Supply Agreements and Service Agreements – Disruption of processes in the areas of contract manufacturing, service provision and research and development against the background of the COVID-19 pandemic.
In the field of pharmaceutical and medical device manufacturing, in the past years an increasing number of agreements were concluded with biotech companies and CROs (Contract Research Organisation or Clinical Research Organisations) relating to services preceding the production, but also relating to production itself.
To protect their staff against the COVID-19 pandemic, many companies have limited the work time of employees. Due to the resulting reduction in production capacities, especially for medium-sized companies, the question arises whether these contract manufacturers, service providers and suppliers can rely on exceptional circumstances and justify delays in delivery and performance.
In the following, please find some considerations to possible effects and possibilities for action.
In addition to contract manufacturing and service provision, the external performance of research and development may also be affected. First of all, it is necessary to check whether and if so, what applicable law was agreed in the contract. Next, the clause on delivery periods and/or provisions on milestones, or a so-called time is of essence provision in the contract or annex, must be reviewed.
If a so-called Force-Majeure clause has been agreed on in the contract, it will then have to be considered in order to determine whether slowdown/stoppage in performance might be justified.
In the absence of a Force-Majeure clause, there may be an impracticability of performance or frustration of contract, which allows for a contractual adjustment or, if this is not possible, a termination of the contract.
If the contract is governed by German law, in particular Sections 275 (Impracticability of performance) and 313 of the German Civil Code (BGB) (frustration of contract) may apply and the questions are specifically arising in this context concern:
- Changes to contractual obligations (performance and payment)
- Extraordinary right of termination
- Application of liability provisions (damage claims)
- Right to refuse performance
- Temporary impracticability – as far as equivalence disruptions are concerned, Section 313 of the German Civil Code (BGB) allows an adjustment of the contractual provisions
- Contract amendments
- Regulatory changes (e.g. the Law on the Protection of the Population in an Epidemic Situation of National Importance, BGBl. I 2020 p. 587)
If the contract is subject to the applicable law of a common law jurisdiction, it is necessary to examine, in addition to an existing force majeure provision, whether there is causality between the corona crisis and the impaired performance of the obligations under the contract and to what extent the party invoking the impossibility or disruption of the obligation to perform, is obligated to minimize the impact. A contract is not frustrated if an alternative method of performance is possible and a contract is not frustrated merely because it is more expensive to perform.
A supply agreement or service agreement is more likely to contain provisions on specific performance obligations and related liabilities than a research and development agreement.
In the interest of further cooperation, it will usually be a good idea to try to find compromises by means of contract amendments that meet the changed situation and the interests of both parties. At the same time, it is important to agree on changes to existing contracts in written, legally binding amendments, all the more so to satisfy the requirement of the written form.
The epidemic may also have an impact on compliance with regulatory requirements agreed on in contracts or so-called changes to law clauses. If the relevant clauses provide that all applicable regulations must be complied with, it is generally to be assumed that this will continue to apply despite the Corona crisis. Deviations from certain, firmly agreed regulatory requirements are generally only permitted if appropriate regulations or decrees have been issued. Changes to the legislation have already been introduced in this respect. The Act on the Protection of the Population in an Epidemic Situation of National Importance, BT-Drs. 19/18111, provides for far-reaching changes to the government’s competence and powers of intervention with regard to the Medicines Act, effects on the manufacture and supply of medical devices, diagnostics, protective equipment, pharmaceuticals and narcotics, pharmaceutical active substances and excipients, and is intended for both pharmaceutical manufacturers and manufacturers of raw materials as well as auxiliary products and services. (We will soon inform you in more detail).
