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Protecting Your Business When Entering Into A PPE Agreement


Although many businesses throughout the United States 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 (“PPE”), 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 which 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 selling, sourcing, distributing, or buying PPE insist on certain contractual protections to minimize risk and optimize the benefits that come with participating in this booming market.

Below is a non-exhaustive list of provisions that should be incorporated into every contract for the purchase, sale and/or distribution of PPE:

    • The agreement must expressly identify the product specifications (either in the body of the agreement or in an attachment).[1] The purchaser of PPE should also 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.
    • 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 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 FDA 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 non-procurement programs; and that it is not included in any relevant database of excluded individuals or entities (for example, the United States Department of Health and Human Services’ Office of Inspector General’s List of Excluded Individuals/Entities, and the General Services Administration’s Excluded Parties List System).
    • 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.
    • A purchaser of PPE should consider including a clause that obligates the seller to provide the purchaser with prompt written notice of PPE recalls.
    • 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.
    • The agreement should 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.
    • While price increases are to be expected given tightened supply, the parties should be cognizant of federal, state, and local price gauging law, 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.[2]  See generally New York General Business Law § 396-R and NY Senate Bills S8189.
    • If the 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, or 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.
    • 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.
    • 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.
    • When contracting between a seller or purchaser of a foreign nation, the parties must be cognizant that the United States, and many other foreign nations, such as China, are signatories to the United Nations Convention on Contracts for International Sale of Goods (the “CISG”).[3] The CSIG will apply unless the parties explicitly exclude its application in favor of the law of a different forum.  BP Oil Intern., 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”).
    • 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.”  JMD Holding Corp. v. Congress Financial Corp., 4 N.Y.3d 373, 380 (2005).  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.

While the sample provisions above are not exhaustive, and no single provision can serve as an iron clad 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 agreement should cover as many anticipated scenarios and carefully delineate the allocation of risk and responsibilities of the parties should such scenarios materialize.

Footnotes:

[1] 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 NYS Needs Your Help Sourcing Covid-19 Products).   

[2] 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 NYS Consumer Affairs – Price Gouging Is Illegal).

[3] A full list of the nations that have enacted the CISG is available at United Nations Commission On International Trade Law

For more information contact either James P. Chou at jchou@moritthock.com or (212) 239-5523 or Alex D. Corey at acorey@moritthock.com or (646) 880-5327.

 

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