Apportionment of liability in contract manufacturing

Legal Obligations

07.12.2006 Contract manufacturing must be worthwhile: for both parties, drug company and contract manufacturer. The cost/benefit ratio should be favourable for both contractual partners. The cost side includes a possible liability risk. Ideally, the risk should not increase on engaging a contract production company, but decrease on the part of the drug manufacturer.


Liability risks can be largely transferred from the drug manufacturer to the contract manufacturer through contractual agreements. In this way the obligation to exercise due care and the liability of the participating companies can be fittingly balanced.

The legal nature of the contracts between a contract manufacturer and a pharmaceutical company is that of a supply contract according to § 651 of the German Civil Code (BGB). Here the contract manufacturer undertakes – as manufacturer or seller – to manufacture or produce (in the case or animal or plant products) movable things and to deliver them, i.e. to hand over and transfer ownership thereof, to the orderer. Thus the supply contract contains elements of a sales contract and of a contract for work and services. The supply contract differs from a sales contract in the obligation to produce the physical result of a successful work process for the orderer corresponding to the stipulations of a contract for work and services, and differs from a contract for work and services in that the manufacturer only has to produce the movable thing and transfer ownership thereof. A contract for work and services also focuses on success, which gives the contract the character of, say, an intellectual achievement (e.g. as in the case of assuring the functioning or repair of a machine or of production of a prosthesis in a surgical operation), (Palandt/Sprau, BGB, 65. A. 2006, §651 Rdn. 4; for former legislation see: BGH WM 1977, 79).
The work-and-services element in contract manufacturing depends upon the specific manufacturing process itself. The sales-contractual component comes from the handing-over and transfer of ownership of movable things. Accordingly, the supply contract contains legal provisions concerning the sale (§651 Satz1 BGB); in the case of the manufacture of non-fungible objects (i.e. such objects as are not interchangeable owing to their adaptation to the individual wishes of the orderer) it also contains work-and-service contractual stipulations (§651 Satz3 BGB).

Assignment of Liability to theContract Manufacturer

According to the German Drugs Act (AMG) the pharmaceutical company is fundamentally liable for damages in the case of product defects (§84 Satz1 AMG). Several liable parties share liability as joint debtors (§ 93 Satz1 AMG). In the relationship of the liable parties to one another, the liability for compensation as well as the extent of the compensation depend on the circumstances, and particularly on the extent to which the damage was caused by one or another party (§93 Satz2 AMG). In the relationship between the contract manufacturer and its customer, the drug manufacturer, as a rule only the latter is responsible towards an injured third party according to the AMG, namely when it has placed the product on the market under its own name. Only by releasing a product onto the market does a drug manufacturer become a pharmaceutical entrepreneur (according to §4 Abs.18 AMG).

The pharmaceutical entrepreneur’s liability to pay damages may not be excluded or limited in advance (§92 AMG). Transfer of third party liability to the contract manufacturer is legally non-admissible. The mandatory nature of liability applies only to the relationship between the (drug) manufacturer and the injured party (cf. Taschner/Frietsch, PHG und EG-Produkthaftungsrichtlinie, Kommentar, §14 Rdn.10; Rolland, Produkthaftungsrecht, §14 Rdn.6). The internal relationship between pharmaceutical entrepreneur and contract manufacturer remains unaffected by this. With respect to other points of law – particularly the Standard Contract Terms Act and the legal limitations of §§139, 242 BGB – the two parties can reach agreements about the apportionment of liability. This opens up the possibility of recourse for the drug manufacturer.

