Packaging - is your supply contract tightly packed?

If you rely on the supply of packaging from a third party, you may be at risk in a number of ways. Does the quality meet your brand standards? Do the materials fulfil the environmental specification? How much wastage is acceptable? Will you suffer a financial loss from delays, for example if goods are perishable, seasonal or fail to make it to customers undamaged?

First impressions count, and packaging is often a substantial part of the costs in taking a product to market. Most problems can be pre-empted and addressed in your contract with the supplier, so do not be tempted to skim over or accept standard supply terms and conditions without taking legal advice first.

A detailed review of the contract or terms of business will provide an opportunity to plug any gaps or address any concerns before issues actually arise.

Depending on the complexity of your products, and their packaging requirements, there is a common suite of issues that can be readily anticipated and successfully negotiated by your solicitor.

Delays in delivery

The importance of timeliness will depend on your product range, but suppliers typically do not like to include ‘time being of the essence’ in the contract. This means you may be exposed to delays in delivery of your packaging materials which will have repercussions on manufacturing timelines and ultimately sales capability.

Aside from a force majeure event (act of God, terrorism, natural disasters etc.), delays could emanate from issues such as: the supplier’s own problems with obtaining materials, staff shortages, poor project management, or machinery breakdown.

While, as a purchaser, you may not be able to prevent such delays, it is possible to consider strategies or remedies you could rely upon to reduce any impact on your business.

Examples include negotiating:

• credits against future invoices should delays exceed a certain period of time;
• right to terminate if delays are consistent and persistent;
• appropriate notice obligations on the supplier so that you can better manage timelines at your end; or
• a right to be indemnified for any losses you may incur as a result of delays.

Quality control issues

Another likely issue with packaging that you could encounter may be related to the actual type and quality of materials used and whether the packaging is in fact fit for purpose. For example, if seals do not adhere properly or if certain environmentally friendly materials were specified but different ones are used, if printing on the packaging is incorrect, or if product somehow leaks out of the packaging. These are unfortunately common and impactful issues. Not only can this cause you financial loss, but it can also damage your market reputation or even subject you to an industry recall, which is why negotiation of quality-related clauses in a supply contract will be critical.

Supply contracts usually have the standard ‘must be fit for use ... in accordance with industry standards’ language. For more robust protection, it is advisable to include provisions that deal with strict parameters and what recourse you would have if there was to be a breach of the quality expected.

With mindful consideration of the nature of your business, this may mean looking at options such as the right to replacement or rectification, the right to an indemnity, tightening up the specifications and quality control processes the supplier is subject to, or even something more specific to your business and sensitivities.

Wastage

Another consideration is where you receive your packaging order and, once manufacturing or use of the packaging commences, you realise that a larger than usual proportion of packaging is unusable or considered wastage.

Some supply contracts may include a wastage buffer to allow the supplier to provide a certain percentage that may fall into this buffer. For example, a 2% to 5% buffer may be considered to be industry standard or acceptable. However, is the contract silent on what you can do if the buffer is exceeded?

Therefore, including suitable rights of remedy would be important to negotiate. These rights could comprise credits against invoices; lowering the buffer percentage to incentivise the supplier to enforce stricter quality control before sending any shipment to you; or a right to indemnity, to name a few.

Pricing changes during the term of the contract

Depending on how your supply chain contract or terms are written, there may be the ability for the supplier to change pricing during a contract term or upon very little notice. They cannot control market volatility and hence will likely insist on this right. Obviously, this is not favourable to you and clauses such as these should be negotiated, where possible.

Examples of solutions include:

• putting a percentage cap on or linking increases to retail or consumer indices could help you protect your business against unexpectedly high increases;
• appropriate notice provisions to provide you with as much time as possible to then make adjustments to your own pricing, if required;
• negotiating or renegotiating volume discounts to help offset some of the increases in the future; and
• if purchasing in a different currency, considering putting in place a suitable foreign exchange hedge to mitigate against price rises from currency fluctuations.

How we can help

Packaging is a vital element of many products, particularly luxury goods, perishable goods, or items which are ordered online.  Our solicitors will help you navigate and tighten up those often supplier-friendly contracts with more confidence and prepare for unexpected bumps in the road.

For further information, please contact a legal advisor in our company and commercial team.

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.