Businesses are built on relationships. Most good businesspeople understand the importance of nurturing strong employee relations and delivering excellent standards of customer care. However, just as crucial to the success of your business are your relationships with suppliers. A reliable supply of high-quality, trustworthy materials at a competitive price is key to commercial success. Nurturing and maintaining strong supplier relationships should, therefore, be high on your priority list.
Unfortunately, supplier disputes are a fact of life. Their impact can be severely disruptive, particularly when the goods involved are critical to your business. Understanding how to minimise the chance of a dispute and how best to manage any that do arise is key to mitigating their potential impact on your operations, reputation and, ultimately, profitability.
In this article, our business dispute solicitors discuss the common causes of supplier disputes and how they can be resolved.
Common causes of supplier disputes
Whilst every supplier relationship is different and presents its own unique challenges, several issues repeatedly arise. They include the following:
Quality issues are one of the most common causes of supplier disputes. The supply of faulty or substandard products, or materials that do not accord with contractual or statutory specifications, can have crippling effects. You may be forced to incur the costs of repairing or replacing the materials and unable to meet your contractual obligations. If the issue does not become apparent until the product is with the end user, blame is likely to be apportioned to you, and your reputation in the marketplace significantly tarnished.
A well drafted Supply of Goods Agreement should contain provisions detailing the supplier’s obligations regarding the quality of the goods they provide. If you do not have an Agreement, or it is silent on this point, the position will be governed by the Sale of Goods Act 1979. The Act implies into qualifying contracts terms that the goods will be of satisfactory quality and fit for purpose. These are inherently vague notions. Whether or not your supplier’s goods satisfy them will depend entirely on the circumstances.
Delivery delays and disruptions
The timely receipt of materials is crucial to the smooth running of a business. Any disruption in the supply chain has far-reaching implications, ranging from production delays to complete stoppages.
Delivery delays and disruption can be caused by many factors. Sometimes, Global issues such as war or labour shortages can be to blame. Other times, the problem may lie with an individual supplier’s poor logistics management. The end result for your business, however, is the same: customer dissatisfaction, lost sales and reduced profit.
The parties to a Supply of Goods Agreement will almost always agree terms dictating the time and place of delivery. In the absence of an Agreement or specific delivery terms, the Sale of Goods Act steps in and states that the supplier must deliver the goods within a ‘reasonable’ time. What constitutes a reasonable time is a matter of fact, not law, and will depend on the situation.
Contractual disputes with suppliers arise for various reasons. A supplier might breach its obligations under the contract – by failing to deliver goods on time, for example. If a Supply of Goods Agreement is poorly drafted and the language ambiguous, the parties might disagree on the meaning and effects of a contractual term. Contractual disputes can be time-consuming and costly and require careful management to avoid the parties becoming embroiled in litigation.
Dispute over non-payment
Invariably, you will be contractually obliged to pay the supplier for any goods and services it delivers. If you fail to do so, the supplier’s remedies will largely depend on the terms of the Supply of Goods Agreement. In the absence of any express provisions on price, the Sale of Goods Act provides that the buyer should pay a ‘reasonable’ price.
Supply of Goods Agreements sometimes contain a ‘Retention of Title’ clause, under which the goods remain the seller’s property until they have been paid for. Often, a Retention of Title clause is accompanied by a clause permitting the seller to repossess the goods in the event of the buyer’s non-payment.
A buyer’s reluctance to pay regularly arises in the context of a wider dispute. You may be unhappy with the quality of the goods, or a delay in delivery may have caused you financial loss. It is important to take urgent legal advice before withholding any payment. Failing to pay for the goods may constitute a breach of contract despite any problems surrounding them.
It is not uncommon for a supplier to render an inaccurate invoice, or for the sums demanded to come as a surprise to the recipient.
Sometimes, the inaccuracies are simply an error and can be remedied by alerting the supplier and obtaining an amended invoice. Other times, the situation is far more complicated. Some commercial contracts contain complex pricing calculations, the supplier’s interpretation of which may differ to yours. Some contracts, particularly long-term agreements, allow suppliers to make price increases in line with inflation or when agreed circumstances arise.
If the invoice discrepancies cannot be resolved, it is crucial to ensure you fully understand the contract’s pricing and payment provisions before acting. You may be obliged to notify the supplier within a specified time of any dispute or be in breach of contract if you fail to pay on time, even if the invoice is contested. Further, interest may accrue on the invoice, despite it being inaccurate.
Why it is important to avoid a dispute with a supplier
The effects of supplier disputes can be far-reaching. Avoiding them and maintaining strong supplier relationships has several key advantages, including the following:
Longstanding, reciprocal business relationships inspire mutual loyalty and can encourage suppliers to offer beneficial terms bespoke to your business, ensuring you receive the best possible value for money.
Smooth business operations
When you work with a supplier for a long time, they develop a deep appreciation of your business operations. They will be able to respond quickly to your requirements and pre-empt your needs, enabling you to consistently fulfil your obligations with third parties and the end consumer. Further, a good rapport encourages dialogue and feedback, helping both parties to streamline their operations and increase cost efficiency.
Helps preserve business relationships
Healthy supplier relationships are integral to a successful business. These relationships take time to build but can be shattered in an instant by a dispute. The loss of a reliable supplier can have long-term consequences, including increased costs, production delays and consumer dissatisfaction.
How to avoid a dispute with a supplier
Whilst some supplier disputes are unavoidable, prevention is always better than cure. Many issues can be avoided with efficient, proactive supplier relationship management.
