Seal the Deal

In an ideal world contracts would not be necessary, but in the real world not having them can be disastrous. Joe Kafrouni explains why customer and supplier contracts are good business.

Long-term suppliers to a supermarket chain, potato growers were shocked to discover the company would not be purchasing the particular potato in which the company had ‘encouraged’ them to invest plant, seed, and machinery as part of a 9000-tonne annual supply to the supermarket chain for the coming year.

The news that the supermarket chain would not be making a commitment to buy any more stock came at a catastrophic time for the growers, many of whom, on the eve of planting season, had also leased land to service the anticipated demand. Approximately 4,500 tonnes of potato awaits the sale that is not to be in cold storage, and costly legal action is anticipated.

Similar scenarios are familiar to many businesses, though the scale and products vary. Misunderstandings with suppliers and disputes with customers are universal headaches of businesses and are especially devastating where the business is dependent on a few or single suppliers or customers.

Perhaps the most unfortunate aspect of the superfluous spuds is that the losses could have been prevented if an effective Supply Contract or, on the part of the supermarket, an appropriate Customer Contract was in existence.

The Deal

The supply contract and the customer contract are two sides of the same coin. The contract between the potato growers and the supermarket is a customer contract in the hands of the growers, and a supply contract in the hands of the supermarket. Therefore, the issues to be addressed are the same.

The negotiation of these contracts is crucial to the success of the deal. If negotiations do not consider the risks faced by each party, determine who is willing to accept those risks and what benefit is required from the other party to accept those risks, then the business relationship may suffer or one of the parties may be left unsatisfied with the final outcome. A ‘no surprises’ policy to negotiations is preferred. It is better to get everything out on the table, even if it is adverse to your position, and deal with it satisfactorily. The other alternative is to remain silent, leaving the potential for unresolvable conflict should the concealed issue arise.

All contracts should be kept simple, be in writing and signed by the supplier and the customer, otherwise difficulty will arise in proving the terms of the agreement. A business owner should not shy away from the requirement of a written contract. Customers or suppliers should also not be surprised by such a requirement. Unfortunately, the good old days of ‘my word is my bond’ no longer stand in today’s commercial world and if another party is not willing to enter into a written contract, you may need to question their intentions.