When you're managing contracts across a supply chain, you're also managing risk, especially in an uncertain trading environment.
The logistics of manufacturing and transporting goods during a global supply chain crisis have become increasingly complex, with rising fuel costs, shortages of HGV drivers, escalating raw material prices, and post-Brexit regulatory changes all adding pressure. If you're dealing with late deliveries, inflated costs, or supplier disputes, it’s not just frustrating; it can be financially damaging.
You need to know that your supply contracts are protecting your business, not exposing it. Our commercial law solicitors work with you to build strong contractual protections, clarify liability, and effectively manage risk allocation, enabling you to operate with greater confidence and fewer commercial vulnerabilities.
Topics we discuss:
- The supply chain contract
- Supply chain risk
- Due diligence in the supply chain
- Managing risk through specialist supply chain contracts
- Reviewing your supply chain contracts
- Commercial contract clauses to review in a supply chain contract
- Tips on managing risk in supply chain contracts
- Preparing your supply chain contracts for continued uncertainty
The supply chain contract
Our commercial contract dispute solicitors often deal with requests for legal advice on supply chain contract topics such as:
- Can a transport company escape a supply chain contract that is no longer economic to fulfil for a transport company because of the sudden rise in salaries for HGV drivers and rapid increase in petrol prices?
- Can a manufacturer sue their sub-contractor as the company has not met an agreed delivery timescale resulting in the manufacturer being in breach of their sales contract with a retailer?
- Can a company terminate a contract for non-performance when the fault lies with the supply of goods rather than their quality?
- Can a retailer claim reputational damage and consequent loss from a manufacturer or supplier as failure to supply goods to the end consumer has led to complaints and refunds?
Whether your company is a start-up, a well-established retail brand or is at the top or bottom of a vertical supply chain contract chain, you must have a specialist commercial solicitor on board to ensure that your business is not the one ‘holding the can’ for all the supply chain issues. Especially as others in the vertical supply chain will have ensured their contracts include review clauses, termination clauses, and liability limitation clauses that work in their favour. In today’s economic climate, it’s more important than ever that your supply chain contracts are robust, forward-thinking, and designed to withstand disruption. For context on the legal framework around these arrangements, take a look at how horizontal and vertical agreement structures can affect your position.
Supply chain risk
Gone are the days when a company could contract with another company to supply or deliver goods and ignore any associated legal or reputational risks. When it comes to supply chain contracts, price is not always the determining factor of who wins a tender or gets the contract or at least. In the opinion of commercial solicitors, choosing the cheapest supplier or haulier may actually increase your risk of commercial litigation through contract disputes, ultimately costing your business more and damaging your reputation with a manufacturer further up in the supply chain or with the end consumer.
Supply chain risk factors include:
| Risk factor | Issues |
| Governance | Any hint of bribery, corruption or tax evasive practices can not only result in investigation that damages your supply chain but can also risk your reputation, even if you are only part of the supply chain and not directly concerned in the governance issue. |
| Data protection and confidentiality | It is inevitable that those in a supply chain need to share data but contractors may not be as diligent as your company in complying with data protection, client confidentiality, cyber security and GDPR. This can lead to breaches of data protection legislation that may not affect your business in terms of non-compliance with GDPR but will cause reputational damage to your company if your business is associated in the media to a data breach. It is inevitable that those in a supply chain need to share data. Still, contractors may not be as diligent as your company in complying with data protection, client confidentiality, cyber security and GDPR. This can lead to breaches of data protection legislation that may not directly result in GDPR non-compliance for your business, but can still cause significant reputational damage if your company is linked to a data breach. Following recognised principles of supply chain security can help you assess and manage these risks more effectively across your supplier network. |
| Treatment of supply chain workforce | However far removed your company may be in a vertical contract supply chain your business can still be affected if a supplier or carrier fails to treat their work force properly. Examples include: |
| The environment | If your business has a unique selling point, for example, being environmentally friendly or committed to animal welfare, it is important that those in the supply chain are equally committed to those principles and will adhere to the same standards that you have introduced within your own business. Failure to address environmental issues in the supply chain can create significant damage to your brand. |
Due diligence in the supply chain
Commercial solicitors say that putting the time in with due diligence prior to the signing of commercial contracts significantly reduces supply chain breakdown and, just as importantly, the potential for commercial litigation over supply chain disputes. Requiring contractors to complete due diligence questionnaires so that your business knows its supply chain in the same way as you ‘know your client’ should be one element of the due diligence procurement process, as well as ensuring that potential business partners fully understand the environmental or other standards they will need to work to if involved in your supply chain. Understanding the standards expected of them ensures they can properly tender for the work or correctly price the contract.
