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

Purchasers and suppliers are advised to ensure their commercial-supply agreements address supply-disruption issues, including provisions possibly entitling purchasers to penalties for late deliveries and/or liquidated-damages provisions triggered by refusals to perform or other defaults. On the flip side, suppliers should consider including late-fee provisions for late payments and/or reimbursement provisions for investments in production facilities where a purchaser decides to discontinue a product or otherwise terminate a contract after a supplier has invested considerable time and effort in production facilities with no ability to obtain reasonably expected profits or to even cover costs.

International contracting and global litigation issues. The pharmaceutical supply industry has been described as an international bazaar with contracts most often entered into between multinational companies located in different corners of the globe. Because of pricing pressures and profitability issues, finish-dosage manufacturers, often based in the US or Europe, are increasingly sourcing product from China, Taiwan, Indonesia, Asia, India, and Mexico. In addition to potential supply-disruption issues related to shipping product across the globe, these international contract arrangements present a myriad of litigation-related issues should a problem arise.

Typically, purchase orders do not contain most, if not all, of the following litigation-related provisions:

  • Choice of law
  • Mandatory forum/jurisdiction
  • Contractual statute of limitations
  • Alternative dispute-resolution procedures
  • Designation of domestic agents for service of process
  • Attorneys' fees and costs
  • Enforcement in foreign countries of potential US judgments
  • Indemnification (including "pass-through" indemnity owed to other entities)
  • Insurance coverage (including additional named insured).

And even if these provisions are included in the purchase order, they are unlikely to survive the "battle-of-the-forms" under UCC Section 2-207.

Unless the above legal issues are specifically addressed in a commercial-supply agreement or global POTC, parties are often left in the precarious position of trying to sort through international law issues and procedures after a breach. To say the least, legal proceedings between foreign entities truly constitute challenging complex litigation, especially when terms are not spelled out. Simple issues that many in-house attorneys take for granted such as service of process can become monumental undertakings that are time-consuming and highly expensive. This situation is often the case when dealing with foreign entities that do not have US agents for service of process or that are located in countries that are not signatories to the Hague Convention. (The Hague Conventions on Private International Law consist of dozens of conventions (agreements) drawn up since the early 1900s aiming to harmonize various aspects of civil law between signatory nations. Among other things, the conventions deal with international service of process in civil actions, and recognition of official documents between signatories). In turn, even if a foreign entity agrees to accept service of process and contractually agrees to a mandatory forum-selection clause requiring litigation to be pursued in US courts, issues arise regarding the enforceability in foreign countries of potential judgments obtained in US proceedings.

Indemnification provisions and related issues also should be analyzed and considered for inclusion in commercial-supply agreements. It should be noted, however, that inclusion of even the broadest indemnity rights in a commercial-supply agreement does not completely eliminate risk and may be of little value if the nonbreaching party realistically cannot pursue litigation against the breaching party to enforce such rights. Similar issues may arise with insurance coverage and additional insured provisions, which typically provide an added level of protection for parties. Nevertheless, including these types of provisions in the commercial-supply agreement is certainly the most prudent course of action.

The time-tested adage of "an ounce of prevention is worth a pound of cure" is well-taken when entering into agreements with foreign-based entities. Parties should complete their due diligence in assessing whether the foreign-based entity (whether supplier or purchaser) is adequately capitalized, insured, has a good reputation and performance track record, and is in compliance with regulatory requirements and good manufacturing practices. International business reports, which are relatively inexpensive, and litigation searches should be obtained in advance of contracting with new companies.


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