On Tuesday, India restricted the export of certain pharmaceutical products because of shortage concerns arising from the coronavirus (COVID-19) outbreak. As India is the largest global producer of generic pharmaceuticals, and as Indian companies obtain the majority of their active ingredients for those pharmaceuticals from China, India’s exports restrictions could signal the beginning of global supply-chain disruptions that are likely to spawn a multitude of international arbitration claims. This alert examines the background to India’s decision to restrict exports and recommends actions that life sciences companies should take now to position themselves for the claims that might follow.

Background

India is the world’s largest manufacturer of generic drugs. It accounts for approximately 20 percent of the world’s generic drug supply,1 and accounted for almost 25 percent of U.S. imports in 2018, according to the US Food and Drug Administration (“FDA”).2

Indian drug makers are highly reliant on China for the active ingredients they use to make those drugs. Sources estimate that Indian drug makers obtain approximately 66 percent3 to 70 percent4 of their active ingredients from China, and the Indian government recently estimated that as many as 450 drug ingredients sourced from China could be impacted by Chinese efforts to contain COVID-19.5

That reliance on China is driving global supply-chain concerns.6 The result is that “[t]he whole supply chain will be disrupted, partly from China and partly from India,” said Jagdish Dore, who leads pharmaceutical-industry consultancy Sidvim LifeSciences.7

India restricts certain pharmaceutical exports

To combat concerns over shortages in its own domestic market, “India has restricted the export of 26 active pharmaceutical ingredients...which represents about 10 percent of their export capacity,” FDA Commissioner Stephen Hahn told the U.S. Congress on Tuesday.8 The restrictions will affect “paracetamol, several antibiotics such as tinidazole and erythromycin, the hormone progesterone and vitamin B12.”9 The Indian Director General of Foreign Trade wrote on Tuesday that those restrictions will continue “till further orders” are issued.10

Shortages are likely to spawn international arbitration claims

The immediate result of India’s export restrictions will be potential shortages of affected products. The longer-term impact, however, is likely to include a number of international arbitration claims that involve various parties in the global supply chain, particularly as shortages cascade through the system.

Many cross-border contracts in the global pharmaceutical supply chain contain arbitration clauses that require disputes to be resolved by international arbitration. International arbitration is a consensual form of dispute resolution that is favored for cross-border supply contracts, because it permits parties to mitigate risk by ensuring that future disputes will be confidentially resolved in predetermined neutral forums by arbitrators who have both industry expertise and commercial commonsense.

As supply-chain disruptions continue, contractual obligations will likely be missed, and parties will increasingly declare force majeure to excuse their non-performance. Counterparties will invariably invoke their arbitration clauses in response and will seek to have their claims formally resolved in arbitration. Life sciences companies should prepare for that eventuality now by taking a few easy steps that will help position them for the future.

Immediate action items

Life sciences companies should begin by taking an inventory of their cross-border agreements to understand which ones might be impacted by supply-chain disruptions. While a cross-border contract for the supply of API is obviously one that could be affected by events in China and India, it is equally likely that related contracts – for instance, one for the delivery of finished a product to a foreign distributor – could equally be impaired.

Once life sciences companies establish the universe of their cross-border agreements, they should review the following in those contracts to understand their rights and obligations:

Governing law provisions – is the governing law of the contract helpful to the claims companies might make or face? Dispute resolution provisions – does the contract call for international arbitration, or does it place companies in front of an unfamiliar court in an unfriendly jurisdiction? Force majeure clauses – what does the governing law say about force majeure and how it can be applied to situations like the current one? Indemnification clauses – do contracts permit companies to recoup losses that another party claimed against them or obligate them to compensate someone else?

Understanding now what rights companies have under the governing law, how that governing law impacts significant contractual provisions such as force majeure and indemnification, and in what forum those issues might be resolved, is critical for positioning themselves for positive outcomes if formal disputes arise.

Notably, if that review reveals that companies’ cross-border contracts do not contain arbitration clauses, they should consider systemically including them in future cross-border contracts to manage risks and provide certainty. As the old saying goes – an ounce of prevention is worth a pound of cure.