Supply Contract Disputes

The most common contract signed by any small business is a contract to supply or receive goods or services. Supply contracts can suffer from problems relating to breaches in performance. Supply disputes are commonly focussed on matters such as price, delivery of goods, quality, and customer service standards.

Case Study  Supply

Background

Mike Jones was a small manufacturer of quality products for the local sports / leisure market. Mike’s company had been in operation for two years. Fun Equipment Pty Ltd operated in the same market selling a wide range of products and accessories. Fun Equipment held around 15% market share and marketed nationally using both television and high impact point of sale promotions.Fun Equipment approached Mike to develop a product based on his existing designs but modified to Fun Equipment’s trade mark brand to complement their range. An order of 100,000 units was confirmed as the initial purchase. The development took three months and costs were incurred in manufacturing moulds and set up costs.

The Dispute

Prior to commencing manufacture an amended order was received for only 5,000 units. Mike attempted to discuss the matter with the Managing Director, but his calls remained unanswered. Mike Jones was a member of the local Business Enterprise Centre and sought assistance from the small business advisor.

The Facts

Fun Equipment had placed a written order for 100,000 units. Fun Equipment had formally advised an amended order for only 5,000 units.

The Process

Mike Jones was referred by the Business Enterprise Centre to a commercial mediator. The mediator contacted Jeff Rhodes, managing director of Fun Equipment, who although reluctant to acknowledge there was a problem did finally agree to mediation.During the mediation Mike stated his willingness to extend the time for completion of the order to 12 months but believed the original order should stand. Jeff Rhodes believed it was Fun Equipment’s legal right to vary the order and if this was not acceptable he would cancel the complete order. The parties were not prepared to change their positions.The mediator met with the parties privately and was able to identify that Mike’s main concern related to the uncertainty of the business relationship for the future, and not the initial order. Mike’s concerns were:
Had Fun Equipment found another manufacturer?
Why were his calls not returned?
What will be the financial implications if the contract does not proceed?
A smaller order over a longer period would in fact be easier to manage and be of less risk to the business.Jeff Rhodes advised the mediator in confidence that one of the major shareholders had been bought out by the remaining partners and the requirement for additional funding had created financial problems for the company. They were still keen to proceed with the new product but funding was the issue.Jeff agreed to table the problem in the joint session (as matters discussed in mediation are confidential) and the parties worked with the mediator to find a solution. The mediator’s ability to identify the real issues and establish effective communication were the keys to a successful outcome.

The Mediated Outcome

Fun Equipment paid Mike Jones $4,000 for the cost of moulds and materials.The parties agreed to enter into a 3 year supply agreement.The initial order was reduced to 2,000 units per month for 6 months, 5,000 units for the following 6 months.

Lessons to be learnt

Avoiding communication does not make a problem go away. In fact, a lack of communication will usually escalate a problem. Solutions between business partners are usually achievable with effective communication.If you have a supply dispute just find out about the other company’s dispute resolution procedures. For example a staff member may be responsible for handling disputes.