Commercial considerations for your supply of goods and services agreements

As a start-up, the precedent agreements you have with your suppliers and customers will be fairly new. Whether you’re working from your own agreement, or negotiating an agreement provided to you by a supplier, what are the things you should be looking out for from a legal point of view?

Delivery and when risk passes

Of course, you’ll want to know when delivery takes place for practical reasons. But there’s an important legal point about the timing of delivery too. Usually the risk and ownership in the goods passes at the time of delivery. That means that you’ll be liable for any damage or losses once the risk in the goods passes to you.

Check when ‘delivery’ takes place, because you can’t assume that delivery happens legally when the goods are at the door of your warehouse or office. Delivery might happen when the ship that’s carrying the goods reaches the port. Or it might happen when the goods are loaded onto a lorry. If that’s the case, then who is responsible for the import and expose licences and costs?

Once you’ve identified when delivery takes place, and when the risk and ownership in the goods passes, what can you do about it?

Depending on the commercial relationship you have with the supplier, and the strength of your bargaining position, you might be able to negotiate a more favourable clause. You could ask to redraft the clause so that risk passes to you when the goods reach your premises.

Alternatively, you can insure yourself against the risk with a comprehensive insurance policy.

Price and VAT

Another obviously key clause is the price of the goods. It’s easy to scan a contract quickly to check the price, and then miss some of the finer details.

Don’t forget to check whether or not VAT is included so you don’t receive any surprises when the invoice arrives. Are you liable for any other taxes or additional fees?

The other thing to look at carefully is whether there are provisions for price increases. If there’s a change in circumstances (price variation or wage inflation), can the supplier suddenly increase the price? Do you have any options to decline a price change? Can you terminate the contract if you don’t want to pay the increased price?

Think about negotiating these clauses if they expose you to more risk than you’re willing to take on.

The liability of each of the parties

In most supply of goods and services contracts, there is a limitation of liability clause, which does what it says on the tin. It limits the amount you are liable if something goes wrong during the contract that causes damage or loss to the other party.

If the contract is your own precedent, you’ll want the limitation to be as small as possible. If you’re looking a contract from a supplier, you’ll want their liability to be as high as possible.

What’s important here is the concept of fairness. It should be a ‘fair’ level of limitation in relation to the value of the goods or services you’re providing. What is ‘fair’ depends on a number of points such as the value of the goods or services under the contract.

If the clause is deemed to be unfair, then it might be void, and you may be exposed to unlimited liability.

Schedule of Works

Your schedule of works manages the expectations of both parties, setting out exactly what the supplier will provide and when.

Your customer may try to negotiate this clause so that they receive a higher level of service than you originally suggested. If they’re an important customer, you might be able to accommodate their request and amend the schedule of works.

But remember to think about the wider picture before you agree. Can you cope with different customers on different service levels? Are there any issues with ‘flow-down’, such that you’re restricted by your own suppliers in what you can offer?

Intellectual property

Your intellectual property is one of your most valuable assets. In some cases, your customers might try to negotiate ownership of your deliverables, especially if they are bespoke items. This is usually one of the clauses where you should stick to your guns, and retain ownership of your own IP.

Key takeaways

Commercial contracts are legally complex and it’s wise to have a solicitor on board to help you navigate them. Most clauses are negotiable, but you need to know how far you can stretch a clause, and whether it will have knock-on consequences for your commercial relationship and the rest of your business.

Commercial contracts generally revolve around the principle of fairness and reasonableness. If a clause is deemed unfair or unreasonable, then the clause itself could be void, and in some circumstances the whole contract will be void. There is a lot of legal nuance in what is ‘fair’ and what is ‘reasonable’ and a solicitor can help you find the balance.

If you’d like any help with your commercial contracts, please get in touch with our experts at SME Comply.

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Commercial considerations for your supply of goods and services agreements

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