In this blog our Commercial team highlight some of the key provisions to consider when negotiating long term supply agreements with large national supermarket retailers in order to achieve contractual fairness and sustainable relationships across the agri-food supply chain.
1. Retailer standard terms and supplier special terms
Large national retailers tend to want to ensure that their standard terms and conditions of purchase are incorporated into any supply contract agreed. In some circumstances, the retailer may be open to agreeing variations in a side letter or commercial terms agreement, but the retailer will want to ensure that their terms are still included. Care must be taken to ensure that the retailer terms are reviewed and there is a clear order of precedence clause in the agreement to clarify which terms prevail and would be legally enforceable in the event of a dispute or inconsistency as between the two.
2. Term and termination
If the supply agreement has been agreed on a particularly long-term basis, it can be helpful to set out the reasoning for such commitment to demonstrate the parties’ intentions at the time the deal was agreed. It is also particularly important to ensure that there are robust termination provisions in place which enable the supplier to exit the arrangement in the event of retailer failures such as material or persistent breach, non-payment or insolvency. From the supplier’s perspective, it is important that any agreed fixed period is sufficiently robust and that the retailer cannot reverse out of an arrangement by including wide or vague termination rights in the agreement.
3. Pricing and investment
Long term supply agreements are likely to include a fixed initial pricing and a cost review process. The retailer may request regular performance reviews and the supplier may be able to benefit from any cost reductions achieved. Payment provisions should be clearly drafted to ensure that the retailer makes prompt and timely payments to support the supplier’s cash flow and financial stability. A supplier intending to commit to significant upfront investment should request reimbursement in the event of early termination where the investment has not fully depreciated to zero.
4. Exclusive purchase and supply
In return for a long term supply agreement, a retailer may agree to buy all or a certain amount of its requirements for a particular product exclusively from the supplier. Equally, a supplier may agree to only supply the retailer within a defined field. A supplier subject to an exclusive supply obligation should ensure that the restrictions on who it cannot supply are not too broad and do not contravene any of its existing customer arrangements.
Where a clause or agreement contains an element of exclusivity, it has the potential to affect competition and constitute a breach of Competition laws where one or both parties have a significant market position or the obligations relate to a large proportion of the total market for the products concerned. As such, it is very important to seek specific legal advice before agreeing any such provisions.
5. Excluding and limiting liability
Limitation of liability is always a key issue in any negotiation. A retailer will want as few limitations as possible to apply, whereas a supplier will want to exclude or limit as much as it can, while avoiding crossing the line of what is permitted by law.
Liability for death and personal injury caused by negligence, good title, and fraud or fraudulent misrepresentation cannot be excluded or restricted in law. Any attempted restriction or exclusion of liability for losses caused by negligence other than death or personal injury, non-fraudulent misrepresentation, breach of contract or breaches of correspondence with description, satisfactory quality and fitness for purpose etc. is only valid to the extent it is fair and reasonable in the circumstances. If an exclusion fails the reasonableness test, it will be wholly ineffective, and if the exclusion is contained in a limitation of liability clause, it may cause the whole clause to fail.
Limitation clauses are not regarded by the courts with the same hostility as exclusion clauses. It is generally better to accept a realistic upper limit on liability and to insure for it. The supplier should contact its insurers to discuss the types of loss for which it might obtain insurance and the appropriate upper limits. It is also important to make sure that the limitation of liability clause does not invalidate its insurance cover. From the supplier’s perspective, in addition to having clear maximum limits on liability exposure, one should also ensure that all indirect and consequential losses are excluded from any claim.
6. Statutory implied terms
In accordance with any business-to-business contract, if the contract is silent, the Sale of Goods Act will imply the following terms for the sale of the products: (i) good title, (ii) no encumbrances and quiet possession, (iii) correspondence with description, (iv) satisfactory quality, (v) fitness for purpose, (vi) correspondence with sample, and (vii) remedies for non-conforming products i.e. breach of the implied terms entitles the retailer to reject the products and reclaim the purchase price (where already paid), unless the breach is so slight that it would be unreasonable for the retailer to reject the products, in which case the breach only gives rise to a right to damages.
7. Force majeure
A force majeure clause suspends performance of obligations where a party is prevented from performing them by events outside its control. Force majeure is not a legally defined term and so it is important that the concept of what constitutes a force majeure scenario is expressly defined and clearly related to the type of supply, the growing or production process and key areas of risk. It may be helpful for the parties agree a remedial plan with a reasonable timescale to resume supply in the event of a force majeure event.
8. Entire agreement and pre-contract representations
An entire agreement clause is intended to dissuade the courts from finding that statements or representations made by the supplier’s sales staff or in its sales brochures and catalogues form part of the contract with the retailer, or constitute a collateral contract. Suppliers should be aware that such clauses are not always effective and they should not treat them as a licence for sharp practice when making pre-contractual statements and representations. Suppliers should also be careful to avoid making false pre-contractual statements or should correct them before the contract is signed.
9. Dispute resolution mechanism
Effective dispute resolution mechanisms are essential for addressing conflicts and disagreements that may arise within the supply chain. Contracts should include provisions for alternative dispute resolution methods, such as mediation or arbitration, to resolve disputes in a timely and cost-effective manner, thereby minimising supply disruptions.
If you need any support or advice on long-term supply agreements, please don’t hesitate to contact the Roythornes Corporate and Commercial team.
Written by Julia Seary and Greta Mockute.