Contract risk mitigation becomes essential when the stability of your business depends on customers paying on time and suppliers delivering what they’ve promised.
You might have a major customer suddenly start missing payment deadlines just as you’ve scaled up production to meet their latest order. Or perhaps your key supplier fails to deliver a critical component, leaving you unable to fulfil your obligations downstream. These aren’t abstract risks; they’re business-critical moments that can create cascading financial and legal consequences.
Assessing the true extent of your exposure, understanding your contractual rights, and actively managing those relationships are crucial to maintaining commercial resilience. If your standard contracts haven’t been reviewed in a while, or your business has grown to depend on a small number of customers or suppliers, you may already be more vulnerable than you realise.
Our experienced commercial law solicitors can help you carry out adequate due diligence, strengthen your contract terms, and build proactive strategies to reduce exposure, so you’re not left reacting after the damage is done, but leading with confidence from the start.
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What is the risk if a supplier or customer defaults?
The primary risk to you and your business is that you do not get paid.
- Customers: your customer fails to pay for goods or services delivered. You may have paid for component parts and/or staff costs.
- Suppliers: failure to deliver component parts may mean that you cannot produce a product or deliver a service to your end customer. This puts you in breach of your contract with your customer, who then refuses to pay. You may have paid for other material, components and staff costs. You may have paid for the materials in advance and therefore risk losing this payment.
In both scenarios, you are significantly exposed financially. This impacts not only your bottom line but also your cash flow, potentially making you incapable of paying your creditors, your employees or your suppliers, who may all raise legal actions against you.
If this failure to pay impacts your ability to make loan repayments, then this could put any secured assets at risk. If you have given any personal guarantees in support of loans, then this risk could extend to your home and other personal assets.
Which suppliers and customers pose the greatest risk to you?
In managing the risk of supplier and customer default, a first and critical step is understanding where your greatest financial exposure lies. Which customer or supplier default would put your business in the worst financial position? This may be a single customer or supplier, or a combination of customers and suppliers.
This is not a review to be performed once or periodically. It is an active and ongoing process. Order volumes may change. Times change. Personnel change. Ownership changes. Maintaining active and regular reviews and risk management assessments enables you to account for these changes and take appropriate actions to protect your business.
How to get an advance notice of a supplier or customer default?
Many business owners and managers believe that their ultimate protection comes in the form of legal remedies outlined in their contracts. This belief can mean that you overlook some straightforward, practical mitigations that might avoid those contractual remedies altogether or might give you time to apply the best contractual remedies for you.
The most effective mitigations are those that provide advance notice of financial difficulties among your suppliers or customers, prior to an actual failure to deliver or pay. These mitigations are active and include:
Build a relationship with your customers and suppliers
Regular communication is key with suppliers and customers. This allows you to spot any differences in personnel, delay in responding to calls or messages or evasiveness in confirming payment or delivery. This may mean taking extra time to take your own action or to seek advice, so that you know what action to take.
Perform ongoing due diligence on your customers and suppliers
It is essential to keep yourself informed about the financial standing of any suppliers or customers, whose default exposes you financially. Public news may highlight if stores are closing down, stock is being sold off and/or employees are being laid off. These can all be indications of a failing business, and all can mean you taking action before your own business is impacted.
Equally, find out as much as possible about other creditors of your suppliers and customers, especially those who are secured and potentially take priority over you in the event of insolvency.
Credit control procedures/stock management
The maintenance and review of your credit control and stock management information is also essential. Are there, for example, any customers who have started to slow down their regular payment practices? Have extensions of payment deadlines been requested? Have credit limits been exceeded, or have credit increases been requested? Spotting this early allows you to understand the options available to you before the situation potentially deteriorates.
Similarly, with your suppliers, are there unexplained delays in their deliveries? Or has there been a change in quality, packaging or support?
How an active contract management plan can help in a recession?
Many business owners or managers breathe a sigh of relief when they have a standard contract or terms and conditions of doing business, but do not realise that these contracts can soon become outdated or inappropriate for the particular economic times.
Equally, many times contracts, purchase orders and other supply chain documentation are stored without checking what actions will be needed if a customer fails to pay or a supplier fails to deliver.
