Supplying the U.S. with PPE – A Primer on Sourcing from China
The acquisition of personal protective equipment (“PPE”), including masks, gloves, and disposable gear, is an urgent and vital task for governments, medical facilities, and businesses in dealing with COVID-19. Both historically and currently, much of the U.S.’s supply of PPE comes from China, and sourcing from China in the current global environment is a challenging task. See “China Medical-Goods Market is “Wild West””, April 23, 2020, at https://www.wsj.com/articles/chinas-medical-goods-market-is-wild-west-amid-surging-coronavirus-demand-11587654973
Stakes are high, and public figures and businesses are subject to a great degree of scrutiny for the acquisition deals they enter. California’s Governor Gavin Newsom, for example, recently committed nearly $1 billion for face masks from a Chinese electric car manufacturer re-purposed to mask production. California has now wired $495 million as the first installment payment, and the terms of the agreement have not been made public. See “Newsom’s Secretive $1-billion mask deal with Chinese Automaker Sparks Bipartisan Concerns,” April 20, 2020, at https://www.latimes.com/california/story/2020-04-20/gavin-newsom-n95-masks-byd-chinese-company-california-legislature
Many of the same factors that apply to the sourcing of products from China during normal times also apply at present, however there are additional specific concerns, as well. This article highlights a few of the many factors to consider for the sourcing of products from China, and PPE in particular.
Pre-Contract Due Diligence of Supplier
- Confirmation of Product Availability. Given the short supply of PPE, and that many Chinese suppliers are new to the business of PPE production, we must confirm whether the goods can in fact be produced on-time and to specifications.
- Terms of the Deal. While prices, delivery times, and products are in a constant state of flux, it is important to be aware of the market rates and comparable sales terms in order to spot where a deal is “too-good-to-be-true” and potentially a sign of fraud or a scam.
- Products Authorized in U.S. We should confirm that the products are authorized for import, sale, and use in the U.S. Much of PPE is subject to FDA approval, although the FDA has recently relaxed its requirements for such items. A list of approved vendors appears on the FDA website, and it is interesting to note that many such vendors only registered within the past thirty days.
- Supplier Authorized to Export. A Chinese supplier must be authorized by the Chinese government for the export of PPE, in part given China’s own ongoing PPE needs in dealing with COVID-19.
- Payment Terms. Typical contracts for the sale of goods involve parties with a pre-existing relationship, opportunities to conduct extensive due diligence, and the gradual ramping up of orders over time. Here, we have the immediate need for large quantities of PPE. It is essential that the payment terms do not leave the buyer exposed after payment and where goods have not yet been inspected or delivered.
- Product Warranties. Warranty language may disclaim the implied warranty of merchantability and fitness. Affirmative warranties must be expressly stated in the agreement.
- Quality Control. The agreement should have clear remedy provisions for dealing with faulty or improperly produced goods.
- Dispute Resolution. Considering the numerous reported problems with quickly-produced PPE and that the parties may be entering their first transaction together, we should expect disputes to arise. What choice of law applies, in what location will a dispute be adjudicated, and the buyer’s potential for collectability on an arbitration or judicial award should all be closely considered.
William O. London, Esq. is a Partner at Kimura London & White LLP, where he heads the law firm’s China Practice. Mr. London is fluent in Mandarin Chinese, and he and his bilingual team of legal professionals counsel both Chinese and U.S.-based companies on cross-border transactions. Mr. London and his firm are members of the Cicero League of International Lawyers.
This posting is intended for general information purposes only. Anyone seeking legal advice for a specific situation should consult with an attorney directly. Nothing herein should be relied on as legal advice and this posting does not create an attorney-client relationship.