Monday, April 22, 2013

Get It In Writing

It seems like a rather basic 1-L contract law proposition, but it bears repeating.  If you want a particular term in your contract, get it in writing.  A recent drug bulk supplier case bears this out – and some unknown contract lawyer out there is probably feeling some heat because of it.

The situation in Prestige Brands, Inc. v. Guardian Drug Co., No. 12 CV 7778 (VB), slip op. (S.D.N.Y. April 18, 2013), isn’t at all difficult to understand.  Drug company buys a component part in bulk from a supplier.  Something’s wrong with the component – in this case possible contamination – the FDA gets called in, and there’s a recall.  We can’t tell if any of the recalled product ever actually reached the market, but the drug company not only lost a lot of money on the recall, and was put to the time and expense of administering the recall.

Drug company sues component part manufacturer for reimbursement of all these expenses.

Here’s where it gets tricky.

The drug company didn’t get the commitment to pay for recall expenses in writing.

Quite the opposite.

At best, the contractual relationship between drug company and its bulk supplier was left to a “battle of forms” (although we’re not even sure about that), and the bulk supplier’s form won.

For you non-lawyers, a “battle of forms” occurs when, typically, a buyer and seller transact business without a formal contract and the boilerplate fine print on the back side of the buyer’s purchase order conflicts with the boilerplate fine print on the back side of the seller’s invoice.  There are legal rules for sorting this kind of thing out – but we don’t need to get into them.

Anyway, the seller’s invoice was held to control, and it read:

Purchaser’s exclusive remedy and [seller]’s sole responsibility for any claim or cause of action arising under this Agreement is expressly limited to . . . (2) refund of the purchase price of all goods shown to be other than as warranted. . . .  IN NO EVENT SHALL SELLER BE LIABLE TO PURCHASER, WHETHER IN CONTRACT OR TORT OR FOR BREACH OF STATUTORY DUTY, FOR ANY INCIDENTAL, INDIRECT, CONSEQUENTIAL, OR SPECIAL DAMAGES INCLUDING WITHOUT LIMITATION CLAIMS FOR INDEMNIFICATION, LOST REVENUES AND PROFITS.

Prestige Brands, slip op. at 4. 

The drug company claimed that the standard practice and usual course of dealing in the industry was that, when a recall happened due to a problem with a bulk drug component, the seller of that component “is responsible for all recall costs” that its customer might incur.  Id. at 3.

That may well be true.  Big whoop.  Unfortunately, the drug company didn’t get it in writing.

On no theory – not on contract, not on implied covenant of good faith and fair dealing, not on promissory estoppel, and not on unjust enrichment, was the drug company able to recover once it had failed to get the critical contract term in writing.  Id. at 5-10.

That’s a big deal.  The drug company (and perhaps its insurer, if it has one) gets stuck with all recall costs even though the component it purchased was unquestionably defective and in breach of warranty.  But, “the purchase and sale of the [component] was an arms length business deal between two sophisticated commercial entities.”  Prestige Brands, slip op. at 9.

And it could be a lot bigger of a deal.  Nearly all drug companies purchase bulk components.  It frequently makes more sense than making everything from scratch.  And, of course, recalls can lead to lots more problems than just the additional expense of their administration.  Recalls and mass torts go hand in hand these days, and once the plaintiffs’ lawyers get involved, the recall-related costs in Prestige Brands look like pocket change.  Nobody wants to be stuck holding that bag, especially when the problem is demonstrably somebody else’s fault.

A word to the wise should be sufficient – get it in writing – or, as the court in Prestige Brands put it:  “If [drug company] expected to be reimbursed for expenses it may incur in a possible recall, it should have negotiated that term into the sales agreement.”  Slip op. at 9.

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