How do you enforce your supply contracts in challenging market conditions?

Does your Master Services Agreement do what you need it to do?

Customer and supplier relationships are often regulated by a Master Services Agreement (MSA). An MSA is a contract reached between parties to govern future business dealings. Drafted well, an MSA is a valuable tool in expediting the order and delivery of services. In theory, all that need be negotiated on every job is the agreed statement of work (SOW).

You are the owner of freight shipping company, Fish are Friends Limited. You have an MSA with boat supplier Nemo Limited. The MSA contains an option to hire a specific type of boat that you require to ship your goods to Siberia at £15,000 a week. Business is going well, you are regularly engaged with Nemo Limited. One day, you place a purchase order (PO) with Nemo Limited for the use of one boat in line with the specifications of the MSA to fulfill your own PO with your customer – Shark Siberia Limited. Nemo Limited say that as a result of changing market conditions, they will not be able to fulfill the PO. Instead, the price is now £25,000 per week.

You are apoplectic. You type a lengthy email, detailing that the MSA you have in place with Nemo Limited grants you a “legally-binding option” at £15,000.  You will be suing if Nemo Limited does not fulfill the PO. After all, that is what the MSA says and Nemo Limited is in breach of contract. You send your email and think “easy, home and dry” – it is that simple.

Or is it?

The key question is “What does your MSA actually say?”

The trouble with many MSAs is that there can often be no obligation on the supplier (Nemo Limited in our case) to provide the services. Known as a “Compulsion Clause”, it is imperative that your MSA, has a clause that compels the supplier to provide the services when requested. Without a Compulsion Clause, the supplier can simply say “no”.

Operating in volatile market conditions as we are right now, it is a must that businesses review their contractual relations with suppliers. At Gilson Gray, we have over 80 years of Corporate experience and would be delighted to assist. For a frank and non-jargon filled review of what your MSA actually says, please do not hesitate to contact Oliver Craig or Calum Crighton.