It can be safely said that the world has faced some turbulent times of late, in which, the effects of the pandemic have been felt on industries worldwide.
Businesses have been further hit with the rising costs of:
- Importation;
- Materials;
- Energy;
- Fuel;
- Logistics;
- Distribution; and
- Inflation.
Tim Lawrence, Director of Digital Supply Chains at Digital Catapult has stated:
“amongst other factors, the ongoing Covid-19 pandemic has made both industry and consumers keenly aware of global supply chain inadequacies. From empty shelves to petrol queues and driver shortages, bosses from all industries are taking note that our brittle supply chains are no longer fit for purpose. It’s hardly surprising, therefore, that UK industrial pros have highlighted overhauling supply chains as a top strategic priority in 2022.”
In research conducted by Make UK, the Manufacturers’ Organisation, it is recognised that 62% of manufacturers agree that the change in the importation of goods following the United Kingdom leaving the European Union and customs rules have had an impact on their business.
Further, it is concerning that the delay to products entering or leaving the UK market has had an impact on around 50% of manufacturing businesses and meeting customer demand is an issue that continues to present problems.
Research from Digital Catapult has identified that 64% of manufacturing businesses have identified that strengthening their supply chains is a key issue to be addressed in 2022. This is a sensible topic of focus, given that it is estimated the global supply chain issues could continue without significant improvement for a further two years.
Potential contractual problems and practical tips
There are important issues for manufacturers to address in considering their contracts with customers and suppliers. Some of which include:
Who is liable to bear losses in the event that customer demands cannot be met?
How are issues addressed concerning delays in supply?
What can be done to protect your business against consequential loss?
Some practical tips in ensuring your contracts provide adequate protection are as follows:
(1) Incorporation of terms
Invest in some appropriate, bespoke terms and conditions that are right for your business.
It is important that any contract is concluded on your terms, rather than those of your supplier or customer. There is no use in ensuring that your own terms are watertight if, in the event of a dispute, you find yourself unable to rely on them and exposed to liability for losses.
A ‘battle of the forms’ scenario arises where commercial parties attempt to contract on their own standard terms and conditions. You should ensure that your terms and conditions are sent last and that no objection is taken to them to ensure incorporation.
(2) Reviewing existing contracts
A review of existing contractual rights and obligations with your customers and suppliers can ensure correct risk management; that financial exposure is reduced and clauses are included in the contract to protect your business. This includes terms covering price reviews; termination and retention of title.
Reviewing existing business deals and considering future relationships ensures you are not tied to contracts that are not adding any commercial value or are in fact exposing your business to risk.
(3) Limitation on liability and indemnity
Obligations and liabilities under a contract are often not considered until problems arise. Contractual terms should be included to provide that liability is limited within reasonable parameters in the event of any breach of contract. A limitation on liability clause can protect you in the event of late delivery or for any consequential loss suffered.
(4) Force majeure and frustration
In the event that a party is unable to perform the contract, the inclusion of a force majeure clause can provide relief on the performance of contractual obligations or can otherwise alter a parties’ duties under the contract.
To be effective there needs to be a clear outline of what events are covered by the clause. Such a clause can offer valuable protection, particularly in customer contracts, in the event that supply chain issues mean you cannot fulfil the contract.
(5) Warranties and indemnities
In supplier contracts, provision should be included to ensure that the supplier has provided an effective warranty that any goods supplied are of satisfactory quality and fit for purpose.
This will mean due thought process should be given to both sides’ expectations of what is being supplied.
(6) Termination rights and renegotiation of contractual terms
Both customer and supplier contracts need to include provision for an exit strategy, as regards the circumstances under which they could be entitled to terminate a contract; similarly which clauses survive termination.
Likewise, a variation clause can be of use in long-standing customer contracts to provide the right for contractual terms to be varied/updated to ensure that the business relationship remains commercially effective for all parties.
How can we assist at Nelsons?
It is important to ensure you are adequately protected or are otherwise provided with the right advice in the event of a dispute caused by supply chain difficulties. Our expert Dispute Resolution team in Derby, Leicester or Nottingham can guide you through that process. Please contact us on 0800 024 1976 or via our online enquiry form.