And after the flood...you need more than a handshake
5 May 2011
Queensland’s recent flood and cyclone disasters have exposed the risk of handshake deals and standard contracts in creating a potentially even bigger tragedy for businesses at the start of the supply chain, according to McCullough Robertson Partner Malcolm McBratney.
A partner in the leading law firm’s commercial practice, Mr McBratney said suppliers from manufacturers to providers of construction materials could face possibly unlimited liability for supply disruptions due to an over-reliance on handshake deals or inadequate standard form agreements.
'Many service providers and producers and providers of raw materials, parts and equipment, have been forced to suspend supply following the recent tragic natural disasters which have badly affected Queensland businesses in a variety of industry sectors, including manufacturing and construction,' Mr McBratney said.
'Unfortunately, without written contracts there is a lack of certainty concerning obligations in the event of such crises, with potentially unlimited liability for failure to supply under the agreement. It is more important now than ever for suppliers to formalise arrangements to reduce their exposure.'
'This extends to those supplying services such as IT and professional corporate services, if their business or their ability to continue to provide that service was reduced for a period of time due to flood or cyclone damage.'
Mr McBratney said buyers should not count on standard agreements concerning the purchase of goods and services to offer them any assistance.
'Well drafted standard supplier contracts minimise the rights purchasers have against a supplier if the goods or services are not delivered as promised,' Mr McBratney said.
'In a worst case scenario, the buyer may be liable to continue making ongoing purchases, even if they have suffered significant loss due to the supplier’s non-performance.'
Mr McBratney noted that many standard form contracts included force majeure clauses giving suppliers the ability to refuse supply when affected by natural disasters, yet many buyers may not have considered the effects of such a failure to supply.
'Suppliers should review their standard form contracts to ensure they appropriately deal with natural disasters, risk and liability. If they do not traditionally use written contracts, then they should look to put in place contracts with customers drafted with professional legal input,' he said.
'Customers should be aware that such terms limiting rights in the event of natural disasters might exist in the standard form contracts and should take professional legal advice before agreeing to those terms.'
He added: 'While it is easy to ignore such matters during the good times, a crisis event such as the recent disasters really drives home the risks in not putting in place formal negotiated contracts prepared with professional legal advice.'
For more information contact: Kristie Fankhauser on +61 7 3233 8876.