The Perils of Purchase-Order Contracting In Pharmaceutical Transactions - Pharmaceutical Technology

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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.

PTSM: Pharmaceutical Technology Sourcing and Management
Volume 3, Issue 9

(3) Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this Act.

Case law: contract formation
How a contract may be formed. Sections 2-207(1) and 2-207(3) describe how a contract may be formed under purchase-order contracting. Under Section 2-207(1), a contract can thus be formed based on the parties' documentation even where their documentation contains different terms and conditions. In addition, under Section 2-207(3) a contract can be formed by virtue of the parties' conduct if the documentation is insufficient to establish one.

Case law: gap-filler provisions
Terms of a contract. Although the rules for contract formation under Section 2-207 are not a model of clarity and have resulted in some inconsistent results (see sidebar, "Case law: contract formation) even greater legal uncertainty exists regarding the terms of that contract. That issue is dealt with under Section 2-207(2) and the last sentence of Section 2-207(3). Parsing through the language of those sections would be neither helpful or instructive here. Suffice it to say that courts have taken different interpretations in analyzing these two provisions, in some instances ignoring terms that are different in the respective parties' documentation, in others permitting the buyer's terms to prevail, and in some instances, permitting the seller's terms to prevail, with gap-filler provisions from the UCC filling in some of the missing terms (see sidebar, "Case law: gap-filler provisions").

Given this level of legal uncertainty, the authors believe that prudent purchasers and suppliers relying on purchase-order contracting should assume that the contract will comprise only the terms on which their respective documentation is completely consistent. Given that purchaser and seller each generally puts forth documentation skewed in its favor, it is quite likely that the only common terms will be price and quantity. So where does that leave the parties in terms of legal risk?

Likely position of purchaser under purchase-order contracting. There are a number of provisions likely contained in the purchase order (or a commercial-supply agreement) that will likely be excluded from a contract formed under Section 2-207 because they would almost certainly not be included in the seller's documentation. The following is a list of the obvious ones:

  • Warranty by seller to comply with current good manufacturing practices
  • Warranty by seller to produce the product in accordance with written specifications
  • Warranty by seller to comply with other specific laws
  • Consequences of missed delivery dates
  • Restrictions on seller modifying its manufacturing process without obtaining purchaser's consent
  • Product shelf-life requirements
  • Documentation requirements such as labeling and certificates of analysis
  • Supplier obligations with respect to its drug master file or other regulatory documents.

The authors believe that many purchasers would be horrified to know that many of these very important pro-purchaser terms might be excluded in a contract formed by purchase-order contracting. Although it should be noted that the supplier has a legal obligation to comply with certain of the above-noted purchaser-friendly terms, and that certain of these terms may be supplied by gap-filler provisions in the UCC, there is no substitute for having a specific contract provision to address an issue of concern to the purchaser.


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