Whether you are a supplier or a customer, negotiating a supply contract can be a long and arduous process, but can ultimately save you from costly disputes. This overview lists key points for suppliers and customers to bear in mind when negotiating supply agreements.
Top five tips for a supplier:
- Price – generally speaking, the price of the goods and/or services is agreed at the outset of a contract. However, if you envisage the relationship continuing long-term, do you have a right to vary/ increase the price? A standard increase should be linked to inflation and a pricing index (RPI or CPI), but you may also decide to include a right to increase for specific factors, for example, the cost of raw materials going up and so on.
- Term and termination – have you negotiated a minimum term? As the supplier, you may wish to bind the customer into the contract for a minimum term so you have a minimum return in mind. Do you want to have the right to terminate for convenience following the minimum period? If so, consider whether the customer will want a right to terminate for convenience.
- Consequences of termination – suppliers should carefully think through the ramifications of the contract coming to an end. The key objective is to get paid but you may want to consider adding post-termination obligations on the customer such as returning equipment, deleting information supplied and continuing confidentiality obligations (see below).
- Confidentiality – consider whether any confidential information is being disclosed. Having a mutual confidentiality provision within your supply agreement will mean customers are less likely to push back on this clause.
- Warranties and indemnities – these clauses serve as a powerful tool in minimising the key risks for a supplier. For example, you may wish to add an indemnity in respect of the parties’ data protection obligations and consider removing warranties which are implied by English law.
Top five tips for a customer:
- Liability – will the supplier’s limitation of liability cap cover the potential losses you may incur? Has the supplier offered a limit on liability for the customer? This is likely to be the most important provision within a supply contract for both the customer and the supplier.
The supplier is likely to have their own standard terms which are supplier friendly, but it is incumbent on the customer to push back strongly on any liability caps which are underwhelming/do not afford the customer adequate protection against its exposure. For example, if the cost of the service is £30,000 but the potential loss to the customer is £3m, it does not make sense for the supplier to limit its liability to charges paid. Negotiating a limitation of liability for the customer may be equally important.
- Auto-renewal and notice provisions – has the supplier inserted a clause which provides for the contract to automatically renew after a set period? Customers are easily caught out by not serving notice in a timely manner and in a form that conforms to the notice provisions within a supply contract. Please ensure you have reviewed these terms and made a note of these dates before entering into a contract. When negotiating these terms, ensure that the period of notice is reasonable and you can conform to the notice requirements.
- IP licensing – if you are being provided with goods or services, you will need to ensure that you have adequate rights over the supplier’s intellectual property within the deliverable. Where IP rights have not been licensed, do ensure that an express assignment of IP rights has been made by the supplier to your business.
- Warranties and indemnities – look out for both and be aware of indemnities which fall outside of limitations on liability. To the extent that an indemnity provision falls outside of a customer-favoured liability provision, your business could be liable for an uncapped amount of damages. Furthermore, it is prudent to ensure that adequate warranty protection is provided to you.
- Costs – ensure that the price quoted includes costs associated with tax, delivery, import duties and so on. If your supply contract has an international element to it, you may wish to use incoterms within your contracts – find out more here.