Are your supply contracts fit for an uncertain world?

Businesses thrive on certainty. But, with global macroeconomic headwinds, the only certainty, is uncertainty.

From the closure of the Strait of Hormuz to tariffs, sanctions and the lingering fallout from the blockage of the Suez Canal, recent years have shown how exposed UK businesses can be to events happening thousands of miles away, finding themselves unable to source materials or facing unexpected costs.

Commercial Partner, Kate Westbrook, and Commercial Dispute Resolution Partner Alastair Govier at Thrings, look at why supply contracts are one of the most important, and most overlooked, tools businesses have for managing uncertainty, and what to do if disruption strikes despite your best efforts.

The scale of the problem

The numbers tell their own story. The UK Business Confidence Monitor, published by the Institute of Chartered Accountants in England and Wales, cites geopolitical risk as the biggest challenge facing businesses. Its latest reading fell to -14.6, the lowest since Q4 of 2022. This, paired with the drop in confidence among private SMEs from +2.1 to -16.1 in a single quarter, fuelled by concerns around late payments, show just how much the challenge is being felt.

It's not just the UK's largest exporters that are exposed. Government data shows the combined value of the UK's imports and exports equates to roughly 63% of GDP, a higher trade dependency than the US or China (25% and 27% respectively), and on a par with France and Italy. Even businesses trading only domestically are rarely insulated from events elsewhere, because their suppliers, or their suppliers' suppliers, will be.

Faced with this, many business leaders are adopting a proactive and preventative approach that prioritises resilience. Supply contracts sit at the heart of that shift and, if done well, they’re a risk-management tool, setting out what happens when things go wrong and what happens next.

How you can prepare

The best time to think about disruption is before it happens, while both sides are still willing to negotiate terms. Focus on a handful of areas when putting new supply contracts together or reviewing existing ones:

• Get specific about what counts as a disruptive event. Broad, vague force majeure wording tends not to hold up if tested, so name the events most likely to affect your business, such as blocked shipping routes, sanctions, export controls or cyber-attacks.
• Decide who absorbs the cost of a shock. Consider linking pricing to key cost drivers like freight, energy or raw materials, so a spike doesn't fall entirely on one party, and consider a mechanism to renegotiate terms in genuinely exceptional circumstances.
• Make termination a considered decision, not a knee-jerk one. Build in a grace period before termination rights kick in, and set out what happens to payments, stock and handover if the contract ends.
• Don't rely on a single supplier if you can help it. Where realistic, check whether the contract allows you to bring in an alternative supplier at short notice, and ask key suppliers about their own dependencies further up the chain.
• Check your insurance lines up with your contracts. War, sanctions and state-backed cyber-attacks are commonly excluded from standard business interruption policies, so check cover against your key contracts rather than assuming you're protected.
• Think about where disputes will be resolved. Choosing your governing law and jurisdiction deliberately, and including a staged dispute resolution process can make disagreements quicker and more cost-effective.
• Read the contract before you do anything else. Check whether there's a force majeure clause, what it covers, and what you need to do to rely on it, such as giving notice within a set timeframe. Missing a procedural step can undermine an otherwise valid claim.
• Be cautious about walking away. Where there's no force majeure clause, the legal doctrine of frustration might apply, but it's interpreted narrowly by the courts and is rarely a quick fix. Wrongly declaring a contract frustrated can leave a business in breach itself, so this route should never be taken without advice.
• Weigh up termination carefully. Ending a contract can feel like the obvious answer, but if alternative suppliers are hard to come by, it can create more problems than it solves. Check what the termination clause requires, and what it means for payments and goods already in the pipeline.
• Speak to your insurer promptly. Most policies require early notification of anything that might give rise to a claim, so don't wait until a formal claim is ready before flagging a potential issue.
• Get advice early, not as a last resort. The earlier legal advisers are involved, the more options tend to be available, whether that's negotiating a practical way through with the other party, or preparing to protect your position formally if needed.

None of this needs to be complicated or expensive. With the right advice, it can just be a case of revisiting a handful of clauses in a contract you already have, rather than starting from scratch.

Handling disruption when it hits

Sometimes, however good the contract, disruption still catches a business out. If that happens, business owners should act quickly but carefully:

No business can control events on the other side of the world. What businesses can control is how well their contracts anticipate that uncertainty, and how quickly they act when something goes wrong. A contract reviewed today could save considerable time and cost tomorrow.

Thrings’ Commercial and Commercial Dispute Resolution lawyers are experienced in supporting businesses of all sizes through the complicated changing worlds of contracts, intellectual property and technology. Whether it is helping clients to stay on top of new laws and ensure best practice, or utilising their outstanding track record for success in court and alternative dispute resolution routes, they’re there to deliver commercially focused solutions that minimise disruption to your business.