By Andrew Broadbent, associate in Keebles’ litigation and dispute resolution team.
Contract negotiations with supply chains can be complex and time consuming – but the cost of getting them wrong in terms of exposure to financial and reputational risks can be high and long lasting.
Without the right professional advice at the outset, it’s easy to overlook something with potentially devastating consequences.
Using our extensive experience of drawing up contracts on behalf of a diverse range of manufacturing clients, here are some key considerations to make the process run more smoothly:
· Time spent scoping the precise requirements of a contract is rarely time wasted. This crucial phase is when you develop a shared understanding of each party’s responsibilities within the arrangement – and their expectations from it.
· In a fast changing world it’s not uncommon for contracts to change and develop over time. Think carefully at the outset about who is able to make changes along the way and under what circumstances this can happen.
· Similar principles apply to agreeing payment and payment terms. As a customer, clearly you want to secure the best price – but forcing a supplier to accept your terms could ruin your relationship or damage their business. Be clear on both sides on when payment is due and the consequences of a failure to pay.
· Identify and agree any ‘warranties’ within the contract. These can apply to things such as the quality of goods supplied or any intellectual property attached to a product or service.
· Be clear on issues of performance such as delivery dates and turnaround times. Either party might want to discuss financial penalties for under-performance or escalation plans when quality concerns are identified.
· Decide how you are going to limit your liabilities in terms of your financial exposure if something goes wrong with the contract. You might want to consider specific insurance policies, for example, to cover you in the event of a major contract failure.
· Compile clear and unambiguous dispute resolution procedures. It may not be in the best interests of the parties to terminate a contract early and it could be possible to agree mutual compromises – but having agreed escalation processes in place will help both parties in the long run.
· If resolution fails, you may be compelled to terminate your contract. It is often far less painful for buyer and supplier if the steps above have been built into the contract and followed conscientiously throughout.
Ultimately, if you are properly aligned with your third party suppliers, have properly drafted contracts in place and treat them as your partners, you are likely to experience higher success rates and enhanced collaboration.
However, it’s always worth obtaining an expert opinion on any new or amended contracts that you draw up. The support and guidance of a legal practice with a proven track record in manufacturing and contract management is crucial to avoid entering into to an agreement that might prove costly or damaging to exit.