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||Neutral Citation Number:  EWCA Civ 2444
||Case No: A3 2017 2134
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
The Hon Mr Justice Arnold
 EWHC 1442 (Ch)
||Royal Courts of Justice
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE FLOYD
LORD JUSTICE HENDERSON
LORD JUSTICE LEGGATT
|| ASTEX THERAPEUTICS LIMITED
||- and -
Charles Hollander QC and Josephine Davies (instructed by Clifford Chance LLP) for the Appellant
James Mellor QC and James Whyte (instructed by Marks & Clerk Solicitors LLP) for the Respondent
Hearing dates: 3-4 October 2018
HTML VERSION OF JUDGMENT
Crown Copyright ©
Lord Justice Floyd:
- This appeal raises questions of interpretation of a drug discovery and development agreement entered into in February 2003 between the claimant and appellant Astex Therapeutics Limited ("Astex") and the defendant and respondent Astrazeneca AB ("AstraZeneca") ("the Agreement"). The Agreement provided for the parties to engage in a collaborative research program to discover and develop a drug for the treatment of Alzheimer's disease ("AD"). Under the Agreement, Astex was to receive payments from AstraZeneca dependent on the achievement of certain milestones, and royalty payments in the event that a pharmaceutical product was licensed and sold. Astex appeals from the decision of Arnold J dated 21 June 2017 and his consequent order by which he dismissed Astex's claim to be entitled to these payments, and ordered Astex to return certain sums which had already been paid by AstraZeneca. He also ordered Astex to pay AstraZeneca's costs in respect of the period after 6 December 2016 on the indemnity basis, in respect of which there is an independent appeal.
- AD is a debilitating disease for which there is no known cure. The disease is associated with the development of plaques in the brain, thought to be caused by an enzyme referred to as BACE (also known as beta-secretase) which causes the breakdown of amyloid precursor protein. Thus it is hypothesised that if one could develop an inhibitor to BACE one could in turn prevent the breakdown of the protein, the development of the plaques, and arrest or prevent the onset or progression of AD.
- At the relevant times Astex was a small drug discovery company reliant on collaborations with larger companies such as AstraZeneca, a substantial global pharmaceutical company. AstraZeneca had commenced a BACE inhibitor project in 1999 at its site in Wilmington in the USA. In 2002 Astex had also started work on a BACE inhibitor.
- Drug discovery typically starts with screening known compounds for activity, or designing, testing and making new ones. By 2003, methods were available to detect binding or "affinity" between the compound being screened and the target. In addition there were virtual methods available using computational software which could enable a chemist to visualise the three-dimensional interlocking between the compound and the target. Compounds which demonstrate activity above a certain level in such screening are commonly referred to as "hits". The next step is to seek to identify high quality "leads" for future optimisation, and ultimately the selection of a candidate drug for pre-clinical and clinical testing.
- Before the collaboration with Astex, AstraZeneca had identified three validated hit series of compounds which interacted with BACE in a similar way. AstraZeneca did not, however, have all the relevant crystal structures for BACE, and had been using a different crystal, endothiapepsin, in its crystallography.
- By contrast, Astex had succeeded in crystallising apo-BACE (that is to say the unbound structure of BACE) and was using it to identify hits. Astex had developed a technique (called Pyramid) for screening fragments against crystal structures of target proteins, and a software tool called AstexViewer which enabled the visualisation of chemical structures. By April 2002 Astex had synthesised some 150 compounds. It proceeded to identify three series of compounds which interacted with BACE in a similar way.
- The judge found that AstraZeneca's main reason for entering into the collaboration with Astex was to obtain access to Astex's apo-BACE crystal, which would enable structure-based design to be carried out. A secondary reason was to gain access to Astex's Pyramid technology. For Astex, the collaboration gave it the chance to work with a larger and better resourced partner, provided some funding for the work, and held out the prospect of payments if defined goals were achieved, and of royalties in the event of sales of a licensed product.
- The Agreement begins with these four recitals:
"WHEREAS, ASTRAZENECA currently performs an internal project aiming at the discovery and development of novel therapeutic pharmaceutical products active at the Target (as defined below) for treatment of Alzheimer's disease or senile dementia (the "Project"); and
WHEREAS, ASTEX is a structure-based drug discovery company with unique skills and proprietary screening methods in which protein crystal structures are used to detect binding of drug fragments; and
WHEREAS, the Parties independently of each other have generated certain knowledge and expertise on the Target; and
WHEREAS, the Parties wish to engage in a collaborative research program under the Project utilising ASTEX's proprietary Pyramid technology for discovery of novel chemical leads active against the Target and suitable for development for treatment of Alzheimer's disease or senile dementia (the "Program")."
- The concepts of "the Project", that is to say AstraZeneca's pre-existing work on the Target (essentially BACE), and "the Program", that is to say the collaborative research, are central to the disputes on this appeal. The Program is described in the fourth recital as being "under the Project", but the recitals do not deal with what is to happen to the Project once the Program comes to an end.
- Section 1 of the Agreement contains a list of defined terms. Importantly, the list includes the definition of "Program" which refers to the scheduled "Research Plan" to which it will be necessary to return. The list of terms includes definitions of categories of compounds to be created successively during the Program: "Affinity Hits" or "AFFITS", "Hits", "Lead Compounds" and "Candidate Drugs" or "CDs". There are also definitions of the optimisation work involved in the transition from one category to another: "AFFIT Optimisation", "Hit Optimisation" and "Lead Optimisation". Hits, Lead Compounds, CDs and other substances or structures identified as a direct result of any of the three types of Optimisation are called Collaboration Compounds. There is also a definition of "Results" which is principally relevant to the provisions relating to the ownership of rights, and of "Materials" which includes the contents of certain Screening Libraries in existence at the date of the Agreement as well as "any other materials such as
used in the Program (other than Collaboration Compounds or Results)." AFFITS are Materials which show binding affinity to the Target.
- I set out the relevant definitions from section 1 below:
1.2 "Affinity Hit" or "AFFIT" means any Material that shows specific binding to the Target in the screens performed under the Program, meeting the criteria set forth in the Research Plan provided, however, that if any such Material is later selected as a Hit it ceases to be an AFFIT and shall for all purposes thereafter be regarded only as a Hit.
1.4 "AFFIT Optimisation" means chemical structure modification performed as part of the Program, starting from AFFITs and aiming to generate optimised AFFIT structures ("AFFIT Improvements") that, together with AFFITs, form the bases for identification of Hits.
1.6 "Candidate Drug" or "CD" means a Collaboration Compound satisfying ASTRAZENECA's pharmacological and pharmaceutical criteria for clinical testing, as outlined in the Research Plan, and which compound has been selected for clinical testing by the JEC or ASTRAZENECA.
