Supply Chain Contracts – Avoiding The Squeeze

As larger businesses struggled during the lockdown, a recurring theme was the pressure that some of those businesses placed on their suppliers (many of whom were already struggling themselves). For example, retailers returning stock to suppliers and cancelling large orders with no compensation.

In English law, there’s no automatic right for businesses to cancel orders, return stock or carry out other similar actions detrimental to their suppliers – any such right has to be included in the contract. In the past, many suppliers have simply accepted contracts imposed by their customers, either because there had never been any problems in the past with that customer, or because they didn’t think they had a choice. It’s too often the case that sales departments spend a lot of time getting comfortable with the price, but don’t place the same importance on reviewing the contract.

However, the price is of course irrelevant if you don’t get paid in the first place!

The reality is that, despite the assertive tone taken by many procurement departments, there are few businesses that will refuse to negotiate reasonable adjustments to their contracts, and it’s always worth spending the time reviewing the contract and raising concerns with potential customers. Even if the customer won’t agree to negotiate away some of the unreasonable provisions, you can at least go into the contract with your eyes open, aware of the risks you are taking. The same applies to any existing contracts you may have signed up to – now is a good time to take stock, assess any risk and consider whether there is any scope to renegotiate any existing contracts.

Areas to consider

Key areas to consider will obviously relate to payment – can your customer delay payment in certain circumstances? Can it return already-delivered stock, and if so, is there any compensation for you if you can’t resell that stock elsewhere?

Also consider what the contract says about orders and their cancellation. In many industries, products can have a long lead time and the impact of cancellation close to delivery can be devastating, particularly for bespoke products or for seasonal items that can’t easily be resold elsewhere. If your customer insists on a right to cancellation, then can you reduce your exposure by insisting on a non-refundable deposit placed at the time of order? Alternatively can you perhaps insist on staged payments at the time of delivery, leaving a more manageable amount of the price outstanding after delivery?

Consider also any “force majeure” provisions. These are intended to protect either party from being in contractual breach where things go wrong beyond their reasonable control. But they shouldn’t be so broadly defined that your customer could abuse them and suggest that, for example, a pandemic justifies withholding payment.

If you need advice on negotiating new contracts or reviewing your existing contracts, please do not hesitate to contact Matt Worsnop on 0116 281 6235 or by email on matt.worsnop@bhwsolicitors.com.