With increasing numbers of employees being furloughed and supply chains disrupted, it is likely that many businesses will be faced with a scenario where they do not have enough resources to fulfil all of their contracts. They then have to decide which customers they will give preference to.
Businesses will need to decide whether to:
- under-deliver to all customers equally
- complete a proportion of their contracts in full and default on the remainder entirely
- adopt a mix of these two approaches.
This decision will ultimately depend upon the individual business concerned and there is no one-size-fits-all approach. However, businesses should take into account each of the following key points when making a decision to ‘prefer’ one customer over another:
- whether there is a clause in any of the contracts which requires the supplier to re-allocate resources to fulfil a particular contract
- conversely, whether there is a ‘good faith’ obligation in any of the contracts, which may require the supplier not to give preference to other contracts
- whether there is a reputational issue, moral imperative or public policy consideration involved with any contracts, such as supplies to the NHS and vulnerable people
- the likely impact upon the customers’ business, balanced with their propensity to engage in litigation
- which contracts have the greater reward for fulfilment, as opposed to those which have the most serious consequences for breach, including consideration of any force majeure clause in the contract.
In practice, the best approach will often be not to ‘prefer’ certain customers, but rather to under-deliver to all customers equally. In taking this approach, failure to deliver the goods or services in full may not amount to a repudiatory breach of contract and the supplier will face claims for damages, rather than termination of long-term supply agreements which could have a serious impact upon their business in the future. The terms of any force majeure clause should be carefully considered in this context.
The most practical approach in such circumstances is to communicate with customers at the earliest opportunity, as this allows the customer to adjust and make allowances within their own business to compensate.
Where the supplier is in a position of dominance in a market, particular care should be taken when making a decision to prefer one customer over another, as this may raise competition law concerns. Suppliers who are in a dominant position should seek expert competition law advice before engaging in such activity.