Commercial Thinking
Such rights are not uncommonly provided for in various types of commercial contract, to address new products becoming available, changes in supply arrangements or the procurement process once the contract expires.
The nature of such rights was considered in AstraZeneca UK Ltd v (1) Albemarle International Corporation (2) Albemarle Corporation (2011). Albemarle supplied AstraZeneca with 2,6 Di-isopropyl-phenol, which AstraZeneca distilled in its manufacture of propofol, the active ingredient of its anaesthetic, Diprivan. The supply contract provided that, should AstraZeneca cease distillation, it would give Albemarle "the first opportunity and right of first refusal to supply propofol to [AstraZeneca] under mutually acceptable terms and conditions". In the event, AstraZeneca entered into a contract to obtain propofal from a third party.
AstraZeneca contended that the provision, at most, required it to give Albermarle an opportunity to negotiate with AstraZeneca a contract on mutually acceptable terms. This is a weak obligation, as an "agreement to agree" is not binding. The court, however, found that a first right of refusal, as an "irreducible minimum", confers on the party to whom it is granted, the right to match the third party offer and be awarded the contract, i.e. to receive a contractual offer containing the essential terms which the party who had granted the right was prepared to accept. This is even though the detailed terms of the contract might require further negotiation and a contract might not necessarily ensue. The party who has granted the right must provide the party to whom it is granted, with details of the third party offer, at the latest, before the third party offer is accepted. Moreover, it must act in good faith and disclose full details of the third party offer to the party entitled to the right of first refusal.
While the court did consider the commercial background to the first right of refusal clause, in particular to the process which AstraZeneca could be expected to follow when tendering for the new contract, the principles are of general application. A party which has granted such a right should bear in mind, when negotiating with the third party, the limitation on accepting third party offers before the right of first refusal is exhausted so as to avoid liability for breach of contract. A party granting such a right should provide for time limits for its exercise, otherwise the delays entailed by any "to-ing and fro-ing" between potential counter-parties to the new contract could increase the trouble of negotiations and cause financial difficulties when the deal is needed to continue funding operations. More fundamentally, the contract should not provide for a first right of refusal if all that is intended is that there should be non-binding, good faith discussions.
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