Key Contractual Protections For Cos. In The PPE Space

By James Chou and Alex Corey
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Law360 (September 30, 2020, 3:46 PM EDT) --
James Chou
James Chou
Alex Corey
Alex Corey
Although many businesses throughout the U.S. were decimated by the economic impact of the COVID-19 pandemic, a few have been able to pivot and take advantage of new opportunities unfolding in the now-lucrative market for personal protective equipment, such as masks, gloves, goggles and face shields.

These companies have provided an invaluable, potentially lifesaving resource for medical professionals, essential workers, hospital patients and consumers in general. The PPE market, however, is rapidly evolving, requiring companies that operate in this space to consider numerous legal issues, such as fraud, quality controls and especially government regulations.

For these reasons, it is crucial that any entity considering buying, selling, sourcing or distributing PPE insist on certain contractual protections to minimize risk and optimize the benefits that come with participating in this booming market.

Below is a nonexhaustive list of provisions that should be incorporated into every contract for the purchase, sale and/or distribution of PPE.

Contract Performance and Risk Issues

The agreement must state the time for performance, time and method of payment, and any other related duties that the parties agree upon. It should also identify the point at which the risk of loss passes from the seller to the purchaser.

The agreement should contain indemnification provisions. The purchaser should be indemnified, defended and held harmless from and against all losses resulting from breaches of representations, warranties and covenants, or for fraud, misconduct or violations of law by the seller.

If the seller is not the manufacturer of the PPE, but instead a reseller of it, the purchaser should consider adding a covenant to the agreement requiring the seller to pass all warranties, indemnification rights and similar protections from the manufacturer to the purchaser.

The agreement should also require that one of the parties obtain insurance to cover the risk of loss. Such insurance should name the other party as an additional insured.

As with all contracts, parties entering into a PPE agreement should consider including a governing law provision and forum selection clause. Such clauses are particularly important where the distributor and purchaser reside in different states, as is often the case. Moreover, given the disruptive impact that COVID-19 has caused to both federal and state courts, including delays, backlogs and reduced resources, the parties may wish to consider submitting disputes to private arbitration, which could lead to a more expeditious adjudication of the parties' dispute.

If the purchaser is concerned about delays that may occur if the seller fails to fulfill purchase orders, the purchaser may wish to consider insisting on a liquidated damages clause, which would entitle the purchaser to a sum certain for every day a particular order goes unfulfilled. Under New York law, for liquidated damages to be enforceable, they must bear a "reasonable proportion to the [non-breaching party's] probable loss," and that party's actual loss must be "incapable or difficult of precise estimation."[1]

Given the unprecedented demand for PPE since the COVID-19 pandemic's inception, and the uncertainty of how that demand will evolve in the future, liquidated damages may alleviate the burden on the purchaser to prove actual damages or lost profits where there is little historical data which the purchaser can rely upon to support those calculations.

Product Specifications

The agreement must expressly identify the product specifications, either in the body of the agreement or in an attachment.[2] A purchaser of PPE should request a representation from the seller that the products conform to the specifications, and a clause relieving the purchaser from accepting delivery of products failing to meet those specifications. A purchaser of PPE should also consider including a clause that obligates the seller to provide the purchaser with prompt written notice of PPE recalls.

The agreement should contain certain representations and warranties of the seller concerning merchantability and fitness of the PPE; compliance of both the PPE and the seller with all applicable laws, rules and regulations, including applicable U.S. Food and Drug Administration regulations; and the seller's unencumbered title to the products.

It is important to consider whether the agreement will require specific health care representations. Under certain circumstances — e.g., if any party receives any federal health care funds or participates in any federal health care programs — the seller should represent, for example, that it has not been convicted of a criminal offense related to health care; that it is not currently barred, excluded or otherwise ineligible to participate in federally or state funded health care programs or federal procurement or nonprocurement programs; and that it is not included in any relevant database of excluded individuals or entities — for example, the U.S. Department of Health and Human Services' Office of Inspector General's List of Excluded Individuals/Entities, and the U.S. General Services Administration's Excluded Parties List System.

While price increases are to be expected given tightened supply, the parties should be cognizant of federal, state and local price-gouging laws, rules and regulations. In New York City, price-gouging exists when goods or services essential to the health, safety and/or welfare of the public are sold at a price that is at least 10% higher than those same or similar products sold one to two months prior to the declaration of the state of emergency.[3]

If PPE, such as masks, features printed designs, the contracts should clearly identify who owns the copyright on the designs, any necessary permissions for use of the designs, and representations and warranties by the party requesting use of the design that it has the right to do so. This is particularly important where the rights to the design belong to a third party.

Trade Issues

In the event of an international transaction, the contracts should include representations that the parties have complied or will comply with all applicable import and export laws, permit requirements and payment of tariffs.

When contracting between a seller or purchaser of a foreign nation, the parties must be cognizant that the U.S. and many other nations, such as China, are signatories to the United Nations Convention on Contracts for International Sale of Goods.[4] The CISG will apply unless the parties explicitly exclude its application in favor of the law of a different forum.[5]

Conclusion

While the sample provisions above are not exhaustive, and no single provision can serve as an ironclad safeguard against all risk, they should help mitigate risk by more clearly and comprehensively spelling out the parties' respective rights and obligations in an array of circumstances.

Indeed, a well-drafted PPE contract should cover as many anticipated scenarios as possible —and carefully delineate the allocation of risk and responsibilities of the parties should such scenarios materialize.



James P. Chou is a partner and Alex D. Corey is an associate at Moritt Hock & Hamroff LLP

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.


[1] JMD Holding Corp. v. Congress Financial Corp. , 4 N.Y.3d 373, 380 (2005).

[2] The parties should also review and familiarize themselves with any state or municipal guidelines or rules concerning PPE quality standards. New York, for instance, has developed guidelines for PPE product quality for medical, professional and regular consumers. See https://esd.ny.gov/sourcing-covid-19-products-nys.

[3] In this regard, the New York City Consumer Affairs Department has identified the following PPE items which are subject to this price-gouging rule: cleaning products, diagnostic products and services, disinfectants (wipes, liquids and sprays), face masks, gloves, hand sanitizer, medicines, paper towels, rubbing alcohol, soap and tissue. See https://www1.nyc.gov/site/dca/media/Face-Masks-in-Short-Supply-Due-to-COVID-19.page#:~:text=During%20a%20State%20of%20Emergency,to%20health%2C%20safety%20or%20welfare. See generally New York General Business Law § 396-R and https://legislation.nysenate.gov/pdf/bills/2019/S8189.

[4] A full list of the nations that have enacted the CISG is available at https://uncitral.un.org/en/texts/salegoods/conventions/sale_of_goods/cisg/status.

[5] BP Oil International Ltd. v. Empresa Estatal Petroleos de Ecuador , 332 F.3d 333, 337 (5th Cir. 2003) ("Where parties seek to apply a signatory's domestic law in lieu of the CISG, they must affirmatively opt-out of the CISG").

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