obligations which, though they must be performed, are not so vital that a failure to perform them goes to the substance of the contract...later usage has consecrated the term 'condition' to describe an obligation of the former class and 'warranty' to describe an obligation of the latter class."
- Second, it is submitted that Albemarle's continuing failure to make delivery of DIP under the purchase orders deprived AZ of substantially the whole benefit of the contract. Third, in the context of the failure to make such delivery, it is submitted that the purported letter of termination on 3 March 2008 was a clear and unequivocal representation that Albemarle no longer intended to perform its obligations under the supply agreement.
- This issue can be dealt with briefly. So far as the first two grounds are concerned, in the context of a long term agreement under which the earliest date upon which either party could terminate the agreement was three years after the agreement incepted, my own view is that (i) breach of the delivery obligation in respect of a DIP shipment was not a condition under the terms of that agreement and (ii) in the context of a three year agreement of this kind, non-delivery of one purchase order (and possibly even two) could not be categorised as a repudiatory breach, in the sense of depriving AZ of substantially the whole benefit of the contract.
- On the hypothesis that, contrary to Albemarle's case, it was not entitled by its letter of 3 March 2008 to terminate the supply agreement for breach of clauses H and K, AZ contends that this letter was itself a clear and unequivocal representation that Albemarle no longer intended to perform its obligations under the supply agreement. In my judgment, if, contrary to Albemarle's case, the letter of 3 March 2008 did not amount to a rightful termination, then it seems to me the irrefutable conclusion must be that this letter was a renunciation.
- In that event, I agree with Mr Odgers' submission that this is not a case in which, despite such renunciation, AZ has failed to terminate for renunciatory breach. In AZ's letter of 2 May 2008, AZ stated that although Albemarle's letter of termination was wrongful, AZ regarded the agreement as terminated. In my judgment, that would be a clear acceptance of Albemarle's renunciatory breach (if such it was) as terminating the contract. However, this is all academic, since for the reasons I have given, Albemarle was entitled to terminate under clause K on 3 March 2008.
Issue 8: The effect of clause D8
- Clause D8 provides as follows:
"In case BUYER or SELLER terminate the supply agreement or when the hardship clause is invoked, BUYER commits to purchase all remaining PRODUCT that is in stock as described in clause C and F (either at SELLER's Orangeburg plant and/or at BUYER's Macclesfield plant under the consignment program)."
- AZ recognises that, read literally, the clause imposes a unilateral obligation upon AZ on termination to purchase all remaining DIP stock, which is either being held as consignment stock at Macclesfield or which Albemarle is holding at Orangeburg as forward requirements as required by clause F, in other words as safety stock. However, AZ argues that, applying the well-known passage in Lord Hoffmann's speech in Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896 at 912-3 which sets out the main principles of construction, the court should not adopt this literalist approach. Mr Odgers urges a construction which imports not just the buyer's agreement to buy but the seller's agreement to sell, even though the latter is not expressly stated.
- In support of that construction, he relies on the drafting of the supply agreement as a whole and the wider commercial context. So far as drafting is concerned, he points out, correctly, that it is not drafted in conventional English legal drafting language, for example the somewhat odd use of the conditional mood "would" in clauses D1, 2, 3, 6 and 7. He also submits that, although the supply agreement is one under which Albemarle agrees to sell DIP, nowhere does it say so in terms. In my judgment, that last point is simply wrong, given the express words of clause C1: "SELLER agrees to provide a maximum of up to 125% of this forecast" and given the clear terms of the seller's delivery obligation under Condition 2 of the Conditions of Contract, incorporated in the supply agreement.
- In terms of the wider commercial context, Mr Odgers emphasises that one of the major aims of the supply agreement was to ensure continuity and security of supply of DIP for AZ. Hence the long and asymmetric termination periods in clause B, the detailed forecasting provisions and obligations to ensure sufficient availability of stock in the future in clauses C and F and the protection of supply in the event of force majeure in Condition 8B. Mr Odgers submits that the reference to the "hardship clause" in clause D8 is indeed a reference to this force majeure provision. He points out that Condition 8B does not protect AZ in the situation where the force majeure event stops production, which is why clause D8 is needed. He says it would be a commercially absurd construction of clause D8 that, if a strike or lockout prevented Albemarle from manufacturing DIP, Albemarle should have the option of selling the safety stock to AZ but AZ should not have any entitlement to purchase it. In all the circumstances Mr Odgers submits that the parties must have intended that clause D8 imported an obligation, on either party's termination, that Albemarle was under an obligation to sell to AZ the DIP safety stock, and urges me to construe the clause accordingly.
