Suppliers keep your business moving, but they can also create some of its biggest risks. A supplier missing a deadline can leave you unable to meet commitments further down the line, while poor quality, rising costs or financial difficulties can quickly affect your own operations.
And problems don't stop at delivery. Regulatory failures, cyber incidents, poor working practices or reputational issues elsewhere in your supply chain can quickly become your problem too.
The aim isn't to contract away every possible risk – you can't. It's to understand where your business is most exposed, put sensible protections around those relationships and spot problems early enough to give yourself options.
If you're reviewing an important supplier relationship, our commercial contract solicitors can help you assess the risk and put practical protections in place.
Jump to:
- How to identify supplier risk
- How to carry out due diligence on suppliers
- How to manage supplier delivery and performance risk
- How to deal with price changes and supply chain disruption
- How to manage subcontracting and supply chain risk
- How to spot supplier problems early in a contract
- What should you do when a supplier becomes high risk?
- What should you do if a supplier fails to deliver?
- What happens if a supplier becomes insolvent?
- How often should you review supplier contracts?
How to identify supplier risk
Start with dependency risk. If one supplier provides a component, service or technology you can't easily replace, what would happen if they stopped supplying tomorrow?
Look at issues such as:
- whether important goods or services come from a single supplier
- how dependent your operations are on particular suppliers
- how long replacing a supplier would realistically take
- whether disruption would put you in breach of contracts with your own customers
- whether suppliers or subcontractors have access to important data, systems or intellectual property
- which supplier relationships could cause the greatest reputational damage if something went wrong
This isn't a one-off exercise. Your exposure changes as the business grows, suppliers consolidate, your order volumes increase and new markets open up.
The contract you signed two years ago may technically still work, but, commercially, the relationship around it may look completely different.
How to carry out due diligence on suppliers
Good contracts matter, but they can't turn an unsuitable supplier into a reliable one. Proportionate due diligence before you enter an important relationship can save a considerable amount of difficulty later.
For an important supplier, ask whether it can actually meet the volumes and deadlines you're expecting.
- Does it depend heavily on one factory, haulier or subcontractor?
- What business continuity arrangements does it have?
- Does it have appropriate insurance?
You may also want to understand its financial stability, particularly where your business would struggle to replace it quickly.
Depending on the relationship, you may also need to consider:
- regulatory and industry requirements
- data protection and cyber security
- bribery and corruption controls
- modern slavery and working practices
- environmental or sustainability standards
- the supplier's use of subcontractors
- business continuity and disaster recovery
This is particularly important when the supplier's conduct could affect your own legal obligations or brand. You don't necessarily need a forensic investigation into every supplier you deal with, so due diligence should match the risk.
But the more difficult a supplier would be to replace, the more worthwhile it is to understand who you're depending on.
How to manage supplier delivery and performance risk
One of the most important questions is what happens when a supplier doesn't perform. Your agreement might address:
- delivery dates and whether particular deadlines are critical
- required service levels or key performance indicators
- what happens following short, late or defective delivery
- rights to source goods or services elsewhere
- service credits or agreed damages where appropriate
- escalation and remediation processes
- termination rights for serious or repeated failure
Think beyond the immediate supplier too. If its failure could cause you to breach a contract with one of your own customers, the allocation and limitation of liability across those two agreements deserves particular attention.
Otherwise, you can find yourself accepting substantial liability to your customer while having much weaker rights against the supplier that actually caused the problem.
How to deal with price changes and supply chain disruption
Long-term contracts can become difficult when costs move significantly. A supplier may face higher raw material, labour or logistics costs, while your business may find that unexpected price increases undermine the economics of the arrangement.
Don't assume either party can simply renegotiate because circumstances have changed. If pricing flexibility matters, the agreement can specify when and how prices may change.
This might involve an index, defined cost increases, review dates or particular trigger events. The important part is agreeing the mechanism before everybody is under pressure.
The same principle applies to force majeure. English law doesn't automatically excuse a supplier simply because an unexpected event makes performance difficult.
A contractual force majeure clause can allocate what happens when specified events outside a party's reasonable control prevent or delay performance, but its effect depends on the wording.
How to manage subcontracting and supply chain risk
Your supplier may rely on subcontractors, manufacturers, logistics providers or other third parties to fulfil its obligations. That can create additional exposure if you don't know who's actually involved in delivering the goods or services your business relies on.