1.7 "Collaboration Compound" means all Hits, Lead Compounds, CDs and other substances and structures discovered or identified as a direct result of AFFIT Optimisation, Hit Optimisation or Lead Optimisation and any metabolites, prodrugs, isomers and enantiomers referable to any of the foregoing. In the event of a dispute between the Parties as to whether or not a given substance or structure was discovered as a direct result of Hit Optimisation or Lead Optimisation the Parties' internal laboratory books and records from the relevant process through which such substance or structure was discovered shall serve as exclusive evidence to resolve any such dispute. For the avoidance of doubt, AFFITs and AFFIT Improvements do not constitute Collaboration Compounds (but constitute Results).
1.9 "Collaboration Term" means the term during which ASTEX performs research activities under the Program as specified in Section 14.2 below
1.14 "Effective Date" means the date first written above in this Agreement.
1.17 "Hits" means all AFFITs and AFFIT Improvements selected by the JEC or by ASTRAZENECA as candidates for Hit Optimisation.
1.18 "Hit Optimisation" means chemical structure modification performed as part of the Program, starting from a Hit and aiming at the identification of compounds with properties meeting the Lead criteria (as defined in the Research Plan).
1.23 "Lead Compounds" or "Leads" means all Hits and all other substances and structures discovered or identified through Hit Optimisation meeting the Lead criteria (as defined in the Research Plan) of the Program, which have been selected by the JEC or, after the Collaboration Term, by ASTRAZENECA as candidates for Lead Optimisation.
1.24 "Lead Optimisation" means chemical structure modification performed as part of the Program, starting from a Lead Compound and aiming at the identification of compounds with properties meeting the CD criteria (as outlined in the Research Plan, which outline may subsequently be amended by ASTRAZENECA at its sole discretion).
1.25 "Licensed Product" means a pharmaceutical product containing one or more Collaboration Compounds for which the first application for Royalty-bearing Collaboration Patent was made anywhere in the world within ten (10) years from the Effective Date
1.26 "Materials" means any compounds (and fragments thereof) included in the Screening Libraries, and any other materials
that are used by a Party or the Parties in the Program, excluding any Collaboration Compounds and other Results.
1.32 "Program" means the research program described in the Research Plan, to be performed in collaboration by the Parties during the Collaboration Term as part of the Project, which thereafter may be continued by or on behalf of ASTRAZENECA alone.
1.35 "Project" means the ASTRAZENECA project referenced in the first whereas clause of this Agreement.
1.37 "Research Plan" means the document attached hereto as Schedule 1.37 outlining the Program and each Party's undertakings and obligations in relation thereto. It is acknowledged that upon execution of this Agreement, some of the undertakings have only been possible to broadly outline in the Research Plan, the details of which shall be determined in good faith by the Parties through the JEC for each stage of the Program pursuant to Section 3.1 below.
1.38 "Results" means any ideas, inventions, discoveries, know-how, data, documentation, writings, designs, computer software, processes, principles, methods, techniques and other information, recorded in any form that is discovered, conceived, reduced to practice or otherwise generated through work performed under the Program during the Collaboration Term by either ASTEX or ASTRAZENECA or by the Parties jointly, but excluding Technology Results.
1.41 "Screening Libraries" means (i) ASTRAZENECA'S library of compounds identified in the Project by AstraZeneca prior to the Effective Date as potential molecules for inhibiting the Target, and (ii) ASTEX's BACE-targeted library of compounds identified by Astex prior to the Effective Date and containing approximately 150 compounds
1.42 "Target" means any and all of beta secretase (BACE)
and any mutants, fragments and polymorphic forms of any of the foregoing.
- Section 2 of the Agreement includes the following provisions:
"2.1 During the term of this Agreement, each Party shall cooperate with the other and perform its obligations under this Agreement in good faith and in a commercially reasonable and workmanlike manner. Following the Effective Date, the Parties shall promptly commence the Program.
2.5 Materials that have become AFFITs, including any intellectual property rights related thereto, shall form part of the Results
2.9 Subject to any license granted to ASTEX pursuant to Section 5.3, the Parties acknowledge and agree that ASTRAZENECA shall have the right in its sole discretion at any time during or after the Collaboration Term, irrespective of whether any Collaboration Compound(s) have already been selected for further optimisation or as CDs and whether or not any such compound(s) have failed in research, clinical development or on the market, to select additional AFFITs, AFFIT Improvements and Collaboration Compounds for optimisation and/or clinical development. ASTRAZENECA shall without delay notify the JEC of any such selections or, if such selections are made after the Collaboration Term, ASTRAZENECA shall similarly notify ASTEX."
- Although not set out in the sections quoted above, section 2 also contains restrictions on the parties' ability to compete. Thus Astex is prevented "during the Collaboration Term and up to the launch of a Licensed Product", subject to an exception, from engaging in any research programs concerned with the treatment of any disease through compounds acting on the Target, whilst AstraZeneca is prevented for 18 months from the Effective Date, again subject to an exception, from engaging in work aimed at the treatment of AD or senile dementia other than pursuant to the Agreement.
- Section 3 of the Agreement is headed "Management of the Program". It provides for the establishment of the Joint Executive Committee ("JEC"), consisting of six members with equal numbers appointed by each party. Section 3.1 provides that the JEC will "oversee the operational responsibilities for the initiation, planning and performance of the activities under the Program."
- Section 3.1 goes on to provide that the JEC's activities shall include, among other things:
- Determining within thirty (30) days of the completion of each stage of the Program the successful completion of such stage and deciding whether or not to continue the Program into the next stage (i.e. making "stop/go decisions"), provided that should the JEC decide not to proceed with the Program into the next stage, ASTRAZENECA shall be deemed to have terminated the Agreement pursuant to Section 14.3 below.
- Determining if and when the Program Milestones have been met and the date of expiration of the Collaboration Term; and
The parties entered into a further agreement effective 1 August 2009 ("the 2009 Agreement") by which they confirmed that the Collaboration Term expired on 20 April 2005. The 2009 Agreement also confirmed that the list provided for by the final bullet point of section 3.1 had been prepared and was enclosed to that agreement.
- Upon expiration or termination of the Collaboration Term, list[ing] by category all AFFITs, Hits, Leads and CDs generated up to the date of such expiration or termination in a document to be enclosed to this Agreement as Schedule 3.1."
Section 3.3 provides for the JEC to endeavour to reach consensus decisions, with disagreements to be resolved by the senior management of the parties. If disagreements cannot be resolved, AstraZeneca has the final say "other than with regard to disputes over whether payment is due ASTEX under this Agreement".
Sections 3.6, 3.7 and 3.8 provide, so far as relevant, as follows:
"3.6 The JEC shall keep accurate minutes of its deliberations, which minutes shall record all decisions and all actions recommended or taken, Program progress reports, Results generated of any significance to the Program and confirmation that Program Milestones have been reached. In particular, all AFFITS, Hits, Lead Compounds and CDs nominated during the Collaboration Term shall be recorded in the minutes of the JEC.
