Advice You - Business

Limitations of Liability Thomas J. Hall, JD It’s a provision found in almost every commercial contract: “Vendor shall be liable only for direct damages, in an amount not to exceed $X. In no event will vendor be liable for indirect, special, consequential, exemplary, or punitive damages or for lost profits

According to USFDA, a combination product is one composed of any combination of a drug and device; biological product and device; drug and biological product

.” Although the actual words may vary, the meaning is the same:
• The most vendor will pay is $X;
• For certain claims, vendor has NO liability.
Such provisions raise a number of issues:
• They are unfair. Vendor’s liability is capped, but customer’s is not. In other words, vendor knows

; or drug, device, and biological product and fixed dose combination would include two or more combinations of drug.

Examples of combination products may in

his or her own maximum liability under the contract, while customer’s liability is unlimited.
• Vendor’s maximum liability - $X – may be inadequate. For example, “X” may be “no more than customer paid under this contract” or “no more than customer paid in the xyz months preceding the event giving rise t

lude drug-coated devices, drugs packaged with delivery devices in medical kits, and drugs and devices packaged separately but intended to be used together.

the claim for damages.” If we assume customer is paying 10 grand a month, and “xyz” is 12 months, then vendor’s liability is capped at $120,000. While that is not pocket change, is it adequate to cover damage that vendor could cause? How much damage can a vendor cause?
• How much is the contract wo

here is enormous increase in the number of combination products entering the market in the recent years. Combination products have proven advantages but fixe

th?
• How much is the over-all project worth?
• Will the vendor have access to sensitive/valuable information?
• Will the vendor have access to sensitive systems or facilities?
Being good business persons, vendors will resist expanding their potential liability, and they will offer a varie

d dose combinations are still in the process of convincing regulatory authority on their advantages over the single ingredient formulations.

Combination pro

y of arguments in opposition. Some of these arguments carry more weight than others:
• “We cannot accept unlimited liability.”
Customer is not asking for unlimited liability, just responsibility. Customer should not bear a loss resulting from errors or omissions of vendor. Curiously, standard lan

ucts have become life saving products for the pharmaceutical companies who doesn’t have many innovative molecules in their product pipeline and have been inc

uage routinely exposes customers to unlimited liability.
• “Our pricing tied to the amount of liability we can accept.” Again, customer is simply looking for responsibility. In addition, a great price combined with an unacceptable level of risk is not a good deal. A customer who is concerned only with

easingly used in the product life cycle management. Even the companies having product patents are trying to extend their product life cycle through the combi

price may be persuaded by this argument. Customers willing to assess the project as a whole may decide that the “great price” is not a good deal after all. There is nothing wrong with telling a vendor “No.”
• “We need a sum certain, so we can manage our risk and buy our insurance, etc.” Customer has t

nation products and maximize the revenues. But the companies involved in this practice are overlooking that they are burdening the patients both economically

e same concerns, so it is only fair to make the limitation mutual. Also, customer has no objection to a sum certain; customer merely wants an ADEQUATE sum. Which is one of the questions we began with.
It may not be possible to determine with certainty how much protection is enough; in which case it is b

and physically. They need to rightly judge the benefits of the combination products and they have to even look at the risks involved when combining the produ

tter to ask for too much rather than too little. A number of tools are worth consideration:
• X times the fees paid and payable under the contract. Three times is a good starting point. Vendor cannot object that they cannot quantify the risk. But, is it adequate to cover the exposure?
• Vendor w

ts. Some of the combination products were well accepted by physicians while others suffered. Companies involved in development of combination products are fi

ll be responsible for direct damages incurred. Vendor will object that “direct damages” cannot be quantified. But:
- “Direct damages”- damages that are foreseeable and which flow directly from the breach or action – are the traditional measure of damages under contract law. This is the amount vendor,

ding difficulty in defining their combination products and facing various challenges from selecting a combination to marketing it.

Following aspects would a

and customer, would be liable for if the contract did not contain a limitation of liability;
- Presumably vendor carries insurance. (If they do not, why are you doing business with them?)
- Is it unfair to ask the vendor to make good any harm that it causes?
- One caveat. As with any legal te

dd to the challenges in developing combination products:

Which markets to tap where the combination products can do fairly well?
Which combination prod

m, the meaning of “direct damages” is open to interpretation, and debate, and debate.
• Vendor will be responsible for up to $X. We began with this approach, which is perfectly reasonable, provided X is sufficiently large. A $500,000 cap is terribly insufficient if the exposure is $2 or 3 million. In

cts are meaningful and rational?
Which therapeutic categories to select?
Which Combinations can address unmet needs of the patients?
Do combin

ddition, with a specified cap, vendor cannot claim unknown and potentially unlimited exposure, AND Vendor can obtain the necessarily insurance more easily.
• Vendor will be responsible for up to the limits of its insurance. This approach removes the objection that the risk cannot be quantified and that

tions increase the patient compliance?
What would be the developing cost?
How to tackle the risks encountered during combination product developmen

t cannot be insured against. BUT:
- The insurance limits must be sufficient to cover the possible risk; - Customer must require certificates of insurance, evidencing the existence of insurance (not to mention that the insurance must be from reputable companies, licensed to do business in your state);

t?

As combination products don't fit into the traditional categories of drugs, medical devices, or biological products, the USFDA is in the process of devel

- Customer must monitor Vendor’s compliance.

All in all, focusing on the limits of vendor’s insurance may be the most productive approach. It overcomes most standard vendor objections AND it helps ensure that sufficient assets are available if things to wrong. Without insurance, vendor may not have suffici

ping new procedures for reviewing their safety, efficacy and quality.

Professional from academic institutions, pharmaceutical industries, health care indust

nt liquid assets to cover the damages. A judgment against a vendor is of little value if it cannot be enforced. A word about the types of damages to be covered. Contract law traditional protects against direct, foreseeable damages, not those that are so remote that they cannot be reasonably foreseen. The

y and representatives from various regulatory agencies are working out to design the regulatory requirements for manufacture and sale of combination products

est of “reasonably foreseeable damages” is perhaps misleading. If vendor knows that dropping the ball will interrupt customer’s core business processes, vendor should reasonably expect that customer suffer lost profits.

But what would those profits have been had the vendor delivered as promised? Would cust

.

As there is an increasing trend of the combination products companies manufacturing such products should be able to tackle the problems involved in the de

mer have earned the millions it expected, or would mistakes by customer, or changes in the market, have produced substantially less revenue? Better to exclude special, exemplary and punitive damages – which are awarded by the court (or jury) and have little direct relation to the value of the contract or the

elopment. They need to be wiser in analyzing the market trends and the regulatory requirements.

Companies that provide selfless information through particip

harm done, and specify a comfortable limit on damages – all damages, however described or characterized. Too much protection costs vendor little or nothing. Too little could cost customer dearly.

Copyright 2006, Thomas J. Hall. All rights reserved tom@tomhalllaw.com

tion in industry events and feedback to regulatory authorities would be able to face the challenges and will be successful in developing combination products

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