MexxaMixx is a Kent-based business which manufactures and sells a range of Mexican style cooking sauces. Its operations recently expanded and it was ready to sell its products in a leading supermarket’s stores across the UK. Thomas, one of the directors, approached us, for advice on the supply contract which had been prepared by the supermarket.
The pricing strategy, and MexxaMixx’s position in relation to price reductions, was at the forefront of all negotiations with the supermarket as, despite the allure of launching products into a major supermarket, contract profitability was vital.
One key concern about the terms of the proposed contract related to the strict obligation on MexxaMixx to deliver the products ordered by the supermarket in the correct quantity and by the date stipulated by the supermarket. If MexxaMixx failed to cope with the demand or delivered the products late, it would be liable to pay a pre-agreed sum of money to the supermarket for breach of contract (known as liquidated damages).
As a principle of law, pre-agreed damages for breach of contract should be compensatory, not punitive. A penalty, imposing an excessive payment as a deterrent to breach, is not enforceable. Our view was that the liquidated damages provision was a genuine pre-estimate of the loss likely to be caused and the provision was likely to be enforceable.
We therefore looked to ways in which we could amend the draft contract so that MexxaMixx had greater control over the order process. We were successful in negotiating terms to oblige the supermarket to provide clear forecasts of the future orders that it would place. We also ensured that MexxaMixx had the absolute discretion to decline to accept any order from the supermarket (especially where MexxaMixx had concerns about meeting the order quantity or delivery date).
Where delivery was late due to circumstances outside of MexxaMixx’s control (also known as a force majeure), we ensured that MexxaMixx would not be liable to pay the liquidated damages. In addition, we carefully drafted the force majeure clause so as to include a failure by third parties (such as the factory, warehouse or carrier).
Following successful negotiations, the contract was signed and MexxaMixx was delighted to have established long-term business continuity with a major supermarket chain.
Article first published in the Kent & Sussex Courier in March 2015.