Supply chain insights: What terms to include in an agreement?
Following on from our previous articles (‘Supply chain insights: arbitration and alternative dispute resolution‘ and ‘Supply chain insights: Risk management and financial disputes‘) in the series focused on supply chains, this article considers several terms which should be subject to careful negotiation in supply chain agreements.
Limitation of liability
This type of provision was discussed in our previous article, Supply chain insights: Risk management and financial disputes, and is common in supply chain agreements.
It is natural for each party to a supply chain agreement to want to limit their liability as far as possible, while seeking maximum liability from the other party in the event of any issues. It is often necessary to balance risks and liability to ensure the agreement is legally and commercially viable.
In supply chains, liability is commonly limited by weight, percentage of either business’s turnover, or an overall cap.
Alternative dispute resolution (“ADR”)
The importance of getting ADR provisions right was also examined in an earlier article: Supply chain insights: arbitration and alternative dispute resolution. As we highlighted then, potential disputes should be accepted as a risk of doing business. In complex supply chains, disputes with one part of the chain will invariably have consequences for the rest of the chain. It is therefore essential to quickly manage and resolve disputes and/or to ensure the continued functioning of the supply chain.
The best way to prepare for supply chain disputes is to pre-empt them at the contract negotiation stage. This means considering factors such as:
- What form(s) of ADR should be included in a contract;
- Should multiple form(s) of ADR be provided for;
- Whether to exclude Court proceedings in favour of mandatory arbitration once other form(s) of ADR have been exhausted;
- The “seat” of the arbitration which is the jurisdiction an arbitration is deemed to take place and where an award is issued.
Reporting obligations
A supply chain agreement should be self-regulating and include mechanisms for reporting and measuring progress. From a business perspective, it is crucial to have continued visibility of the status of the supply chain at any point. Provisions for reporting should therefore be included into a supply chain agreement. Consideration should be carefully given to the frequency of any reporting obligation, the form of the report and content.
Penalty and incentive clauses
To improve reliability in a supply chain and ensure targets are met, a supply chain agreement should include rights to impose financial penalties for delayed performance and/or offer financial rewards for meeting targets. The purpose of these clauses is to motivate suppliers to meet deadlines.
Jurisdiction
As supply chains can often have an international element, it is important to be clear which laws will apply to the contract.
How can Ellis Jones help?
We provide a full-service legal offering for businesses and can advise on all aspects of a supply chain or any disputes arising from a supply chain agreement.
Our expert Banking and Finance litigation team has substantial experience in advising on insurance, complex financial and commercial disputes.
If you like to seek advice or discuss the contents of this article, please contact William Fox Bregman or Wai Chan on 01202 525333 or via email at supplychains@ellisjones.co.uk or by clicking on the “Make an Enquiry” button on our website.
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