When supplying goods and / or services, you’ll no doubt have encountered varying levels of customer sophistication. They know they have the buying power, and they know you are looking to grow; what’s more, they know that their custom is part of the critical path in your evolution.
As a result, they’re in a fairly strong bargaining position. And you may not be able always to contract with them on your preferred, robust and protective terms and conditions.
If this sounds like a familiar theme, then don’t panic! This is a well-trodden path on the growth curve; the key to limiting your exposure is to protect your core position. We set out below some of the key things you need to think about if you can’t get your ideal position on everything:
Liability (part 1). If liabilities arising under the contract are not subject to a financial cap, then risk in respect of those liabilities is unlimited. You should agree a liability cap in each contract and to set this at a level commensurate with the degree of risk you are willing to take. Broadly speaking, other than liability in respect of death or personal injury, title to goods, fraudulent behaviour or consumer protection claims, the law says you can put a cap on your risk. Make sure you do this, and each contract is checked off prior to signature.
Liability (part 2). Aside from the financial caps, there are some liabilities you shouldn’t accept at all. For example, indirect or consequential loss, loss of profits, loss of anticipated savings and loss of goodwill. If you don’t exclude those, you’ll be deemed to have accepted they can be claimed against you.
Salesperson vetting and awareness. In BSkyB v EDS (2010), the fraudulent behaviour of one of EDS’ salesmen negated a hard-fought £30m liability cap and resulted in EDS settling for £318m (ten times the cap). Training and maverick redeployment is the key.
Insurance. Each material contract you enter into should be checked with your insurers, to ensure you are covered. If the customer is asking you to raise your premiums, can you pass on the extra cost?
Payment terms. Could a 60 day net end of month payment put your business model at risk? How are you planning on managing this internally? Can you negotiate a better deal? Ensure your customer can’t contractually withhold disputed payments.
Termination rights. Ensure you have a right to exit for extended non-payment. Ensure that if the customer wants to terminate “for convenience”, there is a suitable exit payment reflecting your sunken costs and some proportion (ideally as close to 100% as possible) of your anticipated revenues over what would have been the lifetime of the contract.
IP. Don’t assign any IP without due consideration. Ensure that any IP arising out of the relationship is capable of exploitation as you want, whether that’s your ownership (ideal) or a wide, irrevocable licence (next best).
Indemnities. Try to resist. They allow the other side an easier claim, as they don’t have to prove loss (or mitigation) in the same way as they would have to without an indemnity.
Time of the essence. Never accept this. It means if you delay delivery, the customer can cancel the whole contract.
“Dependencies”. Your contracts should state you’re not liable if you fail to perform the contract as a result of the customer’s failure to perform a dependency. For example, are you relying on information, drawings, approvals, etc. from the customer? Or any other specific actions, failure of the customer to satisfy which would leave you in breach of contract?
Law and jurisdiction. Make sure you can claim in England under English law. Having to fight a claim in India, California or other non-UK jurisdictions may result in disproportionately higher legal costs.