The contents of your supplier contracts and supply chain may have been impacted significantly in recent years due to numerous external forces, including the economy and global wars and conflicts.

Whilst supply chain issues can affect all types of businesses, this issue can be particularly overwhelming for small businesses. 

The latest research from Aldermore’s SME Growth Index suggests that 3.3 million (60%) of SMEs have faced supply chain delays in the last year, which resulted in lost income of £625,000. Roughly a quarter of SME owners who have experienced delays in their supply chains have realised its financial impact on their business, which has led to difficulties in securing new deals, delays in their existing projects and increased costs. 

Despite this challenging issue, there are approaches you can take to minimise the disruption in your supply chains, thereby alleviating cash flow problems. One way to overcome this problem would be to have a clear supplier contract in writing. 

What is a supplier contract and why should you have one? 

A supplier contract is a binding agreement between a business and a supplier that is entered into for the purpose of delivering goods or services the parties have agreed to. Such contracts are essential in monitoring the supplier’s performance, as well as establishing the parties’ responsibilities, payments and consequences for failing to comply with the terms.  

Having a supplier contract not only allows you to compel your suppliers to perform their obligations in a timely manner and take them more seriously, but it will also help facilitate the management of your suppliers, especially if your business has multiple supply chain contracts at once. Most importantly, without entering into a written supply chain contract, the parties will likely misunderstand their obligations and responsibilities. In the event that one party decides to sue another, it would be difficult for the court to enforce the terms without having a written supplier contract, as the terms are uncertain. Even if both parties have agreed orally, it’s likely that you may have missed out on the key terms, so having the contract in writing ensures that the court can assess the party in breach and assess the remedies available to the wronged party. 

What to consider when entering into a supplier contract

It’s essential to have a supplier contract in writing if your business deals with suppliers and is good practice to review carefully what the terms are prior to supplying the goods or services agreed. When agreeing the terms in writing, the following matters will need to be considered: 

  • Goods or services delivered by the supplier and by when. 
  • What the supplier will need from your organisation. 
  • What to do if there are any problems with supply chains. 
  • What each party will pay, under what circumstances and when payment is due. 
  • Details containing when and how each party can terminate the contract. 
  • Consequences of either party failing to comply with their obligations under the contract. 
  • Information relating to after-sale services, such as maintenance, warranties or technical support. 
  • Provision relating to confidential information and non-disclosure, and specifically outlining how confidential information will be protected when shared between the parties. 

Most importantly, it’s important to use clear and concise language throughout the agreement to avoid any ambiguity. This can be achieved by having well-defined terms and provisions that help both parties understand their rights, expectations and obligations. 

How can you manage risks and liability in supplier contracts? 

In order to reduce supply chain breakdown and other risks relating to supply chains, it’s important to conduct extensive due diligence on the other party prior to entering into a formal agreement. This would require contractors to complete due diligence questionnaires so that your business is aware of its supply chain, as well as making sure that potential business partners fully understand the standards expected of them if they are to be involved in your supply chain. 

Furthermore, managing your suppliers is vital in successfully executing, monitoring and evaluating the performance of suppliers under the contracts you’ve entered into. You will also need to ensure that you reduce your liabilities after the due diligence process. Here are some practical ways to reduce your liabilities, which include but are not limited to the following: 

  • Ensure that the data relating to your suppliers and any third parties involved is up-to-date, reliable and accurate. 
  • Establish the minimum requirements to comply with laws and regulations within your industry and make these mandatory when selecting suppliers. 
  • Assess the risk level of your supplier, or if there are more than one, you need to assess all suppliers and monitor them regularly. Audits and site visits will be essential with the highest-risk suppliers, so you need to ensure that they are complying with specific laws around ethics, corporate social responsibility, health and safety and financial security. 
  • Centralise all supplier information, especially if you’re dealing with more than one. This helps to keep track of suppliers in the event that there are any missing records missing or hidden. 

There are many challenges in relation to managing your suppliers, as there are various steps you need to take in order to achieve a common objective. Our experienced lawyers at Farringford Legal can assist you with preparing supplier contracts for your business and advise you on the steps you need to take when entering into an agreement with your suppliers.