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

Likely position of supplier under purchase-order contracting. Although the supplier is unlikely to forgo as many protections as the purchaser under a contract formed by purchase-order contracting, the protections a supplier is likely to forgo could be extremely important in the event of a dispute. A supplier would not be eager to get involved in a dispute without the following risk-reducing provisions:

  • Exclusion on recovery of consequential damages, including lost profits or dollar limitations on damages
  • Exclusion of remedies other than replacement of products
  • Exclusion of any other express warranties that might be contained in documentation provided by supplier or contained in supplier literature
  • Exclusions of any implied warranties, including the implied warranty of merchantability or fitness for a particular purpose.

Suppliers use the above provisions to lessen the financial exposure from a single contract, and suppliers contend that these provisions enable them to price products affordably. As in the case of the purchaser-friendly terms noted above, the law does mitigate somewhat the impact of not having these terms included in the contract. For example, the law imposes limits on the recovery of consequential damages, making it difficult for a purchaser to recover lost profits even where not expressly excluded. However, having these types of provisions in the contract itself substantially lessens the probability that they could be recovered and may deter purchasers from pursuing legal action against the supplier in the first place.

Neutral terms likely to be omitted under purchase-order contracting. There are a number of contract terms that benefit both parties by providing certainty and predictability to contractual relationships. Some of these terms are helpful in managing contract performance, and others assist the parties in assessing their risk in the event of a dispute. Examples include:

  • Conflict escalation and dispute-resolution procedures
  • Venue and governing law provisions
  • Confidentiality
  • Intellectual property rights
  • Recall procedures
  • Insurance requirements.

Because these issues are important to both the purchaser and the supplier, they are likely to be directly addressed in each party's documentation (and would almost certainly be included in a well-drafted supply agreement). As the parties' documentation would likely clash on a number of these issues, the contract formed under purchase-order contracting would likely exclude some or all of them. In the authors' opinion, both parties lose by having these terms not included in the contract.

Litigation risks in pharma transactions: The case for commercial-supply agreements

The pharmaceutical industry has increasingly gone global and become more complex, with greater risks and rewards, and pharmaceutical transactions are evolving from generic purchase-order exchanges to comprehensive supply agreements. Increases in the number of recalls, mass-tort litigation, regulations and governmental investigations, and a greater focus on supply-chain safety and quality are just some of the factors motivating purchasers and suppliers to enter into comprehensive agreements, including global purchase-order terms and conditions (POTC), which spell out the parties respective rights and obligations. In addition, purchasers and suppliers in the global market place are focusing on risk assessment, risk allocation, and financial predictability when it comes to global transactions. Officers and directors of companies, as well as shareholders, want to know they have contingency plans and recourse against other contracting parties should problems arise due to their performance problems. Well-drafted comprehensive commercial-supply agreements remove considerable uncertainty from the transactional equation and provide protection, especially when things go wrong.

Increased wave of pharmaceutical recalls and financial consequences. Increased wave of pharmaceutical recalls and financial consequences. Despite the most diligent manufacturing, quality assurance, and inspection programs, inevitably things will occasionally go wrong—even for the most careful purchaser and supplier. Between 2001 and 2005, the number of pharmaceutical recalls in the US jumped 63% with 320 total recalls in 2001 [248 prescription and 72 over-the-counter (OTC) products] compared with 502 in 2005 (401 prescription and 101 OTC periods) (1). During this same period, the number of Adverse Event Reports (AERS) in the US jumped from 285,107 to 464,068 (1). It is widely believed that increased worldwide regulatory scrutiny coupled with greater AER system reporting and media attention has led to more pharmaceutical recalls.


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