AstraZeneca UK Limited v Albemarle International Corporation and Albemarle Corporation [2011] EWHC 1574 (Comm)

This High Court case in the United Kingdom highlights the potential risks of granting a right of first refusal, and the need for careful drafting of such clauses.  AstraZeneca (AZ), manufactured propofol (the active ingredient in an anaesthetic) by distillation of 2,6 Di‑isopropyl-phenol (DIP).  Albemarle supplied DIP to AZ pursuant to a supply contract.  Under the supply contract, if AZ decided to cease distillation of DIP and instead purchase propofol (so that AZ did not need to complete the distillation process itself), Albemarle would have the "first opportunity and right of first refusal" to supply propofol to AZ. 

One year into the term of the supply contract, AZ decided to cease distillation of DIP and issued an RFP for propofol supply.  Albemarle's proposed price was higher than those in other proposals, and AZ suggested that Albemarle needed to reduce the price by about 40% to be competitive.  Albemarle chose not to do so, as it understood its right of first refusal meant that AZ would have to give it the opportunity to match any third party offer that AZ proposed to accept. 

During the negotiation period, AZ provided Albemarle with some, but not all, relevant information about its preferred supplier's offer.  Albemarle, concerned about AZ's intentions, failed to deliver on two AZ purchase orders in relation to DIP (in breach of the contract). 

Albemarle successfully claimed that AZ breached the right of first refusal.  The Court made a number of comments regarding rights of first refusal, including the following:

  • It did not matter that Albemarle had not delivered the DIP in accordance with certain purchase orders, as the right of first refusal was not contingent on performance of other obligations under the contract
  • A right of first refusal is not just a right to negotiate a contract.  At an "irreducible minimum", Albemarle had the right to match any third party offer that AZ might otherwise propose to accept, and, if Albemarle matched that offer, to be awarded the business to which the offer related
  • AZ should have acted in good faith, and fully disclosed to Albemarle the nature of the proposed deal with the third party, to enable Albemarle to properly exercise its right of first refusal
  • The broadly worded exclusion of liability clause, which provided that in no case would either party be liable for loss of profits, was found to only apply to the sale and purchase of DIP and not to the right of first refusal.  The Court considered that this was the only appropriate construction, as otherwise there would be no effective remedy for breach of the clause concerning the right of first refusal.

The point to take from this case is that rights of first refusal should be carefully drafted to ensure that the terms of the right are very clear and that the party granting the right is not restricted beyond what it anticipates.  In the absence of clear rules around the application of a right of first refusal, it is likely that the right will be construed very broadly for the benefit of the recipient.