Quality assurance agreements

In practice, the exact purpose of such quality agreements is often lost sight of. This frequently leads to a mixing and overlapping of warranty and organizational provisions. This is not least due to the fact that quality agreements are usually negotiated and concluded in parallel with, or even before, any framework supply agreement. It is not uncommon for quality agreements and supply agreements to be negotiated by different teams within a company. Since the supply agreement and the quality agreement are independent contracts, this is not harmful at first glance. However, problems can arise if the parties do not make a clear distinction between the provisions of the quality agreement and those of the supply agreement.

What is a quality agreement?

One of the reasons for misconceptions about the content and function of quality agreements is often the terminology itself. The term “quality agreement” is often misunderstood (in the literal translation of the English term) as being an agreement regarding the quality of a specific product. As a result, the parties include their ideas and expectations regarding the characteristics of the product to be manufactured in the quality agreement. Although this may seem obvious at first glance, it misrepresents the actual objective.

An agreement on the contractually owed characteristics of a goodclassifies a sales contract as a sale by description.In a sale by description the agreed description of the goods creates an express warranty against which defects (deviations of the actual quality from the target quality) can be distinguished. The agreed description of the goods thus regulates the seller’s obligations under the purchase contract. If the buyer is dissatisfied with the delivered goods, this description of the goods serves as a linchpin for whether or not he can assert warranty claims against the seller. In terms of timing, however, the agreed description of the goods only comes into play when something is already “in a bad state.”

From the buyer’s perspective, on the other hand, a quality agreement aims to ensure that the manufacturer consistently delivers goods of impeccable quality. Such a system is characterized by certain structural requirements for the manufacturing process, such as:

• General organization of production,
• Compliance with specific work steps (e.g., incoming goods inspection for materials and preliminary products; outgoing goods inspection),
• Security of the company premises,
• Storage and logistics,
• Personnel responsibility,
• Internal auditing
• Documentation obligations.

The buyer often also asks the manufacturer to assure them that they are pursuing a zero-defect strategy. Quality agreements are particularly important in the manufacture of products and the provision of services with a potentially high risk to human health (e.g., in the pharmaceutical and healthcare industries or in the automotive industry, cf. Section 110a SGB V).

Why is a quality agreement necessary?

The function and necessity of a quality agreement become particularly clear when looking at the pharmaceutical industry as an example:

Anyone who wants to manufacture medicinal products in Germany requires a manufacturing license in accordance with Section 13 I No. 1 of the German Medicinal Products Act (AMG). According to Section 14 I No. 6a AMG, one of the prerequisites for this is that the manufacturer can guarantee that the manufacture and testing of the drugs are carried out in accordance with the state of the art in science and technology. According to Section 3 I AMWHV, this includes the manufacturer operating a functioning quality management system (QMS) that ensures compliance with “Good Manufacturing Practice” (“Good Manufacturing Practice,” abbreviated as GMP) within the meaning of Section 3 II AMWHV or “Good Professional Practice” within the meaning of Section 3 III AMWHV (the EU GMP guidelines are transposed into German law by the reference in Section 3 II AMWHV). If the manufacturer decides to outsource part of its production, it must, in accordance with § 9 I AMWHV, be able to present a written contract with its contractor that documents the contractor’s inclusion in its own QMS and clearly defines the responsibilities of both parties. In order to present these responsibilities and accountabilities clearly and unambiguously, a RACI matrix (Responsible, Accountable, Consulted, Informed) is used, for example.

The quality agreement thus also serves as written proof of compliance with scientific and technical standards to the regulatory authority. If a pharmaceutical manufacturer cannot prove that it has an effective QMS (also with regard to its suppliers) by presenting the Quality Agreement, the competent authority may withdraw its authorization within the meaning of Section 14 AMG pursuant to Section 18 AMG (see VG Cologne, judgment of June 12, 2018 – 7 K 6685/15). As a result, the manufacturer or distributor would no longer be allowed to distribute the medical products in question. Against this background, the legal and economic significance of the Quality Agreement should not be underestimated.

But even outside such strictly regulated market segments, a quality agreement can play an important role for the manufacturer. For example, it can also be concluded with the aim of minimizing the liability risk arising from the manufacturer’s own producer liability. If a manufacturer is sued for an alleged breach of its duty to ensure public safety under Section 823 of the German Civil Code (BGB), it may be able to prove, by presenting the quality agreements, that it operates a functioning quality assurance system and that the product defect that occurred in the individual case was therefore only an “outlier.” In this way, tortious liability under Section 823 of the German Civil Code (BGB) can sometimes be averted.

How independent is a quality agreement?

