In the realm of commerce, risk is an ever-present factor. When it comes to suppliers and service providers, the pivotal role of contractual terms cannot be overstated. These terms act as a crucial tool for mitigating potential risks and realising the value of customer partnerships.
An effectively crafted contract serves as the linchpin for managing the dynamic between supplier and customer. It delineates critical aspects, including the when and how of goods or services delivery, the quality standards, the obligations of each party, and the available remedies in case of unforeseen complications.
Within the United Kingdom, specific legislation inserts certain terms into contracts for goods and services. These terms, often non-negotiable, take precedence unless expressly excluded from the contract. This implies that, irrespective of whether it favours the supplier, these implied terms apply when no contractual terms are in place.
In this article, Myerson Solicitors’ Commercial Lawyers delve into three pivotal components of a B2B contract: liability, pricing, and payment.
Primary Concerns in Supply Agreements
1. Liability
The distribution of risk between parties is a critical factor when seeking to limit or exclude liability under the contract. Suppliers naturally aim to minimise their liability exposure, but the extent to which they can do so is regulated by English law. In cases where a restriction on liability is deemed unreasonable, it becomes unenforceable.
When a limitation of liability clause is rendered unenforceable, suppliers risk lacking contractual safeguards and may find themselves liable without limits. Therefore, crafting limitation of liability clauses is akin to a delicate balancing act: restraining liability as much as possible without running afoul of reasonableness standards.
What measures can be implemented?
- Imposing both capped and uncapped liabilities: Certain liabilities are beyond limitation by law, such as those stemming from negligence, defective products, fraud, or fraudulent misrepresentation. However, all other potential liabilities arising from the contract can be restricted.
- Carving out specific loss categories: Certain types of losses, such as loss of profits, goodwill, damage to reputation, or data loss, can be exempted from liability provisions. The reasonableness of such exclusions should be assessed on a case-by-case basis.
- Aligning with insurance coverage: Referencing the supplier’s existing insurance coverage can demonstrate to a court that the limitations on liability are reasonable and properly apportioned. Nonetheless, suppliers should always consult their insurance brokers to ensure that contractual limitations do not jeopardise their insurance policies.
Limitation clauses should also be structured with a series of clauses and sub-clauses. This way, if one sub-clause is deemed unreasonable, it can be severed from the contract while leaving the other liability provisions intact.
2. Pricing
Unless explicitly stated otherwise in the contract, statutory regulations imply that the buyer should pay a “reasonable” price. Nonetheless, suppliers seek to ensure that the price is not only reasonable but also profitable, covering ancillary costs such as inflation, insurance, transit, or storage.
What provisions can be instituted?
- Clear price delineation: The contract should explicitly specify the price of the goods or services and indicate whether it includes additional costs like packaging, delivery, off-loading, and business insurance. In the absence of such specification, these responsibilities default to the supplier and are borne at their cost.
- Inclusion of an expiration date for quotations: Including an expiration date for quotations allows suppliers to manage their order commitments and ensures that accepted quotations align with current pricing.
- Mechanism for price adjustments: Particularly in long-term supply contracts, incorporating a mechanism for price variation to account for inflation or other rising costs is advisable. This mechanism often grants suppliers the right to adjust prices in line with market conditions, such as the Consumer Price Index (CPI).
3. Payment
The foremost obligation for the customer under the contract is to make full and timely payments. To safeguard against late or non-payment, suppliers aim to include protective measures in the contract.
What remedies and entitlements can be integrated into the contract concerning payment?
- Time sensitivity: To incentivise prompt payment, the contract can stipulate that time for payment is of the essence. This empowers the supplier to terminate the contract if the customer fails to meet payment deadlines. By default, under statutory rules, time for payment is not deemed critical unless expressly stated otherwise in the contract.
- Additional incentives for timely payment: Other methods to encourage punctual payment include imposing interest on outstanding sums, offering discounts for early payment, declaring that a late instalment renders the remaining balance immediately due, withholding subsequent delivery for late payments when deliveries are made in instalments, and excluding the customer’s right to set off competing liabilities.
Key Considerations
Several other critical aspects of a contract warrant consideration:
- Incorporation: Businesses should be cautious of the “battle of the forms” scenario, where the latest terms presented and not rejected govern the contract. Ensuring that their terms prevail requires making them available to the customer when the contract is initiated and implementing internal processes to manage the risk of customers imposing their terms.
- Competition compliance: Supply agreements should be evaluated within the context of UK and EU competition regulations. Factors such as exclusivity, volume commitments, or non-compete clauses in the contract can trigger competition concerns.
- Data protection: When parties intend to share or process personal data, adherence to data protection laws is paramount. It is essential to determine whether the relationship operates on a controller-to-controller or controller-to-processor basis and to establish the necessary measures for personal data handling.
A well-crafted contract serves as the cornerstone for businesses to optimise outcomes, navigate risks, and establish a foundation for enduring working relationships with clearly defined obligations from the outset.
