Back to News >

In this article, Womble Bond Dickinson  consider red flags in standard terms for both customers and suppliers. They also look at tariff-related clauses and how clauses in standard terms might help (or not!) when tariffs are imposed on goods.

Why do we do red flag reviews of standard terms?

When buying off the shelf or relatively standard goods, services and software it is common for the parties to the transaction to use standard terms and conditions. These standard terms can be favourable to either the customer or the supplier. Depending on the bargaining position of the parties they may not be capable of negotiation. Sometimes due to the low value/low risk nature of the transaction, a party accepts trading on another party’s standard terms but needs to evaluate, and record, the risks under them.

Legal and procurement teams, and business teams with authority to negotiate contracts, conduct “red flag” reviews of standard terms in order to identify potential risks for their business. There are certain red flags which, once identified, should be assessed from a commercial and legal perspective with a view to seeking a variation.

Not all red flags are equal

Usually businesses set their own red flags. Many of these red flags are perennial and will be the same regardless of the type of business involved. However, some red flags are specific to how a business operates or to the requirements of the business’ insurer or to its internal governance structure. Sometimes red flags are topical in nature. For example, the Trump Administration Tariffs mean that businesses must check the standard terms of business they trade on to make sure they specify who will be responsible for tariffs imposed on goods and appropriate parameters are included to avoid contracts ceasing to be viable.

In this article we run through 8 red flags for both customers and suppliers trading on the standard terms of a counterparty. This is not an exhaustive list of red flags, rather a starting point to get you thinking about the red flags which should apply to your business.

Not all red flags mean a hard ‘no’ to the contract. Depending on your businesses’ own policies, some red flags can be identified as lower risk. They can be noted in a risk register and a business decision taken to proceed on the standard terms.

Red flags from the customer perspective

• Tariff adjustment clauses: Customers should be cautious of clauses that allow suppliers to unilaterally adjust prices due to changes in tariffs or duties, as these can lead to unexpected cost increases, particularly in the current economic climate. Customers should also consider whether “change in law” clauses or “hardship” clauses should give a supplier the right to renegotiate pricing
• Limitation of liability clauses: Customers should be wary of clauses that excessively limit the supplier’s liability, including those that exclude liability for consequential losses, liability for direct and indirect loss of profits, or which are very restrictive of remedies for breach of contract. Very often the customer’s liability is not limited at all in supplier friendly terms and the customer needs to assess if that can be accepted, taking internal policy into account as well as assessing what obligations the customer has under the standard terms and the potential for the supplier to suffer a loss or claim
• Limited warranties for goods/services/software: There are certain implied terms (implied into a contract by statute) which apply concerning the quality of goods and services. The customer needs to review the standard terms to make sure that they have not been excluded from the contract. If they have been excluded, alternative provisions concerning quality must be present in the contract
• Limited remedies for defective goods/services/software and late supply: Customers must review standard terms to assess what the remedies are in the event that defective goods or services are supplied by the supplier or if there are delays in supply. The customer must ensure that it is not left without a remedy in the case that defective goods or services are supplied or if delays are excessive in the context of the transaction
• Exclusivity provisions: Some standard terms may attempt to impose exclusivity to a particular supplier or product or service. These clauses restrict a customer’s ability to engage with other suppliers, potentially leading to dependency on a single supplier, even if the customer has valid reasons for wishing to make a change. This could particularly be an issue where a customer wants to move to a new supplier in the event that tariffs have an impact on the commercial attractiveness of a contract
• Excessively broad force majeure clauses: These clauses should not be overly broad, as they may allow suppliers to avoid liability for non-performance under circumstances that are not genuinely beyond their reasonable control
• Termination rights: Customers should ensure that termination rights are clearly defined and not overly restrictive. Clauses that allow suppliers to terminate the contract without sufficient notice or for minor breaches can be detrimental to customers. Conversely, clauses that make the contract a rolling contract which renews automatically can be difficult to exit in practice, particularly where a long period of notice must be given by the customer
• Choice of law clause other than English law: Customers should be cautious of choice of law clauses that specify an applicable law other than English law. If the governing law is not English law then you may not know what the clauses mean as they will be interpreted using a different governing law. Litigation costs are likely to be higher.

Red flags from the supplier perspective

• Tariff pass-through clauses: Suppliers must ensure that the contract includes provisions allowing for price adjustments in response to changes in tariffs or duties, to protect against cost increases. This might include a price adjustment clause which gives suppliers the right to amend pricing, a hardship clause which gives suppliers a right to reassess the commercial bargain, or a change in law clause which gives suppliers certain contractual rights in the event of a change in law. Suppliers should also seek appropriate flexibility with respect to delivery dates caused by delays or disruption at border control
• Liability clauses with very high liability caps or no cap at all: Suppliers should avoid clauses that impose unlimited liability, or very high liability caps, as these can expose the business to significant financial risk
• Wide ranging and uncapped indemnities: Suppliers should be cautious of indemnities that are broad and uncapped, as they can expose the supplier to unlimited financial liability, potentially leading to significant financial risk. Indemnities need to be reviewed carefully to assess the scope and whether they cover matters which are outside of the supplier’s control and where the risk ought to sit more properly with the customer
• Payment terms: Suppliers must ensure that payment terms are clear and enforceable, including provisions for interest on late payments and the right to withhold deliveries if payments are overdue
• Acceptance and rejection terms: Suppliers should ensure the standard terms include clear provisions regarding the timing of acceptance and rejection of goods to prevent customers from rejecting goods without valid reasons or after a prolonged period following delivery
• Excessively narrow force majeure clauses: Suppliers should ensure that force majeure clauses are comprehensive and cover a wide range of unforeseen events to protect against liability for non-performance. They must consider all possible scenarios that could go wrong due to circumstances beyond the supplier’s reasonable control, and how the force majeure clause would play out in real life
• Termination rights: Suppliers will want to see a break clause which enables them to exit an unprofitable contract. They will also be checking that the contract does not contain termination rights which enable the customer to exit the contract before the supplier has recovered its investment costs
• Choice of law clause other than English law: Suppliers should also be cautious of choice of law clauses that specify an applicable law other than English law.

What is the UCTA 1977 position concerning standard terms?

The Unfair Contract Terms Act 1977 (UCTA) imposes statutory controls on limiting liability. It applies to B2B contracts and it imposes a “reasonableness test” on attempts to limit or exclude liability in standard terms. UCTA is not the focus of this article though it must always be considered when considering limitations of liability in standard terms.

What about the battle of the forms?

The battle of the forms arises where two parties are each trying to insist that their own standard terms apply. They keep putting their own standard terms forward and don’t ever agree to the other party’s terms. There are strategies to try and win or mitigate the risks of the battle of the forms and avoid uncertainty as to whose terms apply. Again, this is not the focus of this article and we are writing from the perspective of a party which is doing business on a counterparty’s terms.

What if you want to know more about the Trump Administration tariffs?

UK exporters should check out our Navigating the new US tariff regime website pages. They include links to useful guidance from our specialists at Womble Bond Dickinson US.

Can we help you?

Do you want to talk to us about:

• Reviews of standard terms of business
• How we can support you with training, playbooks for your teams to refer to and checklists for a red flag review
• How the Trump Administration Tariffs might impact your standard terms or those of your counterparties.

  Simply reach out to Peter Snaith (peter.snaith@wbd-uk.com) or Sarah Daun (sarah.daun@wbd-uk.com)