- Miss Carr submits that the clause should be construed according to its literal and plain meaning. It imposes no obligation on Albemarle, but only an obligation upon AZ to purchase the remaining stock of DIP upon termination, if Albemarle wishes it to do so. This is the quid pro quo for Albemarle having the obligation to maintain substantial levels of stock under clause F to ensure AZ's security of supply.
- In my judgment, the construction for which Miss Carr contends is clearly the correct construction of clause D8, its literal and plain meaning. There is simply no basis for implying an obligation upon Albemarle to sell the safety stock on termination, where the clause has imposed no such obligation expressly. I agree that where the supply agreement is intended to impose an obligation upon Albemarle, it says so expressly, for example in clause C1 and Condition 2 to which I have already referred.
- Miss Carr also points out correctly that it is unclear what the "hardship clause" being referred to is. The predecessor 1994 agreement contained such a clause (which provided for the parties to negotiate in good faith in the event that changed circumstances caused the buyer economic hardship) but the 2005 supply agreement does not. It may be that this reference has been mistakenly left in the agreement but, at all events, the force majeure provision is not a hardship clause. As Miss Carr says, even if it were, Condition 8B contains express provision for the situation where Albemarle is unable, for external reasons, to supply full quantities of DIP. It is difficult to square that provision with AZ's construction of clause D8, which imposes obligations on Albemarle in the event of force majeure.
- So far as concerns the point Mr Odgers makes about AZ's construction giving effect to one of the major aims of the supply agreement, to ensure that there is continuity of supply, it seems to me that clause B, with the long asymmetric termination periods to which he referred, itself sets out an agreed mechanism for giving AZ security of supply. Where Albemarle wishes to terminate it has to give 12 months notice, so that AZ has security of supply during the notice period. AZ would be entitled under the clause to terminate on shorter 6 months notice, but still has security of supply during that shorter notice period. I do not consider it necessary to imply into clause D8 the obligation upon Albemarle for which AZ contends in order to provide some yet further security of supply.
- Furthermore, although it is true that the clause applies where either party terminates the contract, so that it would cover not only termination on notice under clause B, but also termination for the other party's breach, for example under clause K, it seems to me that the provision should not be construed so as to benefit the party whose breach of contract has given rise to the termination, here AZ. There is no reason to construe the provision as subverting the general rule that, upon termination for breach, the innocent party, here Albemarle, is relieved from all further obligations under the contract.
- In any event, I can see no justification for implication into clause D8 of an obligation upon Albemarle to sell the safety stock on termination. The short answer to AZ's contentions is that if it wished to impose such an obligation, it could and should have insisted upon an express provision in the clause, if Albemarle had been prepared to agree it.
Issue 9: Does clause M have the effect of limiting the claim for damages of AZ?
- Clause M provides:
"Claims: No claims by BUYER of any kind, whether as to the products delivered or for non-delivery of the products, or otherwise, shall be greater in amount than the purchase price of the product in respect of which such damages are claimed; and failure to give written notice of claim within sixty (60) days from the date of delivery, or in the case of non-delivery, from the date fixed for delivery, shall constitute a waiver by BUYER of all claims with respect thereto. In no case shall BUYER or SELLER be liable for loss of profits or incidental or consequential damages."
- On the face of it, this provision covers the situation where Albemarle has failed to deliver DIP, as happened here: "non-delivery of the products" and is thus limiting the damages recoverable for non-delivery. AZ contends that since, in the ordinary course, non-delivery of products is likely to require the purchase of replacement products and the only "purchase price" paid by the buyer will be the price of replacement goods, the words "the purchase price of the product in respect of which such damages are claimed" most naturally refer to the purchase price of the replacement goods not the contract price of the non-delivered goods (which by definition is not paid).
