COVID-19: Key Issues When Sourcing Pandemic Prevention Supplies from China

White & Case LLPPandemic prevention supplies are in high demand during the current coronavirus disease (“COVID-19”) outbreak. China, as it gradually gets the outbreak under control, is resuming manufacture and exporting the supplies to the world. Most of these supplies, including personal protective equipment (“PPE”), medical supplies and medical devices, are subject to different regulations adopted by China as the originating country and other importing countries. As a consequence, different understandings or even disputes may arise when goods exported from China are found to be inconsistent with the expected standard or quality requirements in importing countries.

Recently, China imposed a series of additional regulatory requirements on exports of such supplies with the aim of enhancing quality control and prompting importers’ awareness in the export process. This may delay the export process in China and could place extra liabilities on importers in certain circumstances. In this article, we set out these regulatory requirements and related contractual considerations, for buyers of pandemic prevention supplies – especially those sourcing PPE face masks and key medical devices (such as COVID-19 test kits or ventilators) from China – to take note of before entering into contractual arrangements with Chinese sellers.

What Buyers of Medical Devices Should Know 

China’s Regulations on Medical Devices

The production and distribution of medical devices in China is administered by the National Medical Products Administration (“NMPA”) and its local branches. Depending on the risk level involved, medical devices are categorized into three classes, and accordingly, their production and distribution are subject to different levels of regulations, as follows:

Category of Regulations Medical Device Examples Risk Level Requirements on Medical Devices Requirements on Manufacturers Requirements on Distributors
Class I Examination gloves
Goggles
 
Low Filing on record Filing on record None
Class II Surgical masks
Surgical preventive clothing
 
Medium Medical Device Registration Production License Filing on record
Class III Ventilators
COVID-19 test kits
 
High Medical Device Registration Production License Distribution License

Before entering into a contract to purchase medical devices from Chinese suppliers, buyers may examine the credentials of medical devices as well as their manufacturers and/or distributors as described above, by requesting for supporting documents of the above qualifications or verifying such credentials on the NMPA online database.1

Temporary Export Regulatory Requirements on Certain Key Medical Devices

Previously, medical devices manufactured in China were exempted from filing or registration with the NMPA if they were used solely for export purposes and not distributed within China; and instead, Chinese manufacturers and exporters of medical devices were only required to “ensure” that the exported products met the quality requirements of the importing countries. However, to enhance the quality control of key medical devices for export during the COVID-19 outbreak, China has now temporarily imposed additional regulatory requirements on five types of medical devices to be exported, i.e., COVID-19 test kits, surgical masks, surgical preventive clothing, ventilators and infrared thermometers, which are now either subject to NMPA registration (effective as of April 1, 2020)2 or otherwise required to secure relevant certification or registration in the importing countries (effective as of April 26, 2020).3

Due to the additional regulatory requirements mentioned above, exporters of such key medical devices are now required to file with the Chinese customs authorities, a declaration that the medical devices to be exported conform to quality requirements in the importing countries.4 In addition, Chinese customs authorities will only grant clearance on exports of such medical devices if they can verify the corresponding NMPA registration certification submitted (if such medical devices are manufactured in accordance with Chinese standards) or otherwise can confirm the manufacturer of such medical devices are on a “White List” maintained by the Ministry of Commerce5 (if such medical devices are manufactured with certification or authorization from foreign countries). It is also worth noting that, with or without such a declaration, Chinese manufacturers and distributors always have general statutory obligations to “ensure” such conformity in the importing country.6  As a result, the buyer of such medical devices should consider reflecting such requirements and obligations on the manufacturers and the distributors in the purchase contract, e.g., requesting the Chinese manufacturer and/or distributor to provide a copy of the certification (or “White List” record) and the declaration document filed for such exports from China or incorporating these requirements in the contract.

Temporary Commodity Inspection by Chinese Customs

Buyers of key medical devices (and other high-demand medical supplies) should also anticipate potential delay in customs clearance when such goods are exported from China, due to statutory commodity inspection measures that the Chinese customs authorities have temporarily imposed as of April 10, 2020.7  

In practice, although this temporary inspection requirement on such medical supplies does not sound as onerous as regular commodity inspection which requires quality inspections at the manufacturing location, it still involves extra verification procedures with the Chinese customs authorities to verify the conformity of merchandise to be exported with what is declared in terms of medical supply qualifications and/or registrations. As a temporary measure to respond to the latest quality issues of exported medical devices under the pandemic, there is no clear implementation guidance on how to conduct such inspections nationwide, and specific implementation requirements may vary at local customs authorities. 