3.7 Following the expiration of the Collaboration Term the JEC shall be dissolved and ASTEX shall provide ASTRAZENECA with consultation services as ASTRAZENECA may reasonably request for the continuation of the Project. ASTRAZENECA shall reimburse ASTEX for out of pocket costs incurred in connection with such consultations services. If the consultation services provided by ASTEX should exceed one (1) FTE day in any calendar year, ASTRAZENECA will compensate ASTEX for any additional FTE days at ASTEX's then applicable FTE rate. ...
3.8 Upon dissolution of the JEC pursuant to Section 3.7 above, ASTRAZENECA will provide ASTEX with Project reports every six months, updating Project progress and future plans. Each Party shall nominate one point of contact for all post-Program contacts between the Parties."
Section 4 of the Agreement deals with Reports. Section 4.1 provides, so far as relevant:
"No later than five (5) business days prior to each quarterly JEC meeting, each Party shall provide the JEC with a detailed written progress report in English containing, without limitation, specifications and other information on all Results generated of any significance to the Program and not previously reported to the JEC.
Section 5 of the Agreement deals with ownership of the Results, and the grant of rights by the parties to each other. It is not necessary to set them out in detail. It is sufficient to note that they are detailed and complex.
Section 6 deals with research funding. Section 6.1 provides for AstraZeneca to fund Astex's work on the Program at specified rates during the Collaboration Term, capped at US$1,050,000.
Section 7 of the Agreement deals with the Milestone Payments. It includes the following provisions:
"7.1 The milestone and royalty payments outlined below, taken together with the funding to be provided pursuant to Section 6 above, shall be all-inclusive and ASTEX shall not be entitled to any additional compensation or remuneration from ASTRAZENECA under the Agreement unless and to the extent separately agreed by the parties in writing.
7.2. Within thirty (30) days of the determination by JEC or ASTRAZENECA, as applicable, that the respective Program Milestone identified below [and] has occurred, ASTRAZENECA will make the following payments to ASTEX:
1) Program Milestone 1: two hundred fifty thousand (250,000) $US following identification of the first Hit.
2) Program Milestone 2: seven hundred fifty thousand (750,000) $US following identification of the first chemical series out of two required to meet the HI to LI transition criteria as set out in Section 3.2 of the Research Plan; and
3) Program Milestone 3: one million (1,000,000) $US following first nomination of a Collaboration Compound as a CD pursuant to Section 3.6 of the Research Plan;
7.3. Within 30 days of the occurrence of the respective event specified below (each a 'Development Milestone') ASTRAZENECA will make the following payments to ASTEX:
1) One million (1,000,000) $US following the first IND approval of a Collaboration Compound obtained by or on behalf of ASTRAZENECA;
2) Two million (2,000,000) $US following the initiation by or on behalf of ASTRAZENECA of the first phase II clinical trial on a Collaboration Compound
3) Five million (5,000,000) $US following the initiation by or on behalf of ASTRAZENECA of the first phase III clinical trial on a Collaboration Compound
7.4 Each of the payments in relation to the Program Milestones set forth under Section 7.2 and Development Milestones under Section 7.3 will be made no more than once under the Agreement collectively amounting to an aggregate maximum of thirty seven million (37,000,000) $US.
Section 8 of the Agreement deals with the payment of Royalties by AstraZeneca to Astex in respect of sales of Licensed Products. Under section 8.2 Royalties are paid for as long as there is a Patent that includes at least one Valid Claim which, but for licence, would be infringed by sale of the Licensed Product, or for a minimum period of 10 years from first launch.
Section 14 of the Agreement deals with term and termination. It includes the following provisions:
"14.1 This Agreement shall become effective upon the Effective Date and shall continue in full force and effect, unless earlier terminated in accordance with this Section 14, during the Collaboration Term and thereafter for as long as ASTRAZENECA is pursuing pre-clinical research referable to the Results and/or clinical development of one or more Collaboration Compounds and/or commercialising Licensed Product to which royalties are owed to ASTEX pursuant to Section 8 of this Agreement.
14.2 The Collaboration Term shall commence on the Effective Date and continue for as long as ASTEX performs research activities under the Program. As set forth under Section 3.1, the JEC shall determine the date of expiration of the Collaboration Term.
14.3 If ASTRAZENECA determines, in its sole discretion, that it is no longer desirable or feasible for it to pursue the Program up to selection of CD(s) or thereafter to clinically develop CD(s) or to sell Licensed Products for any reason including, without limitation, scientific, safety, technical, regulatory and commercial reasons, ASTRAZENECA may at any time terminate this Agreement in its entirety by giving ASTEX written notice to that effect. Upon such termination by ASTRAZENECA each Party shall have worldwide, perpetual, non-exclusive rights, with the right to grant licenses, to use and exploit the Results independently of the other Party,
14.6 Should ASTEX undergo a Change of Control (as defined below) ASTRAZENECA shall be entitled at its sole discretion and with immediate effect to either (i) terminate the Parties' collaboration on the Program or (ii) to terminate this Agreement in its entirety.
14.6.1 In the event ASTRAZENECA elects to terminate the Parties' collaboration on the Program pursuant to Section 14.6 (i), and thereby to end the Collaboration Term, ASTRAZENECA shall be under no obligation to provide ASTEX with any further information on Results generated and any Program or Project progress reports provided to ASTEX will be limited to information as to whether the Program and/or Development Milestones have been met.
14.6.2 In the event ASTRAZENECA elects to terminate this Agreement in its entirety pursuant to Section 14.6(ii) each Party shall have worldwide, perpetual non-exclusive rights, with the right to grant licenses to third parties, to use and exploit the Results independently of the other Party,
14.9 The respective rights and obligations of the Parties under Sections 2.4, 2.5, 4.2, 5.1-5.5, 9.1-9.3, 10.1-10.3, 11.1-11.4, 12.1-12.5, 13.1-13.4, 14.3, 14.6-14.9, 15 and 16 shall, unless otherwise specifically stated therein, survive the termination or expiration of this Agreement."
Schedule 1.37 sets out the Research Plan. An unfortunate aspect of its drafting is that it does not use identical terminology to the Agreement. Thus, as one example, the Research Plan uses the terms Hit Identification (HI) and Lead Identification (LI), when the Agreement would use AFFIT Optimisation and Hit Optimisation respectively to refer to these concepts. A second example is that the Research Plan uses milestones to mark the transitions between phases which do not correspond to the Program Milestones used in the Agreement for triggering payments to Astex. Part 1 of the Research Plan states:
"This document outlines the Program and specifies the activities undertaken by ASTRAZENECA ("AZ") and ASTEX ("Astex") respectively in their mutual quest to discover a novel, potent and selective ί-secretase inhibitor that is suitable for developing into an orally active drug for Alzheimer's disease ("AD"). The Program, outlines projected resources, timelines and screening cascade to successfully achieve sequential Program transitions from AFFIT Identification (AI) to Hit generation ("HI"), to Lead identification ("LI"), to Lead optimization ("LO") and finally to nomination of one or more CDs.