Our related content on contract lifecycle management explains why an active approach to contract management can bring multiple benefits, saving time and money.
In a recession, this contract lifecycle management means that you can benefit from a specific action plan, particularly with those customers and/or suppliers whom you have identified as particularly significant to the financial health of your own business. This action plan may include:
Ensuring all contract documentation is complete.
In order to enforce any contract, that contract needs to be effectively signed. In addition, if the contract contemplates additional documentation, for example, granting you the right to some form of security or payment guarantee, then this additional documentation must be signed and in place.
Knowing your contractual rights and remedies.
There are several contractual remedies that may be available to you and which may provide protection to you.
Customer contracts:
- Retention of title clauses: give the seller rights over goods delivered in preference to secured and unsecured creditors. These clauses must include the right to repossess the goods and prevent the buyer from reselling them. These clauses often provide that the customer must name and store their goods separately. You must confirm that this is indeed taking place; otherwise, your ability to reclaim your goods might be invalidated.
- All monies clause: Are your retention of title clauses sufficiently robust? Do they give you a remedy against one non-payment for particular goods or for the repayment of all monies due? An ‘all monies due’ clause potentially makes your life much easier in reclaiming monies owed, no matter in relation to which goods.
- You may have rights over the proceeds of the sale of your delivered goods.
- Is any retention of title redundant because your goods have become mixed with others or incorporated into a finished product? Are they perishable or have a low resale value? In these cases, you will need to consider other remedies and protections, namely, credit insurance.
Supplier contracts:
- Termination rights: Do you have the right to terminate the contract on non-delivery and source the goods elsewhere?
- Withhold payment: Do you have the right to withhold payment for late or failed delivery?
- What damages are available if your supplier fails to deliver?
- Can you reduce the price in the event of late delivery?
- What can you do if there is only partial delivery?
Unsure about any of your current rights?
If you are unsure about any of your current rights and remedies and whether they are sufficiently robust to protect you please contact our friendly, expert commercial solicitors.
Amending your contracts.
The practical mitigations highlight that when a supplier or customer is facing financial difficulty, an active contract management plan allows you to consider making variations to your contracts with particular suppliers and customers. These variations could include any of the remedies set out above, and also could:
- Reduce the period of customer credit, the amount of credit, or both.
- Look to take alternative forms of security to protect yourself against non-payment.
- Requiring your customer to take out credit insurance
- Requiring your customer to pay a deposit or pay into a fund.
It is also important that your customers and suppliers understand that any additional time you grant them for delivery or payment does not alter any contractual rights and remedies that may be applicable. An active contract management lifecycle means that you can prepare standard form letters and messages, allowing you to manage these situations quickly. If you would like to discuss this further, our commercial solicitors will be happy to assist.
More information on the value of regularly reviewing and updating your terms and conditions of doing business can be found in our article, Updating Commercial Contracts.
Knowing what an administration/insolvency means and what to do
This is all about being prepared for the worst eventuality. You must understand what a customer or supplier's insolvency or administration means for you and your contractual remedies. This allows you to take appropriate action to protect your own business as much as you can.
Procuring enhanced credit insurance
Your review of your contracts and your financial exposure means that you can then put in place adequate insurance for any risk that is not adequately protected contractually.
Strengthen your contracts before others test them
Managing supplier and customer risk isn’t just about protecting yourself—it’s about recognising your place in a wider commercial chain. Just as you're assessing the reliability of those you depend on, others are likely evaluating you too. Your customers or suppliers may already be reviewing your financial position, scrutinising your payment practices or renegotiating terms to minimise their exposure.
That’s why robust contracts, proactive risk management and early action aren’t just good business—they’re essential to maintaining trust and credibility. When you understand your risks and your remedies, you're far better placed to negotiate from strength and keep relationships stable in uncertain times.
Our commercial law solicitors can help you review your key agreements, build in the proper protections, and communicate clearly with counterparties when challenges arise. We’ll work with you to create contracts that not only reduce your exposure but also reassure those doing business with you that you're a low-risk, commercially reliable partner.
