Canada: Frozen? Don't Let It Go: Managing The Risk Of Physical Damage To Your Products

The UPS company doesn't just deliver, or occasionally lose, your courier parcels — it also runs sophisticated storage warehouses. Such a warehouse is capable of storing sensitive vaccines according to strict Health Canada standards of good manufacturing processes.

An employee suppressed the temperature alarm on one refrigeration system, which is the opposite of good manufacturing processes. When a component of the refrigeration broke over a weekend, the alarm did not sound and the refrigeration temperature dropped to -4 C, destroying the vaccines. Sanofi Pasteur, the vaccine owner, had insurance, and its insurance company tried to recover more than $8 million in damages from UPS, its insurer, and other refrigeration companies that either made or serviced the cooling unit (Sanofi Pasteur Ltd. v. UPS SCS, Inc.). While this is a pharmaceutical contract case, it applies to all kinds of contracts for consumer products.

There was a master services agreement governing the ongoing relationship between UPS and Sanofi Pasteur. It had an insurance clause requiring UPS to have general insurance. It also required Sanofi Pasteur to obtain insurance for the value of stored goods. An individual project agreement, called a service schedule covered each storage deal. Another clause limited UPS' liability for negligence to $100,000. Excerpts of these are provided below this article. The project agreement was paramount in case of conflict.

UPS admitted only that it owed $100,000 because its employee disabled the alarm. The appeal court concluded that the agreement stated that the appellant, Sanofi Pasteur, assumed all risk of damages to the vaccines, except for up to $100,000 caused solely due to UPS' negligent acts or insurance. The insurance clause barred the claim for more money. As a result, the Ontario Court of Appeal enforced the cap on liability contract clause, and put the damages claim on ice. Even the refrigeration companies that were not party to the contract got the benefit of the cap on liability.

The take-away message is that courts will allow parties to allocate risk and liability between themselves. In this case, insurance clauses and caps on liability were used. Indemnities are another typical clause used to allocate risk of loss between parties. Multiple clauses about insurance can cause confusion, so it is best to be clear about the parties' intentions so that there is no disagreement later on. Implementing a master agreement, followed by a series of specific schedules for each project is a great way to efficiently customize specific terms for each new deal. Ensure that the master agreement and schedules are consistent.

As well, this story would have been a lot unhappier for the pharma company had it not properly insured its vaccines. Use contracts and insurance together to protect your pharma products, or any products, all along the supply chain.

Excerpt of clauses from court decision:

[11] The Insurance Covenant – s. 10.2(c) of the MSA – required the appellant to maintain "all-risk property... insurance for the Goods and the personal property of [the appellant] ... in an amount not less than the full replacement cost thereof, whether such Goods or property are in [UPS's] facilities or in transit and shall include [UPS] as an additional insured."

[12] Another provision of the MSA – s. 10.1 – required UPS to maintain commercial general liability insurance, "including ... warehouseman's liability and contractual liability covering [UPS's] obligations hereunder for bodily injury and property damage."

[13] Clause 4.2.1.1 of Service Schedule 1 provided that UPS would be liable for damaged vaccines "solely due to its negligent acts or omissions with up to a maximum of one hundred thousand dollars ($100,000)

Previously published by Canadian Lawyer InHouse Magazine

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