Guidance For Negotiating Supply Agreements

Having a standard supply agreement may be useful but they are often fraught with danger. By their nature, standard agreements are very general and will not necessarily accurately capture the full extent of the parties’ intentions. Where the supply of goods or services is complex, or the value is particularly high, a standard supply agreement is unlikely to have the sophisticated terms and details to provide proper protection and mitigation of risk for the parties. A bespoke supply agreement will aim to ensure that the agreed terms are sufficiently accurate, reasonable and comprehensive to cover pertinent issues.

Penalty clauses are not enforceable under English law. However, properly drafted and considered provisions for liquidated damages may be included. Liquidated damages relate to compensation, at a fixed amount, which is agreed at the outset of the contract and which becomes payable in the event that a party commits a breach of the agreement, without the need to pursue a lengthy contractual claim. However, it is important to ensure that the agreed amount of damages represents a genuine pre-estimate of the loss suffered as a result of the breach. If that is not the case, the courts are likely to interpret such provisions as a penalty clause and therefore unenforceable.

We would always advise you to have a written contract in place to record the terms that have been agreed between the parties so that, in the unfortunate event of a dispute, the written contract can be used as evidence of what was agreed. That being said, oral agreements are generally enforceable (albeit often difficult to prove what was agreed between the parties in the event of a dispute), but it is important to note that there are a number of situations where a written contract is required by law or in order to fulfil certain registration requirements.