- Mr Odgers submits that, as a matter of language, the clause draws a distinction "between the identity of the product in the words describing the type of claim which is excluded ('...the products delivered or for non-delivery of the products') and those describing the measure of damages relevant to such a claim ('...the purchase price of the product in respect of which such damages are claimed'). He submits that this distinction is highlighted by the fact that in the first phrase the parties refer to "products" in the plural whereas in the second phrase they refer to "product" in the singular.
- The force of this point is somewhat diminished by the fact that, in the first line of the passage which I have quoted from his written submissions, Mr Odgers refers, in the context of the first phrase to "product" in the singular. I suspect that the inconsistent use of the singular and plural is no more than another example of the somewhat loose language in which this contract abounds. It is much more likely that "products" and "product" are intended to refer to the same thing, namely the DIP which was supposed to be delivered under the supply agreement.
- That conclusion is supported by the fact that in the main contract (clause M is contained in the undated Amendment no. 1) the DIP under the supply agreement is referred to in the singular and in capitals throughout: "PRODUCT". Even on AZ's case the words "the products" in the first phrase in clause M are synonymous with "PRODUCT" elsewhere in the contract, which rather suggests that there is no legitimate distinction to be drawn between singular and plural.
- The submission that the reference in the second phrase must be to the substitute product because there is no "purchase price" for goods which are not delivered is misconceived. Whether delivered or not, the goods are ordered and the purchase price for any goods ordered (whether payable on shipment or when taken into use in the case of consignment stock) is laid down in the supply agreement. Furthermore, I agree with Miss Carr that, whether singular or plural, to ascribe two different meanings to the word "product" or "products" in the different parts of the clause, as AZ's construction does, is an unrealistic and, indeed, artificial, construction of the clause.
- As for AZ's starting point for its submissions on construction that the normal measure of damages for non-delivery of goods under section 51 of the Sale of Goods Act takes account of the price of the substitute goods the buyer has to acquire, Miss Carr entirely accepts that proposition and submits that the whole point of the limitation in clause M is to cap the seller's liability at a different, lower level, namely the price under the original contract. It seems to me that Miss Carr is correct about this, which is of course the construction which necessarily follows if, as I have held, the words "products" and "product" are to be given the same meaning throughout the clause.
- Indeed on AZ's alternative, somewhat artificial construction, in cases of non-delivery, the first sentence of clause M would be doing no more than giving effect to section 51 of the Act and would not be imposing any limitation on the recovery of damages in the normal way. It is difficult to see what purpose the words "no claims… shall be greater in amount than the purchase price" could have been intended to achieve on that construction. To the extent that it may be said they would exclude claims for consequential damages, that is not necessary since the second sentence of clause M excludes those anyway.
- I accept Miss Carr's submission that there is nothing unusual or unreasonable in a clause limiting liability to the consideration provided under the contract for the goods or services in question. A specific example in the field of sale of goods of such a case is the decision of the Court of Appeal in Watford Electronics Limited –v- Sanderson CFL Limited [2001] EWCA Civ 317 where the contract provided: "In no event shall the Company's liability under the Contract exceed the price paid by the Customer to the Company for the Equipment connected with any claim". Chadwick LJ (with whom the other members of the Court agreed) said this at paragraph 58:
"…..the question whether the requirement of reasonableness is satisfied in relation to the term limiting direct loss can be answered shortly. Properly understood, all that the second sentence of the limit of liability clause seeks to do is to substitute a value equal to the price paid by the buyer for the goods for "the value which the goods would have had if they had fulfilled the warranty" for the purposes of the rule in section 53(3) of the Sale of Goods Act 1979 or the equivalent rule at common law. It seems to me impossible to hold that that is an unfair or unreasonable substitution to make in a case like the present."
