As a manufacturing enterprise, you’re exposed to a host of legal dispute risks – here’s how to ensure your supply contracts are watertight so you don’t find yourself in deep water.
If you’ve been unfortunate enough to be on the receiving end of a litigation matter, you will be all too familiar with how reliant you can become on particular clauses in a contract. Even the hint of an ambiguous term can leave you in deep water.
The contracts you negotiate with your suppliers and customers have been designed to protect you in the event of the unexpected. A contract can easily have the impression of being watertight. How leak-proof are yours? Let’s explore some of the key issues you should look out for to limit your risk exposure.
Single points of failure
A very familiar concept on the factory floor, but how are you protecting yourself contractually? If you rely on a sole supplier for a piece of machinery, what would happen if that supplier disappeared or the supply ran dry?
Bringing to mind memories of missing fried chicken and carbon dioxide shortages, contingencies are often overlooked. You may consider that such risks have been adequately managed as you reach for your backup supplier list. But how do you recover your losses for disruption or redistribution? What would the cost be over days, weeks, months? Can you rely on a particular clause to hold your supplier to account for that figure quickly and easily? Do you have to go to court? Can you recover your losses through some other means? Working with established suppliers in trusted relationships or renewing agreements on auto-pilot increases the risk that those contracts will fail to provide adequate protection in the event of liability.
Quantity commitments
Exact quantities are often an unknown when you first engage with another party. You may be agreeing to minimum order commitments, or offering a lighter ‘option to buy’ contract without any commitment. A party may consider they have entered into a long-term relationship when they’ve only the ability to request an order. Be clear from the outset what type of supply agreement you want to create.
Reserving rights
Market fluctuations are abundant, as are contract changes in the manufacturing industry. Contract changes create risks. Consider the effect of currency or raw material price changes and how these will be incorporated into your agreements. Offering lock-in fixed-term pricing agreements can be a compelling proposition as a customer, but an inflated resource cost or sudden currency changes could bottom out profits on a supplier. Adding safeguards, such as allowing pricing reviews periodically or a right to renegotiate on certain triggering events, can be a lifeline to preserving your relationships and profitability in times of uncertainty.
Plan to escape
We report on long-term predictions and make educated assumptions that something will not come along and disrupt the market entirely. Yet products become redundant, customer trends jump erratically and new technologies do disrupt markets. Setting out an exit plan in your contract to account for uncertainty can give you peace of mind in the face of the unexpected. What termination options are available in your contracts? Is the other party free to leave at the first sign of trouble, or without needing a reason to leave at all? Measures can be included in contracts to recover costs or obligations, to offer transition support or set minimum standards for how the relationship will work in the event of termination. Planning a clear exit strategy which is fair to both parties can make it easier to preserve or recover relationships even after you have parted ways. More importantly, these terms give confidence in your organisation’s ability to manage risk and deal with change effectively.
Devil in the detail
It’s important to ensure handshake agreements are committed to writing, even those backed by an underlying supply contract. Having detailed written terms to lean on will carry immeasurable value if you find yourself in a dispute later down the line.
Relationships in manufacturing are rarely governed by a single document, and it’s easy to get lost in the legal jargon and cross-referencing. They often link between specifications, plans, technical drawings, manuals, policies or pricing schedules. One contract may also need to back off liability from another or a number of others.
Take this opportunity to review the documents that make up your relationships. Ensure your contractual relationships continue to reflect the position in practice, particularly as Industry 4.0 continues to unfold.
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