Managing risk through specialist supply chain contracts
The management of risk, after the due diligence phase, includes ensuring that your supply chain contracts limit your risks (whether those are legal or reputational) and your liabilities. Examples of clauses that can help manage supply chain risks include:
| Contractual clause | Comments |
| The supplier must comply with any industry specific regulations and legislation and, where relevant, must maintain membership of an industry professional body and comply with training regimes | If the supplier fails to comply with these requirements, you could include this as a reason for you to have the right to terminate the contract. If your business is being asked to commit to enhanced standards, beyond the industry norm, this may involve additional contract negotiation. |
| The supplier must maintain insurance cover at a specified level | Insurance will not cover every risk and a contracting party may want to include a force majeure clause so that a contracting party is not liable for forces outside its control. |
| Confidentiality clause | Confidentiality can be maintained through a confidentiality clause or a separate non-disclosure agreement. |
| Data protection | A data protection clause emphasises the importance of a contracting party complying with GDPR, not only in relation to the legislation but the potential for the termination of the contract or penalties. |
| Use of sub-contractors | Your business may want to specify that the contracting party should only sub-contract with sub-contractors approved by you or who are members of a recognised industry body. If you are being asked to commit to this type of agreement it could affect profit margins if your hands are tied on your choice of sub-contractor. One way to minimise risk is to include a list of pre-agreed sub-contractors. Where sub-contractors are likely to be used, you may want to include a requirement for flow down provisions so each sub-contractor is bound by the same conditions and adherence to standards. |
| Audit provisions | Audit provisions help manage risk by those in the vertical contract regime being clear that their performance is being monitored in accordance with agreed standards, key performance indicators and the consequences of non-compliance with the contractual standards. |
| Review provisions | Any supply chain contract should include industry-specific review provisions. It is also crucial to regularly update your commercial contracts to ensure they remain fit for purpose. |
| Termination clause | The termination clause needs to consider if a supplier can terminate for breach of contract or if there are scenarios where a contracting party can be allowed to remedy their breach of contract. In some cases, you may want to include a provision for the immediate termination of the contract. Any termination clauses need to consider, on an industry-specific basis, difficulties in securing alternate suppliers or carriage of goods and the importance of continuity of business until alternatives can be organised, especially when assessing whether you can terminate a commercial contract. |
| Dispute resolution | With an increased risk of commercial contract disputes arising from the global supply chain crisis, it is essential to be proactive in managing disputes to achieve a quick and cost-effective resolution. Including a requirement for supply chain disputes to be referred to commercial arbitration is one solution. Alternatively, you might consider commercial mediation as an effective form of alternative dispute resolution, depending on the nature of the disagreement and the relationships involved. |
Reviewing your supply chain contracts
It can take petrol shortages, motorway demonstrations and threats of port blockades for a company to realise just how exposed they are to protracted and expensive commercial supply chain litigation. No commercial litigation solicitor would suggest that a review of a supply chain contract will eradicate all risk but you may be able to minimise your risk, shift the risk and liability to your sub-contractor or review your level of insurance cover or your participation in a market that is too high risk for the level of remuneration and reward.
Whilst reviewing a supply chain contract may appear to be a job of a commercial solicitor the reality is that a joined-up approach is needed with industry specific accountancy, financial and legal advice. This is because there may be a need to trigger a termination clause in an existing commercial contract rather than review and rewrite an existing commercial contract. For example, you can't reliably get the component parts to make a certain widget and your manufacturing arm is therefore better focussed on making those items where there is greater profitability combined with better supply chain certainty of component parts.
