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As a customer purchasing products or services, a supplier’s help and support can be vital for your business’s success. For instance, if you rely on using a supplier’s software, that is business-critical for your own operations. Before you agree to do business with a new supplier and sign a new contract, you should consider certain critical contractual issues to explore and ensure you are comfortable with. These contractual questions can be fundamental in helping protect your business from risk before entering into a contract. This article explores three key questions you should ask your suppliers before entering a contract.
Why Is It Important to Ask the Right Supplier Questions?
You should be cautious when working with new suppliers. Your agreement with a supplier will govern your relationship and rights, and you must be comfortable with crucial contractual terms. Failing to ask the right questions regarding a contract can lead to unexpected challenges, such as cash flow issues, legal disputes, or operational disruptions.
By proactively questioning critical aspects of the contract, you can enter into the relationship with your eyes open and understand any key contractual risks.
You will also have the chance to negotiate terms that are fair, clear, and aligned with your business objectives. Asking the right questions could help you avoid pitfalls and ensure protection in your supplier relationship.
What are 3 Key Contractual Questions You Should Ask Your Suppliers?
Depending on the project and the risks, you may need to ask your supplier various questions. Some of these questions may already be answered within the supplier’s own contractual terms, such as their terms and conditions documentation. As such, you should review any supplier documentation thoroughly and make sure you are comfortable with it.
Here are some common questions most customers will need to understand the answers to from their suppliers:
What Are the Payment Terms?
The payment terms in your supplier contracts are critical and can significantly affect your business’s project. You should clarify issues such as how much you need to pay, when payments are due, and the consequences of late payments.
For example, if your supplier requires payment within 30 days, but your business typically needs a 60-day payment term due to your own cash flow, this mismatch could cause problems. Understanding these terms in detail will let you plan accordingly and avoid the potential for financial strain.
If the supplier imposes penalties for late payments, it is crucial to understand the terms and ensure you can meet them to avoid unnecessary costs. For instance, your business may be charged high interest, or the supplier can terminate the contract if you miss one payment.
Understanding these key payment terms will help you decide whether working with a particular supplier is feasible.
What Are My Exit Rights?
What if you want a quick and easy way out and require agility to change suppliers over time?
There are generally two termination clauses – termination for convenience and termination for cause. Termination for convenience allows you to end the contract without a specific reason, providing greater flexibility. However, this often comes with a notice period and, in some cases, a termination fee. Termination for cause allows you to exit the contract if the supplier breaches specific terms, such as failing to meet delivery deadlines or providing defective products. It is crucial to understand what constitutes a breach and the process for termination.
Also, you should carefully consider any notice period required for termination. If the contract requires 90 days’ notice, you may need to plan your exit well in advance, which might not be suitable if you want the right to a quick exit. Understanding these exit rights can help you ensure that you are not trapped in an unsatisfactory supplier relationship and that your business can move on without excessive costs or delays.
What Are the Liability Limits?
Do you know how much a supplier will be liable for if things go wrong? Often, suppliers seek to limit their liability. Liability limits set out the extent to which each party is responsible for damages or losses that may occur during the contract.
It is common for suppliers to limit their liability to a capped maximum amount, but this may only sometimes be sufficient to cover the potential losses your business could incur. For instance, if a supplier’s fault causes widespread damage or leads to a halt in your operations, the financial impact could far exceed the value of the contract. Negotiating a liability cap that adequately reflects the risks involved in the agreement is essential. As such, you should always ask about and check the liability limitations to determine what recourse you will have if the supplier breaches the agreements.
Use this checklist to ensure your supplier contracts contain all necessary terms.
Once you grasp these critical areas, your business can consider its position and whether you need to negotiate any specific terms with the supplier. If you need help negotiating a contract to protect your position, you can seek legal advice from a commercial contracts lawyer who can help you do this. A lawyer can guide you on the right questions to ask and look to see if the answers to these questions are covered in a supplier’s contractual documents.
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Key Takeaways
Entering into a new supplier contract is important, and you should make sure you have all the information you need before doing so. Asking the right questions when negotiating supplier contracts is essential to protecting your business from unnecessary risks.
Some key issues to explore include liability limits, your exit rights and the supplier’s payment terms. If you need support negotiating a supplier’s contract terms, you can seek legal advice from a commercial contracts lawyer to guide you.
If you need assistance with supplier contract reviews or negotiations, contact LegalVision’s experienced 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.
Frequently Asked Questions
Why is it essential to ask your supplier questions?
Asking your supplier questions will help you fully understand the terms of the contract, prevent misunderstandings, and assess risks. Clarifying key aspects such as payment terms, exit rights, and liability limits will help you understand key risks. You will also be in a better position to negotiate these terms if necessary.
How can legal advice help me when entering a supplier contract?
Legal advice can help walk you through and tackle supplier contracts by ensuring that the terms you sign up for are fair, transparent, and legally compliant. A solicitor with expertise in commercial agreements can assist in identifying potential risks and negotiating them on your behalf.
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