All business relationships entail a degree of risk. For suppliers and service providers, contractual terms play a pivotal role in mitigating potential risks and realising the value of customer partnerships.
A well-constructed contract serves as a fundamental instrument in overseeing the supplier- customer relationship, encompassing aspects like the timing and quality of goods or services, the responsibilities of each party, and the available remedies in case of complications.
Certain UK laws insert terms into contracts for the sale of goods and services that cannot be waived or will apply unless explicitly excluded from the contract. Consequently, unless addressed within the contract, statutory provisions automatically take precedence, regardless of whether they favour the supplier.
Both suppliers and customers are subject to these implied terms in the absence of contractual agreements.
In this article, Myerson Solicitors’ Commercial Team delve into three crucial clauses in a B2B contract and the key considerations for each: liability, pricing, and payment.
Liability
The allocation of risk between parties is a critical aspect when aiming to limit or exclude liability under the contract. While suppliers strive to minimise their liability, English law governs the extent to which this can be done. In cases where limitations on liability are deemed unreasonable, they become unenforceable.
When a limitation of liability clause is declared unenforceable, suppliers run the risk of having inadequate contractual safeguards and being held liable without restrictions. Therefore, limitation of liability clauses necessitates a delicate balance: restricting liability while avoiding unreasonableness.
What Restrictions Can Be Implemented?
• Uncapped And Capped Liabilities – Some liabilities, such as those arising from negligence, defective products, fraud, or fraudulent misrepresentation, cannot be limited by law. However, all other potential liabilities under the contract can be restricted.
• Exclusions Of Specific Loss Categories – Certain types of losses, such as loss of profits, goodwill, damage to reputation, or data loss, can be excluded from liability provisions. The reasonableness of excluding these losses should be assessed on a case-by-case basis.
• Alignment With Insurance Coverage – Referring to the supplier's existing insurance coverage can demonstrate to a court that liability limitations are reasonable and appropriately distribute risk. However, suppliers should consult their insurance brokers to ensure that contractual limits do not invalidate their insurance policies.
Additionally, limitation clauses should be structured with multiple clauses and sub-clauses, allowing any unreasonable sub-clauses to be severed from the contract while preserving other liability provisions.
Pricing
Unless expressly stipulated otherwise in the contract, the law implies that the buyer should pay a "reasonable" price. However, suppliers seek to ensure that the price is profitable and covers ancillary costs like inflation, insurance, transit, or storage.
What Provisions Can Be Included?
• Clear Pricing Information – The contract should specify the price of goods or services and whether it includes additional costs such as packaging, delivery, off-loading, and insurance. Otherwise, statutory defaults may make these the supplier's responsibility and cost.
• Expiration Date For Quotations – Including an expiration date for quotations allows suppliers to manage their order commitments and ensure that accepted quotations align with current pricing.
• Price Variation Mechanism – Particularly in long-term supply contracts, a mechanism for price variation can account for inflation or other cost increases over the contract's duration. This may involve granting the supplier the right to adjust prices in accordance with market conditions, such as CPI.
Payment
The primary obligation of the customer under the contract is to make timely and full payments. Suppliers aim to incorporate provisions that offer protection in cases of late or non-payment.
What Remedies And Rights Can Be Incorporated?
• Time Sensitivity – If a customer fails to pay on time, the supplier is entitled to terminate the contract. By default, statutory law does not consider time for payment to be of the essence unless explicitly stated in the contract.
• Encouraging Timely Payment – Measures to prompt customers to pay on time include charging interest on outstanding sums, offering discounts for early payment, requiring immediate payment of the remaining balance if one instalment is late (in instalment agreements), withholding subsequent deliveries if any payment is late in instalment contracts, and excluding the customer's right to offset competing liabilities.
Key Considerations
Other vital elements to consider in a contract include:
• Incorporation – Businesses should take steps to ensure that their terms govern the contract, addressing the risk of a "battle of the forms". This can be achieved by making terms available to the customer when entering the contract and implementing internal processes to prevent customers from imposing their terms.
• Competition Concerns – Assess supply arrangements in light of UK and EU competition regulations, considering elements such as exclusivity, volume commitments, or non-compete obligations in the contract.
• Data Protection – In cases where parties share or process personal data, comply with data protection laws, distinguishing between controller-to-controller and controller-to-processor relationships and specifying the necessary data protection measures.
A meticulously drafted contract is instrumental in optimising outcomes, managing risks, and establishing a foundation for a lasting business relationship where both parties are clear about their obligations from the outset.
