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HCR Law Events

8 February 2022

Managing discord in the supply chain

Maintaining good relationships with your suppliers and customers is, of course, vital, and having a strong supply chain makes a world of difference.

Challenges can arise equally in both short chains (in which high levels of dependency impact on bargaining power) and long chains (which need a good deal of maintenance to keep all the parts moving).

Wherever you sit in the chain, with a bit of know-how you can increase your prospects of resolving any discord quickly or can at least reduce the impact when things go wrong. Below are our tips to help you along the way.

Check your contracts are fit for purpose

Many disputes arise because the fundamentals of who provides what, how and when aren’t adequately recorded (or perhaps aren’t recorded at all). Leave as little to chance as possible.

The list of potential considerations is long but will need to include things such as:

  • Is the specification of any goods or services to be supplied precise enough (think dimensions/colours/service levels etc)?
  • Is there a right to reject goods supplied, and, if so, how long does the customer have and how must any rejection be communicated?
  • Are any goods to be delivered (and if so, who bears the risk during transport) or collected?
  • When does legal title pass?
  • If payment is made after delivery, is there provision for legal title to be retained?
  • If any goods or services are to be provided in stages, is the timetable clearly set out, and does delivery/performance need to be signed off at each point?

Contracts for services of tech solutions can be particularly complex, with the potential for overlap between the ‘contract’ and underlying statements of work to cause confusion. If there are various layers to your contractual arrangements, all of your documents need to be consistent.

If your contracts leave critical issues unaddressed, you are more likely to find yourself at the mercy of consumer law provisions which may not be the best outcome for you; that is likely to leave more scope for disagreement.

Use dispute resolution clauses

Having clauses in your contract that set out what steps should be taken and when, if there is a dispute, can help to remove some of the heat from the situation.

For instance, dispute resolution clauses might require the parties to talk via appointed representatives or to engage in mediation before rushing off to court. Even adding in one step that requires party representatives to meet in order to try and resolve differences within the first 14 days can buy the breathing space needed to inject rationality and commerciality into a difficult situation.

Check your ‘emergency exits’

Be familiar with termination rights – yours and your supplier’s/customer’s – and refer back to them at the first sign of problems. Does there have to be a breach of contract before a contract can be terminated (and if so, how serious must that breach be) or can a contract be terminated for convenience?  How long is the notice period and how must notice be given (e.g. by email or by post to a specified address)?

If you are looking to terminate a contract and get this wrong, it can mean  your termination isn’t effective. Conversely, if your supplier/customer is looking to terminate, you might be able to challenge that. This is a complex and continually changing area and if you are considering a contract termination which has any prospect of leading to a dispute, or are confronted with the prospect of termination yourself, you should seek early advice. Acting too early or too late can in itself create problems, so tactical and legal considerations must be borne in mind from the outset.

Also bear in mind the impact of any ‘force majeure’ clauses, which deal with the situation when a contract can’t be fulfilled due to something outside of the control of the parties.  Again, this is a complex area and early advice is imperative. The opportunities for either side to use these as a way of getting out of a contractual commitment are likely to be more limited than you think, so make no assumptions.

Mitigate the impact of disruption

If an issue caused by a supplier or customer causes your business to suffer inconvenience or financial losses, you can’t sit back and allow any losses to mount. Even if it’s not your fault. You are under an obligation to protect your position and reduce your losses (within reason). That means different things in different situations, but it might (for instance) mean negotiating more wriggle room on other contracts in the chain to buy you time to move to an alternative supplier. Or perhaps to try to find an alternative customer for goods which have been rejected (but aren’t faulty).

Make an early assessment of best/most likely outcome

Unless you have an array of suppliers or customers to choose from, the chances are that resolving a blip is in everyone’s interests. That said, if instinct/the rumour mill tells you that your customer is finding fault with your goods because they actually want to source them from somewhere else, shifting your focus to finding the right commercial solution rather than diverting all your efforts into fighting back over each and every complaint made may move you towards a more realistic outcome more quickly.

That is easier said than done if your customer is going to leave a big hole in your order book, and that isn’t to say you should let unfounded complaints slide by unchallenged (you shouldn’t). Getting the right balance between addressing areas of disagreement and moving things along is tricky but important. Which brings us on to:

Don’t be afraid to speak without prejudice

A large proportion of disputes are resolved by mutual compromise. Many are only resolved because one party is prepared to compromise in the interests of saving everyone from the distraction, delay and cost which come with disputes. As long as you expressly state that any compromise is suggested on a ‘without prejudice’ basis and ‘without admission of liability’, it is far less likely that you will do anything to undermine your position in the long run, even if your commercial proposal is rejected.

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About the Author
Clare Murphy, Partner

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