"Legal Challenges with Indian One-Stop-Shop pharmaceutical CMO"

"You Say 'Tomato', I say 'Tomatoes', still sliced the same !"

CONTRACT MANUFACTURING

by: RAM BALANI, CEO, FDASmart Inc., New York, USA

INTRODUCTION

In this new era of high-demand HPAPI, High Potency APIs, it turns out, India is largely relevant for outsourcing a wide spectrum of the drug development process,i.e India is emerging as a must-consider destination for pharmaceutical companies to outsource either high potency process research or optimization, HPAPI development, pre-clinical& clinical development, lab-grade then pilot-plant scale-up and commercial manufacturing. This emerging trend seems logical given India’s current role with generic drugs in the pharmaceutical industry so much it’s been dubbed as “pharmacy to the world” .

The not-so-obvious facts are the legal challenges dealing with Indian vendors & commercial contracts with outsourcing to an India vendor/partner located in a distant time zone, with unique work ethics/culture where Services Contracts may be governed by Indian laws.What happens when the Indian CMO you contracted happens to be a group of discrete but ALL wholly owned subsidiaries of a parent, holding company operating as single-entity or a one-stop-shop under the same brand or umbrella out of India?

What if you're a small bio-tech firm with a promising molecule patents granted and perhaps ready for partial or full grade commercialization or licensing? You would narrow down a short list from Cphi or DCAT meetings, perhaps travel to tour the Indian vendor location facilities and meetings with senior management, the technical staff or project managers, etc. Then you sign the contract after a series of evaluations arriving at a final determinatoon of that top-choice vendor with what appears to be acceptable terms of engagement in writing.

So what challenges do you face sitting in New York dealing with an outsourced vendor operating out of Ahmedabad, Gujarat for example? Further-say that this hypothetical vendor is a large public corporation trading in the Indian stock markets but its promoters (founders) still retain majority controlling interest? Let’s assume you signed a Services Agreement contract with the India parent company which owns various global subsidiaries (affiliates) one of which is located in New Jersey. The signed contract spells out that the parent company is the contractual signing party and that Indian applicable laws apply in case of disputes but no forum or jurisdiction clauses specified in the contract.

A few more interesting ‘facts’ associated with the hypothetical company bears mentioning. Its Managing Director /founder promoter and his family constitutes a Hindu Undivided Family (HUF, unique to India) happens to own 60% of its shares in Indian stock exchanges.The entire group of subsidiaries operate under the same brand name and in fact calls itself the “X” Group, i.e.  the one-stop-shop CMO! The “X” Group CMO consist of presumably, stand-alone independent legally registered corporations all across the globe but is controlled by a so-called Global CEO who reports to the India based Managing Director/Chairman of the entire cluster. Corporate law of course views the duly formed corporation as a separate legal entity independent from its shareholders thus affording the proverbial limited liability protection.

The parent corporate entity signs the contract under the corporate "group" brand (DBA) name and though most services are out of India, part of the services required NJ owned subsidiary involvement though the US firm is not referenced explicitly or by name. The contact however states the "beneficiary is the entire group of companies, i.e. CRAMs/CMO firm reserves its right to involve one or more of its many stop shops dispersed across various global locations.

First step is of course to try and resolve the problem with the parent signing company, you claim after all the Indian parent company owns the New Jersey subsidiary and should be held accountable.

If the Indian CMO acts in good faith it will own up to its faults or lack of timely delivery of service & missed deadline and make good moving forward so insure no contract work distractions or failures occur again. It stands to good reason the Indian parent company though it alone signed the contract as a named party appreciates that harm done to its US subsidiary is harm done to the entire “X” group CMO or its one-stop-shop reputation all across the board.

But what if the Indian parent company Managing Director, unilaterally sees a different picture than you do? What if it asserts it should not be blamed for failing to meet its deadline, i.e that its contract obligations were not performed due to a cause it considers a valid permissible- within-the-contract reason, e.g. parent entity changed a process or formulation using a toxic ingredient that the US subsidiary partially uses to perform in the US, but parent company failed to anticipate or project extended time needed to meet the process change impact/ delay from EPAs’ regulatory clearance or hurdle , i.e. took longer than expected to adopt to the new changed process.

