23 Apr 2020

Negotiating a contract can be a challenge, and more so in these uncertain times. If you are a customer in the midst of negotiating an agreement for goods or services and are concerned about protecting your business and securing the supply chain, this article should be of interest to you. In this article, we consider some of the key terms you may want to think about when discussing a contract for supply of goods and/or services in the current climate, and included suggestions which may help you achieve robust and flexible supply terms.

Know your supplier

Talk to your potential supplier. Having a good understanding of your supplier's strengths and weaknesses will allow you to form a more accurate view of their capabilities, and may flag specific points of focus for the contract you are negotiating.

  • Find out what locations they have a presence in, the resilience of their supply chain, their business continuity and contingency plans
  • Ask how their business has been affected by COVID-19 and how they have tackled and are continuing to address the problems it has generated
  • Keep communication channels open and maintain awareness of issues that the supplier might be having in its own supply chain or business.

Keep negotiations smart

Delivery

It is important that you consider the delivery options. Find out whether the goods or services will be delivered by the supplier or via a third party, and whether the supplier has alternative arrangements in place in the event that this supply chain fails (in which case you may consider asking the supplier for the terms between them and their providers, as it is important that the obligations the supplier has flowed down to its providers are no less stringent that those owed to you).

In relation to the supply of goods you may find it beneficial to build in an option to take over responsibility for logistics yourself, although you should think about this carefully as this may have an impact on variety of other issues, such as the passing of risk and title, additional costs (storage, transport) and insurance arrangements.

Also think about delivery times and the implications if these are not met. From the supplier's perspective, it may be important to secure non-binding delivery dates and/or that "time is not of the essence" in relation to those obligations. It is worth considering whether it is absolutely necessary that you receive the goods or services within strict timeframes, or whether you are able to extend these without having to suffer grave consequences. Perhaps you would be willing to accept part delivery of the goods (whereas in normal times you might only be prepared to accept delivery in full)? Given the current situation, unless your contract with your customer contains liquidated damages and/or termination rights for late delivery that need to be flowed down the supply chain, it may not be appropriate to include these in the current circumstances.

Description of goods or services

Consider the consequences if your supplier is no longer able to source the specific goods or services. This could be caused by shortages of a particular ingredient or component, travel restrictions, technical difficulties or staff shortages.

Think about whether it is vital that the goods or services you are purchasing are of a particular description or whether you are willing to consider changing your requirements, and to what degree, to be able to continue with the supply. Consider embedding into the contract a mechanism to agree the goods or services specification on a more flexible basis, for example, each time you place an order. Also consider how changing the specification might affect the price you are willing to pay for the goods or services each time and what happens if you are not willing to accept the specification of the goods or services that the supplier offers. If the supplier is manufacturing goods for you, can you have access to the designs, tooling and templates so that you can source the components elsewhere should the supplier be unable to perform?

Source of supply

Clearly the ability to source elsewhere if the supplier is unable to fill orders is key, so you should avoid exclusive arrangements if possible – if not possible then include a carve out allowing you to purchase elsewhere should the supplier be unable to meet your requirements, which then becomes, in effect, a right of first refusal.

Diversify your list of suppliers where possible to ensure flexibility and agility in the supply chain. Consider the importance of your custom to each supplier and whether this enables you to request a favoured position in the supply chain in priority to other customers, or whether you can request that the supplier reserves a stock of goods specifically for you.

Payment

Last but not least, use payment terms to your advantage. Paying promptly will instil confidence in you as a customer and help you to secure the supply chain; to achieve this you may want to consider agreeing to shorter than usual payment timeframes. On the other hand, making payment conditional on delivery will help you with cash flow. It would also be wise to take advantage of the low interest rates by specifying a low default interest rate (statutory rates default to 8% over base, which is high given the current economic climate). However, do be aware of the importance of the position the supplier holds in your supply chain and be prepared to consider financial aid (by way of a loan, for example) and/or pre-payment for goods if their role is sufficiently important to you that you need to ensure that they are sufficiently funded to continue to operate.

Think beyond now

Revisiting the contract

You may agree to more generous contracting terms to address the current situation, but this situation will not last forever, so you will want to be able to change these favourable arrangements once things are back to normal. You could consider building in a clause which requires the parties to revisit and re-negotiate the terms once the situation has normalised. This is known as an "agreement to agree" clause, and there is a risk that, in the event you are unable to agree, the supplier may successfully argue that this clause is unenforceable and you remain bound by the contract as it is agreed now. One option is to include a separate set of provisions that will automatically apply once the current situation ends, although this will require careful drafting as to what the trigger point for those provisions to kick in is. Alternatively, where you are unable to agree new terms, ensure that you can bring the contract to an end swiftly by opting for a short-term rolling contract or include a right to terminate on short notice without liability should the re-negotiation fail; a standard three-month termination provision may not be a sufficiently responsive solution.

Force majeure?

You should assume that a force majeure clause purporting to release the supplier from any and all liability will not be applicable in relation to the current COVID-19 situation to release the parties from liability. Given that this is a known fact of daily life, a court is unlikely to accept an argument that this was not something that was considered at the time the parties entered into the contract, and was therefore outside their reasonable control when it comes to performing the contract. Therefore you should think about incorporating contingency plans and procedures, once agreed with the supplier, to provide for a robust and enforceable mechanism you can both resort to should performance be prevented from COVID-19 related events, and include in the contract a provision that non-compliance with the agreed continuity plan is a termination event. If you do want to allow for non-performance by either party due to COVID-19 related matters, the grounds for this and the consequences should be set out in the contract as a standalone clause. You should also consider whether a short term contract with an ability to terminate on short notice for convenience or contract on a rolling basis will would be preferable in the current scenario.

Brexit

Remember, it is not just about COVID-19. Your contracts and business operations need to be robust enough to withstand not only uncertainty of a global pandemic but also Brexit, and many other as yet unanticipated fluctuations in years to come. Although it may seem like a large and burdensome task, do not be daunted. You may already have put in place working groups, mapping tools and risk registers during Brexit preparations. Know your business - the more you know about it the easier it will be to cope with the uncertainty. Use the conclusions you have formed to understand your strengths and weaknesses and utilise this knowledge going forward.

Conclusion

Although there is no magic bullet to the challenges of entering into a new commercial contract in these times of uncertainty, we hope that a few points we have outlined above will be helpful in guiding you through the process. Ultimately, the success of every commercial deal lies in understanding and being able to meet each other's requirements, and setting out respective rights and obligations in a commercial contract can help not only with suitably recording these from the start, but also facilitate a productive discussion as both you and your business partner are planning for what lies ahead.

If you have any comments or questions, please get in touch.