Each party to a supply contract will have its separate list of what it needs to see in the contract. Some of the more common clauses are discussed below. The longer the term of a contract or the higher the contract value, the more important the detail of such clauses.

On this page we comment on some common contracts topics:

Limitation of Liability

Service Levels

Force Majeure

Retention of Title

Price Variation

Key Dynamics/Key Parameters

Controls on Assignability

Change of Control

Third Party Rights

Review Meetings

Service credits

Exit Plan

Product Warranties

Audit Rights

Interest on Late Payment

Limitation of Liability. A supplier will typically wish to limit its liability for errors, if nothing else (apart from the price!) is stated in the contract. Insistence on this may be driven by a bad experience in the past or by a realisation that the contract price does not allow for the build - up of any contingency fund for claims.

Limitation clauses work in either or both of two ways:

1...Limiting the category of claims or loss that can be made. Thus, claims for loss of profit or future contracts or of goodwill or reputation might usefully be excluded. Claims for death or personal injury are not allowed to be excluded and any clause purporting to do so is void and unenforceable.

2...Limiting the monetary value of compensation the supplier can be required to pay out, either for each claim or as an aggregate for all claims.

If the clause is part of a set of standards terms and conditions used by the supplier, it will be valid only to the extent that it is reasonable; this is the effect of the Unfair Contract Terms Act 1977.

Service Levels. A detailed description of the precise services to be supplied by the supplier will serve to focus minds right at the beginning as to what is required and expected. Those persons managing the contract later on will be able to identify precisely when service falls short or when there is a requirement for the contract to be updated to reflect a change of circumstance.

Force Majeure. This clause has the effect of suspending the obligations of the supplier where he is unable to carry out his obligations because of some intervening act or set of circumstances outside of his control. Typically, the clause will state that the suspension will last for the length of the intervening circumstances and no further, but if those circumstance extend for a given period, then either party will have the right to terminate the agreement thereafter, either immediately by notice or on a period of notice. The emphasis will be that the intervening event is one is that could not have been predicted or avoided by the supplier.

Without such a clause, the supplier effectively carries the risk of all intervening events for the duration of the contract even though it may have many years to run. The longer the term of the contract, the more crucial this clause becomes.

Retention of Title. Under the general law, the ownership of goods transfers to the buyer when the goods are delivered to it by the supplier. In a simple retention of title clause, the ownership of the goods stays with the supplier until the supplier receives payment in full for those goods. Frequently a clause will instead stipulate that ownership will stay with the supplier until not only the price for those goods but also any other monies due to the supplier are paid in full.

Retention of title is a useful weapon for a supplier even where the goods have a short shelf life because it may afford the supplier some leverage against a customer going into administration.

Some widely drawn clauses have the effect of preventing title ever passing to a buyer, for instance during a long trading relationship, and the courts have had to imply a permission for the buyer to sell on or use the goods in the normal course of its business if such a permission is not expressed in the wording itself.

Price Variation. The price at which goods may be sold will be specified in the contract itself, perhaps in a schedule, or some other document identifiable in the contract. Those prices will apply for the duration of the contract and therefore a price variation mechanism must be included if the supplier is not to be held to the original prices throughout the period. The mechanism can either be specific - e.g. “… the price of the goods will increase by X% on the first and second anniversary of the agreement …“ or it must allow for an independent third party, such as an expert, to specify the new prices. The dates or frequency of price increases must be identifiable as well.

Agreements that provide for price increases or variations “… to be agreed between the parties …” or “… shall be justified by the supplier …” or “shall take effect when market conditions dictate …” are all legally unenforceable because they are inherently uncertain. These clauses only work when the commercial relationship between the two parties is strong and both parties require a resolution. If that relationship falters, then the supplier is stuck with the original prices. In these cases the supplier must have the safeguard of being able to refuse further orders for individual products for which new prices cannot be agreed.

Key Dynamics/Key Parameters. It is important in a long term contract to set out the commercial background or basis for the agreement. Thus the parties might agree anticipated volumes, number of delivery sites, average order value or average number of cases per drop etc or even specific components of the supplier’s operating costs. If any of these alter materially during the life of the contract, that may have a bearing upon the supplier’s cost to serve / profitability; if costs increase then the supplier will obviously want the right to increase his charges whereas if, for example, volumes increase, the buyer may want the right to benefit from the economies of scale and call for reduced charges.