No Shift of Absolute Liability

The limitations of internal recourse follow in particular from § 307 Abs. 2 Nr. 1 BGB (formerly: § 9 Abs. 2 Nr. 1 Standard Contract Terms Act [AGBG]). Accordingly, clauses in the terms of contracts are invalid if they are unfairly detrimental to the contractual partner, which in case of doubt can be assumed if a clause is incompatible with the fundamental idea underlying the legal provision from which it deviates. An unfair disadvantage can be assumed if a liability is based on the provisions governing internal recourse – while providing nothing in return – which per se does not exist towards third parties. A mere contractual liability in an internal relationship cannot constitute a joint and several external liability (cf. Sander, Arzneimittelrecht, Kommentar, Erl. §93 AMG, C.2, S.1). Obligatory exemption from liability must accordingly be limited to cases in which the contract manufacturer is also originally liable externally (cf. Schmidt, NJW 1991, 150; Link, BB1985, 1424 [1428]; Graf von Westphalen, DB1982, 1655 [1661]). Otherwise, for example, a compulsory recall which only concerns the pharmaceutical company could be foisted off on the contract manufacturer, which would be seen as unfair (cf. Foerste in Graf von Westphalen, Produkthaftungshandbuch, Bd.1, 1989, §25 Rdn.91; Graf von Westphalen in Produkthaftungshandbuch, §17 Rdn.65). Thus the drug manufacturer may not justify a sole liability of the contract manufacturer on the basis of its standard contract terms. Instead, a consideration corresponding to §93 Satz2 AMG or §§823, 840, 254 BGB, respectively, must be provided (cf. Schmidt, NJW 1991, 150; Link, BB 1985, 1428).

The apportionment of damages has to correspond to the contributions to causation considering the fault of the individual parties. In so far as the contract manufacturer is not subject to absolute liability, it remains liable on the basis of general tort law (§§823 ff. BGB). In any case, its joint liability remains a possibility given a breach of its legal duty to maintain safety. The external liability which exists in any case is merely transformed into an internal exemption. Internal recourse is thus possible to the extent that the contract manufacturer is itself legally bound to maintain safety or these obligations may be delegated by the orderer to the contract manufacturer. The extent of such delegation possibilities essentially marks the boundary between allowed and illegal liability agreements between the orderer and the contract manufacturer (cf. Ernsthaler, NJW 1994, 818).

Assumption of Legal Dutyto Maintain Safety

In contrast to the absolute liability system according to the Drugs Act there exists in tortious producer liability law the possibility of delegating legal obligations to maintain safety, in so far as they apply to the product supplied, under special circumstances to the contract manufacturer (cf. Kullmann in Kullmann/Pfister, Produzentenhaftung, 1.Bd., Kz.3250, S.16 ff). The party transferring the legal duty to maintain safety is not completely exempted from responsibility, but no longer has to ensure that the duties are fulfilled and also has no obligation to constantly check on the contractor (ders., aa0., ibid. m.w.N.). In detail, the following conditions have to be met for delegation of the duty to maintain safety:

Advantages Accruing fromTransfer of Duties

The transfer of legal duties to maintain safety does not affect the liability of the pharmaceutical entrepreneur according to the German Drugs Act. This is because – as demonstrated – a breach of a legal duty to maintain safety is not necessary for absolute liability to apply. It applies regardless of negligence or fault. The restriction of liability according to tort law favours the pharmaceutical company, however, on the one hand in so far as the extent of liability according to tort law exceeds that of the Drugs Act. In contrast to the absolute liability according to the Drugs Act, there is no ceiling for strict liability in tort. The compensability of damages instead depends on the general provisions (according to §§249 ff. BGB). In both cases, immaterial damages – e.g. compensation for pain and suffering according to §253 Abs.2 BGB, §87 Satz2 AMG – can be awarded. In the case of a legally effective transfer of duties to maintain safety, however, the contract manufacturer is solely liable – beyond the limitation of liability. On the other hand, the possibility of recourse of the orderer vis-à-vis the contract manufacturer is opened. Liability risks can be largely transferred from the pharmaceutical company to the contract manufacturer through contractual agreements. In this way it is possible to appropriately balance obligations to exercise diligence and liability between the participating companies.

Liability risks can be largely transferred from the drug manufacturer to the contract manufacturer through contracts
The obligation to exercise due care and the liability of theparticipating companies can be fittingly balanced

Heftausgabe: Compendium Customer Manufacturing 2006

About the author

Dr. Martin Wesch , Managing Director of the German Quality Association for Pharmaceutical Packaging,