Many businesses rely on third-party suppliers as part of their production chain. Here are some reasons why it is essential to ensure you properly negotiate your contracts with suppliers:
Liability: If a third-party supplier defaults or delays, this may cause your business to default in its obligations to end customers. Since the end customer’s contract is with your business, they could sue you for breach of contract. Therefore, it is crucial that you can claim against the supplier. Supplier contracts should ideally therefore mirror your obligations to your end customers.
Conflict of Interests: Suppliers aim to limit their liability and risk, just as your business wishes to place liability and risk on the supplier. Consequently, suppliers often have their own contracts, drafted in their favour, which can be onerous on you as the business customer. Courts strictly interpret contracts in a business-to-business relationship, so it is vital to understand what you are signing up to. Once onerous terms are identified, negotiation is key to realign clauses more favourably for your business and reduce potential risks. If suppliers agree to your terms of purchase, these terms should be carefully drafted and tailored to reflect your specific business operations and risks.
Onerous Terms: Supplier contracts may include terms which do not protect you if a supplier’s default or delay puts you in breach of obligations to your end customer. Onerous terms might include being tied into the contract for long periods, automatic renewal unless you terminate by a specific date, the supplier’s ability to increase prices or amend the terms without your agreement, unreasonable limitation of the supplier’s liability, indemnities you are required to give and more. The contract should address important aspects such as intellectual property, insurance, force majeure events, termination and handover when the contract ends. A red-flag review is advisable to highlight potential pitfalls. Ideally, all supplier contracts should be negotiated to achieve a better position for your business.
Data Sharing: When using a supplier, you may need to share the personal data of your business employees and end customers. As a data controller, you are responsible for due diligence on your suppliers and ensuring they comply with data protection legislation. Data processing agreements with your suppliers should outline the parties’ obligations and address critical issues such as liability in case of a data breach.
Obligations Throughout Your Supply Chain: It is your responsibility to know your supply chain and ensure the parties involved comply with certain obligations, which may include anti-bribery, anti-slavery, corruption, worker safety and environmental laws.
Reputation: Whilst a default may be with a third-party supplier, it can irrevocably destroy your business’ reputation from an end customer’s perspective.
To summarise:
- Ensure you fully understand what you are signing up to. At a minimum, conduct a red-flag review of supplier contracts to highlight potential pitfalls.
- Properly negotiate supplier agreements to rebalance potential risks and liabilities to your business.
- Where possible, draft and tailor your own contracts to address your business’ activities, risks and potential liabilities and require suppliers to sign up to them.
- Review existing supplier contracts to ensure they still correctly reflect your business activities, risks, and supplier relationships.
- Ensure your business has robust compliance programs and monitors its suppliers continuously.
For further advice, please contact our Corporate & Commercial team by emailing online.enquiries@la-law.com or calling 01202 786188.