Indemnification Agreements – Why You Should Read the Fine Print…

As many of you know, the introduction of the Food Safety Modernization Act (“FSMA”) and the subsequent delay in rolling out certain of its key provisions has the produce industry concerned.  As a direct result of this concern, coupled with the rise of recent foodborne illness outbreaks and the fact that number of food and beverage recalls has tripled since 2000, many produce companies are insisting that their suppliers execute indemnification agreements, hold harmless agreements or continuing guarantees.

Although logical on the surface, the problem I am seeing in the industry is that buyers are over using boiler plate language that someone “cut & paste” from something they either found on-line or pulled from a different agreement.   To add insult to injury, many produce buyers now require their suppliers to either sign one  of these “cut & paste” agreements or risk losing the business.

In connection with the preparation of real indemnification agreements that accurately reflect the realities of the produce industry; I have reviewed hundreds of seller prepared indemnification agreements that savvy suppliers refuse to sign.  Throughout this process, I compiled a list of the most commonly referenced statutes that produce buyers have asked their produce suppliers to indemnify them against and which have NO bearing on the produce industry.

Allow me to share:

Federal Food, Drug & Cosmetic Act Sections 404, 405, 505, & 512

Section 404 of the Federal Food, Drug, and Cosmetic Act provides for emergency permit control by the Secretary where the Secretary finds that a class of food distributed in interstate commerce is contaminated with micro-organisms during the manufacture, processing, or packing, that it is injurious to health, and that the injurious nature cannot be adequately determined after the articles have entered interstate commerce. The section further provides that the Secretary is authorized to suspend any permit issued under section 404 if a violation of the permit issued is found.  Nothing in Section 404 requires a seller of produce to comply with any regulations absent the initial finding of contamination by the Secretary and promulgation of regulations and issuance of permits. Therefore, there is no need to, ex ante, guaranty compliance with section 404.

Section 405 allows the Secretary to make regulations exempting certain labeling requirements, but does not put any affirmative obligation on suppliers to label products.

Section 505 provides that no person shall introduce or deliver into interstate commerce any new drug unless such application is approved. This section has no applicability to the sale of produce.

Section 512 provides that a new animal drug is unsafe unless there is an approval of an application on file with the FDA.  Again, this section has no applicability to the sale of produce.

Fair Packaging and Labeling Act

The Fair Packaging and Labeling Act exempts certain persons from the scope of its requirements.  Specifically, it exempts persons engaged in business as wholesale or retail distributors of consumer commodities unless they are specifically engaged in the packaging or labeling of such commodities or prescribe means by which commodities are labeled. 15 USC § 1452(b).  Most produce companies operate as either a wholesale or retail distributor of food products and are not engaged in packaging or labeling of the commodities, nor does it specify the manner in which the commodities are labeled.  Therefore, this Act will not apply to most produce companies.

Federal Hazardous Substances Act

Under 15 USC § 1261(f)(2), the term “hazardous substance” does not apply to foods, drugs, and cosmetics subject to the Food, Drug, and Cosmetic Act.  Fruits and vegetables are products subject to the Food, Drug, and Cosmetic Act (though the sections discussed above are inapplicable) and, therefore, the Federal Hazardous Substances Act is inapplicable.

Critical Point:

For the buyer: Improper use of “cut & paste” agreements and other boiler plate language can do more harm to your supply line than good because you may jeopardize a relationship with a valuable supplier if you demand they indemnify you against things outside of their control.  Simply put, you may force the end of a valuable and mutually beneficial relationship because you are asking your supplier to indemnify you against something over which they have no control.  This presents to great of a risk for the seller and smart sellers will not assume such a risk.

For the seller: You must read the fine print and know what it is that your customers are asking you to indemnify them against.  It could be financially disastrous for you to indemnify your customer against something over which you have no control.  Similarly, you must be careful and guard against the unintended consequences of signing agreements that reference statutes that you do not understand.  In a dispute, a court will likely rule against the seller because the obvious intent of any type of hold harmless agreement between a buyer and seller is the seller’s desire to indemnify the buyer in order to induce the buyer to purchase product from the seller.  Against this backdrop the tie goes to the buyer.

 

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