All commercial relationships are a matter of risk. For suppliers and service providers, contractual terms play a key role in controlling such potential risk exposure and realising the value of customer relationships.
A well-drafted contract operates as an essential tool in managing the relationship between supplier and customer, including when and how goods or services are to be delivered, to what standard, the obligations of each party, and what remedies are available should things go wrong.
Certain UK legislation implies terms in contracts for the sale of goods and services that either cannot be excluded or will take effect unless they are expressly excluded from a contract.
This means that, unless provided for under the contract, the position under the statute is automatically adopted (such as on price or delivery) – irrespective of whether this is a favourable position to a supplier.
Suppliers and customers are subject to these implied terms without contractual terms in place.
In this article, we explore three key terms in a B2B contract and the key points to consider for each of these: liability, price and payment.
The allocation of risk between parties is a key consideration when looking to limit or exclude liability under the contract.
Whilst a supplier will look to restrict or exclude its liability as much as possible, its ability to do so is governed by English law. In certain instances where a restriction or limitation of liability is unreasonable, it will be deemed unenforceable.
Where a limitation of liability clause is deemed unenforceable, a supplier risks having little or no contractual protections in place and being found liable on an unlimited basis.
Limitation of liability clauses are, therefore, a balancing act: to restrict as much as possible without such restrictions being deemed unreasonable and therefore rendered unenforceable.
What restrictions could be put in place?
- Uncapped and capped liabilities – certain liabilities cannot be limited by law, such as in respect of death and personal injury caused by negligence or defective products or fraud or fraudulent misrepresentation. However, all other liabilities which might arise under the contract can be limited.
- Exclusions of certain categories of loss – certain categories or specific types of losses can be carved out of liability provisions, e.g. loss of profits, loss of goodwill, damage to reputation, loss of data, etc. Such losses should be considered on a case-by-case basis as to whether it is reasonable in the circumstances for such categories of loss to be excluded.
- Limiting in accordance with insurance cover – referencing the insurance cover which the supplier has in place can be useful to demonstrate to a court that the limitations on liability are reasonable and reflect an appropriate allocation of risk. However, a supplier should always discuss these limits with its insurance broker to ensure that any contractual limitations do not invalidate its insurance policy.
Limitation clauses should also be structured in a series of clauses and sub-clauses so that, in the event that one sub-clause is found unreasonable, it can be severed from the contract whilst the other liability provisions remain in force.
Unless expressly stated otherwise in the contract, the statute will imply a term that the buyer should pay a 'reasonable' price.
However, a supplier will look to ensure that the price is profitable and any ancillary costs are passed on to the customer, such as the costs of inflation, insurance, transit or storage.
What provisions could be put in place?
- The contract should clearly provide the price of the goods or services and whether additional costs are included, such as packaging, delivery and off-loading costs, and insurance. Otherwise, the standard position under statute is that these will be the supplier's responsibility and, therefore, at the supplier's cost.
- The contract should provide for an expiration date on any quotations provided to allow suppliers to manage their order commitments and ensure that quotations accepted by customers are in line with current pricing.
- The contract should include a mechanism for price variation. This is useful, particularly in long-term supply contracts, to provide for inflation or other costs which may increase over the contract's lifetime (due to raised support costs, or increased duties). This is usually achieved by including a right for a supplier to raise prices generally or in accordance with market conditions, such as CPI.
The customer's primary obligation under the contract will be to pay the charges due – in full and on time.
Suppliers will, therefore, look to ensure that the contract provides for protection should a customer be late or fail to pay.
What remedies and rights can be included in a contract in relation to payment?
- Time for payment is of the essence - if a customer fails to pay on time, the supplier is entitled to terminate the contract. The standard position under statute is that time for payment is not of the essence unless expressly provided so in the contract.
- Other methods to encourage a customer to pay on time: Interest being payable on any outstanding sums;
- Offering a discount if payment is made before the due date;
- Where paying by instalments, if one instalment is late, then the remaining balance becomes immediately due and payable;
- Where delivering by instalments, if any payment is late, the supplier has a right to withhold subsequent delivery of the remaining instalments until all sums due have been paid, and
- Excluding the right for the customer to set off competing liabilities.
Other key elements of a contract which should be considered include:
- Incorporation – whenever businesses contract with each other, they risk entering into a 'battle of the forms' where the latest terms put forward and not rejected are the 'winning' terms that the contract is concluded upon. Businesses should consider their channels for entry into contracts to ensure that their terms are the ones to govern the contract, including by making them available to the customer at the point the contract is entered into and that internal business processes manage the risk of customers looking to impost their own terms.
- Competition concerns – supply arrangements should be considered in the context of the UK and EU competition regimes; for example, is there an element of exclusivity, a volume commitment or a non-compete obligation in the contract?
- Data protection – where the parties may share or process personal data, then the position under data protection law should be considered, including whether the relationship is operating on a controller-to-controller or controller-to-processor basis and the measures each party must take with respect to personal data.
A properly drafted contract will assist a business in optimising outcomes, managing risks and laying the foundation for a long-standing working relationship where each party is clear on its obligations from the outset.