When supplier and customer non-performance leaves you high and dry
The premise of UK commercial law is that you have to prove your loss, and prove that the loss is due to the actions of the defaulting party. Many companies were left faced with tough choices over the last two years.
Commodity prices, shutdowns, volatile demand patterns, labour changes and border control changes all affected companies’ ability to supply according to their contracts. Many chose simply not to honour the terms of their contracts. Why was this the case?
They had to survive themselves
The truth is that many companies upset the customers and suppliers they felt that they could afford to first. Where no contracts were in place, there was limited risk (unless the other party was a dominant share of revenue). If services and products were agreed to be supplied, then prices generally rose significantly on a take-it-or-leave-it basis.
The relationship with contracted customers and suppliers was generally less adversarial. Instead contractual provisions were pointed to.
Understand what’s in your contract
Despite many organisations believing that a contract is a water-tight guarantee, the truth is that nearly all contracts contain clauses which permit changes in the need to buy and supply under certain conditions.
Force majeure is one such common clause. All companies ought to take the time to understand what is included and excluded in their force majeure clauses, and scenario plan against certain events.
Many contracts also permit for a change to the terms and conditions under certain circumstances. It is common to find that a party may change price, product specification or service following changes in legislation or market conditions. Again, these clauses need to be understood.
Finally, there is the question of liability. If a company does breach the contract, exactly what is it actually liable to the other party for? Liability and limitations to liability are key contractual elements. Where liability was low for a party to default, they would choose to stop trading with companies in order of which default would hurt them the least.
Understand the financial stability of your suppliers and customers
However, if a company went bankrupt as a result of wider economic forces, then the realty is that there is no money against which to claim your damages anyway. This is where companies need to evaluate the financial stability of their business partners, as well as determine the business risk that they should insure for.
The power of business relationships
How organisations reacted to each other’s issues has been a key part of a decision to supply or buy. Those with strategic partnerships and collaborative relationships tended to work through the issues of the other party with trust and a commitment to support, whilst those with arm’s-length transactional relationships, or those who refused to engage in understanding the other party’s issues tended to stop trading with each other.
Categorising your key suppliers and buyers into the type of business relationship you require is a fundamental of modern supply chain management.
Challenge for your organisation
Do you truly understand how strong your contracts are and what type of relationship you have with your suppliers and buyers?
At Slater Austin, we have a number of training courses to help you and your organisation manage supply chain activity, including Contract Terms and Supplier Relationship Management.
Our consultancy division can also help your business develop greater resilience within your contracts and deliver benefit from segmenting and structuring the right relationships with your suppliers and customers.