- I also agree with Miss Carr that AZ fails to address clearly how, on its construction, clause M applies in cases of defective products. The clause is clearly intended to limit liability to the price payable for the product under the supply agreement even if AZ as buyer has suffered a greater loss. Under ordinary principles and irrespective of loss of profit or consequential damages (which are excluded by the second sentence of clause M) the buyer of defective goods may be entitled to damages measured by reference for example to the cost of substitute goods (in the event that the buyer rejects the goods) or the cost of adaptations. It seems to me clear that the intention of the first sentence of clause M is to cap any such losses at the level of the price of the product supplied which was defective.
- On that basis, the same rationale must apply to claims for non-delivery of product, otherwise the phrase "the purchase price of the product" in clause M would simultaneously have two different meanings, depending on whether the case was one of non-delivery or delivery of defective goods, which cannot have been the intention. AZ seeks to answer that argument by making the point that where the seller of defective goods rejects the goods, the damages recoverable become those assessed under section 51 for non-delivery, namely the purchase price of replacement goods, so that in that example, AZ's construction is equally applicable to cases of defective delivery and those of non-delivery. However, it seems to me that AZ's argument in the context of defective goods overlooks the fact that the "product in respect of which such damages are claimed", even more clearly than in the case of non-delivery, is not the replacement goods, but the original defective goods.
- Furthermore, the argument does not overcome the anomalies inherent in AZ's construction in cases of non-delivery, which I have already identified, nor does it address all the other cases of delivery of defective goods where the goods are not rejected so there are no replacement goods. In those cases, AZ's construction leads to the conclusion that the words "the purchase price of the product" mean something different in those cases from their meaning in cases of non-delivery or rejection of the goods.
- AZ seeks to avoid in two other ways what in my judgment is the natural and obvious construction of the first sentence of clause M, that it limits AZ's damages for Albemarle's breach in failing to deliver DIP under the agreement to the purchase price of those undelivered goods. First, it contends that, on its true construction, the clause does not apply to cases of deliberate repudiatory breach of the supply agreement. The short answer to this submission is that, on the basis of the findings I have made, there was neither a repudiation of the contract by Albemarle, nor was any breach of contract deliberate, in the sense of being committed by Albemarle knowing that it was in breach of contract.
- As I said earlier in the judgment, although I have found that in failing to deliver more than 1,936kg of DIP pursuant to the 9 November 2007 purchase order as amended, Albemarle was in breach of contract, I accept the evidence of Mr Carter and Mr Clary that they genuinely (albeit mistakenly) believed, on the basis of US legal advice, that Albemarle was acting within its contractual rights in refusing to deliver the full order and instigating a monthly "top-up schedule". That is borne out by the internal Albemarle documents. Although Albemarle was intent on putting AZ in a "time box" and squeezing it in relation to the supply of DIP, its intention was to abide strictly by the terms of the supply agreement. There was no indication of any intention deliberately to breach the agreement.
- However, since AZ's case on the law as to why clause M does not cover deliberate repudiatory breach was fully argued on both sides, I should deal with it. AZ's argument relies heavily on the recent decision of Gabriel Moss QC (sitting as a Deputy High Court Judge) in Internet Broadcasting Corporation v MAR LLC (Marhedge) [2009] EWHC 744 (Ch); [2010] 1 All ER (Comm) 112. In seeking to summarise the relevant legal principles at paragraph 33 of his judgment, the learned Deputy Judge said:
"There is a presumption, which appears to be a strong presumption, against the exemption clause being construed so as to cover deliberate, repudiatory breach.....The words needed to cover a deliberate, repudiatory breach need to be very "clear" in the sense of using "strong" language such as "under no circumstances...""
- With the greatest respect to the learned Deputy Judge, in my judgment, this conclusion is wrong on the modern authorities and effectively seeks to revive the doctrine of fundamental breach (which the House of Lords in both Suisse Atlantique Societe d'Armement Maritime v NV Rotterdamschke Kolen Centrale [1967] 1 AC 361 and Photoshop Production v Securicor [1980] 1 AC 827 concluded was no longer good law), albeit under the guise of "deliberate repudiatory breach".
- What the learned Deputy Judge appears to have done is to quote selectively from the speeches in those cases, whereas full consideration of the relevant speeches demonstrates that the cases do not support the proposition which he set out in paragraph 33 of the judgment. Thus, at paragraph 21 of his judgment, he says that: "The 'presumption' language in the House of Lords can be traced back to the Suisse Atlantique case [1967] 1 AC 361, where Lord Upjohn at p.427 D-E refers to a 'strong, though rebuttable, presumption'.
