Contracts are underused by medical device companies. Here’s why they are worth a second look.Courtney Young, Medmarc Insurance Group
Contracts are both one of the most effective risk management mechanisms available to medical device companies for mitigating products liability risk, and one of the most underused. Contracts effectively transfer risk and assure that each party is liable only for eventualities within their control.
Life sciences companies may assume that their use of purchase orders with terms and conditions suffice for contracts, but for the reasons briefly outlined below, this is often not the case.
Contracts versus purchase orders
Many companies, particularly those in the life sciences industry, rely on purchase orders and order confirmations, sometimes with terms and conditions appended, to conduct business. In fact, in Medmarc’s most recent survey of their defense panel conducted in 2018, 80% of defense panel respondents indicated that some or most of their life sciences clients relied solely on purchase orders to govern the relationships between themselves and their vendors. There is a misunderstanding in the industry that these documents sufficiently protect the parties by including terms important to them. Although such documents can be preferable to operating without any documentation, they are fraught with problems and a poor substitute for a contract governing an entire relationship. They become particularly problematic when the terms appended to the purchase order differ from those issued from the vendor in a receipt or confirmation. This scenario gives way to something called the “battle of the forms,” after which a contract is hobbled together — often judicially through litigation — from the various terms of the different forms. This process can be time-consuming and expensive to litigate and often yields a result that neither is satisfactory to either party nor reflects the subjective intent of the parties in their dealings.
Contracts for the sale of goods are generally governed by the Uniform Commercial Code (UCC) as it has been adopted by the particular state in which the contract is being litigated. The UCC addresses the “battle of the forms” in § 2-207, Additional Terms in Acceptance or Confirmation. This provision stipulates that any different or additional terms appearing in the “acceptance” or receipt will be deemed accepted and become part of the contract unless: the offer expressly limits acceptance to terms of the offer; the additional terms materially alter the agreement; or notification of objection to the additional terms has already been given or is given within a reasonable time after notice of the terms is received. This means that those including terms and conditions in their purchase orders would be wise to include among those terms an express statement that no additional terms will be deemed accepted except by express mutual consent of the parties in writing. Even this method, however, misses many of the benefits and protections of a contract of mutually agreed upon terms which govern not just one transaction but the entire relationship between the parties.
The absence of a contract leaves parties too vulnerable to cost and uncertainty. Conversely, contracts offer drug and device companies the opportunity to contemplate the details of a particular transaction or relationship and memorialize those details to the parties’ mutual satisfaction before a claim arises. In the event of a product liability lawsuit, contracts can and should assist in identifying the responsible party and obtaining the appropriate indemnification from that party.
Courtney Young is senior attorney for risk management at Medmarc Insurance Group. Her primary responsibilities include assisting brokers, policyholders and underwriters with efforts to evaluate and mitigate products liability risk. Young publishes articles on products liability risk management for industry organizations, such as IMDA, and publications, such as Life Sciences Panorama. She also maintains a blog on products liability issues for the life sciences industry, on which she discusses recent products liability litigation, FDA regulatory activity and industry news.