With all eyes on London for the recent Olympics, the high profile failure of G4S to deliver the service agreed for its eye-watering £284 million contract highlighted the issues that can arise when a supplier falls short.
The Government deployed thousands of extra military personnel to cover the security required to make up the shortfall but how can SMEs and owner managed businesses protect themselves from the risk of a similar situation?
By way of example, failure to deliver on the part of a supplier can have serious consequences for a hotel relying on a caterer to deliver on quantity and quality in time for a wedding or a B&B that regularly relies on laundered bedding to be returned by a set time. Prevention is always better than dealing with the problems that result in this situation.
Advance homework is always worthwhile when dealing with a new supplier. Obtaining references and readily available information to see how established the supplier is by running a credit check can help avoid headaches further down the line. If, despite best efforts, things do go wrong, having a written contract can help to ensure that a business doesn’t lose out financially and substantially reduces the scope for disputes as to what was promised.
Service Level Agreements
Where regular supplies are envisaged, a Service Level Agreement (SLA) should be seriously considered. This is a legal contract which should state exactly what is required from both parties and also takes into account what will happen should there be a failure to comply. It is advisable to have an SLA in place at the beginning of a new working relationship.
Such a document should include the following:
1. Defines the service to be delivered and details:
- Required standard
- Agreed timeframe
- Responsibilities of both parties
- Legal compliance
- Payment and credit terms
2. Non-disclosure agreement
3. Clear guidelines on termination
Defining service expectation
This ensures clarity as to what is required from each party and provides peace of mind and evidence should a dispute arise.
Whilst most of the provisions will relate to the expectations of the supplier, they will also set out the obligations on the other party to pay for the services provided including any credit terms. Many such contracts go on to provide that the supplier can withhold further delivery of services should any payments be significantly overdue.
Non-disclosure agreement (NDA)
In an increasingly competitive market place, it is wise to set out a non-disclosure clause, otherwise known as a ‘confidentiality agreement’ or ‘confidential disclosure agreement’.
This helps secure any financial or other details disclosed to an external supplier from being shared with the competition or other party where knowledge of the information could prove detrimental.
Terminating a contract
If a supplier breaks the terms for example, not delivering the service or quality agreed within the timescales discussed, having a signed contract becomes particularly important.
The first step may be to discuss the issues with the supplier with a view to rectifying the situation but failing that, a business may well be within its rights to terminate the contract early. However, it is important that expert legal advice is obtained before taking any step of this nature. Failure to do so may cause the party purporting to terminate to be in breach.
It is likely that any financial loss suffered as a result of the supplier not delivering can be claimed from them – again expert legal advice is important before pursuing a claim. Having a written contract in place will be of considerable benefit making it far easier to show how the supplier’s performance has fallen short of what was agreed initially.
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