- However, those words were used in a passage in Lord Upjohn's speech which was referring to breach of a fundamental term of the contract. He and Viscount Dilhorne, in a minority in that case, sought to draw a distinction between fundamental breach of contract and breach of a fundamental term (a distinction discredited in subsequent authorities, specifically by Lord Wilberforce in Photo Production). The passage from Lord Upjohn at 427E reads:
"But where there is a breach of a fundamental term the law has taken an even firmer line for there is a strong, though rebuttable presumption that in inserting a clause of exclusion or limitation in their contract the parties are not contemplating breaches of fundamental terms."
- Similarly, the learned Deputy Judge cited (at paragraph 16 of his judgment) part of a passage from the speech of Lord Wilberforce: "Some deliberate breaches ... may be, on construction, within an exceptions clause (for example, a deliberate delay for one day in loading). This is not to say that 'deliberateness' may not be a relevant factor: depending on what the party in breach 'deliberately' intended to do, it may be possible to say that the parties never contemplated that such a breach would be excused or limited."
- However, that citation was from the middle of a paragraph where Lord Wilberforce was clearly rejecting the idea that deliberate breaches of contract should be treated differently from other breaches. This is demonstrated by the full passage from Lord Wilberforce (at p435C-E), which reads as follows:
"The 'deliberate' character of a breach cannot, in my opinion, of itself give a breach of contract a 'fundamental' character, in either sense of that word. Some deliberate breaches there may be of a minor character which can appropriately be sanctioned by damages: some may be, on construction, within an exceptions clause (for example, a deliberate delay for one day in loading). This is not to say that 'deliberateness' may not be a relevant factor: depending on what the party in breach 'deliberately' intended to do, it may be possible to say that the parties never contemplated that such a breach would be excused or limited: and a deliberate breach may give rise to a right for the innocent party to refuse further performance because it indicates the other party's attitude towards future performance. All these arguments fit without difficulty into the general principle: to create a special rule for deliberate acts is unnecessary and may lead astray."
- It is clear from that passage and from his subsequent speech in Photo Production which I cite below, that Lord Wilberforce was rejecting any artificial distinctions between different kinds or degrees of breach of contract or presumptions against the application of exclusion or limitation clauses and saying that, whilst such clauses are construed strictly against the party who seeks to rely on the clause, it is a question of construction of the clause in every case, as to whether it covers the particular breach in question.
- In paragraph 17 of his judgment the learned Deputy Judge says that: "In the Photo Production case there are statements which suggest that there is a presumption against an exemption clause being interpreted so as to cover a repudiatory breach." He then cites two passages from the speech of Lord Diplock:
"Since the presumption is that the parties by entering into the contract intended to accept the implied obligations exclusion clauses are to be construed strictly and the degree of strictness appropriate to be applied to their construction may properly depend on the extent to which they involve departure from the implied obligations. Since the obligations implied by law in a commercial contract are those which, by judicial consensus over the years or by Parliament in passing a statute, have been regarded as obligations which a reasonable businessman would realise that he was accepting when he entered into a contract of a particular kind, the court's view of the reasonableness of any departure from the implied obligations which would be involved in construing the express words of an exclusion clause in one sense that they are capable of bearing rather than another, is a relevant consideration in deciding what meaning the words were intended by the parties to bear." (at 850)
"In commercial contracts negotiated between business-men capable of looking after their own interests and deciding how risks inherent in the performance of various kinds of contract can be most economically borne (generally by insurance), it is, in my view, wrong to place a strained construction upon the words in an exclusion clause which are clear and fairly susceptible of one meaning only even after due allowance has been made for the presumption in favour of the implied primary and secondary obligations." (at 851)
- To the extent that the learned Deputy Judge was relying upon these passages as supporting the proposition that there is a presumption that exclusion clauses do not apply to deliberate repudiatory breaches, it is clear both from those passages and from Lord Diplock's speech as a whole that he was rejecting any such presumption. He, like Lord Wilberforce, was saying that whilst exemption clauses are construed strictly, it is always a question of construction of the clause whether it covers a particular breach, however that breach is categorised.
