Contracts, countermeasures and COVID-19: key considerations for manufacturers
This article was originally published in the Commercial Dispute Resolution Magazine.
This article was co-authored by William Finnerty, Trainee Solicitor, London.
In the midst of the global COVID-19 pandemic there continues to be an unparalleled demand for personal protective equipment (PPE), and an ongoing need for ventilator production (also both referred to as “countermeasures”). PPE, in this context, refers to any essential equipment used in the treatment and management of patients suffering from COVID-19 and includes eye protection, masks, aprons, gowns, gloves and hand sanitiser.
In order to meet this demand, governments around the world have made multiple pleas to manufacturers to increase production of PPE and ventilator systems, and suitable manufacturers have been asked to switch production lines, wherever possible, to focus on these COVID-19 countermeasures. As part of this effort, the relevant UK regulator, the Medicines and Healthcare products Regulatory Agency (MHRA), has taken the step of publishing the specifications for a Rapidly Manufactured Ventilator System (RMVS) to enable the fast tracking of the production of ‘minimally clinically acceptable’ ventilators. The UK government has also relaxed the regulations on CE marking, depending on how ventilators and PPE are being placed onto the market, after acknowledging that compliance with the relevant CE marking requirements is unrealistic in the short timeframes within which the countermeasures are necessary.
Whilst many manufacturers have responded positively, unprecedented circumstances pose challenges for both new and seasoned manufacturers. This article focuses primarily on the commercial litigation issues that may arise for manufacturers engaging in COVID-19 countermeasures, with reference to the current position in the UK and the United States in respect of manufacturer indemnity protection, liability and causation issues, and contract specific issues. We conclude with various practical tips on how contracts can be designed in the spirit of safeguarding manufacturers, where possible.
In response to pressure from UK manufacturers, the British Government announced in mid-April that it would indemnify manufacturers of MHRA-approved RMVSs for any connected claims for product liability and for third party intellectual property violations. It has not been announced whether or not there is a financial cap on the level of these indemnities provided by the government, and if so, how much the cap is. Of note is that this protection does not extend to PPE, nor, for the avoidance of doubt, to other medical devices such as COVID-19 testing kits.
As a result, manufacturers choosing to produce COVID-19 countermeasures should remain mindful of their potential exposure(s) and ensure they take appropriate steps, primarily through contractual mechanisms, to minimise financial and reputational harm to their businesses. Manufacturers assisting the UK government would be wise to review their product liability insurance cover to check whether any new products manufactured as part of the government’s countermeasures are covered by their existing policies, particularly if these products fall outside the ambit of the recently announced ventilator indemnity.
The United States government has gone even further than the UK government in its protections of manufacturers with the implementation of the Public Readiness and Emergency Preparedness (PREP) Act. The PREP Act, which was effective as of 4 February 2020, grants blanket tort immunity to entities involved in both the creation and distribution of "countermeasures" related to the COVID-19 virus. Unlike the UK position, the PREP Act covers all forms of PPE, in addition to medical devices similar to RMVSs, putting US manufacturers in a favourable position in that they are protected from all tortious liability stemming from consumers in respect of the products.
At the time of writing, no jurisdictions within continental Europe have agreed to grant immunity in line with the US position, nor have they outlined provisions by which they will indemnify companies manufacturing life-saving medical devices such as RMVSs. This is perhaps surprising given the global production power of countries such as Germany, France, Italy and Spain.
Product liability exposure
In England and Wales, the law on product liability is as follows. The Consumer Protection Act 1987 (CPA) governs the law on establishing whether or not a consumer product, including a medical device, is defective and whether that defect has caused loss or injury. In addition, liability for any injury or loss to a consumer, resulting from a product, can be pursued in negligence.
Although the UK government’s indemnity in relation to RMVSs has largely protected UK manufacturers’ in relation to any third party claims for product liability arising from these products, this does not prevent such claims from being advanced. Given that the financial cap on the indemnity is not clear, the risk of injury or death to a consumer as a result of any potential malfunction or failure of a RMVS remains a significant liability issue for consideration.
In addition, there is a risk of increased product liability claims arising from PPE, medical devices and/or medical equipment generally, in a situation where no government indemnity is provided. However, of note is that a consumer is likely to face difficulty in proving a causal link between a defect in the product/negligence and the alleged loss and/or injury. Studies have confirmed that the effectiveness of PPE cannot be confirmed where PPE-wearing practices are not strictly adhered to. Therefore, it would be extremely challenging to prove whether, say, any COVID-19 infection resulted from either the ineffectiveness of or a defect in the product, or incorrect wearing practices and/or completely unrelated factors.
Intellectual property exposure
Another liability issue concerns the risk of deliberate or inadvertent patent infringements through the design and manufacturing of similar product lines. While the government has extended indemnity for manufacturers for third-party IP rights in respect of RMVSs, it remains unclear what protections may be afforded to manufacturers of PPE. Given the mounting pressures on the government to source additional PPE reserves, it is possible that further types of indemnities may be given.
The key exposure to manufacturers of RMVSs and other countermeasures is contractual and they should therefore be extremely cautious when dealing with contracts involving government health agencies, NHS Hospital Trusts and private entities. Given that time is of the essence, it is understandably tempting to try and get agreements out of the door as quickly as possible. However, careful thought must be given to the unique risks this crisis presents and how manufacturers can best mitigate these risks through effective use of contractual language.
One of the prominent risks to manufacturers is associated with delivery. If there is an absolute obligation or specified time period stated within the contract regarding delivery (“time of the essence” clauses), then delayed (or in the worst case, non-) delivery of PPE, RMVSs or other COVID-19 countermeasures will give rise to a breach. For manufacturers who have altered production lines and temporarily ceased manufacturing their usual product lines, there is also an additional exposure for inadequate delivery of the original product and therefore a risk of breach of contract. It would therefore be prudent for manufacturers to agree any necessary deviations from existing contracts, for example leniency with delivery timelines.
Furthermore, it may be advisable for manufacturers to implement robust force majeure and/or frustration clauses into their contracts where performance of the contract (and any future agreements) becomes impossible due to factors outside the parties’ control. Additionally and/or alternatively, any successive contracts could include an option to terminate early, for example if there are significant logistical and supply issues.
Manufacturers should also consider limiting and/or excluding liability under the contract as far as reasonably practicable via exclusion or limitation of liability clauses. Given the potential disruptions to local and international supply chains due to COVID-19, manufacturers should consider excluding liability in the event there are transport and/or logistical issues with the delivery of RMVSs (as contemplated above). The contract should also specify a limit/cap to damages that may paid out (for example, damages could be placed at a percentage or multiple of the contract price).
Furthermore, manufacturers should consider including within their contracts a specified period after which the contract will terminate automatically, and decide whether contracts should be staggered and rolled out on a piecemeal basis, i.e. an agreement per batch of RMVSs to narrow contractual exposure and therefore limit liability. This is because production of RMVSs will be quite novel to most manufacturers, and there may be improvements in manufacturing techniques as production escalates.
Lastly, manufacturers should be mindful of the supply chain when considering contract wording, as complexities can arise where each contract in the chain has potentially conflicting terms. As a result, when negotiating new agreements (with new or additional parties), the contracting parties should aim for back to back terms along the entire supply chain.