Supply chain failures and the importance of well-drafted T&C’s

If you are a business, then you have likely felt the effect of the recent supply chain crisis, caused by a combination of factors including Covid-19 and the new post-Brexit world of border controls and customs regulations.

It is essential that businesses understand their potential liability exposure if they are unable to supply their customers. In order to do this, they will first have to consider the contracts that they have entered into with those customers.

Key points that suppliers will have to consider include the following:

• Does a failure to deliver, or a delay in delivery, actually put the supplier in breach of contract?

If the contract fixes the delivery date and provides no flexibility, then failure to meet that date clearly puts the supplier in breach. This could lead to the customer suing the supplier for damages to reflect the losses that they have incurred as a result of that breach. However, the supplier can attempt to mitigate this risk by contracting via a well-drafted set of terms & conditions that set the delivery dates as estimates only. This means that a failure to deliver on those dates will not necessarily put the supplier in breach of contract.

• Does the contract contain any limits on the supplier’s liability?

If the supplier is liable for a breach of contract, then they will need to consider whether the contract contains any limits on their liability. Well-drafted terms & conditions will include a  monetary limit on what their liability is.

• Does the customer have any right to liquidated damages under the contract?

Liquidated damages are a fixed sum (or a mechanism for determining a fixed sum) agreed by the parties to a contract to be payable on breach by one of the parties. They are a quick and easy way for customers to recover money from suppliers without having to go through the full court process to establish what losses have actually been suffered.  However, the customer has no automatic right to liquidated damages unless the contract sets this out – so you must check those terms!

• Does the contract contain a force majeure clause?

Force majeure clauses address unforeseen events that are outside of a party’s control and which prevents that party from fulfilling their contractual obligations. A force majeure clause in the supply contract may allow suppliers to suspend performance of their obligations until such time as they are able to continue performing them. Suppliers should review any force majeure clause to see if it will assist them in arguing that their delivery obligations should be suspended. Note however that the force majeure clause may exclude actions or inactions of the defaulting party’s own supply chain, on the basis that that party will have at least some control over its own suppliers via their own supply contracts with them.

• Can a party pass their liability down the contractual chain to their supplier?

If the cause for delay is the fault of a party’s own supplier, that party may be able to pass any  liability they may have to their customer down the contractual chain to that supplier. This depends on the contractual position and a party will clearly be in a better position if they have contracted with their own supplier upon terms & conditions which have been professionally drafted in their favour. Remember that commercial contracts are key tools to mitigate risk.

Other Points

It is also worth mentioning “frustration”, which is a legal concept that occurs where a change in circumstances makes it physically or commercially impossible for a contracting party to carry out its obligations. In practice however, claiming frustration is very difficult and such claims often fail.

Of course, on a practical level, warning the customer as soon as possible about a potential delay in delivery is a sensible step. Courts look favourably on parties who have tried to resolve the problem themselves, and the customer is obliged to try to  mitigate their losses, which they can usually do more easily the more notice they are given.

What can we do to help?

For advice in respect of any of the issues raised in this article, please contact either James Sarjantson on 0113 201 0401 – ku.oc1713550776.fcl@1713550776nostn1713550776ajras1713550776j1713550776 or Thomas Taylor on 0113 204 0407 –  Âku.1713550776oc.fc1713550776l@rol1713550776yatt1713550776

*Important information about our articles*