Contract remedies illustrated after purchase of junky medical supplies
Wednesday, July 29, 2020 @ 10:54 AM | By Noel Courage and Jennie Yum
To meet the heightened demand for N95 masks, for example, the U.S. Food and Drug Administration (FDA) in early April began to allow imports from manufacturers whose masks had been tested by a suitable independent laboratory but had not been tested by U.S. authorities. Subsequent testing by the National Institute for Occupational Safety and Health (NIOSH), the regulatory body responsible for testing and rating masks and other PPE in the U.S., found that a significant percentage of imported masks allowed more particles to pass through than permitted by U.S. safety standards. In response, the FDA pulled approval for N95 style masks for more than 60 manufacturers.
Closer to home, there have been similar reports of faulty medical devices. This article will not look at regulatory authority involvement in recalling unsafe medical products. (Unsafe medical devices should be reported to Health Canada, even if the contract issues are resolved between the parties.)
Generally, sellers must provide goods that meet the quality standards set out in the sales agreement, or else may be liable for breach of contract. There are also implied warranties of quality in many sales contracts pursuant to provincial sale of goods legislation, unless specifically excluded by the contract terms and specific provisions relating to fulfillment (performance) of the contract and product quality. The specifics of these provisions will govern the type of recourse available.
Conditions, intermediate terms, warranties
Conditions regarding product quality specifications must be carefully worded as they are important to being able to reject the goods and demand proper replacement goods. For example, the description “N95 masks” is less meaningful from a quality perspective than “NIOSH-certified N95 masks.” Only independently tested N95 masks have NIOSH certification. “N95-style masks” are a different type of mask that may also filter out tiny particles but are not certified. Another example of specificity is to describe a quality brand name for the masks (e.g., 3M) and the materials that the buyer requires the masks to be made.
Contractual terms relating to the nature of the goods can be drafted in such a way that they are either conditions, intermediate terms or warranties. Importantly, the legal recourse available to contracting parties differs for breaches of each of these types of terms. Terms relating to quality of the goods should be drafted as conditions. A condition is critical to the contract such that if there is a breach of a condition, the buyer can terminate the contract and claim damages, even for minor breaches.
If the contractual terms relating to the quality of the goods are considered less than a condition of the contract, such as an intermediate term or a warranty, then the buyer may not be able to terminate for minor breaches. For intermediate terms, a sufficiently serious breach may still justify contract termination, but if the breach does not substantially deprive the buyer of what was bargained for (i.e., is not considered “serious” in the legal sense) then it may not justify termination. Alternatively, a breach of a warranty about the nature of goods will typically only permit the buyer to sue for damages, but not to terminate the contract. Despite these general principles, the contract can be written to specify that breach of an intermediate term or warranty does give the right to terminate.
Refusal to perform essential elements of contract
If a seller performs some aspects of a contract but refuses to perform other, essential aspects of a contract, there may be an anticipatory breach. This differs from a complete failure to perform (or ghosting), wherein the seller simply fails to deliver at all.
If the unperformed aspects of the contract deprive the buyer of substantially the whole benefit of the contract, then that may be considered an anticipatory repudiation of the contract. The buyer may reject the repudiation, and if the seller does not perform, then hold the seller liable for damages and/or potentially claim for specific performance (i.e., performance of the contractual duty). This will obviously not be practical on an international, time sensitive contract for goods. Alternatively, the buyer can accept the repudiation, terminate the contract and claim for damages. This option is also not practical when the goods are required as soon as possible, as in the case of PPE, but damages can at least provide some potential recourse for losses incurred by setting up a new contract with a different seller that will be fulfilled.
Due diligence, contract terms
As always, basic contractual due diligence cannot be neglected. In the case of PPE, due diligence can help buyers to identify sellers that are not properly authorized to produce PPE, as well as fraudulent sellers.
The COVID-19 crisis has exposed weaknesses in the medical device supply chain. This article focuses on quality, but the risks for buyers contracting with new suppliers that have not thoroughly been vetted include other issues such as generally poor performance under the contract, late performance and payment issues (for example, demands for additional money). The consequences of each and options for legal recourse need to be discussed on a contract-by-contract basis with a lawyer.
Noel Courage is a partner and patent attorney at Bereskin & Parr LLP in Toronto. His practice focuses on patenting and licensing inventions. He can be reached at email@example.com. Jennie Yum is an associate at Bereskin & Parr. She can be reached at firstname.lastname@example.org.
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