How to deal with supply contract issues and uncertainties

There have been many media reports in the last few months relating to concerns over suppliers being able to meet demand. These supply concerns have arisen for a number of different reasons, including the impact of Brexit, the post-pandemic commercial world, driver shortages and supply shortages. More widely, however, this is affecting all industries – in particular, retail and food retail (especially in the run up to Christmas), the agricultural sector, construction and the manufacturing industry to name a few.

Here are some top tips in how to approach, and hopefully overcome, any supply issues in practice:

Strategy

When considering supply issues or uncertainties, it is important to consider an internal approach to dealing with and overcoming these. Most importantly, don’t take any unreasonable action that could worsen the situation. This may involve negotiating, communicating and working together to find innovative solutions.

For example, if a supplier is aware of future supply concerns which are communicated to its customer, the customer could look to place orders for larger quantities of goods and provide payment up front, or revise its obligations relating to timescales when submitting orders.

Act reasonably

Generally, in contracts, there is an implied presumption that parties will act reasonably and deal with each other honestly and fairly. Both suppliers and customers should be striving to maintain an open and transparent dialogue with each other. To have an effective and long-lasting supplier-customer relationship, the parties need to be able to talk to each other openly and liaise to find reasonable solutions that work for both parties.

Good faith obligations

Many contracts also imply that the parties will act in ‘good faith’. The ‘good faith’ concept goes beyond that of reasonableness and means that there is an expectation that the parties will work together to achieve the commercial objectives that the contract looks to cover.

It also implies one party will not look to take unfair advantage over the other party through acting in its own commercial interests. This is particularly relevant in contracts where there are uncertainties or supply concerns. In some contracts, ‘good faith’ obligations can be set out expressly. These obligations can be very onerous and both suppliers and customers should be aware of these.

Negotiate

Negotiation is one of the most important tools in the commercial world and even more so for long-lasting relations between parties. Successful supply contracts require parties to understand each other’s commercial position and work together amicably to find solutions when problems surface.

Communication is key

There should be an understanding between the parties where, if either party has concerns over meeting its obligations, the other party is informed as soon as possible and kept updated as to estimated timeframes and resolutions.

Cooperate to resolve unforeseen issues

Most importantly, parties should always work together to resolve issues. This generally means both parties adopting a practical approach, understanding their ‘pinch points’, but also being aware of areas where they can be more flexible.

Consider implementing forecasting obligations

Forecasting is used as a tool in many contracts to assist both parties. This provides the customer with confirmation that a quantity of orders will be fulfilled by the supplier (once accepted) and the supplier then has guaranteed orders and accordingly, guaranteed revenue. Considering this on an annual basis could assist both parties in any uncertainties over supply issues in future.