April 26, 2016

CONTRACTUAL OBLIGATIONS: What to do when supply availability is short?

By: Tom Oliveri

When supplies are tight, I tend to receive calls from our shippers who are experiencing inadequate supply, the inability to fulfill contracts and asking if they will be exposed to any potential liability for failure to ship.

The threshold question to ask, is there a contract between the parties? A shipper is deemed to have entered into a binding buy/sell contract normally when pick-up and P.O. numbers are exchanged. This is compelling evidence that there was a mutual meeting of the minds where the contract(s) calls for a specified number of cartons or multiple loads to be shipped, and at a specified price. Now, what if there are no other disclosure or contingencies documented in writing and you unexpectedly fall short of supply and are unable to ship as promised to your customer?  

First, communication and written documentation with your customer are vital in situations like the aforementioned. When you become aware that there is a possibility that you as the shipper will not be able to cover all your commitments, immediately pick up the phone and subsequently confirm with an email and communicate with your customer the extenuating circumstances that preclude your ability to ship. Next, be prepared to document your production shortfall that required you to be unable to ship the full quantity and offer to ship on a prorate basis some percentage of your harvested production. In circumstances where you have a well developed business relationship with your customer, the conversation with proper disclosure of the situation will certainly be much appreciated. If the customer is new and the relationship has not been developed, the customer can be less forgiving and you could be responsible for the replacement cost of produce not shipped. In this situation, the damages are calculated by the buyer documenting his or her replacement cost, and then subtracting the agreed upon contract price with your company, the difference resulting in damages due the buyer from the shipper.

To protect against these types of damages, you should consider a provision at time of negotiations that stipulates that the contract performance is subject to availability of expected supplies, which could then allow you to prorate the shipments based on what supply you do have available, or in a case of a crop failure, cancel the order. Keep in mind that any stipulation to a contract relating to product availability or adequate supplies must be discussed when negotiating the transaction and detailed in an email to your customer or on a confirmation of sale. To avoid this situation, the following suggested language can be added to your sales confirmation or emailed to your customer:

“This sale is subject to (shipper’s company name) having product available. (shipper’s company name) shall not be required to supply product when sufficient supplies of product are unavailable to ship due to unforeseen weather conditions that affect yields, the elements, strikes, labor troubles, power shortages, truck shortages, national emergencies, governmental edicts, quarantines, natural disasters, and/or any other events that are beyond the reasonable control of (shipper’s company name)”

To avoid potential pitfalls like this, consider selling to customers that you have established relationships with that are willing to work with you in the event you are short on supply. Pick your opportunities to grow your business, but as I like to say, DOCUMENT, DOCUMENT, DOCUMENT and set expectations prior to the day of shipment.

If you are going to negotiate sales for future dates prior to harvest, then I strongly recommend that you place your customer on notice, both verbally and in writing, concerning the availability of adequate supplies at time of shipment is a contingency of contract performance.

Should you be faced with a similar situation when it comes to future commitments of product with your customer or the inability to fulfill a contract, please give me a call or send me an email and I would be happy to walk you through these situations. Should you have any questions on this or any other topic please contact me at 949-885-2269 or TommyO@wga.com.