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My supplier cannot meet their obligations. What are my contractual rights?

This article by LegalVision Practice Leader, Kirstin McKnight, will provide you with an overview of a supply contract’s details and contractual rights that all businesses purchasing goods should be looking out for. This article was originally published by LegalVision.

At a glance

  • If a supplier cannot meet their obligations to you, the first step is to review your contractual rights under your supply contract and see if there has been a breach

As a purchaser of goods, it is important to understand the potential risks of your supplier failing to meet their obligations. A range of broad factors from weather to labour strikes impact the supply chain. Further, the goods that you have obtained from your supplier may have defects. Simply put, if a supplier fails to meet its obligations, your business’s operation will likely be impacted. 

What Are Your Supplier’s Obligations?

Firstly, you must determine what exactly your supplier’s obligations are. If you do not have a contract with your supplier, they may not owe you any obligations at all. A contract that sets out obligations on the supplier is crucial. This is because it ensures you have rights when you are purchasing goods from that supplier.  

You should review your contract with your supplier to determine the supplier’s obligations regarding:

Supply

For ongoing supply arrangements, you should determine whether the supplier has an obligation to accept your requests to supply the goods. 

For example, if you send the supplier an order for goods, do they have an obligation to accept your order? 

Often suppliers want the flexibility to reject an order. Suppose you are in the process of negotiating a supply agreement. In that case, you may wish to include obligations on your supplier to agree to supply a minimum amount of goods if you are the one ordering those goods. 

Delivery

Does the contract specify a date when the delivery of goods needs to take place? If  you set a delivery date, some contracts include the possibility for you to obtain damages for each day that there is a delay with the delivery. Often, suppliers cannot commit to delivering goods within a certain time-frame. You should look out for this in your contract with the supplier.

Defects

Does the contract specify what the supplier will do if the goods you purchase are defective? Further, do the goods have a warranty attached to them or guarantee that the goods will meet a certain standard? Your contract should ideally provide you with the right to return and obtain a refund, replacement or credit note if the goods are defective. This will prevent loss to your company.

Insurance and Risk 

Are there specified obligations in the contract for the supplier to insure the goods before delivering them to you? When will you be responsible for damages that may occur in the goods? It is important to understand who will be responsible for damages in the goods while they are in transit. 

Suppose your supplier has an obligation to insure the goods while in transit. Then if the goods are damaged in transit, you can rely on the supplier having the ability to make a claim for the damage in the goods with their insurance provider.  

The above addresses some of the common supply obligations included in a contract. If you have already engaged a supplier, you should review your supply contract to determine what obligations your supplier owes you and what rights you may have against your supplier if they fail to meet those obligations. If you are considering engaging a supplier, keep the above points in mind prior to signing the supply contract. 

What is Force Majeure and Why is it Relevant?

Often supply contracts include clauses that refer to force majeure. Generally, force majeure is an occurring event, beyond the reasonable control of a party in the contract. However ultimately, if a contract includes force majeure it would provide a specific definition for what the force majeure contains. 

Force majeure is relevant because often suppliers include force majeure clauses in their contract in order to: 

  • exclude their liability for their obligations set out in the contract; 
  • suspend their obligations in a contract; 
  • provide them with the right to terminate the contract if the force majeure event continues for a certain period of time. 

For example, a force majeure clause may allow a supplier to no longer be required to supply a good to you because while the goods were being shipped to you, a storm impacted the containers on the ship and the goods you purchased were damaged. This would then make it important for you to consider whether the supply contract included clauses to protect your interests, e.g. receiving a refund because they did not supply the goods to you. 

Purchasers of goods should review their supply contracts to determine the extent to which any force majeure clause could potentially limit their rights under the contract.  

Why Do I Need Contractual Rights? 

Businesses should be looking at ways to ensure that they protect their interests in the supply arrangement. This is important to ensure that you obtain the benefit of the goods that you would expect to obtain from a supplier. Also, to maintain your business operations. If there are issues with the supply of your goods, this may potentially affect you, if you: 

  • are a business that is involved in the re-supply or distribution of goods to your customers. Then the failure of your supplier may impact any contractual obligations you may have with your customers;  
  • require the goods to provide services to your customers, e.g. construction works. Then, your supplier’s failure may have knock-on effects as to the provision and timeline of your services to your customers; and 
  • require the goods to set up your office or retail space. Then the failure of your supplier may impact when you can use your office or retail space. 

Further, contractual rights in a supply contract will allow you to ensure that the goods that you are purchasing meet a certain standard and quality.  

Our partner, LegalVision, can help your small business with affordable, ongoing legal support. Find out how you can access a free 30-minute strategy session and 1-month membership to on-demand legal assistance. 

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The information in this post is provided for general information only and does not take into account your personal situation. Nothing contained in this post constitutes advice or an endorsement or recommendation of any kind by Prospa. Any links to third party websites are strictly for informational purposes only. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from financial, legal and taxation advisors. Although every effort has been made to verify the accuracy of the information as at the date of publication, Prospa, its officers, employees and agents disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy, or omission from the information for any reason, including due to the passage of time, or any loss or damage suffered by any person directly or indirectly through relying on this information.

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