Right of First Refusal Clauses in an existing contract give some additional rights to a party such as to quote and be awarded a further contract, to renewal or buy shares and similar and are common in commercial contracts.  A party may be inclined to grant such a right in the belief that since the right and the terms will need to be discussed and agreed they represent an agreement to agree and therefore an unenforceable obligation.

The recent judgment (21 June 2011) of AstraZeneca v Albemarle indicates that this is not the case and the Courts will enforce such rights and give them commercial meaning.

This particular case, related to a contract for the supply of an anaesthetic, sold by AstraZeneca. Albemarle had supplied AstraZeneca for many years with the active ingredient, from which the anaesthetic was distilled. It was a term of the ingredient contract that, if AstraZeneca decided to purchase  the anaesthetic instead of the ingredient, then Albemarle would have the opportunity and right of first refusal to supply the anaesthetic.

When AstraZeneca decided to buy the anaesthetic, it invited Albemarle to participate in the tender process however, quoting pricing issues AstraZeneca decided to award the anaesthetic contract to a competitor supplier.

Albemarle claimed that, this was a breach of the right of first refusal and that AstraZeneca could not proceed with the other supplier, without giving Albemarle the further opportunity to match its terms. In the meantime Albemarle terminated the ingredient contract.

Regarding the right of first refusal clause, the Court found that:

1.     The Court should try to give the clause some commercial effect.

2.     The clause was not only giving Albemarle the opportunity to negotiate with AstraZeneca, as part of the tender process, but also Albermarle should be offered an opportunity to accept or refuse a contractual offer on the same terms, which AstraZeneca was minded to accept from the third party.

1. AstraZeneca should have made full disclosure of the terms of the competing deal, so that Albemarle could understand the terms it was to match. In the event that it did so, AstraZeneca was obliged to accept Albemarle’s offer rather than that of the third party.
2. The words “under mutually acceptable terms and conditions” did not indicate an agreement to agree. The words meant that, once the right of first refusal had been exercised, further matters may need to be resolved, before a binding contract could be entered into.
3. The breach occurred as soon as AstraZeneca decided that, Albemarle would not receive the new contract.

Although AstraZeneca and Albemarle continued to negotiate towards a possible Albemarle anaesthetic contract, Albemarle's willingness to negotiate could not be considered as a waiver of its contractual right to terminate for breach. AstraZeneca's failure to honour its obligations under first right refusal clause  continued and Albemarle was entitled to terminate the ingredient supply agreement.

So, if a right of first refusal creates a binding and enforceable obligation, what are the consequences if it is breached, especially, if the main contract contains a limitation of liability clause? In fact, the ingredient contract excluded liability of the parties for loss of profits.

Albemarle’s claim for breach of the right of first refusal though, was precisely that, lost profits on the anaesthetic contract. The Court found that, the limitation clause could not apply in that way; it would strip the right of first refusal of any commercial effect. The clause should be read therefore, as referring to the loss of profits on the sale and purchase of the ingredient, not the loss of profits on the anaesthetic contract.

The above case is in contradiction with the previous case law but clarified that a limitation of liability clause could apply even to a deliberate breach depending on the construction of the clause. So in view of the above, you could:

Amend an exclusion clause to state that the clause does not exclude or restrict liability for deliberate breach. If AstraZeneca is a correct statement of the law, businesses should assume that an exclusion clause will prima facie apply to a deliberate breach of contract. Therefore, if a business wants to be sure that a counterparty's liability will not be limited if that counterparty commits a deliberate breach of contract, it should amend the exclusion clause to state this expressly. Businesses are most likely to consider that they would benefit from this carve-out when buying goods, services or rights (as most of the major obligations under the contract will belong to the other party).

Amend your exclusion clause to state that it covers liability for deliberate breach. This approach would now only be appropriate if a business wanted to put the matter beyond all doubt. Note however that the courts are averse to over-wide exclusions which allow parties to abandon performance of a contract and leave the non-defaulting party with no meaningful remedy, and construe them strictly. Note also that Unfair Contract Terms Act considerations mean that such an exclusion is very unlikely to succeed in a standard terms and conditions, or if the clause is not genuinely negotiated by the parties.

Make no change. If a business took the view that it was not necessary that its exclusion clause referred to deliberate repudiatory breach, it may well take the view that such a reference remains unnecessary after AstraZeneca.

Remember that the courts will always strain to interpret an exclusion clause against a party in breach, and probably more so in the case of a party guilty of deliberate repudiatory breach.