Quarantine Inspection for COVID-19 Test Kits

In addition, special attention from buyers is required when sourcing COVID-19 test kits from China. COVID-19 test kits are usually classified under two 8-digit HTS codes, i.e., 38220090 (for kits of nucleic acid testing) and 30021500 (for kits of antibody detection), the export of which requires not only temporary commodity inspection as above described but also health and quarantine inspections. In practice, an export sales certificate is also required for export of such test kits from China. Thus, customs procedures for export of COVID-19 test kits may take longer than expected for other medical devices.

What Buyers of PPE Face Masks Should Know 

Pandemic prevention supplies for PPE purposes (such as PPE face masks) are not considered as medical devices in China, and therefore are not subject to the NMPA’s regulation or filing requirements. Such PPE supplies, if not distributed within China and solely for export purposes, were previously free of any specific quality requirements in the Chinese export process. This changed recently when China began to address quality concerns from abroad by imposing additional quality requirements on exports of PPE face masks.8 Therefore, buyers of PPE face masks should consider the following factors before entering into a contract.

“Black List” Check

Along with the rapidly escalating supplies of PPE face masks to foreign countries, China’s State Administration of Market Regulation (“SAMR”), as the competent authority to administer the domestic market in China, is strengthening its enforcement to identify unqualified products and their manufacturers. These manufacturers are publicly posted on the “Black List” maintained by SAMR.9 The Chinese customs authorities will refuse to grant export clearance if the manufacturer in the export declaration form is on this “Black List”. It is advisable for the buyers, when sourcing PPE face masks from China, to first identify the ultimate manufacturers and check the business names against the “Black List”.

Joint Declaration to Make

A buyer who intends to serve as an importer of PPE face masks under a contract should also know the potential liabilities it would assume under current regulatory requirements in China. Specifically, the importer of PPE face masks is now required to make a joint declaration with the exporter before the Chinese customs authorities when the goods are declared for export, to certify the conformity with the standards of either China or the importing country/region as mutually agreed; moreover, the importer itself is also required to certify, under this joint declaration, that (i) the goods conform with the quality requirements of the importing country or region, (ii) the goods will not be used for medical purposes, and (iii) “[t]he exporter or the producer is not liable for any losses caused by the inappropriate use, maintenance or keeping of the face masks by the importer or any third party” (collectively as the “Joint Declaration”).10

By requesting importers to declare its knowledge of non-medical usage in a formal manner, China intends to push importers to prompt such awareness of the end-users and therefore avoid unnecessary quality claims from the importing countries due to misuse. It is also worth noting that the Joint Declaration makes it clear that the manufacturers or the exporters will not be liable for any losses arising out of others’ inappropriate use, maintenance or storage. The signed declaration evidences the buyers’ agreement to such a liability exemption, and would therefore substantially undermine a buyers’ ability to pursue indemnifications (if permissible under the applicable laws) from the manufacturers or the exporters should any dispute on inappropriate use occur. In order to avoid potential disputes on inappropriate use and to mitigate liabilities caused thereby, the buyers should work with the manufacturers and exporters to come up with clear and sufficient descriptions of product use, maintenance and storage, and request manufactures to properly include such descriptions in the product packaging or manuals. Also, in the contract, buyers should consider restricting the scope of inappropriate use, maintenance or storage, so that the above exemption will not be easily triggered. 

Which Standard to Choose 

There is another practical issue for a buyer of PPE face masks to consider – whether the import formalities and end-use in the importing country has any specific requirement on quality certification or registration. If PPE face masks manufactured under Chinese standards are acceptable in the importing country, a buyer may consider, under the current supply shortage circumstances, not to request conformity with foreign certification or registration. By declaring the conformity with the Chinese standards alone, exports of PPE face masks are only subject to the “Black List” check and the joint declaration as described above, which would greatly facilitate the export process. On the other hand, PPE face masks declared in conformity with foreign standards are subject to stricter export regulation, that, as an additional requirement, the manufacturer of such goods must be also admitted to a separate “White List” maintained by China’s Ministry of Commerce.11 By May 1, 2020, there are only 68 Chinese manufacturers in this “White List” as qualified PPE face mask suppliers in conformity with foreign standards. This caused an unexpected cut-off of PPE face masks supply from China when the measure became effective at the end of April 2020. Moving forward, such sudden shortages may be gradually improved along with the expansion of the “White List” (currently updated on a weekly basis).

All of these measures are to ensure that the stakeholders in the exportation of PPE face masks, including the manufacturers, exporters and importers, accurately mark on packages and declare before the Chinese customs authorities the applicable usage and standards with respect to the face masks to be exported. Recent customs enforcement in China also focuses on circumventions of the above additional requirements, by striking improper marking or declaration of such exports, such as marking or declaring foreign certified or registered PPE face masks as those under Chinese standards (to avoid a “White List” check), or marking or declaring medical face masks as PPE (to avoid temporary commodity inspections on key medical devices), even though it may be commercially feasible from the buyer’s perspective.