What do you now do with this ‘one-stop-shop’ in India which maintains it is not to blame and allegedly hides behind the ambiguity of the signed contract (NJ subsidiary not a named party to the contract!) to claim it is not responsible for the missed deadline because the delay was caused by a subsidiary that though it owns was not a named party to the signed contract?

Contracts whether in India or USA or an place else are made by parties jointly with offer and acceptances spec fied, the agreement s legally enforceable. When one party fails to meet its contractual obligations, that is a considered a breach of contract which carries liabilities ordered in courts. A court however cannot make nor change the contract made by the parties but merely interpret them with statutes, case law and precedents given the facts of the contract. So what –sitting in the Big Apple—what are your options really? Boils down to the underlying contract terms and clauses signed, i.e. contract laws 101, i.e. parties named to the contract, governing laws, forum for dispute litigation.   

Contract is signed, project is underway. Work commences and you hope for the best during contact performance but that’s not always the case! Then suddenly—things go ‘south’, the Indian parent vendor company does not meet its obligations so what then ? In other words, a lawsuit to settle the score!

 The landmark US Supreme Court case of Daimler AG vs Bauman has made it near impossible for a US Plaintiff to render jurisdiction on a foreign India company in the US thru the Alter-ego doctrine which subscribes that a US subsidiary’s is so closely controlled by its parent. Agency theory on the other hand states that when subsidiary actions in New Jersey can be imputed to its India parent such that the subsidiary’s continuous and systematic activities can be shown to promote its Indian parent business interest in NJ (agency) then New Jersey courts may be allowed to exercise its long-arm statute and subject the Indian one- stop-shop to New Jersey court jurisdiction.

India works under the common law system as the US does both inherited from the UK British rule of laws-but they’re not the same necessarily! A contract in India and contract in  the US works similarly of course, i.e. offer and acceptance, agreement is legally enforceable specially if a written contract.

Ideally and in principle these agencies are in place in India to protect shareholders, investors, corporate entities conduct by senior management including the Board of Directors.

Truth be told- the regulatory monitoring and compliance enforcement of these agencies have some ways to go. For example, class action suits are a recent phenomena as of 2016 in India opening up new avenues for legal relief to minority shareholders often silenced and made impotent by the family founders of Indian corporations which maintain majority and controlling interests.

Are Indian CMO vendors operating as a one-stop-shop from India globally at risk in the US with the New Jersey long-arm statute for US lawsuit forums? India subscribes to the Group of Companies doctrine where non-signatory companies can be haled into arbitration if it can be shown the party participated in the performance of the contract, i.e implied contract.

In the US post Daimler AG v. Bauman landmark litigation, the agency theory survives if it can be shown for example that there are exceptional circumstances evidencing the NJ subsidiary is engaged merely as a 'sales office' or US agent for its Indian parent, e.g. NJ imports shipments data mostly from its Indian parent’s India manufactured products sold in US.” Contract laws can get complex but could serve Plaintiffs well, i.e. though not explicitly inked on the contract, if it can be shown the US subsuduary played a role in the contract dealing or performance, your chances of demonstrating a legally substantiated "implicit contract" just shot up. There's is also this -- oral contracts and breaches thereof, if it can be shown by actions or evidences of say email communication or call transcripts, are admissible in a court of law.

Is this why India SHOULD fear the one-stop-shop label? You be the "Judge"!

About the Author:

Ram Balani is an accomplished IT, pharmaceutical clinical research, manufacturing & healthcare business development industry entrepreneur whose experiences include:

-  CEO of FDASmart Inc.- a pharmaceutical consulting company focused on East-West business development. FDASmart assist biopharma companies mammage US FDA hurdles including NDA, IND, Medical Devices (incouding 510K, UDI, GUDID).

-Ram Balani succesfully developed the one of a kind cGMP advanced (simulated AI) 21 CFR Part 211 advanced search tool with Microsoft Office 365/Sharepoint Online Cloud that betters the US FDA own website search to (greatly) assists US FDA 483, Warning Letters and CAPA regulatory compliance. https://tinyurl.com/qtc9apf

-  FDASmart highlight - Successful delivery & management of a clinical data management group for Pfizer Inc via their start-up presence in India during mid-1990s ( Pfizer Inc - Central Research, Groton, CT USA)