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Securing robust supplier contracts is crucial to protect your business from risk. However, various clauses can expose your business to significant risk as a business customer. As such, it is vital to thoroughly review supplier contracts and ensure you understand what you are signing up to. This article will explore some critical risky clauses to watch out for in supplier agreements.
Why Is it Important to Review and Understand Supplier Agreements?
Establishing solid relationships with reliable suppliers is vital for a business customer. However, overlooking the complexities of supplier agreements can expose your company to unexpected risks and restrict a smooth collaboration. These seemingly straightforward contracts often contain clauses that significantly impact your financial obligations and legal recourse in case of a supplier breach.
Supplier agreements are frequently drafted to safeguard the supplier’s interests. By carefully checking these contracts, customer businesses can proactively protect their interests. This proactive approach allows for negotiating fairer terms, mitigating potential financial burdens, and disrupting project timelines.
Investing the time to thoroughly understand your supplier agreements allows your business to navigate the partnerships clearly and confidently. This can also foster a more transparent and mutually beneficial relationship with your suppliers, ultimately contributing to long-term partnership success.
Which Terms Should Your Business Watch Out for in Supplier Agreements?
While a range of clauses could present risks depending on your business and project, here are some of the riskiest clauses to be aware of:
Risky Payment Terms
While seemingly simple, specific payment terms can hide significant complexities and risks.
For example:
- a supplier’s terms could include additional fees, which could significantly impact how much your business must pay. For instance, a clause stating that the supplier can charge your business for expenses without your approval;
- ambiguous payment terms can result in a lack of clarity, leading to future disputes if the supplier or your business disputes what you owe or have paid under the contract;
- unilateral price increase clauses allowing suppliers to increase costs can damage your business budget planning and leave you out of pocket; and
- onerous late payment penalties such as high-interest provisions can also lead to high additional costs for your business.
Given the importance of financial planning and staying within budget, it is vital to understand a supplier’s payment terms. Ensure that the supplier agreement matches what you have discussed and agreed to so your business is not exposed to financial risk and unexpected costs.
Risky Limitation of Liability Clauses
Limiting liability clauses can protect suppliers from excessive financial exposure if they breach contracts. These clauses can also leave your business vulnerable if you are left without a meaningful remedy when the supplier breaches your agreement.
For instance, a supplier’s agreement significantly reduces their maximum financial liability to customers. For example, the contract may state that the supplier’s maximum liability is only capped at project charges. In such a case, all you can recover from the supplier in the event of a breach will be limited to an amount which may be far smaller than the damages you have incurred because of their breach.
Limitation of liability clauses are usually heavily negotiated, and you should seek legal advice if you require support with negotiating these clauses.
Risky Termination Clauses
Supplier relationships, despite a promising start, may need to end early. Your business budget, deteriorating supplier performance, or changes in your strategic direction might necessitate a change or exit from your contractual agreements.
A well-drafted exit strategy within the supplier agreement can ensure a smooth and less disruptive exit route. However, several risks can arise if the supplier agreement does not provide fair exit rights. An imbalance in termination rights can keep you tied in an agreement, potentially leading to ongoing poor service and increased cost. You may face significant operational disruptions, financial penalties, or legal disputes without fair termination clauses. For instance, a supplier’s agreement contains generous termination rights for them but none for your business, leading to a dispute around your termination rights.
Download this free Supplier Contracts Checklist to ensure your contracts will meet your business’ needs.
To mitigate these risks, you should ensure that your supplier agreements contain reasonable termination rights for an exit route should you wish to end the deal. You should also ensure you have clear rights for fault-based termination, for instance, where the supplier breaches the agreement or becomes insolvent.
Seeking legal advice is critical to understanding and navigating these risky clauses in supplier agreements. A contracts lawyer can help negotiate and ensure your agreements are balanced, especially when your bargaining power is limited. They can assist in negotiating fair terms, clarifying ambiguous clauses, and securing rights to protect your business. This proactive approach can help protect your business from unexpected costs and potential legal disputes, also helping ensure stability and certainty in your supplier relationships.
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Key Takeaways
Navigating supplier contracts is crucial for protecting your business from significant risks. Supplier agreements may contain complex and high-risk clauses that can impact your financial obligations and legal recourse. Understanding these agreements mitigates potential risks and fosters a transparent, mutually beneficial relationship with your suppliers. Key risky clauses include onerous payment terms, stringent limitation of liability and unfair termination clauses. Should you require support understanding and negotiating such clauses, seek legal advice.
If you want advice on supplier agreements, you can contact LegalVision’s contract lawyers as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
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