Contractual Considerations

Buyers should also consider including other elements into the contract when purchasing pandemic prevention supplies from China. 

Contracting Parties

One such consideration is that an export certificate of medical devices from the originating country may be required under the laws of the importing country or region. If such a certificate is indeed necessary, buyers should bear in mind that the NMPA only issues the export certificate for medical devices, upon individual application, to domestic manufacturers who also serve as exporters of such medical devices. Under such circumstances, it is not desirable for a buyer to enter into contract with a Chinese non-manufacturing distributor, who is not eligible to apply for and thus unable to provide such an export certificate.

Payment Terms

Payment terms are another key element to consider before entering into a contract to purchase PPE or medical supplies. Although bargaining power may temporarily shift to the supplier due to increasing global demand at this time, it is highly advisable for a buyer to negotiate for payment in installments, so that at least partial payment can be held as collateral until export clearance is granted by the Chinese customs authorities. This would reduce the potential liabilities of the buyers if exports are delayed or suspended due to the supplier’s failure to meet the export regulatory requirements. 

Force Majeure and Governing Law

Before entering into a purchase contract, other regular contractual provisions should also be reviewed in the context of the COVID-19 outbreak. Taking force majeure provision as an example, references to a “force majeure” event are generally used to mean “unexpected” circumstances outside a contracting party’s reasonable control that, having arisen, prevent it from performing its contractual obligations. If parties simply adopt a standard force majeure provision, it would be hard to argue that the COVID-19 outbreak, as “existing” pandemic situation known to the parties at the time of contract signing, could trigger the provision. Therefore, a better force majeure provision that caters for the COVID-19 situation should make it clear that any future pandemic situation, if changed in an unforeseeable way, shall constitute a force majeure event. In addition, parties shall also consider specifying the consequences of the force majeure events, e.g., performance suspension for a period of time or immediate contract termination. 

A buyer who enters into a purchase contract with its Chinese supplier, may also serve as a middleman with the intention to enter a back-to-back sale contract with a third party for distribution of the purchased supplies in the importing country. In such scenario, it is advisable for the buyer to adopt the same governing law in both contracts along the chain, so as to avoid potential disputes arising out of conflicting interpretations on contract terms (e.g., the force majeure provision) due to different governing laws.

Outlook

Many of the aforementioned regulations and practices are temporary measures and may evolve further with the changing pandemic situation. This requires sufficient awareness and close monitoring of such developments. In addition, increasing global demand is encouraging more entities in China to start manufacturing or exporting PPE or medical supplies, many of which may not have relevant experience or knowledge to deal with the regulatory requirements. We strongly suggest that buyers take the initiative to understand such regulations and practices in China and stay informed.

We will continue to monitor any developments on this regime.

1 Available on NMPA’s official website, available at here (in Chinese)
2 See Joint Notification No. 5/2020, from China’s Ministry of Commerce (MOFCOM), General Administration of Customs (GAC) and NMPA, dated on March 31, 2020 (“Joint Notification No. 5/2020”). 
3 See Joint Notification No. 12/2020, from MOFCOM, GAC and NMPA, dated on April 25, 2020 (“Joint Notification No. 12/2020”). 
4 Also see Joint Notifications No. 5/2020 and No. 12/2020.
5 See “List of Medical Devices and Supplies Companies with Certification/Authorization from other Countries”, latest updated on May 3, 2020, available on the website of China Chamber of Commerce for Import and Export of Medicines and Health Products (CCCMHPIE).
6 See China’s Regulation on the Supervision and Administration of Medical Devices, Article 44; and Measures for the Supervision and Administration of Medical Device Production, Article 77.
7 See GAC Notification No. 53/2020, dated on April 10, 2020, which affects exports of eleven types of medical supplies under 19 lines of 10-digit code under Chinese Customs Harmonized Tariff Schedule (HTS), including surgical masks, surgical preventive clothing, infrared thermometers, ventilators, surgical caps, medical goggles, medical gloves and shoe covers, patient monitor equipment, medical disinfection wipes and sanitizers.
8 Also see Joint Notification No. 12/2020.
9 Available on SAMR’s website, the latest version of which is at here (in Chinese).
10 See the template of “Joint Declaration of the Exporter and the Importer” attached in Joint Notification No. 12/2020.
11 See “List of Non-Medical Use Face Masks Companies with Certification/Authorization from other Countries”, latest updated on May 1, 2020, available on the website of China Chamber of Commerce for Import and Export of Medicines and Health Products (CCCMHPIE), at here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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