I’m a loss-making supply contract – get me out of here!

As the cost of living crisis and general downward trend starts to impact, contractual arrangements which might have been attractive a few years ago could now be becoming problematic. In-house lawyers will probably be seeing a few of these coming across their desks.

We have dealt with a number of early stage disputes involving loss-making commercial supply contracts. As a starting point, courts generally will not intervene in a business to business contract to correct a bad deal. However there can be some potential pinch points which could be exploited to provide some commercial relief (whether via exit, re-negotiation or temporary amendment).

Firstly, complex contracts do often contain general drafting errors which have the potential to be exploited when the contract becomes unattractive. The extent to which that is possible and the particular errors involved will of course vary from case to case.

You can also consider the impact or potential interpretation of a force majeure clause to see if that might assist. Economic downturn, or something more specific like strike action, could possibly be interpreted as a force majeure event – leading to exit or at least temporary relief.

The payment mechanism and/or indexation clause should usually be explored, to see whether it might be interpreted in a way which is more commercially favourable. Not only might this improve things moving forward, but it will also require a back payment/refund. Similarly, the scope of the contract should be checked – could you be getting more, or doing less, for your money?

Consideration should also be given to what the parties knew during the contract negotiation. Most well-drafted contracts will contain an entire agreement clause, along with a provision against claims for misrepresentation. However, these are usually exclusion/limitation of liability clauses and so could be open to scrutiny under the Unfair Contract Terms Act 1977. If found unreasonable under that Act, the clause is void and unenforceable. This may open the door to an argument about misrepresentation or negligent misstatement, for which the other side would be liable in damages - which if argued appropriately could lead to a renegotiation or exit. Remember - the concept of ‘reasonableness’ is a flexible construct that will be fact specific; the same clause might be reasonable in the context of some events/outcomes, but not others.

This all requires some creativity and therefore some legal spend, but that can be worthwhile for a substantially loss-making contract. External lawyers can give the in-house team the best arguments to raise directly with the other side with a view to achieving a better commercial outcome. It is a collaborative process - the in-house team will add value with their knowledge of the business/relationship and confirm whether some arguments will have more impact than others. Also, entirely commercial (non-legal) considerations should never be discounted and a holistic approach is important.

For more information, please contact Rory Mac Neice.