Wake Smith LLP's commercial team are experts in reviewing contracts and situations to help clients plan ahead and deal with complex contracts whether it be in manufacturing, branding or e-commerce solutions, short term or long term, online web-based or hard copy arrangements.
Managers need to constantly review their commercial and legal risks when negotiating contracts and businesses can't afford to miss opportunities but must tread cautiously to deal with current pressures in the global economy.
Buyer's are slashing budgets and suppliers are changing all too frequently. This article is the first in a series which looks at the legal and commercial issues that businesses face and provide helpful advice to enable businesses to control these risks. Owner managers, executives and managers must prioritise risk and create systems which will help them to exploit new opportunities within the current environment.
This first article deals with the Customer relationship.
CUSTOMER ISSUES
• Know Who You Are Dealing With - Due Diligence
In all commercial transactions it is more important than ever to carry out appropriate due diligence.
This may seem obvious but clients still fail to find out whether a customer is able to pay in the short and long term. Carry out credit reference checks and speak to other suppliers. Are there concerns regarding the identity or relationship of the customer within the customer's group of businesses?
Find out if there are risks to which the customer is exposed? Are they part of a larger supply chain and could someone higher up the chain be about to go bust which might affect your customer and put your contract at risk
• Contract Terms
Review and amend your contractual payment terms.
Midway through a contract will be difficult but check to see if there are opportunities to re-negotiate. Although difficult in the current environment try and negotiate upfront payments or tighten your credit terms. Make sure your terms and conditions apply to the contract. It's too late sending your terms on the back of an invoice. Seek advice about ensuring your terms govern your contracts.
• Early Payment
Caution is also necessary to avoid claims that the customer is giving you preference if early payments are made (on the back of discounts being offered) which may prefer you over other creditors of the customer.
• Security
Ensure your contract terms contain appropriate retention of title clauses to recover goods supplied pending payment. Also review whether it is possible to seek additional security over other assets.
Obtain third party guarantees or possibly letters of credit if there are serious concerns.
• Reduce Your Own Costs
Check your suppliers terms to see if there are opportunities to scale down your operations as a consequence of the loss of customers or non-payment of your invoices.
Your ability to control cash-flow is king. Will your supplier agree to qualifications to their terms and conditions which govern your outgoings so that they may be reduced to match the effects of the downturn in your income.
Consider pushing for longer terms with your suppliers at better rates. However, it may be better to maintain flexibility and pay a higher price in case you need to terminate because your customer has pulled out or gone under.
• Avoid Exclusivity Arrangements
One of the main concerns is not to be tied exclusively to one particular customer - you need to be able to expand and diversify to survive.
Negotiate a clause which triggers an entitlement to cancel exclusivity before necessarily exercising a right of termination.
• Pricing Pressures
Review terms carefully so you are aware of terms which match falling prices. Be aware of "most favoured nation clauses" which match prices falling in the market.
Ensure terms enable your pricing structure to work with changes to such VAT rates.
• Reduce Your Exposure to Shared Liability
Manufacturers are liable to end users in product liability and negligence claims and these are unavoidable. However, retailers and others within the supply chain may potentially increase exposure to other liabilities particularly where the retailer or third party connected with the manufacturer becomes insolvent. Consumers and other parties down the chain may try to hold the manufacturer responsible.
Minimise the risk and reduce such liabilities by ensuring the branding for the product or services used does not create confusion so that customers consider that your business is involved at the retail level.
• Insurance
In the current climate it would be prudent to assume that risks of claims will increase. If retailers are no longer in business, consumers will look to others within the manufacturing chain to bring a claim. You need to plan accordingly, and although this may not result in increased overall liability, you may find that more of your time (and unfortunately that of your lawyers) is spent in managing such claims and additional legal indemnity cover may be a sensible move when you are reviewing your insurance renewals.
The above is not an exhaustive list but in these challenging times we hope this provides some help and guidance to owners and managers.
Please contact Duncan Shepherd on [email protected] or telephone 0114 266 6660 for further information.