- Lord Wilberforce in Photo Production (with whose analysis all their other Lordships agreed), in a passage which the learned Deputy Judge did not cite in Marhedge, effectively sounded the death knell of the doctrine of fundamental breach, in terms which are wholly inconsistent with there being any such presumption as the learned Deputy Judge found:
"I have no second thoughts as to the main proposition [to be derived from Suisse Atlantique] that the question whether, and to what extent, an exclusion clause is to be applied to a fundamental breach or to a breach of a fundamental term, or indeed to any breach of contract, is a matter of construction of the contract. Many difficult questions arise and will continue to arise in the infinitely varied situations in which contracts come to be breached - by repudiatory breaches, accepted or not, anticipatory breaches, by breaches of conditions or of various terms and whether by negligent or deliberate action or otherwise. But there are ample resources in the normal rules of contract law for dealing with these without the superimposition of a judicially invented rule of law." ( [1980] AC 827 at 842)
- In the subsequent development of the law of contract since Photo Production, the rejection of any doctrine of fundamental breach has continued, with the courts more inclined than ever to eradicate anomalous categories of case or obsolete principles which might lend credence to the survival of the doctrine. As I said during the course of argument, an example of this is the treatment of the cases of deviation (and related cases such as unauthorised carriage on deck) in shipping law. In Photo Production, Lord Wilberforce said (at 845) that the deviation cases were to be treated as "a body of authority sui generis with special rules".
- However in the Court of Appeal both Lloyd LJ in The Antares [1987] 1 Lloyd's Rep 424 and Longmore LJ in Daewoo Heavy Industries v Kipriver Shipping ("The Kapitan Petko Voivoda") [2003] 2 Lloyd's Rep 1 have doubted whether they should continue to be so treated and whether they (and similar cases such as carriage on deck) should not be assimilated into the general law of contract. In The Kapitan Petko Voivoda, a case of unauthorised carriage on deck, the Court of Appeal overruled an earlier decision of Hirst J in The Chanda [1989] 2 Lloyd's Rep 294, which essentially applied the doctrine of fundamental breach or something very like it to unauthorised carriage on deck.
- A citation from paragraph 14 the judgment of Longmore LJ in The Kapitan Petko Voivoda will demonstrate the way in which the law is moving:
"It is a question of some controversy whether they now exemplify even a principle of English law. As Lloyd LJ said in The Antares [1987] 1 Lloyds Rep 424, 430:-
'Whatever may be the position with regard to deviation clauses strictly so called (I would myself favour the view that they should now be assimilated into the ordinary law of contract), I can see no reason for regarding the unauthorised loading of deck cargo as a special case.'
I respectfully agree. Moreover at page 429 Lloyd LJ (with whom both Glidewell and O'Connor LJJ agreed) expressly disapproved the passage about deck cargo which was contained in the 18th and 19th editions of Scrutton. It now only appears in the current (20th edition), as I have said, in an amended form.
15. It seems to me, therefore, that the cargo-owners can derive no benefit from the supposed principle stated in the deviation cases or, indeed, the warehouse cases. The duty of the court is merely to construe the contract which the parties have made."
- Thus, in my judgment, the judgment in Marhedge is heterodox and regressive and does not properly represent the current state of English law. If necessary, I would decline to follow it. Even if the breach by Albemarle of its obligation to deliver DIP had been a deliberate repudiatory breach as AZ contends, the question whether any liability of Albemarle for damages for that breach was limited by clause M would simply be one of construing the clause, albeit strictly, but without any presumption. Since it states: "No claims by [AZ] of any kind, whether as to the products delivered or for non-delivery of the products" it seems to me it is sufficiently clearly worded to cover any breach of the delivery obligations, whether deliberate or otherwise.