The plan calls for stage wise delivery of the following:
"AFFITs", "AFFITs", are essentially weak ligands identified by physical methods that can determine specific interactions between the ligands and a target protein. Affinity NMR analysis is one example. The use of X-ray affinity analysis to determine specific binders (specific binding defined as <1 ΅M affinity with sufficient electron density in the active site) allows a binding mode to be determined with a high degree of certainty.
Improved AFFIT, which are optimized AFFITs demonstrating BACE inhibitory activity (in enzymological assays), with specific binding properties and with an affinity in the <100 ΅M range.
Hits, which are selected from the AFFITs and Improved AFFIT and will then progress to "validated hits", and enable the Program to enter into the LI phase. In general, a Hit will be a pure compound with known structure, a potent inhibitor of BACE activity (< 10 ΅M) that possesses demonstrable SAR with significant degree of selectivity against other aspartyl protease (> 10 fold), and without undesirable chemical functionality from a CNS drug development point of view.
Leads and CDs which have the properties described in Table 3.1 below."
Part 2 sets out the anticipated timeline for Program activities. These envisage that AI and HI will occur in 2003, LI in 2004, LO in 2005 and "Pre-CD Nomination" in 2007, and that the Program activities will go as far as "Transition MS 5". It then states:
"As used in this Research Plan 'MS1' through 'MS4' refers to the generic discovery milestones defined and used within the AstraZeneca Global Discovery organization. When the success criteria for a stage of the Program has been met the Program may, subject to JEC decision pursuant Section 3 of the Agreement, transition into the following stage of the Program as set forth herein. Such transition does not necessarily mean that the stage for which the success criteria have been met is completed since JEC may decide to continue such stage to generate further results."
Part 3 begins with the following:
"The following table outlines key activities to be undertaken at each stage and the criteria to be achieved for successful transition to the next stage. These activities and the transition criteria cascade from the overall goal of delivering a ί-secretase inhibitor with desired CD profile.
The table sets out activities under the following headings and success criteria are introduced with the following statements:
"3.1. AFFIT Identification (Al) and Hit Identification (HI)
3.2 Hit Identification (HI)
Success criteria for completion of HI: Once at least two distinct chemical series have been identified meeting criteria outlined below, the Program may enter LI, which the parties anticipate by end of 2003.
3.3 Lead Identification (LI)
Success criteria for completion of LI: Once at least two distinct chemical series have been identified meeting the criteria outlined below, the Program enters LO. The parties anticipate that to happen by end of 2004 and that the LO will go on for approximately 2 years before the LO success criteria are met.
3.4 Lead Optimization (LO)
Success Criteria for completion of LO: Once sufficient number of compounds to be decided by JEC has been selected meeting the criteria outlined below, the Program enters the pre-CD nomination stage. The parties anticipate that to happen by end of 2006.
3.5 Pre-CD nomination stage ('pre-nomination')
The following are "generic" criteria for project transition from LO to the CD pre-nomination stage. Specific criteria applicable to the Program will be established during early LO stage.
AstraZeneca may amend the pre-nomination criteria from time to time at its sole discretion.
Success criteria for completion of Pre-CD nomination stage: Following nomination of one or more compounds meeting the criteria outlined below, CD(s) may be nominated. The parties anticipate that to happen by end of 2007.
3.6 CD Nomination and initiation of concept testing MS5
The following are "generic" criteria for CD nomination. Specific criteria applicable to the Program will be established by AstraZeneca during the LO stage.
AstraZeneca may amend the CD criteria from time to time at its sole discretion."
Paragraphs 3.1, 3.3 and 3.4 (but not paragraphs 3.2, 3.5 or 3.6) identify certain activities to be undertaken by Astex and AstraZeneca respectively. It can be seen from paragraph 3.4 of the table that it was envisaged that Astex would provide "structural crystallography support" "[f]or duration of LO".
Conduct under the Agreement
The Collaboration Term lasted from 21 February 2003 until 20 April 2005. Thereafter AstraZeneca continued the Project on its own. Some years later, two compounds referred to in these proceedings as CD1 and CD2, were developed. CD1 and CD2 were nominated by AstraZeneca as Candidate Drugs under the Agreement and Milestone Payments were made by AstraZeneca to Astex in respect of CD1. CD1 progressed to Phase I clinical trials, but subsequently its development was discontinued. In September 2014 AstraZeneca announced that it had entered into an agreement with Eli Lilly under which Eli Lilly was to conduct a large scale Phase II /III clinical trial of CD2. At the date of the hearing before the judge, CD2 was in the Phase III arm of that trial. On 24 February 2015 AstraZeneca informed Astex that it had reviewed the position and now considered that neither CD1 nor CD2 were Collaboration Compounds within the Agreement. That led to this action. On this appeal we were informed by counsel for Astex that the development of CD2 had been discontinued.
The principal issue at the trial was whether CD1 and CD2 were Collaboration Compounds. The resolution of this issue turned in part on the interpretation of the Agreement, and in part on factual questions as to how CD1 and CD2 were arrived at. It was common ground below, and remains common ground, that AstraZeneca's statements and actions (in particular its nomination of CD1 and CD2 as Candidate Drugs, and the Milestone Payments it made for CD1) were inadmissible on the issues of interpretation, although Astex contended that they shed light on the factual issues.
The judgment of Arnold J on liability
After a trial occupying some 14 court days, Arnold J identified and resolved a number of issues of interpretation of the Agreement. A first, and important issue ("issue 1") was the duration of the Program, and in particular whether the Program was temporally coterminous with the Collaboration Term (as AstraZeneca contended) or whether it continued after the Collaboration Term (as Astex contended). A second issue ("issue 2") was how one determined, under the Agreement, whether a compound had been "selected" as a candidate for Hit Optimisation or Lead Optimisation. Does selection require a positive act of identification of the compound as having been selected for that purpose under the Agreement (as AstraZeneca contended), or is factual or de facto selection permissible (as Astex contended)? A third issue ("issue 3") arose in relation to the definition of Hit Optimisation and Lead Optimisation, both of which refer to starting with a Hit or a Lead Compound. Did this requirement for a starting point require a specific compound to be identified (as AstraZeneca contended) or was it sufficient for the purposes of the Agreement if the optimisation started from a series or group of compounds (as Astex contended)?
