Sign Here and See You Later: Getting Ghosted in Commercial Transactions (COVID-19)
May 5, 2020
By Noel Courage and Jennie Yum
There is currently a global scramble for personal protective equipment, such as medical masks. This has led to IP-related issues, such as false marking, counterfeit and fraud (see our article here). There are also basic contract issues, as governments and health institutions try to parse legitimate sources of personal protective equipment (“PPE”). Some of the usual checks and balances in government contracts and tendering processes for PPE have gone out the window in view of the COVID-19 pandemic. Many PPE have been successfully procured, but there have also been agreements made to buy PPE, with no follow-through. This article looks at contractual issues and remedies to deal with suppliers that cannot, or choose not to, deliver. These considerations can apply to any sale contract, not just PPE contracts.
Broker / Distributor
The usual trusted medical device suppliers have at times been unable to provide enough PPE. This has meant that buyers have had to vet other brokers and distributors that suddenly appeared on North American radars, claiming to have access to PPE. Yet, some brokers claiming to have access to PPE actually have no ability to deliver and, either due to overpromising or sometimes even outright fraud, the PPE shipments simply never materialize. In one recent example, the New York State government allegedly wired millions of dollars to a person with no ability to deliver. New York’s procurement rules typically prohibit payment until after an order has been fulfilled, however, those restrictions had been suspended to fill the urgent need for PPE in the state. Closer to home, the Ontario government reached an agreement for 100 million masks (apparently with assistance of a well-intended broker), but the supplier allegedly did not follow through and may not have had legitimate inventory. In another example, the Maryland State government cancelled a multimillion dollar PPE contract with a US-based procurement firm after it failed to fulfill an order (the firm claims that the delay was a result of logistical issues in getting the product out of the country of origin).
Even if a manufacturer is legitimate and the product is acceptable quality, there can be issues. Recently, a private Ontario group reached a contract for 5 million masks. A $500,000 deposit was paid to the manufacturer, and the masks were to be shipped directly by the manufacturer to Ontario. The shipment was apparently at the airport when another group offered to pay more, and the shipment was diverted, leaving the Ontario buyers without their masks. There are also reports of chartered planes arriving at their destination to pick up PPE orders, only to find none waiting. Planes have returned to Canada empty.
Prevention and Recourse
To avoid being left empty-handed, basic contractual due diligence cannot be dropped. In the New York State situation mentioned above, the middle-man apparently tweeted at the White House and was subsequently recommended to the state – it seems improbable that there could have been much due diligence in that situation.
These examples underscore the need for buyers to look past the middle-man, where possible, and verify the source of their product. Basic due diligence research includes confirming whether the supplier is properly registered and licensed to produce PPE – i.e., does it have the necessary certifications or authorizations to manufacture, distribute and, importantly, export the product. Numerous countries have restricted exports of PPE. China’s export regulations, for example, require that PPE leaving the country have approval from the National Medical Products Administration (“NMPA”). Similarly, exports of PPE from the US require express authorization from the Federal Emergency Management Agency (“FEMA”).
Contract Terms and Damages
If a contract has been agreed upon with a seller that refuses to deliver, thus is an anticipatory repudiation of the contract by the seller. Under contract law, the buyer still has the option to demand performance of the contract. It is more likely that the buyer will exercise its right to immediately terminate the contract for breach (as in the New York and Maryland State examples above, where the purchase contracts were both subsequently terminated). A lawyer can advise on the specific recourse for the breach depending on the jurisdiction and whether there is fraud involved or not. It may also be possible to sue for damages. In the unlikely event that the broker or manufacturer is able to fulfil the contract, it may be possible to sue for specific performance, requiring the seller to deliver on its obligations. There are jurisdictional challenges when suing for breach of contract internationally, and then trying to enforce a judgment.
Buyers must ensure that the purchase contract is drafted in a way that protects their interests. Considerations include:
- Choice of law provision: the purchase contract should ideally be under the law and exclusive jurisdiction of a Canadian province or US state where the buyer is located.1
- Time for performance: there should be strict conditions for performance specifying the date/time of delivery, product quality, and amount to be delivered. Specify that time is of the essence. Penalties may be inserted in the agreement in case of non-delivery or late delivery.
- Conditions relating to product quality are vital – don’t permit waivers of basic sale of goods provisions, such as fitness for purpose and merchantable quality. Insert representations and warranties on performance. Note, however, that a condition warranty that is enforceable in one jurisdiction may not be in another, and these should therefore be drafted with the assistance of an experienced lawyer.
- Method and timing of payment: funds should be paid into escrow to the extent possible, not to a broker or manufacturer directly. The final payment should only released upon delivery and satisfactory quality inspection. A validation service can assist with inspecting and certifying products before a buyer takes delivery.
- Consider having ownership pass to the buyer before the goods leave the manufacturer, since apparently others may try to purchase them even while in transit. Insure the goods. Transit arrangements may need to involve a security escort.
Police should also be called if there is fraud, as in a case reported by the New York Times where a person made a series of fraudulent representations to the US Department of Veterans Affairs for 125 million face masks and other PPE, knowing that it was impossible to fulfill the order.
Buyers are advised to discuss potential transactions with experienced legal counsel before contracting with a PPE supplier, distributer or broker, or considering a logistics operation to bring PPE into Canada.
1 The UN Convention on Contracts for the International Sale of Goods 1980 (CISG) is implemented in Canada by the International Sale of Goods Contracts Convention Act 1992. The buyer may consider whether to choose local law, and exclude the Convention terms. Other terms may be considered, such as the International Chamber of Commerce International Commercial Terms (Incoterms).
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