16 December 2014
Entering into a contract as a supplier
There are common pitfalls relating to the negotiation and management of contracts. In the first of a series of three articles, Tom Purton 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.
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).
Make it clear that your terms will govern the contract
Customers will sometimes attempt to displace your terms of supply with their own standard terms of purchase. For example, you send out a quotation accompanied by your standard terms and 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, 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.
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. 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.
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.
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.). It is unwise to simply 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).
Typically, standard terms will set out how the contract can be terminated, but will not necessarily specify how long it is for – 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. For example, the default termination notice period in your standard terms is six 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 six months’ notice until after the end of the initial period (and that this will override the ‘normal’ position in your standard terms).
You should strongly resist any attempt by the customer to remove the liability cap altogether
Standard terms should contain a series of exclusions and limitations on your liability, which are designed to restrict the exposure of your business if something goes wrong. 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, statutory implied terms and liability for death or personal injury caused by negligence cannot be excluded or limited and liability terms in standard contracts 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 wrong.
This 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 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. This is because they are no longer your ‘standard’ terms – so there is a potential upside for the supplier in the event of a claim.
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 its contracts with customers does not invalidate its insurance cover (for example, a supplier agreeing to accept liability for a type of loss required by the customer as part of its performance requirements).
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. 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.
Tom Purton is a Partner at Travers Smith LLP and Head of the Commercial, IP and Technology Department