The judge decided each of these issues in favour of AstraZeneca. On the first issue, the argument arose because, in the definition of Program in section 1.32, it was not clear whether the words "which thereafter may be continued by or on behalf of AstraZeneca alone" referred to the Program (as Astex contended) or the Project (as AstraZeneca contended). The judge set out and considered the parties' arguments (at  to ) and concluded at :
"As the preceding discussion demonstrates, there are arguments in favour of both interpretations. The conclusion I have reached is that the better view is that the Agreement should be interpreted in the manner contended for by AstraZeneca. Astex's strongest point is Section 1.23, but I agree with AstraZeneca that comparison with Sections 1.6 and 1.17 suggests that the inclusion of the words "after the Collaboration Term" may have been a drafting error. In any event, I consider that this point is outweighed by all the other provisions and considerations which support AstraZeneca's interpretation, whereas the other provisions and considerations relied upon by Astex carry less weight."
In relation to CD1, the resolution of the first issue adversely to Astex had the consequence that, as was common ground, CD1 was not discovered as a direct result of chemical structure modification "performed as part of the Program" as required by section 1.7 of the Agreement read with 1.17 and 1.24. The judge, however, went on to decide whether, if the Program did continue beyond the Collaboration Term, CD1 could be said on the facts to be a Collaboration Compound. The judge found that it was not a Collaboration Compound for a succession of reasons:
i) The first part of the relevant work (the identification of the "ISIN core") did not start from AFFITs and the aim was not to generate optimised AFFITs as required by the definition of AFFIT Optimisation, (judgment );
In relation to CD2, it was again the case that the resolution of the first issue adversely to Astex had the consequence that, as was again common ground, CD2 was not discovered as a direct result of chemical structure modification "performed as part of the Program" as required by section 1.7 of the Agreement read with 1.17 and 1.24. The judge again went on to consider whether, if the Program did continue beyond the Collaboration Term, CD2 could be said on the facts to be a Collaboration Compound. The judge found that CD2 was not a Collaboration Compound for a succession of reasons:
ii) That work was not Hit Optimisation either because the development did not start from a specific compound (issue 3 above), and did not start from any compound which had been selected as a Hit (issue 2 above), (judgment );
iii) The subsequent modification of the ISIN core to create fluorinated or F-ISINs was not Lead Optimisation, because it did not have the requisite aim, (judgment );
iv) That modification was not Hit Optimisation either because it did not start from any compound which had been selected as a Hit (issue 2 above), (judgment );
v) CD1 was not discovered as a result of Lead Optimisation of any ISINs which had been selected or nominated as Leads under the Agreement (issue 2 above), (judgment ); and
vi) The path from anything which did qualify as AFFIT Optimisation, Hit Optimisation or Lead Optimisation to CD1 was too long and indirect to qualify as the direct result thereof, (judgment ).
i) The relevant core in this case, the AiZ core, was not discovered as a result of chemical structure modification of the DHIZ core. This turned on an assessment of the evidence of a Ms Viklund, a computational chemist who the judge found to have been inspired by the earlier DHIZ core, but not to have made a structural modification of it, (judgment );
ii) Applying the same reasoning as he had for CD1, the development of the AiZ core was not AFFIT Optimisation or Hit Optimisation, (judgment  to ) and was not discovered as a direct result of Lead Optimisation of any AiZs which had been selected or nominated under the Agreement, (judgment ).
The main appeal
Astex appeals with permission granted by Kitchin LJ on the papers in relation to each of the issues of interpretation decided adversely to it by the judge. In addition Astex challenges the judge's conclusions on the facts. In particular it challenges the conclusion based on Ms Viklund's evidence that the AiZ core did not result from chemical structural modification of the DHIZ core. In doing so, it was argued that the judge had wrongly preferred the witness' oral reconstruction of what she had done to the evidence of the contemporaneous documents.
It is convenient to address, firstly, the parties' respective arguments on the duration of the Program.
Mr Charles Hollander QC, who appeared on the appeal with Miss Josephine Davies, submitted that, in the definition of Program in section 1.32 of the Agreement, the final words "which thereafter may be continued by or on behalf of AstraZeneca" made it clear that the Program continued after the Collaboration Term had ended, and the judge was wrong to decide that the section was equivocal. Section 1.32 was the definition of Program, so one would not expect to find language in it relating to the Project. Further, he asked rhetorically, why would the Agreement need to spell out that the Project (which was AstraZeneca's own, pre-existing, internal project) might continue after the end of the Program? AstraZeneca's right to continue the Project was self-evident because the Project had nothing to do with Astex. On the other hand if the words referred to the Program, then they provided an indication that the Program did not come to an end at the end of the Collaboration Term. Given the absence of any other provision explaining the duration of the Program, this was far more likely to be the function of those words.
Next Mr Hollander drew attention to clause 14.1, which refers to the possibility of AstraZeneca pursuing pre-clinical research referable to the Results and/or clinical development on one or more Collaboration Compounds after the end of the Collaboration Term. Pre-clinical research might include Lead Optimisation leading to a Candidate Drug. Thus the Agreement envisaged performing Optimisation, a Program activity, after the end of the Collaboration Term.
Mr Hollander continued by reference to section 2.9 which acknowledges AstraZeneca's right, during or after the Collaboration Term, to select additional AFFITs, AFFIT Improvements and Collaboration Compounds for optimisation and clinical development, subject to notifying the JEC, or if after the Collaboration Term, Astex. This section, he submitted, made it clear that the defined process of Optimisation under the Agreement could continue after the Collaboration Term. The fact that Astex was to be kept informed showed that Astex retained a financial interest in the results of such Optimisation, otherwise there would be no point in the requirement for notification.
Section 1.23, the definition of Lead Compounds, also provided strong support for Astex's construction, in Mr Hollander's submission, because it expressly recognised that Lead Compounds could be selected after the end of the Collaboration Term. He also pointed to clause 1.38, the definition of Results. The phrase "work performed under the Program during the Collaboration Term" was unnecessary surplusage if the judge was right that the Program was coterminous with the Collaboration Term.
Mr James Mellor QC, who appeared on the appeal with Mr James Whyte, relied on the fact that it was expressly contemplated in the Agreement and the Research Plan that a Candidate Drug would be achieved within the Collaboration Term. That was clear from the Research Plan, which identified the overall goal as delivery of a BACE inhibitor with desired Candidate Drug profile. The Research Plan laid out stages all the way to nomination of a Candidate Drug.
The Research Plan also supported the notion that the Program was a fully collaborative research program, with Astex providing support into the late stages. Astex's attempt to interpret the Agreement as one where it was only envisaged that it would contribute at an early stage to the identification of a starting point, and would reap rewards whenever that starting point yielded a successful drug, was driven by hindsight, and did not reflect the true intention of the Agreement.
