Contractual dilemma

12 December, 2008
In the current economic climate, keeping a contract with a retailer may depend on some tough commercial decisions. So how do you stand legally? Nichola Evans reports
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With the current economic problems, companies are reviewing their arrangements with suppliers and seeing where savings can be made. One element of this is that firms are increasingly looking at pricing structures in place and reviewing their position with regards to providers.
We are hearing of more and more stories of companies putting the squeeze on their suppliers and one particular scenario seems to be as follows. The supplier is asked to reduce its price by X%, on the basis that the economic climate demands it and also that, in effect, the supplier should "share" the burden with the company. The company further suggests that if the supplier agrees to this, then the company would look favourably upon them in the future. The unwritten implication is that if the supplier does not play ball, they could be jeopardising their future.The supplier is immediately placed in a tricky situation. By playing ball, their own profit margins are badly affected - and this is at a time when most companies are already working on very fine margins. There is also the danger that, even when the economic situation improves, the company will still not bring the prices paid up to the previous level. But then the converse is that the supplier does not agree to the price reduction and the business is lost completely.So what should a supplier do, what is the legal situation and do suppliers have any legal remedies?The starting point is to review the contractual arrangements in place with the company concerned. If needs be, it may be worth taking legal advice on the contractual position. Let's take a couple of different scenarios:Scenario 1Baker A has an excellent working relationship with Supermarket X - so much so, that it does not have a written contract with the supermarket. Orders are simply placed on a regular, if ad hoc, basis. Every time Supermarket X calls to place an order, Baker A quotes a price and that is accepted by Supermarket X. However, Supermarket X now says that, with the economic downturn, it cannot afford to pay the price being asked by Baker A and has asked for a 5% reduction. Baker A has to make a commercial decision as to whether to accept the percentage reduction or not. It's a gamble. Baker A cannot demand that Supermarket X continues to place orders with it. If Baker A says no to Supermarket X's demands, then Supermarket X can simply walk away from the trading relationship and there is nothing Baker A can do. If Baker A decides that it cannot take the gamble that Supermarket X will walk away and it will have to take the reduction, what should Baker A do? Perhaps Baker A should use this as a negotiating chip and an opportunity to formalise the relationship with Supermarket X. Baker A could suggest the following:l That the parties enter into a written agreementl That Supermarket X is under an obligation to place a certain number of orders with Baker Al To have a notice periodl That the percentage reduction only be applied for a certain period of timeHowever, Baker A is still in a weak position and, realistically, has to make a commercial decision as it has very few, if any, legal rights or remedies.Scenario 2Baker B is a very well-organised bakery. It has written contracts in place with all of the supermarkets that take its products. Its contracts provide:l For six months' notice to be givenl Full details of what the bakery can charge for its productsl The number of products and the dates when those products will be sent to the supermarket.Supermarket Y gets in touch with Baker B and says that it is in financial difficulties and needs Baker B to take part of the financial risk with it, by taking a 9% reduction in its prices. What can Baker B do? Well Baker B is in a much stronger position and can insist on Supermarket Y complying with the contractual terms. The only danger would be Supermarket Y serving notice that it would end the contract at the end of the notice period.Again, it comes down to a commercial decision on whether Baker B wishes to make some kind of concession. However, due to the fact that Baker B's position is that much stronger if minded to make a concession, it might be worth Baker B asking to see the evidence that the company is in trouble or negotiating a smaller percentage reduction and again for a limited period only.For smaller businesses, what has to be key in this situation is that their position is made as watertight as it can be within the contractual document between themselves and the entity to whom they supply. While legal advice may sound expensive, this has to be considered as against possibly the loss of a business if a major customer pulls its business. Many suppliers are under the impression that companies have to give them notice and, more particularly, reasonable notice if they are going to withdraw their business, but this is not necessarily the case.So to conclude, if faced with a situation where a company wants to re-negotiate price: 1. Review your contract and, if necessary, take legal advice on that document.2. If your contract makes you reasonably secure, consider commercially whether you should accede to that request, but see whether any future commercial advantage could be secured by giving your agreement - for example, with the company giving you agreed increased orders.3. If agreement is reached on a reduction in price, give great consideration to placing a guillotine for how long that reduction is in place.? Nichola Evans is a partner at legal firm Browne Jacobson----=== Prevent late payment ===Payment times are a key part of any contract, whether written or verbal. According to the Forum of Private Business, poor payment practice costs UK business £20bn every year with small firms each owed an average of £30,000 at any one time, so the FPB has drawn up some top tips to help prevent late payment:Make your terms clearAgree payment terms at the order stage and have those terms printed on relevant documents such as invoices. Terms should include any credit period and details of interest charges on overdue accounts. All businesses have a legal right to claim interest from late-paying customers.Consider credit-checking potentially large customersAn online credit rating can be on your desk in minutes and costs from £10 upwards. Consider taking up credit references.Make your invoice clearAn easy-to-understand invoice will encourage customers to pay more quickly. Make sure, in particular, that you include a detailed description of the goods/services, a reference to the order number and that you send the invoice to the right person.Invoice on timeSend the invoice out immediately after the goods are sent or the service is completed. Don't forget that many businesses simply don't pay invoices until they receive a statement.Create a systemSet out in writing a timetable you feel comfortable with for chasing unpaid bills - and stick to it.

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