Borough Business Kingston Dec 21 Ed Patton

legal

Falling out with a supplier: avoiding catastrophe

For small and medium sized businesses, a dispute with a supplier can range from minor inconvenience to existential threat. Trivial matters may escalate quickly, reliable suppliers may unexpectedly refuse to fulfil their contract or a long-standing pattern of unreasonable behaviour might eventually reach a point where our client has to act. So what should your business do to protect itself from the worst consequences of supplier disputes?

Assessing the importance of the dispute Minor supplier disputes are unlikely to ever be fully rectified and may arise almost daily. However, some disputes can result in such a significant financial loss that they have the potential to jeopardise the future of the business.

Therefore, the financial impact should be the first thing considered when assessing a dispute as failure to deliver goods might have an immediate impact on cash flow. If timescales are extended, the mid to longer term consequences for your cash position need to be assessed and this may be more difficult. Are there future payments or deliveries you are expected to make or to receive and how will an absence of these funds or goods impact your relationships?

The severity of the impact may not correlate with the amount of money in dispute. Businesses can often ride out significant cash disruptions at certain times of year, but not others. The financial importance must be therefore judged on its current impact and not underestimated because of the quantum of the sum in dispute.

Pursuing a claim will require management time to be diverted from day-to-day activities. If a claim is pursued, there will be deadlines for response at regular intervals that are not within your control. It might also be necessary to seek

The Royal Borough of

Kingston

Chamber of Commerce

support in the form of a paid expert. A cost benefit analysis will be required to determine if the dispute is sufficiently important to both divert staff away from their more productive activities and expend money in order to resolve it.

You will need to consider how reliant you are on the particular supplier and their advantages over alternatives. This will likely impact the best course of action as, if the relationship has little value, time would be best spent extracting yourself from the situation as quickly and cheaply as possible, knowing that there is no requirement to use the supplier again.

Understanding your leverage Important documents and first-hand accounts will need to be obtained to determine your best course of action, differentiating between internal and external information. While internal information can be assembled relatively painlessly, it will be a slower process if you are reliant on external entities.

It is best to secure this information as early as possible as written accounts of what happened and the chronology of the dispute are going to be the first thing that any external advisor (such as a lawyer) will want. Having obtained the information, this is also a good time to consider what has been learnt from the gathering process. How much time and resource has this process taken? Does the dispute still seem worth pursuing in light of this?

If you have sought legal advice, you should have a greater understanding of the parties’ obligations under any contract. This will include payment terms, timescales, termination provisions and any dispute resolution mechanisms which will need to be followed.

If both parties understand their legal obligations, then it should be possible to reach a commercial

resolution. There may also be commercial pressures that can be applied at this point and the threat of legal proceedings can force the supplier to the negotiating table. Although it is preferable to resolve a dispute agreeably, this may be less of a consideration if you are not very reliant on the supplier.

Making your decisions If steps can be taken which will mean part-performance of the supplier’s obligations, then this will reduce the value of the dispute and the pressures on your business. However, such action will need to reserve your rights to ensure that any compromise is treated as an interim measure and not a variation to the original contract. If this ‘holding position’ can be reached, then the parties can consider their approach and their options.

The first option is to leave the dispute unresolved. This is more likely if the dispute is low value and will only be possible if both parties are happy to accept some loss. If you later change your mind, any claim will still need to be brought within legal limitation dates.

Accepting on the terms available is also likely to include an element of mutual loss. However, definitively resolving the matter is desirable for both parties, enabling them to draw a line under the matter.

The final option is further escalation. If this mea¬ns issuing proceedings, then this is a question of whether the potential improvement (beyond the current position) justifies the expense and risk of taking the matter forwards.

A resolution will either be reached between the parties or externally imposed on them. In either event, there will be a period of dialogue, followed by a period of negotiation. If this is unsuccessful then the matter may proceed to a third party determination, such as court.

The bigger picture The steps described in this article should not be thought of as stages in a lineal process. You should constantly assess the financial and commercial impact on your business and protect your position. The RussellCooke dispute resolution team can help you to avoid the pitfalls.

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