Food supply contracts: key issues in supplier to retailer contracts

Food supply contracts can be complicated and detailed legal agreements that require careful consideration. Some of the key points for suppliers to consider when contracting with food retailers are set out below.

Large food retailers will often insist on using their standard contract and in such case, those contracts must be carefully reviewed by the supplier. In cases where the supplier’s standard contract applies, that contract must be properly drafted to make it clear what the supplier’s obligations are and to fairly apportion risk under the contract.

Price

The price of the products and how that price is paid must be clearly set out in the contract. With food supply contracts, a supplier will want to ensure that any increase in the costs to manufacture/produce the food products is passed down to the retailer. For example, this could be due to a shortage of a particular component required for manufacturing/production as we have recently seen with the shortage of carbon dioxide resulting in a rapid increase in prices in carbon dioxide and cost of production for carbonated drinks suppliers.

Food supply contracts are typically entered into on an ongoing basis with repeat orders which is likely to result in a longstanding relationship between the parties. The supplier will need to consider incorporating clauses in the contract to increase the price of the products in line with the Retail Prices Index (or other index as applicable) percentage increase in each year of the term and/or a general right to vary the prices to preserve its profit margins under the contract.

Additionally, where the contract covers international supply both parties will want to ensure that if a currency fluctuation occurs on conversion of a particular currency paid by the retailer, there is drafting to deal with who shall meet any shortfall in the price which might arise as a result of the fluctuation. The outcome of this discussion will come down to the bargaining power of the parties to the contract.

The supplier’s obligations

Some retailers require an exclusivity period to be the exclusive retailer for certain food products which means that the supplier cannot deal with other retailers. A supplier will need to consider this against their overall business strategy and the value of the contract before it agrees to supply products to a retailer requesting this. This type of clause is sometimes found in retailer’s standard contracts.

Food products move through the supply chains quickly and retailers might wish to resell the products before title has passed. The terms on which the retailer is able to resell will need to be considered by the supplier in order to protect its position and to ensure that payment is received. The supplier will want to retain the right to terminate the retailer’s right of resale and will want to be able to recover any proceeds of sale from the retailer. The supplier’s position is weakened considerably if the retailer mixes the supplier’s products with those of a third party and the supplier’s products cannot be readily identified and this should be considered in the drafting.

The contract should be very clear as to what the supplier’s delivery obligations are (where it is to be delivered, what method of delivery should be used and when it should be delivered). Food products might need a particular method of transport and the contract should make those requirements clear so that the supplier can factor these elements into the price agreed with the retailer.

Limitation of liability

The limitation of liability clause is one of the most important clauses in a supply contract to seek to protect the supplier from claims from retailers.

The food supplier will need to consider (in conjunction with its lawyers and insurers) how liability should be apportioned under the contract. The supplier should seek to exclude liability to the retailer for loss of profits and business under the contract. The scope of the limitations and exclusions will be a matter for discussion between the parties and the protection the supplier receives will be led by its bargaining power over the retailer.

If the retailer is responsible for packaging, the supplier will want to ensure that in packaging the products the retailer complies with all applicable laws and regulations (including in respect of the new Natasha’s Law requirements for pre-packed direct sales of food). A supplier could request an indemnity from the retailer for any claims made against the supplier as a result of an act or omission of the retailer in performing its duties under the contract. The supplier should seek to ensure that any such indemnity is not subject to any limitations and exclusions of liability in the contract.

Force majeure

Force majeure has no recognised meaning in English law. It is a matter of contract whether a force majeure clause is triggered and it will depend on how that clause is interpreted. Before considering force majeure clauses further, the governing law and jurisdiction of the contract (see below) should be considered.

When looking at English law force majeure provisions, the first step is to look at how the force majeure event is defined. Usually this will be a long list, including: acts of God, flood, drought, earthquake or other natural disaster; nuclear, chemical or biological contamination; terrorist attack, civil war, civil commotion or riots; and action taken by a government or public authority. Occasionally, it might also include non-performance by suppliers or subcontractors as well as interruption or failure of utility services.

The supplier will not want to be liable to supply the products to the retailer if something occurs which is out of its control. In the context of food supply, an example of this is the recent fuel and HGV driver shortage which prevented products being delivered. In such circumstances, the supplier should have robust clauses to rely on in the event of it being unable to fulfil its obligations under the contract due to a force majeure event.

Product recall

The Food Standards Agency (FSA) regularly issues allergy alerts and/or food safety alerts. A supplier will need to ensure that the contract deals with the procedure for product recall and/or FSA alerts and the supplier should consider whether to include a clause to compel the retailer to notify the FSA in the event of an incident being identified.

Additionally, there should be clear obligations placed on the retailer to notify the supplier if any communication is received from the government or other regulatory authority (including the FSA) that the products should be removed from the market. This is particularly pertinent where the products have been supplied by the supplier to other retailers so that it can ensure all products are removed from the market.

Governing law and jurisdiction

When dealing with cross-border contracts, the supplier based in England will likely want to ensure that the contract expressly states that the governing law and jurisdiction of the contract is the law of England and Wales. This will make bringing a claim against the retailer easier (as you do not have to issue the claim in the retailer’s jurisdiction) but the supplier should be aware that it could still be difficult to enforce against the retailer.

The supplier will need to consider any import/export controls that apply to the contract where food products are crossing international borders. This should be considered at the outset as part of an appraisal of the deal with the retailer as a whole and factored into the price paid by the retailer.

In conclusion

Whilst some of the key issues are identified in this article, it is not intended to be an exhaustive guide and each contract should be reviewed in light of the potential issues and risks applicable to the arrangements with retailers.

If you would like to discuss this article and/or your food supply contracts, please contact Jack Shreeve.