Lockdown restrictions across the world are beginning to ease but the outlook for many businesses remains challenging. The pandemic has produced significant supply and resourcing issues which show no immediate signs of passing. This makes many B2B supply contracts difficult, if not impossible, to perform.
Whilst some businesses are faced with a complete inability to supply their customers others face a more nuanced issue – what happens when you cannot meet the demand that there is for your products? Do you supply some customers to the exclusion of others? Or do you short supply everyone? How do you prioritise customer orders whilst ensuring that you minimise the risk of aggrieved parties bringing claims against you as a result, hoping to recoup lost income?
The obvious starting point is to assess who, from a commercial perspective, are your best customers – the ones who make you the most profit, pay on time and are likely to continue to need your supplies through the pandemic and on the other side. Considerations in this regard include:
- Will any customers accept part deliveries or delayed deliveries?
- Which are the easiest contracts to fulfil? For international supplied are there some countries which it is difficult to get the products into, or some of your warehouses where it is difficult to get stock out of?
- Which customers are most likely to pay on time? Cash flow is important to every business at the best of times but has taken on increased importance in the current climate.
- Might your reputation be damaged because of who you are prioritising or not prioritising? Are particular customers more “worthy” than others in the eyes of your industry or the general public?
As part of this assessment it is also very important to consider the applicable contractual terms. This is because your failure to supply may ultimately constitute a breach of the supply contract and you need to ensure that you minimise your financial exposure for committing a breach.
Key questions will include:
- What is the governing law? The choice of law clause is one of the often neglected boilerplate clauses but is one of the most important, particularly in international supply contracts. Everything said in this article assumes that English law applies. However if it does not it is essential to get local advice on the consequences of breaching a contract by failing to supply or providing short supplies.
- Are there minimum volumes under the contract? If not you may be able to cease supplies to a particular customer or at least cut them drastically without breaching your contractual obligations.
- What are the penalties for breaching the contract? Does a breach allow the customer to terminate? Are there clauses that provide for limitations on liability or liquidated damages? Suppliers should analyse the relevant contracts to understand their potential liability under each so that they can properly assess their exposure and plan accordingly.
- Check the contract for a preferment clause. These clauses require a supplier to prioritise one party over another where there are supply issues. Whilst this might not ultimately affect the priority that you decide to afford your customers it will affect any arguments that you may be able to deploy justifying your decision.
- Is the contract a relational contract? If so this makes it more likely that a duty of good faith will be expressly contained in the contract or implied into it. This again could affect the priority that you are expected to give to particular customers.
- Is it easier for one customer to mitigate its loss than another? The customer will have a duty to mitigate its losses by seeking supplies elsewhere and if it is easier for one customer to do this than another this may affect your decision as to who to supply and in what quantities.
Many suppliers will be looking to see if the contract contains a force majeure clause excusing performance of the contract under certain circumstances. The scope of the clause and its applicability will depend on how it is drafted and, in particular, whether the current circumstances are covered by inclusion of the terms pandemic or epidemic. However a force majeure clause will be of, at best, limited assistance to a supplier who could supply a particular customer but chooses for commercial reasons to supply a different one instead.
A further consideration for large suppliers, who are possibly dominant in their market, is competition law. Any arrangements that have the appearance of abuse of a dominant position or market sharing may fall foul of both domestic and international competition and anti-trust laws.
Ultimately suppliers will need to carefully carry out a methodical assessment of their customer relationships and contractual terms if they are to minimise the fall out caused by demand outstripping supply. Whilst you cannot please all of the people all of the time careful future planning, continual risk assessment and an agile mind set will help ensure that the displeasure of others does not result in your business being out of pocket.