5 key ideas to improve supply chain contracts

Supply chains create complex legal risks, even under normal circumstances. If a supplier fails to deliver or meet its contractual commitments, your business may, in turn, be unable to fulfil its own contractual obligations to customers or end users.

Supply chain problems are particularly common in contracts for the supply of goods, sometimes with ancillary services, and in construction contracts. How can you protect your business and mitigate contractual risks when supply chain disruption occurs?

Key supply chain issues in commercial contracts

First, review your existing commercial contracts carefully, including the technical specifications and schedules that can easily be overlooked. These may contain provisions dealing with technical failures, defaults or other circumstances that provide options you might otherwise miss, including potential termination rights. However, terminating a contract requires careful consideration, as doing so without a valid legal basis may expose your business to a claim for breach of contract.

Other aspects to consider in your commercial contracts include:

• Alternative suppliers - Check whether your contracts allow you to source goods or services from alternative suppliers if the existing supplier cannot fulfil its obligations. If they do not, consider negotiating appropriate contractual protections when the opportunity arises. We can assist with commercial contract variations to help address these risks.
• Contract variations and waivers -  Consider how to respond when suppliers request extensions to delivery dates or customers seek additional time to pay. Any variation or waiver should be assessed carefully to protect your legal and commercial position. Depending on the circumstances, you may wish to seek additional security, such as a personal guarantee, where appropriate.
• Retention of title clauses - Properly drafted retention of title clauses can help suppliers retain ownership of goods until payment is made and may provide protection if a buyer becomes insolvent. Their effectiveness depends on the wording, the nature of the goods and the circumstances, so the relevant provisions should be reviewed carefully.
• Price - Check whether your contracts contain mechanisms for adjusting prices when costs increase. Supply chain disruption can create costs outside your control, making it important to consider how price changes under supplier contracts interact with your onward sales contracts. Where possible, aligning the relevant provisions can help reduce the risk of absorbing cost increases that cannot be passed on to customers. When renegotiating contracts, consider whether appropriate price-adjustment provisions would improve your position.

Supply chain dispute?

If supply chain disruption leads to a contractual dispute, we can help you assess your position and identify practical options for protecting your commercial interests. Early advice can be important where several parties are involved, as decisions taken in one contractual relationship may affect your obligations and potential liabilities under others. Taking action promptly can help limit losses, preserve contractual rights and reduce the risk of a dispute escalating.