Companies, Partnerships and Directors
Dealing with suppliers in a recession
Most businesses rely on their suppliers. This article looks at the steps that you can take to control the legal and commercial risks posed by your suppliers in a downturn and the potential benefits you can reap from the recession.
Price and payment
In the current economic climate you are in a strong bargaining position to obtain better price and payment terms from your suppliers.
In order to secure your order, your supplier may be prepared to agree to stage payments deferring payment until you have received the goods/services or you may be able to protect your payment by using escrow style arrangements or letters of credit. Typically these involve making the payment to an independent third party who releases the payment only when the supply contract has been performed.
Lots of businesses are facing financial difficulties at present therefore you need specific contractual rights in your supply contracts that will entitle you to cancel your contract and look elsewhere should you require.
If you depend on assets which you do not own or control which are essential to the running of your business, it is vital that your terms and conditions of supply ensure that title passes to you at the earliest possible opportunity.
Transactions at an undervalue
The trend in price cutting by suppliers in a recession may result in a transaction at an undervalue. This occurs if the supplier sells an asset either for no payment or for significantly less than the asset is worth and at the time of the transaction the supplier was insolvent or became insolvent as a consequence. Where there is a transaction at an undervalue it may be set aside by a liquidator if the supplier becomes insolvent. The rules relating to undervalue transactions are complicated and if you have any doubts it would be best to take advice.
It is important that you have proper legal contracts with all your suppliers in writing, if possible. Unfortunately, few businesses have terms and conditions of supply despite the protection that these provide. Templates can be provided for businesses that currently do not have terms and conditions of supply. Your standard purchase documents should be reviewed every two or three years to ensure that they are up to date and take account of recent changes in law.