Mr Mellor submitted that AstraZeneca's (and the judge's) reading of section 1.32 was supported by section 3.7 which referred to Astex providing consultancy services "for the continuation of the Project", and by section 3.8 which referred to AstraZeneca providing Project Reports, and nominating points of contact for "post-Program contacts between the Parties". Thus it was both grammatically and contextually correct to read the closing words of 1.32 as referring to the continuation of the Project after the end of the Collaboration Term, but not the continuation of the Program.
Section 3 was also important because it was concerned with management of the Program. The Program was to be managed by the JEC, which was to be dissolved after the end of the Collaboration Term. There was no mechanism in place thereafter to make the necessary decisions about transition from one stage to the next, as required by one of the bullet-points of section 3.1. Moreover there was nothing akin to section 4, which provided for detailed reporting of all Results of any significance to the Program. If the Program continued thereafter without oversight from Astex, one would expect more rather than less in terms of such reporting.
Sections 5.1 and 5.2, which dealt with ownership and licensing, related exclusively to Results , which were limited to ideas, inventions, discoveries, know-how etc produced during the Collaboration Term. If the Program continued beyond the Collaboration Term there would be no more Results, and no provisions dealing with ownership or licensing of the product of the continuing work. If the Program did continue beyond the Collaboration Term one would expect to see provisions dealing expressly with ownership and licensing.
Mr Mellor also relied on the consequences of Astex's construction which he described at times as "absurd", and at others as "strange". If Astex was correct, it would be possible for it to identify a Candidate Drug nominated by AstraZeneca many years after the end of the Collaboration Term, trace its development back to a Hit or Lead (also identified many years after the Collaboration Term had ended) and contend that Milestone Payments and Royalties were due. Mr Hollander retaliated that, on AstraZeneca's construction, it becomes virtually impossible for Astex to secure its reward under the Agreement, because AstraZeneca could defer nomination of a Candidate Drug until just after the end of the Collaboration Term.
Mr Mellor also asked forensically, if the Program does not end with the end of the Collaboration Term, when does it end? The Agreement may, under section 14.1 continue as long as AstraZeneca is commercialising Licensed Products in respect of which Royalties were owed to Astex under the Agreement. That period can, pursuant to section 8, be for as long as AstraZeneca has any Valid Claim of a Patent protecting that product. That meant that the Program might continue for many years after any pre-clinical research had stopped.
Like the judge, I prefer AstraZeneca's interpretation of section 1.32 of the Agreement. I agree with the judge that the definition is not crystal clear. The concluding words "which thereafter may be continued by or on behalf of ASTRAZENECA alone" could be referring to the Project or the Program. Thus, those words could be spelling out that the Program continues after the Collaboration Term, albeit not involving Astex, and therefore not as a continuing research collaboration. Alternatively the words could be explaining that there was no impediment to AstraZeneca continuing the Project, of which the Program previously formed a component, after the end of the Collaboration Term.
There are, however, three fairly obvious initial points which favour AstraZeneca on the meaning of these closing words. Firstly, as a matter or ordinary grammar, one would expect a clause beginning "which" to be referring to the immediately preceding clause (which deals with the Project). On Astex's construction the "which" has to overreach that clause and refer back to the opening words which deal with the Program. Secondly, and perhaps more powerfully, the fourth recital makes clear that the Program is "a collaborative research program". After the end of the Collaboration Term, however, any continuing research is, by definition, not collaborative: see the definition of Collaboration Term in section 1.9. It is improbable that one would define a Program as collaborative if it could be carried on, possibly for many years, by one party alone. Thirdly, one would expect in such a closely drafted agreement to find a term which defines the temporal extent of the Program. On AstraZeneca's construction, section 1.32 is such a term because "Program" means the research program described in the Research Plan "to be performed in collaboration by the Parties during the Collaboration Term as part of the Project". On Astex's construction, the most section 1.32 does is define the start of the Program, which continues after the end of the Collaboration Term. There is nothing else in the Agreement which deals with the end of the Program: section 14 is concerned with the end of the Agreement.
I do not think that clause 14.1 assists Astex in the way in which Mr Hollander suggested. The reference to pre-clinical development in clause 14.1 is not necessarily a reference to the stages of Optimisation referred to in the Agreement. The final stage of Optimisation, Lead Optimisation, is said to be "aiming at the identification of compounds with properties meeting the Candidate Drug criteria" (section 1.24). Clause 14.1, on the other hand is seeking to embrace all pre-clinical testing referable to the Results, a potentially much wider concept.
Looked at in isolation section 1.23 does appear to assist Astex's case, because of the express inclusion of the words "or after the Collaboration Term". The judge identified this as Astex's strongest point. Section 1.23 is, however, only the definition of Lead Compounds, and is differently drafted from the definitions of Candidate Drug in section 1.6 and Hits in section 1.17, which do not include those words. I agree with the judge that it would be wrong to attribute too much weight to a single definition which appears out of line with two other definitions in the Agreement. It is true that clauses 1.6 and 1.17 refer to selection for clinical testing and selection as candidates for Hit Optimisation "by the JEC or by ASTRAZENECA", which Astex regard as an implicit reference to the fact that such selection could occur after the end of the Collaboration Term by AstraZeneca alone. That however is not the only possible reason for the inclusion of the reference to AstraZeneca. The inclusion could be an acknowledgment of AstraZeneca's ability to have its own way when the JEC is unable to reach agreement, as provided for in section 3.3. Alternatively it could refer to a selection outside the mechanism of the JEC (although that possibility runs somewhat counter to AstraZeneca's position on the way in which selection operates under the Agreement). Either way, these definition sections do not bear the weight which Astex seeks to put upon them. The same applies to the surplusage in the definition of Results. It is true that if the Collaboration Term and the Program are coterminous, it would be sufficient for section 1.38 to refer to one or the other, rather than both, but I do not regard that as a strong point. It is entirely plausible, given the many drafting infelicities in the Agreement, that the more economical way of expressing the requirement did not occur to the draftsman.
Clause 2.9 also, at first sight, provides some support for Astex, but goes nowhere near as far as indicating unequivocally that the Program continues after the end of the Collaboration Term. As the judge explained, Astex does continue to have an interest in the Project after the end of the Collaboration Term because of the ownership provisions of section 5. It is not correct that Astex's only interest is in the Milestone and Royalty Payments. It therefore makes sense for it to be notified of selections made by AstraZeneca for development. AstraZeneca can also point to the fact that the uncapitalised "optimisation" referred to in clause 2.9 does not necessarily refer to the defined process of Hit Optimisation and Lead Optimisation in the Agreement.
By contrast, there is compelling support for AstraZeneca's construction in sections 3.7 and 3.8, which use language which is only consistent with the Program having ended at the end of the Collaboration Term and the Project continuing thereafter. Whilst it is reasonable to suggest that the draftsman might have muddled two similar words "Project" and "Program", section 3.8 shows him using the words in close proximity and distinguishing between them. Moreover, in referring to "post-Program contacts between the Parties", the error, on Astex's interpretation, is of a different kind, because what should have been said, for Astex to be correct, is "post-Collaboration Term". There is no realistic explanation for that error. Rather, this section is only really consistent with the Program and Collaboration Term being coterminous.
