How a Contract Can Prevent Supplier Problems

Problems with suppliers can be very stressful and disrupt business operations. This is particularly the case where suppliers are late to deliver critical products or services or fail to deliver what a customer is expecting. However, there are key protections you can put in place in your supplier contract to prevent problems from arising. This article will explore how a contract can prevent supplier problems

Why Supplier Contracts are Important

A contract is a key legal document for your business when dealing with suppliers. In fact, it is often drafted or negotiated specifically to help protect you when things go wrong. Contracts for the supply of goods or services are very important to get right. As a customer, you need a carefully drafted contract to ensure that your business is covered against the potential risks of what could go wrong in the supplier relationship.

If you are unsure about how to protect your business, you should work with a commercial lawyer to take legal advice and draft a contract which is tailored for your project and to prevent the risks of what could go wrong. An experienced lawyer will help you understand what could potentially go wrong and include contractual provisions to mitigate against those risks. This is an important exercise to carry out during your supplier procurement process as a buyer of services.

Where a contract is based on a supplier's own terms, ensure that you carefully review those terms and understand them. You should also look to build in key provisions for your own legal protection by negotiating changes to the supplier's terms, as necessary. For example, you may want to request a clause limiting your liability to the supplier in the event that you breach your obligations under the contract.

How a Contract Can Help

The following are some of the key ways in which a well-drafted supplier contract can prevent issues with suppliers:

1. A Contract Can Clearly Set Out What You Are Expecting From the Supplier

Uncertainties in business relationships often lead to difficulties and disagreements. Mismatched expectations are a common cause of disputes. However, a contract can stipulate clearly the contractual obligations of each party.

As a customer, you should very clearly set out what you expect of the supplier and what deliverables you require from them.

Your contract should include an extremely clear 'Scope of Work' or 'Order Form' to set out your expectations and what products or services you are paying for. This will evidence what you have agreed and what the supplier needs to deliver. Any niche or bespoke requests also need to be documented, so you can point to them if the supplier has failed to deliver them as requested.

You also need to be crystal clear on your obligations as a customer in the commercial relationship. For example, your contract cover the following key points:

• What data or materials do you need to provide the supplier?
• How much do you need to pay for the products or services?
• What happens if you fail to pay on time? Can the supplier end the contract?
• What are your remedies if things go wrong?
• How can you end the contract if you are not happy with the services?

Properly documenting the relationship with the supplier, with clear duties and obligations laid out, will mean there is less room for argument and misunderstandings. It also means you can hold the supplier accountable and potentially liable when they have failed to deliver what they have agreed they would, per the supply contract.

2. A Contract Can Offer a Way to Manage Issues Amicably and Prevent Contract Disputes

As a customer, going to court and bringing legal proceedings should always be the very last resort. Bringing a claim to court can be stressful, time-consuming and extremely costly. However, problems do arise under contracts, and you need a way to resolve them quickly and easily and avoid contractual disputes.

A contract with your supplier can set out a clear method to resolve problems, for example, with an informal dispute resolution procedure. This can be extremely useful for you, as a customer so you have a process to follow where a problem arises. For example, your contract can require the supplier to enter into constructive discussions and negotiations with you to resolve a potential dispute. Importantly, this can also help manage business relationships effectively and save time and costs overall. Commercially, you may want to try to save the relationship with your supplier rather than needing to find another supplier to work with.

3. A Contract Can Protect You Against Legal Risks and Help With Risk Management

There are often legal risks when working with third party suppliers.

For example:

• What if the supplier causes a data breach with personal data you supply them with?
• What if the supplier creates materials for you which infringe the intellectual property rights of a third party?
• What if the supplier misuses your confidential information?

A contract can help prevent these risks. Your contract can set out clear contractual rules and remedies to protect you if the supplier is in breach of its obligations. For example, you can include an indemnity clause requiring the supplier to compensate you on a pound for pound basis for any losses your business suffers if the supplier causes a personal data breach. By including clear remedies in your contract, you can be comfortable that you are protected if things do go wrong. These provisions often also worry suppliers and help them ensure that they work hard to comply with the terms of your contract, so that you don't pursue remedies against them (such as making an indemnity claim against them pursuant to a contractual indemnity provision).

Key Takeaways

A well-drafted contract can prevent supplier problems from happening in various ways. For example, a contract can set out clear obligations to avoid misunderstandings between parties. A contract can also give you an easy way to resolve issues and mend relationships, for example, thorough informal discussions with the supplier. As a business customer, you should invest in robust contracts to minimise risk when working with suppliers. Alternatively, if you are asked to sign a supplier's contractual terms, you should ensure you properly review and negotiate them so that they also protect your best interests.

If you need help with drafting a supplier contract or reviewing one, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. 

Frequently Asked Questions

How can a well-drafted supplier contract prevent problems?

A clear and detailed supplier contract can outline expectations, set out deliverables, and define remedies if things go wrong. It can also help prevent misunderstandings by documenting both parties' obligations, and provide a structured process for dispute resolution, saving time and costs if issues arise.

What should be included in a supplier contract to mitigate risks?

To protect your business, ensure your supplier contract includes provisions such as indemnity clauses for data breaches, intellectual property protection, and clear consequences for non-compliance. These clauses help manage legal risks and ensure accountability, encouraging suppliers to meet their contractual obligations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.