An ounce of prevention is worth a pound of cure – liability issue protection

Know what makes up the contract – This seems obvious but it is not uncommon for there are commonly multiple written documents that make up the entire agreement. Purchase orders, the supply agreement, and related quality agreement all may control the relationship. Make sure that when all agreements are considered as a whole, the parties’ desired goals are intact and all the documents are harmonious. For example, terms on the backside of a form purchase order may conflict with – or unintentionally add – terms that change the impact of a heavily negotiated supply agreement.

Also don’t expect or rely on emails and discussions leading up to, but not specifically incorporated in, the final agreement to be enforceable. Unless the contract is ambiguous and requires determining the parties’ intent by considering other evidence, a court may refuse to consider emails and conversation before the written agreement was signed.

Intellectual property (IP) Ownership – The OEM should own IP rights attributable to the design and specifications provided by the OEM. However, there are often gray areas. If a contract manufacturer develops a process for manufacture of the medical device – unless the contract decides the issue – ownership of the associated IP rights is potentially open to debate.

Warranties – A contract manufacturer will want to disclaim all warranties other than compliance with OEM-provided specifications and defects. An OEM may seek additional warranties of merchantability and fitness for a particular purpose. While warranty clauses can be viewed as boilerplate language that isn’t negotiated because that is “what we have always done in the past,” consider the medical device and engagement before agreeing to offer or accept the warranty provision favored by the other party.

Indemnification – Indemnification clauses typically spell out under what situations a party has an obligation to pay for the other party’s legal defense and any judgment from a third party lawsuit. If a person is injured by the medical device and sues the OEM, an indemnification provision could require the contract manufacturer to pay the costs incurred by the OEM in defending the lawsuit and any verdict against the OEM. Whether there are any dollar limits on a party’s indemnification obligations is an important consideration. A contract manufacturer might negotiate for its indemnification obligations to be capped at a set dollar amount or some number of months of fees paid by the OEM to the contract manufacturer. Because of the significant legal and financial exposure, indemnification clauses should be thoroughly vetted before signing on the dotted line.

Amount and type of recoverable damages – The dollar value of the parties’ agreement does not limit the damages that may be recovered by one party against the other. Typically, a party to a contract can recover direct damages and consequential damages – those damages foreseeable but not directly caused by a party’s failure to perform. Consequential damages may exceed a party’s direct damages. Contractual provisions that waive recovery of certain types of damages (for example, by excluding consequential damages) or limit the dollar amount of recoverable damages (for example, to the trailing 12 months of fees paid or products purchased) should be considered in the financial light of what a party may give up or the exposure being accepted.

Thinking through with your legal adviser on the front end what happens if the business relationship sours, and negotiating accordingly, may eliminate disputes or reduce the cost of litigation. Exactly what Benjamin Franklin had in mind when he spoke of an ounce of prevention being worth a pound of cure.

Bass, Berry & Sims plc
www.bassberry.com

About the Author: Steele Clayton is an attorney in the Nashville, Tennessee, office of Bass, Berry & Sims plc. He can be reached at sclayton@bassberry.com or 615.742.6205.