It is also legitimate to examine the consequence of the two rival constructions of Program. AstraZeneca's construction does mean that a Candidate Drug needs to be arrived at within the Collaboration Term. The Agreement and Research Plan read together do, however, make it clear that the parties foresaw a collaborative research program leading to a Candidate Drug, with Astex involved, at least with crystallography support, throughout. AstraZeneca's construction does not therefore lead to any obstacle to Astex achieving its Milestone and Royalty Payments in the event of a successful collaboration. I reject Mr Hollander's submission that AstraZeneca's construction "made it almost impossible for Astex to achieve the Milestone Payments and Royalties that were the benefit to Astex in entering into Agreement" (appeal skeleton paragraph 23).
On the other hand, if Astex's construction is correct, the consequence is that Hits and Leads arrived at many years after the Collaboration Term and which lead independently to Candidate Drugs with commercial promise will potentially trigger Milestone Payments and Royalties under the Agreement. That result would be surprising given that the Agreement recognises that AstraZeneca had a pre-existing Project seeking to identify BACE inhibitors which one would expect it to be able to continue if the continuing research owed nothing to the collaboration. It would also be surprising given the way in which the non-compete provisions in section 2 appear to permit AstraZeneca to pursue other work aimed at BACE inhibition after an initial period.
It was no doubt because of the potentially limitless grasp of the Program on its construction that Astex introduced into their submissions (e.g. in their appeal skeleton at paragraph 28) a requirement that the selected compounds had to be "sufficiently referable" to the work done in the Collaboration Term. It would, of course, be conceivable that one could read into the Agreement, by a process of interpretation or of necessary implication, a requirement that the compounds be "sufficiently referable" to work carried on in the Collaboration Term, although that approach would face obvious challenges. In a closely drafted agreement of this kind, one would expect to find the necessary connection set out expressly, and in less woolly terms. No doubt because of that consideration, Astex says that the "sufficiently referable" formulation is no more than a distillation of the contractual nexus which is expressly provided for by the Agreement. Thus, an AFFIT, in section 1.2, means any Material that shows the necessary binding affinity to the Target. A Material is defined as a compound included in the Screening Libraries, which were fixed as of the Effective Date of the Agreement. That provision provided a link back to the Materials which the parties brought into the collaboration, and expressly prevented the Agreement extending its grasp to any compound, however derived.
I do not think that this argument is correct. It depends critically on reading the definition of Materials in section 1.26 as limited to compounds derived from Screening Libraries. Yet section 1.26 goes on to include in the definition of Materials "any other materials
that are used by a Party or the Parties in the Program, excluding any Collaboration Compounds and other Results", and cites a long, but non-exhaustive list of "other materials", which includes proteins and crystals. Thus, for Materials other than those derived from the Screening Libraries there is no link back to the Effective Date: it is sufficient that they show the required binding affinity and are used by the Parties or one of them in the Program. I think, therefore, that Astex's construction produces a result which is surprising, and therefore one which is unlikely to have been intended by the Parties.
I also think there is force in the absence of any oversight provisions for monitoring the progress of the Program through its various stages after the end of the Collaboration Term. The JEC is supposed to monitor when the Program Milestones have been met, including Program Milestone 3 which involves the nomination of a Candidate Drug. That cannot occur after the end of the Collaboration Term, because the JEC will have been dissolved under section 3.7. Nothing approaching a mechanism of this kind is put in place thereafter: 6-monthly unilateral reports under clause 3.8, with unspecified content, do not provide an equivalent mechanism for defining when these goals have been met. I also agree that one would expect to see some provisions dealing with ownership of work product arrived at after the end of the Collaboration Term. Astex's response is to concede that all AstraZeneca work product post Collaboration Term is owned by AstraZeneca. Even if that concession is correct, it is by no means obviously so, and one would expect provisions in the Agreement making that clear.
I conclude that on the proper interpretation of the Agreement the Program ended when the Collaboration Term ended, with the consequence that Astex did not thereafter become entitled to any payments in respect of CD1 or CD2. It follows that I consider that the main appeal should be dismissed. In these circumstances it is unnecessary to address the other issues raised on the appeal.
The indemnity costs appeal
In a subsequent judgment delivered after a hearing on the form of order, the judge awarded AstraZeneca its costs, including costs on the indemnity basis from 6 December 2016. He considered that Astex's conduct of the case was sufficiently out of the norm to justify an order for indemnity costs, citing the well-known case of Excelsior Commercial and Industrial Holdings Limited v Salisbury Hammer Aspden & Johnson  EWCA Civ 879 at .
The judge examined the conduct of Astex in pursuing its claims at a number of different stages in the chronology. The first stage was three weeks after the service of the Defence and Counterclaim, at which point Astex had seen the detailed account set out by AstraZeneca of the way in which CD1 and CD2 had been developed. At paragraph  of his judgment, the judge concluded that it was not unreasonable for Astex to pursue its claim thereafter and to test the account "first by disclosure and then by evidence".
The next stage examined by the judge was two weeks after 11 April 2016, when AstraZeneca had served a response to a request for further information informing Astex that the Defence had been prepared on the basis of interviews with AstraZeneca scientists. The judge thought this added little to the position at the previous date, implying, therefore, that he considered that it was still reasonable for Astex to pursue its claim.
Next, the judge took a date two weeks after the provision of "stage one" disclosure on 23 May 2016. The judge rejected this date also, as the documents provided in stage one were limited to those that were used to plead the Defence, and did not include wider disclosure which would enable Astex to test the account in the Defence.
The disclosure required in the stage two disclosure exercise was very much more substantial and costly. However, as the judge observed, this was always going to be the case in a claim of this nature concerning a development taking place involving a large number of scientists over a considerable number of years. He therefore did not consider that the scale of the disclosure exercise justified an order for indemnity costs. Astex's position remained a reasonable one two weeks after the completion of the disclosure exercise on 14 October 2016.
That brought the judge to 6 December 2016, the date from which he ultimately ordered indemnity costs. By that date Astex had received AstraZeneca's offer of 8 November 2016, the essence of which was as follows: (1) AstraZeneca agreed to forgo repayment of the $2 million payments made for CD1; (2) AstraZeneca agreed to bear its own costs down to the date of acceptance of the offer; (3) Astex had to accept that neither CD1 nor CD2 were Collaboration Compounds; and (4) Astex had to accept that the Agreement had expired prior to February 2014.
