Legal briefing | 17 May 2019 |

Entering into a contract as a supplier

This briefing outlines the key practical points to bear in mind when your business is entering into a contract as a supplier of goods and/or services with another business. It also includes a list of "Do's and Don'ts".

Do your terms apply?

Most businesses will have standard terms that are designed to govern the provision of goods or services which they typically supply to their customers. However, it is surprising how often businesses fail to take the necessary steps to ensure that customers are made aware of their standard terms. For example, if you are dealing with a new customer and the first time they see your standard terms is when you send them an invoice, they will have a good argument that your terms do not apply. This is potentially very damaging should you get into a dispute; among other things, it is likely to mean that there is no limitation on your liability if something goes wrong.

If you want your standard terms to form part of the contract, you need to draw them to the customer's attention before you are both committed to going ahead with the transaction and ensure they are incorporated into the contract. The ideal position is to get customers to sign a document which sets out the terms in full – but this is often difficult, particularly where both sides are keen to do a deal quickly or where documents are being exchanged by email. The next best approach is to ensure that your standard terms are included with any quotation you send and a statement is included in the quotation that the relevant supply will be governed by these terms. Keep a record of such communications so that you are able to prove that the customer was aware of your terms (otherwise it will be their word against yours should the matter result in a dispute).

THE "BATTLE OF THE FORMS": POINTS TO WATCH

Customers will sometimes attempt to displace your terms of supply with their own standard terms of purchase. For example, let's say that you send out a quotation accompanied by your standard terms. The customer responds saying that the order is agreed, but attaches its own standard terms of purchase. Your business then proceeds with the order. In that situation, a court would probably say that, as the customer
had "fired the last shot" in the so-called "battle of the forms", its terms should apply – and those terms will inevitably favour the customer and not the supplier. It is therefore essential to respond to any attempts by the customer to impose its own terms by making it clear that your terms will govern the contract.

Tough customers

Occasionally, a customer will have the bargaining power to impose its own terms – or will refuse to do a deal unless you accept certain changes to your terms. In these situations, you need to be clear about your own "red lines." For example, a customer's standard terms of purchase will rarely contain a limitation of liability in favour of suppliers – but, in practice, most customers recognise concerns of their suppliers about exposure to unlimited liability and will accept reasonable amendments to their own terms (see the discussion under the heading "Negotiating with customers" below). It therefore makes sense to have some alternative "compromise" wording available for situations where you are unable to secure acceptance of some or all of your own standard terms.

What's the contract for?

You may have a well drafted set of standard terms, but you can still run into problems if you have not clearly documented what the contract is intended to cover.

For example, it is quite common to see contracts for the supply of services that refer to “the Services” but then fail to specify what these are either at all or in sufficient detail. Irrespective of how well drafted the standard terms are, failure to define clearly what needs to be done is a recipe for disputes further down the track about exactly what your business has promised in the performance of the contract.

The solution for many businesses is to develop generic descriptions of the different types of services provided which can be easily tailored to the specific requirements of particular customers. Often, these will be incorporated into quotations – in which case your definition of "the Services" could either replicate some of the wording from the quotation or simply refer to that document. However, wherever possible, it is better to avoid referring to pre-contract documents – often, they contain statements which are, by definition, more akin to a sales pitch. If these become part of the contract, they can be regarded as giving rise to legally binding promises in the customer's favour.

PRICE AND PAYMENT: POINTS TO WATCH

Pricing and payment terms generally receive close attention during negotiations, but issues sometimes arise where pricing provisions refer to concepts such as "gross" or "net" (or do not make it clear that the price is exclusive of VAT, delivery etc.). Don't assume that your customer's understanding of these terms is the same as yours – it is important to define what those concepts mean in the contract. Similar
problems can arise where complex pricing formulae are used. In some cases, it is worth preparing some worked examples and sharing them with the customer, so that both sides are clear about how the pricing is intended to work (make sure that copies of such correspondence are retained).

How long is the contract for?

Typically, standard terms will set out how the contract can be terminated, but will not necessarily specify how long it is for – so this may need to be set out in your agreement. It is particularly important for suppliers where the profitability of the transaction is dependent on the customer remaining with your business for a minimum initial period.

