Contracting as a Supplier – Precautions and Pitfalls

Suppliers will often not consider on what basis they are contracting for the supply of goods or services. This may be as they feel they can deliver on the contract and so there is no risk. Often, the issue for many is that they do not foresee a potential liability arising. Others may believe that they are contracting on their standard terms of business, though often these are not brought to the attention of the customer, either at the point of contracting, or at all. This note examines the potential issues facing a supplier through lack of a suitable contract.

Terms of Business

Standard terms of business are a useful tool for suppliers as many instances of supply may not warrant a signed contract. These could be contracts entered into over the internet and over the counter sales. These can be introduced as a contract to the customer:

• Over the counter- by a sign stating where the terms can be found or requested and placed on the sale literature/receipt
• Online – by requiring the customer to agree to the terms before proceeding to purchase
• On communication – by stating that any contract offer or any acceptance is subject to your terms of business
• By written contract – by providing the terms with order form for the customer to sign

There are particular issues with regard to consumer contracts and in particular consumer credit arrangements which are not covered by this commentary.

Best practice for standard Terms of Business would include:

• Ensuring that the terms of business are brought to the attention of the customer with any fee quote or work proposal
• That they are included with any quotation or acceptance of an order
• That in relation to each of the communications relating to the sale, they are referred to.

The above reduces the risk that the customer may claim that:

• As the contract was not provided at the outset, it does not bind the customer
• That the customer’s purchase terms apply to the contract.

The second point above can be an issue for many, and is known as the “battle of the forms”. The basic rule of thumb is to ensure that your terms have been first, last and most often referred to in communications, and sales documents which will place you in a stronger position, though even this will not always lead to a positive outcome. In some instances, courts may hold in favour of the customer’s purchase terms and have also been known to hold that neither party’s terms apply.

Another risk associated with using terms of business is that if the supply is regular, and the parties adopt a particular practice in relation to a specific aspect of the contract which contradicts the terms of business, then this can be considered as a “course of dealing” by which the parties have agreed to amend the terms and which can be held to bind the parties going forward regardless of the terms of business.

Written signed Contracts

The benefit of a written signed contract is that it is clear that the party has agreed to those terms. It would be usual for the contract, as with well drafted terms of business, to exclude any extraneous communications so sales literature, advice by sales persons, representations about the quality or fitness of the product or service being supplied, so that unless it is specifically referred to in the contract, the customer cannot seek to rely on it. Note there are exceptions such as when a statement has been fraudulently made, the party making the statement would not be able to rely on an exclusion in the contract.

Why have a contract? What are the pitfalls?

There are many reasons why a supplier should have a written contract. Below are some examples why:

• To exclude extraneous communications as referred to above
• To specifically set out what is being provided and sometimes, state what is not being provided
• To ensure that timescales, if given, are estimates only and therefore not binding
• To deal with customer duties where a product is damaged on delivery, such as setting timescales when the customer must inspect for visible damage and report it, and so reduce the scope for a claim arising much later (which may not have been there on delivery)
• To retain title to the goods pending payment in full being received, and to set out rights to reclaim goods
• To deal with payment terms and, in respect of late or non-payment, to apply default interest and retain the right to withhold further supplies
• To apply monies received under one contract against another (useful where payment may have been made on an undelivered supply)
• To apply a right of set off – where you may be also be purchasing from your customer, to set off sums owed to the customer against sums due to you from the customer
• To excuse you from your obligations should an event of force majeure occur
• To cap your liability in terms of scope, financial limits and to whom that liability is owed
• To set out rights of termination, so for example, where your customer enters into administration and you may no longer wish to supply
• To exclude a non-contracting third party, who may be receiving a benefit under the contract from relying on the contract.

Just concentrating on the main issues identified above, the most important issue is for a supplier to reduce potential liability for damages in the case of a claim. Some claims, cannot be excluded or have any limits placed on them, such as causing personal injury or death, or as mentioned above fraud. In consumer contracts, certain consumer rights cannot be excluded but some rights that are implied by law to all supplies, can be excluded in non-consumer supplies. Ways to reduce potential liability:

• Exclude warranties (such as quality and fitness) that would otherwise be implied by law
• Exclude liability for indirect or consequential loss (explained below)
• Place a cap on your overall liability

Excluding liability for indirect or consequential loss is important. Suppose you sell machinery which overheats and catches fire. That then causes a fire and that fire spreads to the rest of the building damaging both building and stock. An exclusion of indirect and consequential loss would reduce the likelihood of success of a claim for damage to the building, stock, down time and lost orders, and limit your liability to the cost of replacing the equipment only. Or where you supply services and where your service supply leads to bad publicity, which itself leading to customers of your customer cancelling orders and dissociating themselves with your customer. Should you be liable for the lost orders? There are general legal principles which apply, such as to what is reasonably foreseeable but it is possible to specifically override some aspects.

Placing a cap on your liability could act to reduce liability for even direct costs. Some suppliers tie this to their levels of insurance cover, which is unwise as insurers may find ways not to pay. The cap should be reasonable. Frequently, the supplier will seek to limit liability to the cost of supply but courts have recently held that this does not take into account the other costs associated with the claim and as such, it is best to set the level at something above the cost of the supply for example the cost of supply plus 15%. This is more likely to be accepted by the courts.

Exit Strategy

It is important that you are not tied into continued supply where the customer is in breach of contract or suffers an insolvency type event. Unless stipulated in the contract, an insolvency event such as appointment of an administrator or receiver would not entitle you to terminate the agreement and you may not wish to supply or to leave unpaid for goods with them. You should ensure the right to terminate and to reclaim good yet to be paid for.

The above commentary is not exhaustive and is not intended or should be perceived as advice. Should you have any queries or concerns, you should take legal advice.

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