Changing your supplier is a common situation in business. Can you switch between suppliers without restrictions, if there is no fixed term or exclusive contract? Do you have to purchase from the supplier during the notice period? What are the risks of failing to give purchase orders? In our article, we answer the above questions by analysing the Hungarian judicial practice.
In which case the situation can occur?
In business, such situations are frequent when a customer regularly gives purchase orders to its supplier to manufacture products or provide services, without having fixed term or exclusive contract with the supplier. It is also common that suppliers undertake larger investments or hire new staff in order to perform those purchase orders continuously.
The question is, whether you, as a customer can decide to change your supplier in such cases. If so, are you obliged to purchase from the supplier during the notice period? What are the risks of using the service of your new supplier instead buying from the old one?
Should you purchase during the notice period?
The Hungarian court practice has a unified position regarding the above question. According to the decisions, contracts are still in force during the notice period, thus the parties must fulfil their contractual obligations. This means that during the notice period, you have to order the service or product from your old supplier.
In case the supplier is unable to perform the contract despite its will, because the customer simply does not request it or even obstructs the performance, it is considered as an impossibility of performance under the Civil Code.
Rulings confirm that the supplier will not be entitled to demand remuneration in the above case, since he did not perform the contract, however, you as a customer shall be liable for your contractual obligations and by not requesting or blocking the supplier's performance during the notice period, you breach the contract.
Liability for damages
In practice this means that if you do not ensure that the old supplier can perform the contract during the notice period, the supplier may claim the amount that he would have been earned if the contract was performed, as a lost profit.
The ruling in the following case highlights a further consequence.
The defendant was a supermarket chain, as customer, the applicant was a carrier. The customer expanded the order, so the supplier leased eight new vehicles to be able to perform. After that, the customer suddenly terminated the contract with immediate effect, so the main income source of the carrier was immediately cut instead of the four-month notice period. Due to the loss of the contract, the carrier was unable to pay the lease fee for the redundant "fleet", became insolvent in six months, finally, the business was liquidated.
The court found that the immediate termination by the supermarket was unlawful and in addition to awarding the carrier his lost profit for the term of the notice period, the Court also awarded the lease fee paid by the carrier for the fleet, in his favour, since the carrier could reasonably expect that the contract will remain in force for long term when he concluded the "fleet" lease contract,
Based on the Hungarian case law, it is clear that in the absence of an exclusivity clause, you as a customer can freely change your suppliers, however,
- you must provide your old supplier with purchase orders making him possible to perform the contract during the notice period
- failure to comply with the above constitutes a breach of contract resulting in a claim for damages by the supplier, claiming loss of profit and further damages.
In the light of the above, it is advisable to consult a legal professional before changing supplier to avoid unexpected risks.
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.