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Distressed projects and fractious supplier relationships: when contracts go wrong



United Kingdom

Another week, another household name facing administration. No-one's using the r-word in earnest yet, but fewer opportunities mean that businesses will inevitably be looking to extract greater value, or cut their losses, from existing contracts. In the IT and outsourcing space, customers should look out for suppliers cutting the size (or quality) of their team or asking for more time. Have you got the right levers in your contract to manage service quality? Are you managing the supplier and keeping the relationship warm and open?

On the other side of the coin, suppliers should look out for customers pulling people with the right knowledge off their team and de-prioritising the vendor relationship, which is a strong sign of difficulties further down the line when the customer alleges breach as a result of the supplier delivering a service or product that the customer didn't want. Are you documenting the cause for delays and rigorously applying the relief event mechanism in your contracts to keep the customer honest? 

Ultimately, there will be contracts where the supplier isn't making a profit and the customer can get a better price or service elsewhere. There may be a deal to be done, but parties need to be careful about how they have that conversation to make sure they don't allow claims for repudiation of the contract. This is particularly important in the IT and outsourcing sector, where there are more termination claims than in any other sector.

Whatever the situation, early engagement with legal advisors is crucial. Commercially-minded lawyers with experience of this type of situation are not only there to litigate or protect your position, but can give invaluable input into negotiation strategies. An early analysis of the contract and the strength of your legal position can give you your 'BATNA', by giving a view on liability if it all goes wrong, and your legal advisors can create a safe space for 'without prejudice' negotiations to try to resolve the problems and move on.

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