Commercial contract clauses to review in a supply chain contract
Depending on where you are in the vertical supply chain it is critical that you regularly review the following clauses in any supply chain contract:
| Supply chain review clauses | Rationale |
| The parties | Does the supply chain contract allow for subcontracting the manufacture or transportation of goods to a third-party company? Are there any safe guards in place such as prior approval of sub-contractors? |
| The price | If you can't make money creating widgets or in transporting them on behalf of the manufacturer to the retailer then can the price be reviewed under the contractual terms? If not, can the contract be terminated and a new one negotiated? If the price can't be renegotiated can other clauses be reviewed to make the commercial contract economic to continue, such as extending the delivery timescale? |
| Deadlines | Does the contract specify deadlines and the penalties and price rebates for missing them? Should the contract be expressed as using ‘best endeavours’ or best efforts to meet deadlines? A case in point that received much publicity is the Astra Zeneca contract with the EU to deliver COVID-19 vaccines. |
| Liability and exclusions | Should liability for failure to comply with deadlines be limited or exclusions for events outside the contractors control be excluded. |
| Commercial dispute resolution | As commercial disputes over supply chain contracts are on the increase it is best to look at commercial contract dispute resolution options and to include those in the contract. For example, arbitration can be a quicker and less expensive means of resolving supply chain disputes. |
| Contract review provisions | Does the supply chain contract provide for reviews and, if so, do the review provisions need to be updated to reflect the current supply chain disrupters, such as petrol shortages or port or motorway blockades. |
| Contract termination | In some situations, a contractor will want to terminate a contract whereas the manufacturer or retailor will want the supply contract to remain in force as they know the price set or current supply deadlines would not be achievable with another contractor. That is why it is important to ensure that termination of contract clauses is carefully considered from your business sector and your company perspective. |
Tips on managing risk in supply chain contracts
In an ideal world, you’ll dot the i’s and cross the t’s from the outset, but often reusing old contracts or relying on email conversations to avoid lengthy negotiations seems the easiest way to move forward. Whether this rings true for your business or not, following these tips will help you reduce the potential risks in your supply chain contracts:
- Be proactive – do not wait until a supply chain problem occurs. If you know that there are manufacturing or transport issues further up the vertical agreements in your supply chain, do not wait to address them until they are adversely affecting your manufacturing, retail, or transportation of goods.
- Talk to your commercial solicitor – there is often a reluctance to talk to a commercial solicitor until there is a full-blown commercial dispute and letters before action. Taking early commercial legal advice can avoid expensive litigation through contract review or negotiation.
- Give supply chain contract reviews the priority they deserve – often, once a contract has been signed, there is a tendency to put the contract in a drawer or file it on the computer until the contract is formally up for renewal or is reaching its end date. Reviewing contracts proactively can nip problems in the bud, so don’t wait for formal review dates or contract review triggers but look ahead. A commercial solicitor can help you with this. For example, by examining new potential regulations, legislation, environmental, or social awareness issues that may impact your supply chain contracts.
- Evolution happens – whether it is Brexit, changes to business immigration and the end of free movement for EU nationals, a global pandemic, a supply chain crisis or something more mundane, the best commercial contractual terms for your business will change. You need to have both internal and external personnel, as well as the necessary systems, in place to react to changes and evolve with the times.
Preparing your supply chain contracts for continued uncertainty
Managing risk in your supply chain contracts isn’t just about reacting to disruption; it’s about planning for it. You need contracts that are flexible enough to accommodate the changing commercial landscape, from post-Brexit trading conditions to inflation-driven cost pressures and delivery uncertainties. The ability to adapt starts with how your contracts are structured and how regularly they are reviewed.
That’s where contract lifecycle management becomes essential. By routinely assessing your agreements, you can identify weaknesses before they become liabilities, update terms to reflect new realities, and ensure that your business remains protected, regardless of where the issue originates in the supply chain.
Our expert commercial law solicitors help you take control of supply chain risk through strategic contract reviews, transparent risk allocation, and forward-looking commercial advice. Whether you’re a manufacturer, supplier, or retailer, we’ll make sure your agreements give you the clarity, control and protection you need in uncertain times.
