The relevance of party knowledge in supply chain contracts

If you or your business are involved in the manufacturing or supply of consumer products, the recent case of RSW v Purple carries some significant implications for you. The (then) Queen’s Bench Division delivered a judgment that highlighted the importance of party knowledge regarding the ‘final destination’ of a product within a supply chain. This case also has major implications on the use and role of intermediaries within the chain.

Background

The case concerned the sale of Personal Protective Equipment (PPE) in 2020, when demand for these items skyrocketed at an unprecedented rate. RSW and Purple were both intermediate buyers of the PPE from a manufacturer in China, with the purported end customer being the Department of Heath and Social Care (DHSC). No such sale took place.

RSW brought a claim against Purple for damages on the basis that a contract existed between them due to the exchange, via an ‘intermediatory’ of a ‘purchase order’ (alleged offer) and a ‘pro-forma invoice’ (alleged acceptance). The judge dismissed the existence of any such contract but clarified the following issues:

Importance of knowledge

In the above case, the parties were aware that the end customer was a public body, as such they knew there would be no contract between them without government approval of the final transaction.

Moreover, the state of the market at the time should have made it sufficiently clear that an actual deposit was required for the manufacturing to commence and consequently, the contract to take effect. The use of a purchase order and ‘pro-forma’ invoice was, as deemed by the judge, for merely persuading the manufacturer to block factory space.

The case demonstrates that, in the context of businesses participating in an extended series of transactions that constitute a chain, parties’ knowledge of the final transaction takes precedence in the absence of concrete evidence of the binding nature of a contract lower in the chain.

This means those in a supply chain must make sure their actions are consistent with up-to-date market practices and the transactions are protected with strong contracts.

Pro-forma invoices

The case further highlights the appropriate use for ‘pro-forma’ invoices as non-binding and informative documents, much like quotes. These invoices could constitute offers and, surprisingly, acceptance in some very rare cases.

The judge did not detail any instances where they would be construed as either. This highlights the importance of not relying on ‘pro-forma’ invoices in any instance unless it is absolutely unavoidable.

Agents and Intermediaries

Another important aspect of this case is the role of the intermediatory, who by way of conduct, was deemed by the judge to be a presumed agent. This intermediary was deemed be an agent for both parties, and so to owe a fiduciary duty to both. The judge clarified that the law of agency allows the existence of ‘dual agents’, regardless of the apparent risk of a ‘conflict-of-interest’ arising.

As the legal relationship developed throughout the course of negotiations, it was deemed that the agent only had authority to negotiate and not to bind the parties in contract. The judge also distinguished ‘pure intermediaries’ from agents as accurate transmitters of knowledge only.

The distinction between an agent acting as a conduit or channel for negotiating terms and a “pure” intermediary transmitting messages has not yet been subject to substantive judicial review. However, factors that would increase the likelihood of an intermediary to be classified as an agent would include where:

• They have substantial knowledge of the subject matter of the transaction
• They advise the parties in respect of who they should transact with, and on what terms
• They have entered a relationship with a party in which it is reasonable for that party to have trust and confidence in them

This means that those in a supply chain must be vigilant and careful when using intermediaries to negotiate possible contracts as this may expand the scope of the supplier’s liability.

Under common law, a principal is under a duty to indemnify an agent against liabilities incurred by them in the lawful performance of acts falling within the scope of their authority. Furthermore, the Commercial Agents Regulations provides commercial agent with added rights upon termination of their agency, including the right to compensation or indemnity payments certain in circumstances.

In short, supply chain contracts consist of sophisticated transactions that require in depth and up-to-date understanding of the changing commercial landscape. Businesses in a supply chain must therefore ensure that their contracts are consistent with the principles detailed above.