The right for such price variation in the costs of service can be expressed to arise if any one key dynamic varies by any given percentage from that applying at the beginning of the contract. The actual amount of the price variation will be the subject of negotiation and, ultimately, determination by the suitable independent expert in order to provide certainty to the right.

The parties sometimes also agree that if any key dynamic varies by a larger percentage, then either party has the right to call for a re-negotiation of the commercial basis of the agreement and, if that is unsuccessful, the right to terminate the agreement on a period of notice.

Controls on Assignability. Without this, the customer is free to assign the benefit of a contract to a third party such as a purchaser of its business. Such a purchaser might turn out to be a competitor of the supplier or otherwise a company financially weaker than the original customer and in either of these cases the supplier might wish to prohibit such assignments. A prohibition will at the very least enable the supplier to renegotiate terms of supply to the business, either for the remainder of the term of the existing contract or completely afresh.

Change of Control. Under this clause the supplier is given the right to terminate the contract early if a customer gets taken over by either any third party or one of a number of named third parties. The purpose of the clause again is to protect the supplier from the risk of ending up dealing ultimately with persons it would otherwise not have to.

Third Party Rights. Under the Contract (Third Party Rights) Act 1999, a third party who is either identified in the contract by name, either as a member of class or answering a particular description (but not necessarily being in existence when the contract was entered into), is able to enforce contract terms as if he had been a party. In addition, any contract which can be enforced by a third party must not be varied by the parties to it without the consent of that third party in certain circumstances. Parties to a contract frequently include a declaration that they do not intend third parties to benefit from the contract (barring any named exceptions that they are prepared to make).

Customers with long term supplier agreements will of course benefit from many of the above clauses as well. However they will have separate points which during the negotiations they will want to incorporate into the written agreement. The following are by way of example.

Review Meetings. These serve to ensure that conduct of the service is monitored, any minor issues are resolved before they become big issues and, in due course, the minutes from them may help to build a case to support exercise of a right of early termination should that ever become necessary. To determine a supply agreement for poor service will invariably carry with it the risk of a claim by the supplier that the termination was not justified, and thus that compensation is due from the customer; this risk can be considerably reduced if not eliminated if there is a contemporary record on service defaults which, even though individually not significant, together amounts to a material service failing sufficient to justify an early termination.

Service credits. A scale of service credits is sometimes negotiated, to keep the supplier up to the mark and to provide a convenient compensation mechanism for defaults. Without this the customer is left with the unwieldy and damaging legal process. Service credits should be at a level no more that a pre-estimated assessment of damage suffered by the customer; if excessive they will constitute a penalty and be unenforceable.

Exit Plan. A requirement in the contract that the supplier must have an exit plan and review this from time to time with the customer serves not only to ensure that the transfer from one supplier to the next supplier will take place with the minimum of disruption but also demonstrates to the customer’s own customers and risk assessors that this possibility is being properly managed. Where a customer is dissatisfied with service levels from the supplier, a call from for the customer for a current copy of the exit plan can serve to sharpen up performance from the supplier.

Product Warranties. A particular supplier may have been chosen because of its use of certain manufacturers, sources for products, its approach to and reputation in respect of environmental matters. If these are important to the customer then the supplier should be required to give specific warranties in respect of those standards and conduct, such that the customer should be able to take action in the event of a lapse. The customer’s reputation in its own marketplace maybe at risk in these circumstances even where its delivery levels and purchase prices are not at issue.

Audit Rights. It is useful for a customer to have audit rights not only in respect of financial matters but also on the other matters on which its reputation may stand or fall. See the comments above in respect of warranties. Better for a customer to be able to examine a concern, identify an issue and have it resolved directly with the supplier rather than to be left with dealing with a problem once it has become public.

Interest on Late Payment. The benefit of an interest clause on late payment has changed in the last few years. Under the Late Payment of Commercial Debts (Interest) Act 1998, a supplier has a statutory right to interest on late payment of invoices. The statutory rate is 8% over the Bank of England official dealing rate on the 30th June or 31st December, which ever date precedes the start of the interest period. It is preferable from the customer’s point of view for the contract to include an express interest clause setting a rate more akin to a commercial rate of interest which is likely to be lower than the statutory rate. As long as the agreed contractual rate is a “substantial remedy” to the supplier for late payment, then the statutory provisions will not apply.

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