“Our suppliers aren’t providing the quality that we expect – how do we terminate them?” is a common question I hear. In this article, we cover off the steps that you should be taking from the beginning of the relationship to make sure you can get out of any non-performing contract, and some horror stories of businesses that didn’t take this preventative action.
So if you have you ever been in the position of being caught in a contract with an under-performing supplier that you found difficult to terminate, then read on…
The case of Ultimo Document Storage v Liquid Visions is a great example of what can go spectacularly wrong when you fail to properly plan out and document your relationship with your suppliers. This case was a dispute about a technology system – but the learnings of the case are just as relevant for any supply relationship you might be involved in.
Ultimo hired Liquid Visions to upgrade its barcode tracking system, but things didn’t go as planned (do they ever…?). Firstly, the old system started to become unstable, and ended up requiring major maintenance. Then came difficulties with the new system during development. Despite Liquid Vision working on the system over a long period, the conversion to the new system just never happened. Ultimo eventually got fed up, and decided it wanted to get out of the contract. The supplier was obviously not providing it with what it required – a functioning system, and like any customer, there comes a point when it is time to cut your losses and move on. But unfortunately it wasn’t that simple…
So… after the expense of much time and money by both sides, the court found there was not any documentation to show that Liquid Vision had at any stage committed to an actual date to convert to the new system. Unbelievably, there was no written contract, and to make matters worse for Ultimo, the correspondence and meeting minutes were vague and ambiguous on when exactly the new system would be ready.
Ultimo not only lost their court claim, but also never converted to the new system – and to add salt to their wounds, Ultimo also ended up with massive legal costs awarded against it (not to mention their own legal costs to pay).
So what can you do to proactively protect yourself from being locked into a non performing supplier or product?
As the saying goes, the devil is in the detail. So here’s the kind of detail that you need to make sure you have covered off:
1. Have a contract in place.
The first fairly obvious item on the tick list is to make absolutely sure that you have signed contracts with all of your suppliers before they start work, or start providing supplies. Now whilst businesses these days seem much more diligent about ensuring that they have major suppliers on contract, I still very regularly see examples of businesses that have don’t have any contracts with their smaller suppliers. And from time to time I see the odd major supply arrangement without contracts. Its fair to say that failing to have any contract at all is like owning a car and having no insurance against accidentally running into the next door neighbour’s merc. The kind of issues that could arise with your supplier are almost countless, and failing to have a contract to provide a reference for how to deal with things that go wrong is akin to business suicide. Contracts don’t have to be difficult to prepare once you have some templates in place. And the mere process of negotiating the right clauses forces you to have those important discussions at the outset about how you will deal with things that don’t go to plan.
2. Get specific.
Now that you have your standard terms in place, make sure that you come back to the specifics of what you require out of your contract. Things like:
- Exactly what is required to be provided, and to what standard
- How that output and standard will be measured (acceptance testing)
- Timings for delivery of each of the stages/milestones
- How issues will be resolved if they come up
* at our contract law seminars we provide a full checklist of the types of things to consider when putting together the specifics of each supplier contract
3. Be clear about the remedy.
Now this step is one of the most important. You must ensure that you have tied your specifics (above) to a remedy if the supplier doesn’t comply.
Here is a short list of some of the kinds of remedies you could consider:
- Will you have the right to pull out (terminate) and find another supplier?
- Will you have the right to refunds or rebates or other concessions?
- Will you have some other right?
But just remember – if you want a right of termination, specify it!
4. Make sure your contract is a living document.
And while having a contract of some description is of course better than the alternative, a contract that’s neglected in the bottom drawer can produce the same result as where there is no contract at all.
Make sure that you take the time during the term of your agreement to measure your supplier’s achievement of the specifics that you have included in your agreement, and take immediate action if it hasn’t been. Because failing to monitor the progress of your supplier, or its ongoing compliance with your requirements, is simply allowing problems to worsen rather than heading them off as they start to occur.
So in the end, your aim is just to ensure you don’t end up in a position like Ultimo, who ended up having to pay the full bill for the services, together with legal costs, for a product that just didn’t work. Imagine how different the result may have been for them if they had read this article first, and gotten together a contract before Liquid Visions began work – that specified what they required from the new system and when they required that by.
Make sure you don’t fall into the same trap – maybe now is a good time to go and dot your i’s and cross your t’s to make sure you don’t become the next example…
In future editions, we will cover what sorts of things should be included in your contracts.