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Drug bust-up reveals hazards of complex contracts

25 July 2017 by Paul Harris

Drug bust-up reveals hazards of complex contracts - read more

A clash in court between two pharmaceutical giants highlights the importance of consistency and clarity in legal documents, says Paul Harris of Venner Shipley.

It seems the financial meltdown, which occurred in 2008 and led to austerity measures being imposed worldwide, has reached the pharmaceutical sector.

In the case of Astex Therapeutics Ltd v AstraZeneca AB (2017), Mr Justice Arnold considered AstraZeneca’s decision to seek to claw back several million dollars it had paid to Astex Therapeutics.

To be able to decide this meant he had to consider the terms of a research and collaboration agreement in relation to the search for drugs to inhibit Alzheimer’s disease.

With many collaborations in the pharmaceutical field, the large companies have the cash, but less ability to research specific drug applications, whereas the small research companies (often university spin-outs) have the skill and expertise, but not the cash.

So, when a dispute like this happens, the commentators tend to reach for the ‘David and Goliath’ metaphor. This may once have applied in this case.

However, Astex was bought by the Japanese group, Otsuka, which has a group turnover of £7 billion, so it is more a case of David plus his gigantic brother versus Goliath, who is not looking so big after all.

Milestone payments

The collaboration agreement was for just over two years, commencing in February 2003, after which AstraZeneca could continue researching the fruits of the collaboration by itself, which it did in its Swedish centre.

That subsequent research identified two compounds, called CD1 and CD2 in this case, as possibilities. AstraZeneca nominated these as ‘candidate drugs’, as a result of which a milestone payment was paid to Astex.

Although CD1 failed at the first hurdle, CD2 is currently in the final, phase III, stage of a clinical trial.

Shortly before the phase III trials, AstraZeneca wrote to Astex and stated that contrary to its earlier view, neither CD1 nor CD2 fell within the definition of the agreement (in other words, were not collaboration compounds) upon which they were obliged to pay further milestone payments.

In essence, despite AstraZeneca’s own conduct in considering that a milestone payment was to be paid, the issue was whether AstraZeneca could get its money back.

“This is more a case of David plus his gigantic brother versus Goliath, who is not looking so big after all”

For those of you with knowledge of contract law, this is not on the basis of a mistake leading to the rescission of a contract, but rather a question of fact as to whether CD1 and CD2 fell within the definition of ‘collaboration compounds’, and there had been enrichment as a result of that mistake.

The behaviour and conduct of the parties had no bearing in this particular matter. In order for the milestone payment to become due, the compound had to be a ‘hit’ or a ‘lead’, after which AstraZeneca had to nominate the collaboration compound as a CD, and it nominated CD1 and CD2.

Million-dollar bills

Once those milestone payments had been paid, and the compound was on a path to clinical trials, the subsequent payments became eye-wateringly large, from $1 million up to $5 million at the start of the phase III clinical trial.

Hence, AstraZeneca reconsidered whether any of the compounds actually fell within the definition. The collaboration agreement was 67 pages long, detailed the research steps and specific project concerned, and was regarded by the judge as extremely complex.

In 2009, the parties executed an amendment agreement altering some of the terms of the agreement. The key provision, clause 2.3, provided that the collaboration agreement had expired and all the hits, leads and CDs had been agreed by the parties and were attached as a schedule. That schedule was 127 pages long and contained 1,335 compounds.

Judgment

The trial lasted 13 days, involved 16 witnesses of fact, and one expert on each side. The decision is 90 pages long.

In his judgment, the judge skips lightly across the technical background to Alzheimer’s disease and possible inhibitors, but only because he had previously set it out in a judgement of his in 2013, which was itself another 90-page blockbuster.

The next large chunk of text delved into the world of drug discovery. The only part of his judgment that was brief dealt with the law and approach to the construction of the agreement, a now well-trodden path.

The difficulty faced with increasingly lengthy and complex contracts is that the chances of provisions seemingly contradicting themselves increases.

This was apparent in the first part decided by the judge when he considered whether the project could have been carried on by AstraZeneca after the collaboration term ended.

Although he considered both yes and no answers were possible, the ambiguities of the drafting tipped the balance in favour of AstraZeneca.

“There is no point in lawyers drafting intricate agreements if those they serve have no idea how to interpret them”

The significance of the finding of the judge was that it invited the question of whether CD2 resulted from the programme or arose out of the work AstraZeneca did on its own.

However, having analysed the actual situation, as he saw it, and what was defined as a ‘collaboration compound’ (in some 40 pages of judgment), the judge concluded that neither CD1 nor CD2 fell within the definition.

Financial recovery

The final part of the judgment considered whether AstraZeneca, having accepted by its own conduct that payment was due, and paying it, could nevertheless recover its money. This is called ‘a claim to restitution of an enrichment’ that can only be invoked where:

  • At the time the enrichment was conferred the payer was mistaken
  • The mistake caused the enrichment to occur and, but for the mistake, the enrichment would not have occurred.

The main evidence, oddly enough, came from AstraZeneca’s own former vice-president. Surprisingly, he gave evidence on behalf of Astex, in which he reiterated his firm belief that CD1 was a collaboration compound.

The judge carefully reviewed the process that was followed by those witnesses who made the recommendation that the milestone payment for CD1 should be paid. This turned out to be the former vice-president himself.

The judge pointed out that the witness was undoubtedly mistaken at the relevant time, not least because he still believed CD1 was a collaboration compound when, as a fact, the judge concluded it could not be. So, he was still mistaken, even after judgment.

As for the payment for CD2, it transpires that because of what happened in respect of CD1, the finance department of AstraZeneca merely followed suit because there was no reason to consider that CD2 was to be dealt with any differently to CD1, for which a milestone payment had already been made.

Therefore, AstraZeneca was able to recover the money it had paid.

This case highlights the importance of consistency and clarity in legal documents. Even here, in an agreement 67 pages long, there are still errors in drafting.

However, it is not the error in drafting that ultimately caused the problem, it was the error in legal construction as to whether something did or did not fall within the definition of ‘collaboration compound’ – and thus whether or not a payment was necessary.

The salutary lesson here is there is no point in clever lawyers drafting lengthy, intricate agreements if those operating under them have no real idea how to interpret the drafting.

Paul Harris is a Partner of Venner Shipley

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