In addition, on 8 November 2016, Chief Master Marsh had made an order requiring Astex to state its case on derivation of CD2, the response being due by January 2017. As things transpired, AstraZeneca was dissatisfied with the response. This led to a further application in February 2017, at which Astex put forward amendments to its pleaded case, and proposed further amendments to which AstraZeneca ultimately consented in March 2017. That was not, however, the end of the matter, as Astex made further applications to amend at the beginning and during the trial. This formed the basis for the judge's conclusion that Astex was struggling to formulate its case on CD2.
It was in those circumstances that the judge came to summarise the position at 6 December 2016 as being as follows. First, AstraZeneca had made its offer which "as it turns out was much more favourable to Astex than the ultimate result at trial". Secondly, a very extensive and expensive disclosure exercise had been undertaken which had really yielded nothing of any benefit to Astex, in particular in terms of supporting its claim in relation to CD2. Although one document was subsequently disclosed ("the spreadsheet") it was "nowhere near to be being decisive". Thirdly, Astex was struggling to formulate its case in relation to CD2 and the struggle continued thereafter.
Mr Hollander submitted that the judge had erred in his conclusion that the present case had features which were sufficiently out of the norm for an award of indemnity costs. None of the three factors relied on by the judge, either alone or in combination, constituted a proper basis for an award of indemnity costs.
The judge had recognised that the relevant facts concerning the derivation of CD1 and CD2 all lay within AstraZeneca's knowledge and not Astex's. The judge also expressly rejected the contention that Astex's case was speculative. The case on CD1 was based on AstraZeneca's own representation that CD1 was a Collaboration Compound, backed up by a payment of $2 million dollars, and also on an account of the derivation of CD1 contained in an article by AstraZeneca scientists ("the Jeppsson article"). The case on CD2 was also based, at least initially, on AstraZeneca's representations.
I should start by emphasising that we should not interfere with the judge's exercise of his costs discretion unless we are satisfied that it is wrong in principle; or that it involved taking into account matters which should not be taken into account, or that it has failed to take into account matters which should have been taken into account, or if it is plainly unsustainable: see F&C Alternative Investments (Holdings) Ltd Barthelemy (No 3)  1 WLR 548 ("F&C") at .
Astex's submissions require one to examine each of the factors relied upon by the judge in turn. I take first of all the offer made by AstraZeneca, and its rejection by Astex. Whilst the offer was (in financial terms) significantly more favourable to Astex than the ultimate outcome of the trial, it was not made under Part 36, and the comparison between the offer and the outcome at trial did not therefore carry any automatic costs consequences: see F&C at . In a case not invoking Part 36, it is not legitimate to apply Part 36 by analogy so as to make an order for indemnity costs based only on a comparison of offer and outcome.
The only relevance of the offer in this case was under CPR 44.3(4), where:
"In deciding what order (if any) to make about costs, the court must have regard to all the circumstances, including - (a) the conduct of all the parties;
admissible offer to settle made by a party which is drawn to the court's attention and which is not an offer to which the costs consequences of Part 36 apply."
The judge cannot therefore be criticised for having regard to the offer made by AstraZeneca: indeed he was bound to do so because of the mandatory wording of CPR 44.3(4). That did not, however, discharge him from asking what it was about the offer and its rejection that contributed to a conclusion that Astex's conduct of the case was outside the norm. As Davis LJ (with whom Arden and Tomlinson LJJ agreed) explained in F&C at  there may be special cases where the refusal to accept reasonable offers of settlement is capable of justifying an award of indemnity costs, but a failure to accept such an offer must be unreasonable. In Kiam v MGM Ltd (No 2)  1 WLR 2810, Simon Brown LJ (with whom Waller and Sedley LJJ agreed) said at  that it would be "a rare case indeed where a refusal of a settlement offer will attract under Part 44 not merely an adverse order for costs but an order on an indemnity rather than standard basis
This, of course, was not a case where it was just the offer of settlement which was relied on. I turn therefore to consider the second of the judge's factors, namely the fact that the extensive disclosure exercise had disclosed nothing of benefit to Astex. It seems to me that there are a number of problems with reliance on this factor. First, as the judge recognised at , a case of this nature was always going to require extensive disclosure, and Astex cannot therefore be described as unreasonable in asking for it. Secondly, as the judge held at , Astex was entitled to test the account being put forward by AstraZeneca in its Defence "by disclosure and then by evidence". The disclosure exercise simply represented the first stage of that exercise, and it remained to be seen whether the evidence withstood the scrutiny of the trial process. Thirdly, and consistently with the second point, Astex's position remained a reasonable one two weeks after the stage two disclosure was given. The judge made a finding to that effect at . Fourthly, it might be said that it hardly lies in AstraZeneca's mouth to rely on the state of disclosure at 6 December 2016, when at that stage it had not disclosed the spreadsheet. We have not had to decide the aspect of the case which turns on derivation of CD2, but we were taken to the spreadsheet in some detail in the course of the argument. It is enough to say that it does provide some documentary support for Astex's case that the AiZ core was derived from the DHIZ core, although, as with any document, it might be possible to explain away its significance with oral evidence. Given that Astex's position was reasonable in the light of the stage two disclosure, it must have appeared to it to have become stronger in the light of the disclosure of the spreadsheet. It is no answer to say, as the judge did, that the document was not decisive. I therefore do not accept that the fact that there was extensive, costly and ultimately unhelpful disclosure can be said to take the case outside the norm.
Finally the judge relied on Astex's repeated amendments and applications to amend their case on CD2, as indicating that they were struggling to articulate a case. That, of course, was a matter to which he was entitled to refer, and on which his views as the trial judge, and the judge who decided earlier interim applications, is entitled to great respect. In the end, however, I do not see how this factor justifies an order for indemnity costs. The judge was able, in his detailed and careful judgment, to identify and deal with Astex's case on derivation. At no stage did he hold that it was insufficiently articulated.
The reason that Astex were ultimately unsuccessful on CD2 appears to me to have turned on two matters in particular. These were (a) the three points of construction of the Agreement which I have identified, and (b) Ms Viklund's account of how she derived her compounds. As to the first of these, the judge expressly recognised when refusing permission to appeal that the construction points were arguable, and Kitchin LJ (as he was then) agreed with him when granting it. For what it is worth, I agree with both of them. As to the second, the judge's acceptance of Ms Viklund's evidence was by no means a foregone conclusion, and Astex was entitled to test it by means of the documentary record including the spreadsheet. The issue of factual derivation is also a point on which Kitchin LJ considered it appropriate to grant permission to appeal, notwithstanding that it was an appeal on the facts, something which this court is normally reluctant to do.
Having looked at all three points, I cannot see anything in Astex's conduct which could justify an order for indemnity costs. Accordingly I would set aside that part of the judge's order which ordered AstraZeneca's costs to be assessed on the indemnity basis from 6 December 2016, and order that they be assessed instead on the standard basis throughout.
Lord Justice Henderson:
Lord Justice Leggatt:
I also agree.
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