Negotiating supply contracts
The importance of commercial contracts cannot be understated. In this article we offer some key tips and pointers when negotiating a commercial contract to help ensure your business starts on the right footing.
Price and payment
Consider how much the goods or services cost and ensure this is accurately reflected in the contract. Ensure payment terms are suitable for your business and consider how this may impact cash-flow.
Consider a price-review clause. Given the shortages of workers and global shortages of materials, most supply chains have seen a price-hike in some shape or form. A standard increase is often linked to inflation and a pricing index, but you may also decide to include a right to increase for specific factors – for example, the cost of raw materials going up.
Consider the method of payment. Check which currency your agreement deals in. Supply agreements that deal in a currency other than sterling are at risk of rate fluctuations, so you need to identify and keep track of these if that is what is decided.
Consider the term of the contract and how long it will last for. If a particular contract is important to the business, consider specific renewal or extension provisions.
Carefully review the termination position to see if you or the counterparty can ‘exit’ (terminate) the contract at any time for convenience. From a supplier perspective, you may want to include a charge for terminating.
Pay attention to insolvency clauses and make sure your rights are clear and preserve the best position possible for your company if your customers or suppliers become insolvent.
Preserve access to information and data
Following on from the points above, do not allow valuable data about services and products to get lost in a supplier or customer who has ceased to trade or terminated their agreement. Consider additional contractual provisions to safeguard against this i.e. post-termination obligations that preserve your data.
Always check with your insurers that the terms of the insurance clause and other provisions in the contract do not nullify or invalidate existing insurance cover.
Intellectual Property (IP)
IP can be a business’s most important asset. Consider how your contract ensures yours is protected.
Businesses will need to consider how new IP will be captured and ultimately where ownership of will lie and the costs attached to this.
Parties should approach limitation of liability clauses with care. If a clause is too aggressive, there is a risk of it being challenged and the court holding it ineffective.
If a limit on liability is included, consider whether the limits are acceptable to the business and appropriate for the risks involved. Check to see if the business has sufficient insurance coverage to ensure it has the financial resources to satisfy its liabilities under the contract.
Above all, as the infamous AstraZeneca and EU clash has shown (where the former disagreed over their contractual obligations to the latter), rather than trying to rely on widely drafted legal terms, it is important to ensure that you have conversations to agree specific commercial terms before putting pen to paper.
Often, a heads of terms sheet may be helpful here, which is a document which sets out the core/key terms that the parties see as forming the main part of the contract.