Are your supply agreements racquets ready?

Forecasting provisions are a common feature of business-to-business agreements such as supply, manufacture and distribution agreements.

They help parties to understand each other’s future demand and delivery expectations and may be given monthly, quarterly or annually. This article focuses primarily on minimum quantity commitments, delivery timetables, and deadlines in supply of goods agreements.

Minimum quantity commitments

Suppliers who provide their products to the organisers of Wimbledon would likely want a commitment to purchase a specified amount of their products. This is known as a “minimum quantity commitment” (MQC). An MQC would benefit Wimbledon’s suppliers by giving them predictability of supply.

If a supplier creates products which are bespoke for Wimbledon – let’s say sunglasses with a strawberries and cream motif – it will probably struggle to sell them on the open market if Wimbledon doesn’t purchase the full amount. This would leave the supplier with a surplus of products that it has spent money to manufacture but has not been able to recover for. An MQC, provided it has been calculated correctly, would give the supplier the peace of mind that it will not be left with boxes and boxes of unsold strawberry sunglasses.

Conversely, a supplier will be wary of committing itself to unqualified obligations to supply products. It will want to understand from the customer’s forecasts the quantity of products which are required and assess whether it can meet these demands. The supplier will want to have in-built protections to say that it will not be liable for breach of contract if it can’t meet demand due to the customer’s default, or force majeure events which may disrupt supply. The supplier could, however, argue that it should only have to use reasonable endeavours to meet the forecasts, rather than having a strict obligation.

Care needs to be taken by the drafter of the MQC to ensure the provision (a) doesn’t give rise to competition law issues, (b) takes account of increases in product prices and (c) has a clear duration. If the customer does commit to an MQC, it may wish to ask the supplier for a discount on prices in light of its commitment.

Delivery timetables

Specific dates for delivery will usually be given in purchase orders. To protect itself against breach of contract claims for late delivery, a supplier may wish to agree either alternative delivery dates or substitute products.

Forecasting obligations could commence at the start of the agreement, or only once the agreement is operational and the parties better know how it operates.

Deadlines

To help ensure that the supplier meets delivery deadlines, the parties may find it helpful to implement performance management systems. Monthly performance reviews can be arranged between the parties with the purpose of identifying whether the supplier has struggled (or will struggle) to meet the customer’s forecasts. This can allow the parties to identify issues and put measures in place before they cause a real issue.