Breaking the chains

If you eagerly take on business which you later find actually costs you money, what are your options? Your customer will have their own pressures up the supply chain and not welcome your request for a price increase.

Consider first how long you are locked into the price. If there is no mechanism for variation, the price agreed at the outset is the price for the whole period of supply. Refusing further orders may expose you to a claim for the difference between your price and any higher price the customer has to pay in the market.

A review mechanism must contain some formula for the variation – Retail Price Index, for example – to be binding, otherwise it is simply an agreement to negotiate/agree later. That works if you reach a deal, but not if your customer slows down the negotiation (every week that goes by is a good one) or, worse still, simply says “No”. A specific right to decline further orders would have evened up the tables.

Terminating the contract sounds drastic but, if you are confident in your market, this will serve to restore your negotiation position. Where else would the other party go? How disruptive would that be for them?

Check that you do in fact have a right to do this. If the contract is for a fixed term, you will have to wait until the minimum period expires. Look out for unilateral options to extend the contract period – common in local authority contracts.

Terminating a fixed-term contract midway through requires careful analysis – you need to identify a major breach by the customer, and then serve one or more correct notices. Late payment by the customer is not necessarily adequate for this. The reason, amount and period for the late payment and the value of the contract all have to be taken into account. Wrongful termination by ‘the good guys’ may end up with you as ‘the bad guys’! It is much better to have a specific right not to supply in the event of late payment.

copy; Calnan Cox 2009

For more information contact Sebastian Calnan at Calnan Cox on 01604 882287 or visit www.calnancox.co.uk.

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