Examples of measures you can take to avoid a supplier dispute include the following:
Conduct due diligence checks on all new suppliers
By satisfying yourself that any potential new supplier is financially stable, capable of delivering what you need on time and has a proven track record of reliability, you can minimise the chances of a dispute arising.
Make payment terms clear
Unequivocal payment terms are crucial. If the price is determined by reference to a complicated calculation, all parties should be clear on how the calculation will work.
Have a well-drafted commercial agreement in place
Well drafted Supply of Goods Agreements are fundamental to any stable, reliable supply chain. A properly considered, unambiguous contract ensures all parties have clear rights and responsibilities and greatly reduces the likelihood of disputes. The timing of the Agreement being agreed is also key and it is important to agree the terms and conditions of sale of the goods prior to sending a purchase order.
Without an Agreement, the relationship will be governed by the Sale of Goods Act. The provisions of the Act are deliberately vague to allow for what would be ‘reasonable’ in the context of the parties’ commercial reality. As a result, protracted disputes can ensue over the interpretation of such terms.
Record all communication between you and the supplier
By recording all dealings with your suppliers in writing, you will have a paper trail to refer to in the event of a disagreement. You should follow up all material conversations with an email to confirm what was discussed.
How do you resolve a dispute with a supplier?
It is essential to face a potential supplier dispute head-on to avoid it escalating and becoming a serious problem. As soon as you become aware of an issue, you should take the following steps:
Collate all relevant documentation - This might include the Agreement, invoices and written communications.
Seek legal advice - Timely legal advice is essential to the effective management of a supplier dispute. Our business dispute solicitors will review all relevant documentation, consider the merits of your position and devise a strategy to deal with the issue as quickly and cost-effectively as possible.
Contact the supplier - Often, a letter from a business dispute solicitor detailing your position and the action required from the supplier can suffice to resolve the issue.
Sometimes, the nature of a dispute is such that further action is required. Clients are often relieved to hear that there are many ways to tackle a supplier dispute that do not involve Court proceedings. They include the following:
Negotiation - Our business dispute solicitors are skilled negotiators. They will work hard to reach a settlement on terms favourable to you through correspondence, discussions and meetings with the supplier or their legal advisors.
Mediation - Mediation is a form of alternative dispute resolution whereby the parties seek to settle the matter with the help of an impartial third party, the mediator. Mediation is used extensively in the context of business disputes. It is cheaper and less formal than litigation, can be arranged quickly, and often produces excellent results.
Arbitration - Arbitrations are overseen by an arbitrator or a panel of arbitrators. Like mediation, arbitration is a form of alternative dispute resolution. However, unlike mediation, where the parties reach a voluntary settlement, the arbitrator’s decision is binding. Arbitration is more formal than mediation, but the parties retain some control over the proceedings; they can choose the arbitrator, venue and time, for example. Arbitration is quicker than litigation and often cheaper, although that is not always the case.
Adjudication - Adjudication is a popular form of dispute resolution, particularly in the construction industry. It is intended to maintain cash flow during large construction projects by settling issues quickly and cost-effectively. The parties must abide by the arbitrator’s decision, at least in the short term, but can subsequently pursue court action if they wish.
Whilst the alternative dispute resolution methods listed above have a high success rate, some disputes are unfortunately only resolvable through litigation. If your situation results in Court action, our business dispute solicitors will guide you through the process and prepare the strongest possible case on your behalf.
Supplier dispute remedies
A properly drafted Supply of Goods Agreement will address both parties’ rights in the event of the other’s breach, so should be the first port of call when considering potential remedies.
For example, the parties may agree a liquidated damages clause whereby the buyer will be entitled to a specified amount if certain circumstances arise. In the context of delivery delays, for instance, the supplier may be obliged to pay an agreed sum for each day delivery is delayed.
If the Agreement does not address the consequences of a breach, the most common remedies are as follows:
Damages are the primary remedy sought and granted in supplier disputes.
Damages are intended to be compensatory as opposed to punitive. If, for example, the supplier fails to deliver the goods, you will be expected to seek alternative goods and can then claim for the difference between the contract price and that paid. If you cannot source alternative goods, you can claim for the losses proven to stem from the breach, provided the other requirements for an award of damages are fulfilled – the loss was reasonably foreseeable, for example.
If you do not pay the purchase price, the supplier can sue for the sums owed as a debt.
Specific performance is a remedy whereby the Court compels a party to perform its obligation under a contract. Courts are generally hesitant to order specific performance in the context of the sale of goods since alternative goods are usually available, so damages would suffice. The remedy is most appropriate in cases involving rare or bespoke goods that cannot be sourced elsewhere.
If the goods breach the terms implied by the Sale of Goods Act as to quality or fitness for purpose, you may be entitled to reject them and claim reimbursement of the purchase price.
Rights against the goods
If you fail to pay for the goods, the seller has rights over the goods themselves, as well as a claim against you for recovery of the unpaid sums. Such rights include the right to retain the goods, stop them in transit and resell them. These rights are particularly useful when a buyer is insolvent.
The potential impact of a supplier dispute can be catastrophic, so it is crucial to take proactive steps to avoid one insofar as possible. A well-drafted Agreement can go a long way towards preventing any disagreement over the nature of the parties’ relationship and provide a useful framework for addressing any dispute that does arise.
If a supplier issue comes to light, timely legal advice is vital. Speak to us as soon as possible, preferably before your payment obligations arise. Failing to pay for goods regardless of the circumstances can constitute a breach of contract and severely jeopardise your position. Our business disputes solicitors will urgently review the contract terms and advise on the appropriate course of action. We will strive to preserve your relationship with the supplier whilst protecting your position and securing the optimum outcome.