- The second way in which AZ seeks to avoid Albemarle's construction of clause M is to contend that it does not apply to damages in lieu of specific performance. AZ pleaded and maintained at trial a claim (in respect of Albemarle's breach of its delivery obligations) for damages in lieu of specific performance, although it is fair to say that it was not a point which assumed any great prominence in Mr Odgers' oral closing submissions. It seems to me there are two major problems with the argument, first that this is not a case in which damages in lieu of specific performance would be available in any event and second that, even if they were, as a matter of construction, clause M would cover such a claim.
- As to the first point, under section 52 of the Sale of Goods Act 1979, specific performance of a contract of sale is only available in the case of specific or ascertained goods. Specific goods are defined in section 61 of the Act as: "goods identified and agreed on at the time a contract of sale is made and includes an undivided share, specified as a fraction or percentage, of goods identified and agreed on as aforesaid". It is clear that in the present case, none of the DIP to be supplied under the supply agreement constituted "goods identified and agreed on" at the time the supply agreement was entered into in 2005. More to the point, the undelivered DIP under the 9 November 2007 purchase order which is the subject of any damages claim had yet to be manufactured at the time the supply agreement was entered.
- "Ascertained goods" are not defined in the Sale of Goods Act, but the generally accepted definition is that advanced, albeit somewhat tentatively by Atkin LJ in the Court of Appeal in Re Wait [1927] 1 Ch 606: " 'Ascertained' probably means identified in accordance with the agreement after the time when the contract of sale is made". Applying that definition, I agree with Albemarle that the DIP ordered by AZ did not become ascertained or identified until, at the earliest, it was shipped.
- Any argument that the DIP to be supplied under the 9 November purchase order was "ascertained" because of the safety stock obligations of Albemarle under clause F would be fallacious, for two reasons. First, the obligation under clause F only required Albemarle to have enough stock at Orangeburg to comply with the requirement to hold a year's supply. No particular drums were labelled for or allocated to AZ. Second, Albemarle could satisfy its obligation to deliver DIP by delivering any DIP it manufactured. It did not have to deliver specific or identified safety stock and the purchase order did not identify particular drums of DIP to be delivered to Macclesfield.
- However, even if AZ had a sustainable argument that the DIP for delivery under the 9 November purchase order constituted specific or ascertained goods, entitling it to claim damages in lieu of specific performance, its further contention that clause M does not apply to such a claim is unsustainable. Mr Odgers' argument was that because clause M does not affect the primary remedy, specific performance, the secondary remedy, damages in lieu, should not be cut down either.
- However, in my judgment, this is a logical non-sequitur. As AZ accepted in both its opening and closing submissions, damages in lieu of specific performance are assessed according to the same principles as damages awarded under the Sale of Goods Act or at common law. Thus, in the present case, they would be assessed as damages for non-delivery of the DIP. There is no logical reason for treating those damages differently from any other claim for damages for non-delivery. Furthermore, it seems to me that the opening words of clause M: "No claims by [AZ] of any kind, whether as to the products delivered or for non-delivery of the products" are clearly wide enough to encompass such damages in lieu of specific performance.
Issue 10: Does clause M have the effect of limiting Albemarle's claim for damages for breach of clause H?
- I have held that AZ was in breach of its obligations under clause H and, in principle, subject to the application of clause M, Albemarle is entitled to damages for that breach. AZ submits that any such claim for damages is excluded by the second sentence of clause M: "In no case shall [AZ] or [Albemarle] be liable for loss of profits or incidental or consequential damages". Albemarle submits that since the supply agreement is essentially a contract for the supply of DIP and the first sentence of clause M is clearly concerned with limiting Albemarle's liability in respect of the supply (or otherwise) of DIP under the agreement, the second sentence flows naturally from the first and deals with the same subject matter, the sale and purchase of DIP.
- In response, AZ submits that since the second sentence applies to both parties, whereas the first sentence is a unilateral limitation on AZ's damages, it would be wrong to limit the second sentence to the supply of DIP. It seems to me that a necessary consequence of that construction would be to leave Albemarle essentially without a remedy for a breach of clause H by AZ, which had led to it not obtaining the propofol contract, in circumstances where, but for the breach, it would in all probability have been awarded that contract. As Miss Carr pointed out, AZ's argument that the court should not be over-concerned that that is the effect of AZ's interpretation of the second sentence, is premised on AZ's case that clause H is of little value in any event, a case which I have rejected.
