The Perils of Purchase-Order Contracting In Pharmaceutical Transactions

Purchase-order contracting is a commonly used approach to conducting commercial transactions, but it is a risky proposition when applied to pharmaceutical transactions, including the buying and selling of contract services and pharmaceutical ingredients. The authors examine the contract provisions covered in a commercial-supply agreement that are likely to be omitted under purchase-order contracting and the risk-reduction benefits that a commercial-supply agreement can offer in pharmaceutical procurement.
Sep 05, 2007
Volume 3, Issue 9

An executed commercial-supply agreement is not a prerequisite for conducting a commercial transaction between a buyer and seller of pharmaceutical products. In fact, most commercial transactions in the pharmaceutical industry take place without any separately executed commercial-supply agreement. Each party typically relies on the business and legal terms contained in its respective purchase order and documentation for order acknowledgement and invoicing. Although such "purchase-order contracting" is an efficient way to conduct commercial transactions, the legal framework governing purchase-order contracting rarely produces a comprehensive set of enforceable legal terms and conditions to govern the transaction.

While this level of legal uncertainty may be acceptable for contracts involving little financial or legal exposure for the parties, the authors believe that purchase-order contracting should be avoided for pharmaceutical transactions, which often include substantial financial and legal risk exposure for the parties. This article will examine three important issues:

  • Rationale of why purchase-order contracting fails to create a reliable legal framework to govern a commercial transaction
  • Identification of the contract provisions that are typically covered in a well-drafted commercial supply agreement but are likely to be omitted under purchase-order contracting
  • Examination of how an executed commercial-supply agreement can lessen the legal risks inherent in pharmaceutical procurement transactions.

Legal framework for pharmaceutical transactions

Pharmaceutical transactions are governed by the Uniform Commercial Code (UCC), a version of which has been adopted by nearly every state in the United States. As there is no single document that both purchaser and supplier sign under purchase-order contracting, the terms of the contract must be largely determined by the legal terms and conditions contained in each party's documentation. The difficulty presented by purchase-order contracting stems from the dramatic differences between the terms and conditions typically contained in each party's documentation. The purchaser typically includes purchaser-friendly terms in its purchase order, such as warranty provisions and requirements for timely delivery. On the other hand, the supplier is likely to include supplier-friendly terms in its documentation for order acknowledgment and invoicing such as disclaimers of implied warranties and exclusions of certain types of damages. And of course, because these "boilerplate" terms are rarely discussed under purchase-order contracting, these inevitable differences are not resolved at the time the contract is formed. Even in the rare circumstances where the discrepancies between the parties' documentation are discussed and resolved orally, there is no mutually executed document in which that agreement is memorialized. This issue has been referred to as "the battle of the forms" because the contract terms are determined by competing legal terms and conditions contained in each party's respective documentation.

The battle of the forms
Section 2-207 of the UCC was drafted to address this "battle-of-the forms" problem, but it has caused substantial uncertainty in contract law (see sidebar, "Battle of the forms"). Section 2-207 provides as follows:

Section 2-207. Additional Terms in Acceptance or Confirmation

(1) A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.

(2) The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless:

(a) the offer expressly limits acceptance to the terms of the offer; (b) they materially alter it; or (c) notification of objection to them has already been given or is given within a reasonable time after notice of them is received.

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