As mentioned at the outset, quality agreements are generally independent contracts that do not directly depend on the existence or content of any (framework) supply contract. The reason for this is less legal than practical. For many buyers, the conclusion of a quality agreement is a basic prerequisite for entering into a long-term supply relationship, not least with regard to any regulatory requirements (see above). Conversely, the content of the quality agreement can also have a significant impact on a supplier’s production costs (e.g., if they are required to set up additional control points as part of their production), which also influences the price calculation underlying the supply relationship. For this reason alone, it is in the interest of both parties to agree on the quality agreement at the same time as the supply agreement, if possible.

Although it would also be conceivable in principle to include the quality assurance agreements as an independent segment within the supply agreement, such a contract structure would often prove to be less practical. When submitting the quality agreement to an authority, the entire supply agreement would then have to be submitted, even though the respective authority has no interest whatsoever in the price and delivery conditions and other commercial agreements between the parties. The clauses relating to the quality assurance agreement would then also share the legal fate of the rest of the supply agreement. However, since a quality agreement is primarily aimed at prescribing structural requirements for the production process, it is – unlike a quality agreement in a supply agreement , it is not necessarily applicable to a specific product, which is why it may well be in the interests of the parties for the quality agreement to outlive the supply agreement, for example if the supply agreement is to be amended or replaced at a later date because additional or different goods are to be delivered while retaining the quality assurance system already agreed.

For these reasons, the separate structure of the quality agreement encountered in practice is generally preferable.

Pitfalls in the drafting of quality agreements

Even though quality agreements generally exist independently of any supply agreement, they are not entirely independent of it. Typically, a quality agreement is one of a whole series of different agreements between the parties (e.g., non-disclosure agreements (NDAs), general terms and conditions of purchase/sale, specifications, codes of conduct, etc.). Ideally, these agreements should have clearly distinguishable content and avoid overlaps. The reason for this division is not mere formalism, but rather to ensure consistency in the legal relationship between the parties.

If there are (deliberate or accidental) duplications of content, for example because the characteristics of the goods to be manufactured are mentioned in both the supply agreement and a quality agreement, it is essential to ensure that the provisions use exactly the same wording. If there are discrepancies between the respective contract texts on the same (legal) issue, a court may (depending on the applicable law) consider the parties’ provision to be contradictory and therefore assume a hidden lack of agreement (e.g., Section 155 of the German Civil Code (BGB)). A provision that was so important to the parties that it was mentioned several times might then not have been effectively agreed upon precisely because of this multiple mention.

Given this risk, duplication of content should be avoided. If this is not possible, the relationship between the respective contract documents should at least be explicitly regulated. For example, it may be necessary to clarify that a description of the goods within the quality agreement has no influence on the agreed description of the goods as per the supply agreement. If the descriptions do indeed contain discrepancies, this will result in a split in the respective evaluation criteria, but this may well be in the interests of all parties given the different objectives of these individual agreements.

Even if identical wording is used, the legal assessment standards for the respective agreements may still diverge if the interpretation of the agreements is governed by the rules of different legal systems. This may happen as a consequence of diverging choice of law agreements that stipulate the contracts to be subject to different legal systems according to the intention of the parties. Here, too, the legal independence of the individual agreements should be expressly stipulated, because otherwise there is a risk of an unpredictable interaction between several legal systems. Although it is generally preferable to subject the entire legal relationship between the parties to a single legal system, this is not always feasible, especially in the case of global supply agreements. The question of international jurisdiction and applicable law must always be expressly regulated. When formulating a quality agreement, the parties will often resort to pre-formulated clauses. These may qualify as general terms and conditions (GTC), which is why the strict standards of Sections 305 et seq. of the German Civil Code (BGB) must be observed when incorporating and interpreting them. Such GTC usually also include clauses in which the buyer waives its obligation to inspect the goods upon receipt pursuant to Section 377 of the German Commercial Code (HGB) and transfers this obligation to the supplier in the form of an outgoing inspection. Whether such a contractual arrangement is to be considered an unreasonable disadvantage pursuant to Section 307 II No. 1 BGB and is therefore invalid is a matter of dispute. In any case, provisions that also waive the right to complain about obvious defects are likely to be invalid according to the prevailing opinion and should therefore be avoided.

When formulating quality agreements, reference is regularly made to DIN standards (e.g., DIN EN ISO 9000). This offers the advantage, particularly in cross-border supply relationships, that the parties have a clear idea of the requirements behind these standards, regardless of the applicable legal system. Such standardized standards can therefore serve as a lingua franca for quality assurance and prevent misunderstandings.

Summary of the key facts

• Always conclude supply contracts and quality assurance agreements at the same time
• The topics covered in supply agreements and quality assurance agreements should not overlap
• Always subject supply contracts and quality agreements to the same law