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Commercial Court upholds “right of first refusal” clause in supply contract

22/06/11

The Commercial Court (Flaux J) has upheld a claim by US chemical supplier Albemarle International Corp against AstraZeneca UK Limited, arising from a right of first refusal in a contract under which Albemarle supplied AZ with a chemical ("DIP") from which AZ manufactured the anaesthetic Diprivan. The contract provided that if AZ decided to switch from using DIP to using propofol (which is distilled from DIP), then Albemarle would have "the first opportunity and right of first refusal to supply propofol to [AZ] under mutually acceptable terms".

AZ decided to switch from DIP to propofol but, on Albemarle's case, did not afford Albemarle a proper opportunity to match the terms on offer from AZ's prospective third party supplier of propofol, and thereby infringed Albemarle's rights under the contract provision.

At a trial on questions of liability, Flaux J upheld Albemarle's claim, rejecting arguments by AZ that (a) the contract provision was too vague to be enforceable, (b) the provision was complied with merely by giving an opportunity to negotiate, (c) Albemarle had failed to match the terms offered by the prospective third party supplier, (d) Albemarle could not exercise its right if, at the relevant time, it was in default of deliveries of DIP and (e) any damages Albemarle might claim were capped by a contractual limitation of liability provision.

Flaux J also held that Albemarle had breached the contract by failing to make a delivery of DIP while the parties were in dispute over the right of first refusal, but that that was not a repudiatory breach, and that AZ's damages were capped by the contractual limitation of liability provision mentioned above.

AZ had originally included claims for duress and conspiracy in its proceedings against Albemarle, but those claims were stayed by Hamblen J on the basis that they were subject to an exclusive jurisdiction clause in favour of the courts of South Carolina in a separate contract between AZ and Albemarle's parent company.

The judgment of Flaux J is here.

Earlier judgment of Hamblen J on the jurisdiction issue.

Andrew Henshaw acted for Albemarle.