- Equally, AZ's submission that its construction of clause M would still permit Albemarle to claim any wasted expenditure incurred in reliance on AZ's performance of its obligations, in reality leaves Albemarle with little if anything by way of remedy, since such expenditure is likely to be minimal, significant costs only being incurred once a propofol contract had been concluded. AZ's construction would deprive AZ of all of its real loss, the loss of profits it would have made on the propofol contract.
- In the context of the present issue, the second sentence of clause M has to be construed strictly against AZ as the party seeking to rely on the relevant exclusion. In my judgment, the second sentence should not be construed in the manner for which Mr Odgers contends. I have reached that conclusion for two reasons. First, I accept Miss Carr's submission that the clause overall should be construed as referring to the sale and purchase of DIP, not to the distinct question of whether this contract might be replaced by another, for a different product, propofol. That construction is a perfectly sensible one, particularly given that there may well be situations where Albemarle might suffer loss of profits as a consequence of AZ breaching its obligations in relation to its annual off-takes of DIP, for example under clause C6 and where, therefore the second sentence will apply to exclude any liability on AZ.
- Second, AZ's construction of the second sentence of clause M is one which leaves Albemarle with no effective remedy for AZ's breach of clause H. This has the effect of making clause H, so far as AZ is concerned, little more than a statement of intent, which would in a very real sense achieve for AZ its narrow construction of clause H through the back door, in circumstances where the court has held, contrary to AZ's case, that the provision obliges AZ to provide details of any third party offer and give Albemarle the opportunity to match that offer. Viewed cynically, if any right of Albemarle to claim for its loss of profits suffered as a consequence of AZ's breach of that obligation is excluded, there is little incentive for AZ to comply with that obligation.
- In construing an exception clause against the party which relies upon it, here AZ, the court will strain against a construction which renders that party's obligation under the contract no more than a statement of intent and will not reach that conclusion unless no other conclusion is possible. Where another construction is available which does not have the effect of rendering the party's obligation no more than a statement of intent, the court should lean towards that alternative construction. This is an application of the principle enunciated by Lord Roskill in Tor Line AB v Alltrans ("The TFL Prosperity") [1984] 1 WLR 48 at 58-9. A more recent example of that approach to construction can be found in one of the cases cited by Mr Odgers himself, the decision of Ian Glick QC sitting as a Deputy High Court Judge in Mitsubishi Corp v Eastwind Transport [2005] 1 All ER (Comm) 328 (paragraphs 25 to 33).
- For those reasons, I prefer Albemarle's construction of the second sentence of clause M and conclude that the provision does not exclude Albemarle's right to claim by way of damages any loss of profits suffered by it as a consequence of breach by AZ of its obligations under clause H. The assessment of those damages will be for another trial, but they will essentially be damages for the lost profits which Albemarle would have made under a contract with AZ for the supply of propofol over a period of five years, at the same price and on the same terms as the Sochinaz contract (in other words on the basis that Albemarle is entitled to stand in Sochinaz's shoes), appropriately discounted for the possibility that, even with the exercise of good faith on both sides, a final and binding contract might not have been entered.
G Conclusion
- In conclusion, in my judgment, any breach of the supply agreement by Albemarle was limited to its failure to deliver 6,170kg of the DIP due under the 9 November 2007 purchase order, which was not a repudiatory breach of the supply agreement. Pursuant to the first sentence of clause M, AZ's damages for that breach are limited to the purchase price of that quantity of DIP under the agreement. AZ's other claims for breach of the supply agreement by Albemarle all fail.
- AZ was in breach of clause H both in accepting Sochinaz's offer in October 2007 before giving Albemarle the opportunity to match that offer and in failing subsequently to award Albemarle the propofol business in January or February 2008 when Albemarle matched the Sochinaz offer. Albemarle is entitled in principle to recover damages for that breach, which damages are neither excluded nor limited by the second sentence of clause M. The assessment of those damages will have to be the subject of a subsequent trial.
- I will hear submissions from the parties as to the appropriate orders to be made in consequence of this judgment and as to directions for such a quantum trial.