Depending on the level of risk, your contract may need to deal with whether subcontracting is permitted, whether your approval is required and whether key contractual obligations must be passed down to subcontractors.
Those provisions can be particularly important where data protection, confidentiality, regulatory compliance or service continuity matters.
You should also consider whether the supplier remains responsible for the actions and failures of its subcontractors. From your perspective, the fact that a problem originated further down the supply chain doesn't necessarily make its commercial impact any smaller.
How to spot supplier problems early in a contract
A contract is your safety net, but it shouldn't be your early warning system. Often, the first indications of trouble are operational rather than legal.
A supplier becomes difficult to contact, delivery quality drops, deadlines start slipping or senior contacts leave. Prices are repeatedly challenged or the supplier begins requesting changes to agreed arrangements. None of those things automatically means a business is in trouble, but, together, they may justify a closer look.
Regular communication helps, as does information your business already holds. Procurement may see delivery or quality issues developing, finance teams may notice unusual payment requests, and operations may know that a supplier has quietly started using different subcontractors.
Bring those signals together. You can also carry out proportionate external checks, including Companies House searches and news monitoring. The purpose isn't to panic every time something changes, but to give yourself enough time to act before your available options narrow.
What should you do when a supplier becomes high risk?
The right response depends on the seriousness of the risk. Sometimes a conversation is enough. A strategically important supplier may have a temporary problem that can be managed through revised delivery arrangements.
But if your exposure is increasing, consider whether your protections should change too. That could mean:
- reducing order volumes with a vulnerable supplier
- identifying an alternative supplier
- dual sourcing critical goods or services
- increasing stock of important components
- requesting additional reporting or financial information
- getting a guarantee or other suitable security
- reviewing available insurance
- reserving contractual rights before agreeing a temporary concession.
Be particularly careful about informal changes. Commercial teams naturally want to keep relationships moving, but changes to contracts – including repeated email agreements to waive deadlines, extend performance periods or overlook contractual requirements – can make the legal position considerably less clear if the relationship later breaks down.
What should you do if a supplier fails to deliver?
First, understand why. There is a major difference between a short-term operational delay and a supplier that simply no longer has the financial or practical ability to perform.
Then check the contract. You need to understand the relevant delivery obligations, any cure period, rights to purchase elsewhere, liability provisions and whether you have grounds to terminate the contract. Avoid jumping straight to termination simply because the contract appears to allow it.
For a supplier, ending the relationship may create a bigger operational problem than the original breach. There may also be notice requirements, transition obligations or consequences for other contracts.
Sometimes the commercially stronger approach is to preserve the relationship temporarily while putting alternative supply arrangements in place.
That decision works best when the business and its lawyers look at the operational and contractual position together.
What happens if a supplier becomes insolvent?
Timing starts to matter much more. Review what you're still ordering, what you've already paid, whether any goods are outstanding and what contractual rights or security you have.
You should also consider whether you have termination, suspension or step-in rights and whether you can actually exercise them in the circumstances.
Formal insolvency can restrict certain enforcement action. For example, administration involves a statutory moratorium that can prevent creditors from taking some steps without consent or a court's permission.
This is why businesses generally have more options before a supplier enters a formal insolvency process than afterwards. The aim isn't to be the first person to threaten legal action, but to understand your position before decisions are effectively made for you.
Operational planning matters just as much. If the supplier provides something your business can't function without, identifying alternative supply and managing continuity may be more urgent than enforcing the contract.
How often should you review supplier contracts?
Don't wait for a dispute. Prioritise contracts where the commercial exposure is highest, then review them when something important changes: order volumes increase, pricing becomes uneconomic, a supplier becomes difficult to replace, the law changes or performance starts to deteriorate.
A useful review asks more than whether the contract is legally valid. Ask whether it still reflects the way the relationship actually operates.
- Are the delivery obligations realistic?
- Can prices change and, if so, how?
- Do liability provisions match the impact a supplier failure could have on your business?
- Could you move to another supplier if performance deteriorates?
- Do you know what happens if the supplier becomes insolvent?
Those are commercial questions as much as legal ones. Strong supplier contracts won't eliminate disruption, but they can give you clearer choices when disruption arrives, which is often the difference between managing a problem and being controlled by it.
If some of your most important supplier relationships have grown faster than the contracts supporting them, our commercial contract solicitors can review where you're exposed and help you put proportionate protections in place.
