Worried you'll run out of milk: what does your contract say?

09 April 2019. Published by Ciara Cullen, Partner

This isn't a 'B'-word blog, don't worry. But with 'B' looming (in whatever form it may take) UK businesses are facing unprecedented uncertainty when it comes to their supply chain – talk continues of border delays, stock piling and shortages.

This got us thinking: what do you do if you think you may not be able supply the thing you are contracted to? To take one (none-'B' related) example, coffee fans may have spotted that 'It' product Oatly, the non-dairy milk alternative, had some difficulty with meeting orders over the past year or so (down in part, it says, to a surge in demand coupled with trying to expand its production facilities).


One simple thing you can do is check your contract with the customer: does this help or hinder?


Suppliers can try to improve their contract position in a number of ways. Think about the following areas:


  • What is your supply obligation? This may depend on your bargaining power but could be anything from: an absolute obligation to fulfil any order the customer submits or a commitment for you to meet a minimum supply quantity. A right to accept orders on a case by case basis or cancel individual orders which have already been accepted would add more flexibility.


  • Can you vary the contract and on what terms? Varying the contract could be a straightforward way to suspend or reduce your supply obligation. However, be aware of the scope of the variation and what this means for your supply obligation: while you may be able to vary the supply of future orders, you may still have a commitment to supply existing orders (or vice versa).


  • Can you terminate? If you are able to exit the contract for convenience, this should be a straightforward means of exit. However, the contract would need to be carefully considered to see whether exiting impacts upon the current supply obligation or only a future one.


  • Do you have a change control process? For example, this may deal with what happens in the event of a change of regulation and provide that if certain regulatory changes occur, there is an automatic effect on the supply obligation.


  • Do you have a right to vary prices (and if so, how)? Contracts often have fixed pricing or allow for an RPI uplift but you may have a right to vary your prices, either at your own discretion or to reflect cost increases for things like raw materials, national minimum wage, living wage or import costs.


  • Can you rely on force majeure? As force majeure is a pure contractual concept, if the contract is silent on force majeure there will be no force majeure right. If there is a clause, the actual scope of force majeure will totally depend on how the clause is drafted and for what it allows. Though the clause could be widely drafted to include things like changes in law and regulation, civil unrest and supply chain failures, customers may have pushed back on these more generous events. Also be aware of an obligation to continue trying to supply despite the force majeure event and wording that force majeure cannot be claimed for events for which the supplier could have planned.


This list isn't exhaustive but gives a feel for the kinds of contractual fall backs suppliers might be able to rely on if supply becomes an issue. 


Of course, in a scramble to meet an order, the contract may not be the first place suppliers look - but considering existing terms now or revisiting your standard terms (for future use), could provide valuable comfort – especially if there are specific supply issues you can anticipate now. (We also know that the legal, non-contractual remedy of "frustration" can be difficult to rely upon, so where possible it is advantageous to have something in the contract).

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