DURATION: POINTS TO WATCH

For example, let's say the default termination notice period in your standard terms is 6 months, but you need the customer to commit to an initial fixed term of 18 months. In that case, you would need to make it clear that the customer cannot terminate on 6 months' notice until after the end of the initial period (and that this will override the "normal" position in your standard terms).

Limiting your exposure

Standard terms should contain a series of exclusions and limitations on your liability, designed to restrict the exposure of your business if something goes wrong. However, these provisions need to be carefully drafted. If you seek to exclude too much, you risk falling foul of the Unfair Contract Terms Act 1977 (UCTA), which may render some or all of your liability provisions void and unenforceable – for example, liability for death or personal injury caused by your negligence cannot be excluded or limited and liability terms in contracts based on standard terms must be reasonable.

It is not uncommon for standard terms to provide that the supplier's total aggregate liability will be limited to the contract price – but this is not always the best approach, because even a very low value transaction could still give rise to a significant loss for the customer if something goes badly wrong. This, in turn, may mean that the cap on liability would fall foul of UCTA – potentially leaving your business open to a claim for all of the customer's loss, rather than just some of it. A better approach is to limit liability by reference to the higher of the contract price or a specified sum, which should be reasonably substantial (i.e. for all but the smallest businesses, this would normally be at least a five or six figure sum, possibly more depending on the circumstances).

Be prepared to negotiate – but resist attempts by customers to remove your overall liability cap altogether.

Negotiating with customers

Be prepared for customers to seek to negotiate the liability provisions. Typically, standard terms will provide that certain types of loss are excluded altogether, such as loss of the customer's data or damage to the customer's reputation/brand (although this will vary depending on the nature of your business). It may be that you can make concessions on some of these exclusions and/or agree to an increase in the size of the overall liability cap – but, as a supplier, you should strongly resist any attempt by the customer to remove the cap altogether. Although making such concessions may feel like a "defeat", the fact that you have negotiated the liability provisions will sometimes mean that it is more difficult for the customer to challenge them under UCTA because they are no longer your 'standard' terms – so there is a potential upside for the supplier in the event of a claim.

INSURANCE: POINTS TO WATCH

It is crucial for the supplier to dovetail its insurance arrangements with its standard terms (as amended). In particular, suppliers need to ensure that the wording of their contracts with customers does not invalidate their insurance cover (e.g. a supplier agreeing to accept liability for a particular type of loss required by the customer as part of its performance requirements).

Good housekeeping

Once the contract has been agreed, it is vital to ensure that adequate records are kept – which is not always quite as straightforward as it sounds. For example, if you have been corresponding with the customer by email, the evidence needed to demonstrate that there is a contract may consist of the customer's final email saying "Yes" together with several earlier emails in which you attached a quotation and a copy of your standard terms. If the only document you keep is the customer's email saying "Yes", you may have difficulty persuading a court that you have made the customer aware of your standard terms.

It is also worth considering regular training for staff who make use of standard terms, to make sure that they are aware of the pitfalls outlined in this article. Equally, it is important that your standard terms are regularly reviewed, not only to take account of changes in the law, but also to ensure that they continue to be "fit for purpose" in relation to any new products or services which have been rolled out since they were drafted.

DO ensure that customers are notified of your standard terms before final agreement is reached
DO include a detailed description of the goods, services or statement of work (as applicable)
DO ensure that the contract sets out how long it is for – and consider whether you need to override any termination notice periods in your standard terms
DO be prepared to negotiate with customers on more contentious aspects of standard terms, such as liability
DO make sure staff are trained on the pitfalls of using standard terms and get your standard terms reviewed regularly

DON'T ignore customer terms of purchase – write back saying that your terms apply
DON'T let customers remove key protections such as liability caps
DON'T assume customers share your understanding of terms like "net" or "gross" or what's included in "costs" – spell it out in the contract
DON'T forget to ensure that your standard terms (and variations to them) are approved by your insurers and suitable insurance cover is put in place
DON'T forget to keep adequate records of contracts with customers

NOTE: This article only covers business-to-business contracts; it does not deal with business-to-consumer contracts, where the legal framework differs in a number of important respects. It originally appeared in ICSA Governance and Compliance Magazine.

How we can help

We regularly advise suppliers on commercial contracts, including standard terms and the processes businesses need to put in place to ensure that they have appropriate contractual protections in place. We also have significant experience of assisting clients with training for staff who are involved in contract negotiation.

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