Distressed supply chains

Distressed suppliers: top tips for the 'innocent' party

Published on 7th Jul 2022

For customers experiencing difficulties with suppliers, good contract management can help keep options open

Our earlier article in this series looked at what you can do if you are a supplier experiencing difficulties in fulfilling your contractual obligations. But what if you are the customer, and problems are starting to crop up with your suppliers? In this podcast and accompanying insight, we set out some top tips on how best to achieve your commercial goals.

Spot that trouble is brewing in the first place

It may sound an obvious point, but working out if you are experiencing the usual delays in deliveries and performance that can be part and parcel of commercial transactions, or if they are instead the first warning signs of a deeper, widespread risk to your supply chain is crucial.

That can be easier said than done. Good contract management, making sure that different teams are looped in, and the early intervention of commercial leads and in-house lawyers is key.

The earlier problems are spotted, the more options are likely to be available.

What should you think about first? 

Is the relationship salvageable (and do you want it to be)? This may depend on whether alternative suppliers can be sourced.

If they cannot, a renegotiation or variation of the contract may prove to be the best long-term commercial solution. If so, check what your contract says about variations first and beware inadvertently changing your contract by informal, unrecorded, discussions with the other side (if there is no "no oral modification" clause in your contract).

Will all this pass problems further up your commercial chain, which would put you in breach of your own contractual obligations? Consider if you need to have discussions with other parties, such as lenders or insurers.

If problems cannot be resolved easily with your supplier, you may wish to start extricating yourself from the contract. There will be a number of issues to consider, including the terms of the contract, and the need to prepare for a dispute.

What are the key contractual terms and exclusions? 

Again, check your contract. For example, is there a liquidated damages clause? If not, damages for non-delivery will usually be the difference between the contract price and the current market price of the goods.

Where there have been some deliveries, and the contract is not severable into separate parts, you will be able to claim damages and set them off against any claim from your supplier for payment.

Is this a force majeure situation? 

If your contract has a force majeure clause, will it apply to the problem faced by your supplier (or the problem you now face with your own suppliers)? For example, is the supplier unable to comply at all with its obligations, or will it just be more costly or difficult for it to do so? 

Can you terminate the contract? 

Again, the contract is key. Be careful, because if you get termination wrong, your supplier can sue you for damages or choose to keep the contract going. 
If your contract is silent about termination, you will need a very serious breach to justify termination. If you have a supplier who is continually a bit late, you may not be able to terminate. 

If your contract requires delivery by a certain date and time is said to be "of the essence", even a short delay will justify terminating. 

But if your contract talks about terminating for "material breach", the position will be more nuanced. Ask yourself if the breaches are having a serious effect on the benefit you get under the contract. 

It is important that any requirement in the contract to serve notices is complied with carefully, even if it seems pointless. 

Don't give away your rights.

There are various principles of English law that block a wronged party from relying on rights which it would otherwise be able to assert.

To cut down the risk of those arguments succeeding, make sure you are not giving mixed messages or leading the other side to believe that you are willing to pardon breaches and non-performance. For example, termination must end the whole contract, you can't keep some bits alive.

Parties frequently write in their correspondence with each other that they are "reserving their rights". But you need to know exactly what rights you are reserving – don't refer to future rights that might arise at some point. There is no need to reserve until you have done something that suggests you don't mind about the delay or other problem. 

Get ready for a dispute (even if you are not going to litigate in the end)

Consult lawyers early on and keep a paper trail, making notes of conversations with your supplier as soon as possible. Start preserving relevant documents and suspending any automatic deletion programmes.

Dispute resolution options

If all else fails, the method of resolving your dispute will be critical and will usually be spelt out in the contract.

Contracts often contain an escalation clause in the event of a dispute. This may provide for good faith attempts to settle before escalating to, for example, a senior industry figure and then, if that fails, on to either arbitration or litigation. These clauses are usually enforceable and can help preserve relationships, but care should be taken when agreeing to them as, if you wish to assert your legal rights quickly, they can add unnecessary delay to resolving the dispute.

Even if your contract provides for arbitration/litigation, you can still attempt mediation at any stage. But do not lose sight of the fact that some defendants are not worth suing: either because they will have insufficient assets to meet any judgment against them, or because they are moving towards insolvency. 

If you would like to discuss the issues raised in this article further, please do not hesitate to get in touch with one of our experts, or your usual Osborne Clarke contact.
 

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* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

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