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Negotiation is a crucial skill for business customers engaging suppliers to provide products or services. Not only should you negotiate commercial terms where possible when engaging new suppliers, you should also seek to negotiate legal terms to protect your best interests. This article will explore why your business should negotiate a supplier contract.
What is a Supplier Contract?
A contract is a critical legal document recording the terms on which parties will do business with one another.
When working with a supplier, your business should enter a robust contract setting out key terms around the supplier’s services.
For instance, your supplier contract should lay out provisions including:
- which products or services the supplier will provide and when;
- the standards you expect from the supplier;
- how much you will pay for the products or services; and
- what happens in the event the supplier does not perform, including rights for you to end the agreement.
By signing a commercial contract setting out each party’s responsibilities, your commercial relationship will likely run more smoothly, making you less likely to encounter disputes.
Why is Negotiation Important for Supplier Contracts?
Supplier negotiation regarding contracts is a vital consideration when considering new supplier relationships.
Suppliers often have their own contracts, which they ask customers to sign. Supplier contracts can be extremely onerous. Furthermore, they are often not tailored to each business’s requirements. If an issue arises and the supplier breaches their obligations, this could leave you with few remedies as a customer.
When discussing a contract to govern your project:
- you can propose a contract (prepared by your business) for the supplier to sign; or
- the supplier can propose their own contract (prepared by the supplier) for your business to sign.
Ideally, you should ask a supplier to sign your own supplier contract. A contract you specifically prepare for your business will likely be in your favour and protect you. If a supplier rejects this, you should at least seek to negotiate the supplier’s contract to protect your business.
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Why Should Your Business Negotiate Supplier Contracts?
Negotiation is a vital exercise to protect your business contractually. Let us explore some critical reasons why negotiating supplier contracts is important.
Negotiating Allows You Flexibility to Define Your Requirements
As a business, you may have specific and niche requests for a supplier. For instance, you may have key service levels or standards that the supplier needs to meet.
Negotiating a supplier contract allows you to clearly define your specific requirements and any key performance indicators required from the supplier. For example, you can request critical timeframes for delivery and set out deadlines in the contract. By doing so, you may have remedies against the supplier if they breach their obligations.
You may also be able to negotiate flexibility and a change in the supplier’s usual processes, such as longer payment terms or faster delivery windows. Negotiation is vital to ensure that the payment terms in a supplier contract suit your business and cash flow needs. You also have the opportunity to negotiate to help control future costs, for example, a supplier’s request to increase their charges.
Negotiating Gives You the Chance to Protect Your Business from Risk
As a customer, you are exposed to several risks when engaging suppliers.
For example, the supplier can:
- misuse your intellectual property rights, for example, your brand logo;
- take payment upfront but then fail to deliver the services to your satisfaction; or
- deliver products late or deliver defective products that your business cannot use.
It can be challenging to trust a new supplier. However, contract negotiation and negotiating contractual business protection can give you comfort. For instance, you can negotiate to request stringent supplier obligations to protect your company’s data and information. For example, consider including detailed data security obligations and standards in your supplier agreement. You can also set strict parameters around using your data and confidential information. This can serve to protect your business.
A supplier’s contracts may seek to limit their liability for the damage they may cause you due to breaching the agreement. For example, they may seek to include a clause limiting the damages they will pay you if they breach the contract. Negotiation presents an opportunity for you to challenge this and ensure that the limits of liability are reasonable so that you have reasonable remedies against them. Under your supplier agreement, you can also request that the supplier put in place appropriate insurance to cover their potential liabilities.
Negotiating Can Give You Key Remedies and Termination Rights
Often, suppliers are reluctant to offer customers an easy exit route. However, as a customer, you should ensure you have a way to terminate your contract if things do not go as planned. Likewise, ensure that you have remedies if the supplier fails to comply with its contractual obligations.
You can seek to negotiate helpful remedies and termination rights by negotiating a supplier contract.
For instance, you can seek to negotiate:
- that the supplier re-delivers deficient products or services;
- that the supplier issues you with a refund where the products or services are not up to standard; and
- termination rights, allowing you to end the contract if the supplier breaches certain key obligations.
If you do not seek to negotiate such rights, you may find it difficult to terminate your contract or receive recourse from the supplier for breaching their obligations. This can be highly challenging for long-term, high-value or critical business contracts.
In summary, negotiation is a key tool to help you protect your business contractually when working with suppliers.
Use this checklist to ensure your supplier contracts contain all necessary terms.
Key Takeaways
As a business customer, it is essential to protect your business contractually when engaging suppliers. Negotiating a supplier contract allows you to protect your business from various risks. For instance, negotiating will allow you to clearly define your requirements and request supplier remedies if things do not go as planned. You can use negotiation as an opportunity to request valuable supplier termination rights if you are unhappy with the services and want to ensure you have a way to exit a contract smoothly. Without negotiating a supplier contract, your business may be left with little recourse if the supplier does not perform their obligations to the standards you require.
If you need help with a supplier contract, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers who can answer your questions and draft and review your documents. Call us today at 0808 196 8584 or visit our membership page.
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