Protecting Your Business When Entering Into A PPE Agreement

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Although many businesses throughout the United States were decimated during 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”). These companies have proven invaluable and life-saving for medical professionals, essential workers, hospital patients, and consumers in general.  The PPE market, however, is rapidly evolving, thus requiring companies which operate in this space to consider numerous legal issues, such as fraud, quality controls, and 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 entering this booming market.

Below is a list of provisions that should be incorporated into every contract for the purchase, sale and/or distribution of PPE, in addition to other key provisions that should be included in any commercial contract, such as dispute resolution, governing law, and forum selection clauses:

    • 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 agreed duties of the parties. It should also identify the point at which the risk of loss passes from the seller to the purchaser, and any other agreed-upon obligations of the parties.
    • The agreement should contain certain representations and warranties of the seller including merchantability and fitness of the PPE; compliance of both the PPE and the seller with all applicable laws, rules and regulations; and the seller’s unencumbered title to the products; and that the PPE is FDA compliant.
    • 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 listed by a federal, state or local agency as debarred, excluded or otherwise ineligible for participation in federally or state funded health care programs or federal procurement or non-procurement programs; and that it is not listed in any applicable exclusion database (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 and 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, which insurance should name the other party as an additional insured.
    • While price increases are to be expected given the 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 products (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 New York State Senate.
    • In the event of an international transaction, the contracts should include representations that the parties have taken and/or will comply with all applicable import and export laws, permit requirements, and payment of tariffs.

While the sample provisions above are not exhaustive, and no single provision can serve as an iron clad safeguard against all risk, they are important to mitigate risk while ensuring a successful transaction, it is important to spell out the parties’ respective obligations, as well as representations and warranties, as clearly and comprehensively as possible.  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 become knowledgeable of 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).

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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