Supply chain · 14 January 2019

Can my supplier demand 20% onto an agreed quote? An entire project is at risk

A claim for compensation could easily become a long and drawn out legal battle

Is this legal? The new price would leave the project making a loss, and using a different supplier would jeopardise the delivery date for the client.

Grid Law founder David Walker helps a reader consider their options and asks whether compensation is a route worth taking.

Question

I run a specialist manufacturing company. Most of the work is carried out in-house but when casting is required, we outsource this to a foundry.

Recently, we received an enquiry from a customer and their job included some casting so we sent “requests for quotations” to various foundries so they could bid for the work.

After receiving all the bids, we submitted our quotation to our customer. This was accepted and they sent us a purchase order. Off the back of this, we placed our order with the foundry.

The foundry acknowledged our order and all of the details – delivery dates, prices etc matched. But then, six weeks later, they wrote to us saying they had made a mistake. They said the total price should be £24,900 rather than the £19,700 that they originally quoted.

They said that unless we paid the new price they would not complete our order.

Can they legally do this?

It’s now too late for us to go elsewhere as this would mean that delivery to our client would be at least six weeks late which would put us in breach of contract. However, if we pay them the higher amount, we would actually lose money on the project.

What can we do? Any advice would be really appreciated.

Answer

This is a difficult question to answer definitively without further details. Also, I’m going to assume that this was a fixed price contract so the foundry has no right to unilaterally change the price.

First, we need to establish whether this was a genuine mistake. You should ask the foundry what went wrong for them to be so far out with their quote. You should also compare their quote to the other bids you received.

Was their price vastly different to the others?

If this bid was significantly cheaper, it may be another indication that the foundry had made a mistake whilst quoting for this work.

If this was a mistake, were you aware of it?

For example, when comparing this bid to the others, and based on your experience in the industry, should you have reasonably assumed that they had made a mistake?

If this was a genuine mistake and you were aware of it, it may prevent a contract from being formed between you. If there’s no contract, you cannot enforce it and therefore there’s no obligation on the foundry to deliver the castings you were expecting.

If this bid wasn’t significantly cheaper than the others, or if it was, but there were justifiable reasons for the lower price, it’s unlikely to be an obvious mistake.

If there’s no obvious mistake, there will be a legally binding contract between you and the foundry and they will have to honour its terms. If they don’t provide the goods for the price quoted, they will be in breach of contract.

If they refuse – because they don’t want to lose money on this order – what can you do?

Sometimes, when you absolutely need one party to uphold their part of a bargain, you can apply to the court for an order for specific performance. In this case, you would apply to the court for an order forcing the foundry to supply the products for the price originally quoted. If they still refused, they would be in contempt of court and this would be a criminal offence.

Two conditions

An order for specific performance is a discretionary remedy which means that there’s no automatic right to it. For a court to consider granting such an order, two conditions must be met. First, there must be a valid contract in place and second, damages (financial compensation) must not be an adequate remedy.

In my view, it’s this second condition that’s unlikely to be fulfilled. You could go elsewhere to have the products made and you could be financially compensated for any additional costs or delays that this caused. So, you won’t be able to force the foundry to make the goods for the price quoted.

Also, you need to keep in mind the commercial reality of this situation. We’re talking about a price difference of £5,200. Whilst this is a significant sum for any small business to lose, it would probably cost you more in legal fees to make the application to the court.

So, what do you do now?

The client

You have to speak to your client to find out what they want to do.

If they understand what when wrong when the foundry quoted for the work, they may, reluctantly, agree to pay a higher price. Alternatively, they may agree to delay the delivery date so you can find another foundry to complete the work. If they do, great.

However, this will be an amendment to your contract, so make sure it’s recorded in writing and that both parties sign it. This will protect you in case they change their mind later.

If they refuse, they may either cancel your contract or insist that you stick to the terms originally agreed. If they insist you stick to the terms of your contract you have a choice. You can either pay the higher amount quoted by the foundry so you can fulfil the terms of your contract, or you can refuse.

If you refuse, you will be in breach of contract. Your client won’t be able to obtain an order for specific performance against you because it’s impossible for you to fulfil the terms on your own. You need a foundry to complete the castings.

So, if your client decides to take legal action against you, they will be claiming compensation for their losses.

__________________________________________________________________________________
handshake

Does a handshake form a legally binding contract?

For any contract to be legally binding, five essential elements must be present.

__________________________________________________________________________________

Claiming damages

When you claim damages (compensation) for breach of contract, you’re claiming a sum of money to put you in the position you would have been in had the contract been performed properly.

This could be significantly more than the difference in the prices quoted by the foundry.

You didn’t say what the products were going to be used for, but say, for example, they were needed to repair an important piece of machinery. If that piece of machinery was out of action for another six weeks and your client was losing trade every day because of this, they could claim compensation from you for all their losses.

Then, to save you from being out of pocket, you would need to sue the foundry to recover your losses. This would likely be the amount you had to pay out to your client plus any other losses you had incurred.

As you can imagine, this could easily become a long and drawn out legal battle.

If you threaten the foundry with this, they may agree to honour the original price. If they don’t, you may decide to pay the higher amount to avoid an expensive claim from your client.

You then have a choice about whether you try to recover the amount you have overpaid from the foundry. You have to keep in mind that this would be a small claim (as it’s under the £10,000 limit) so you wouldn’t be able to recover your legal costs of doing so.

Also, if you decide to pay the higher amount, be careful not to inadvertently agree to an amendment to the terms of the contract which would prevent you from being able to claim later.

I appreciate you’re in a difficult situation here, so if you would like to talk through the specific details of this, please let me know.

Kind regards,

David

Sign up to our newsletter to get the latest from Business Advice.


 
TAGS:

ABOUT THE EXPERT

David Walker is the founder of Grid Law, a firm which first targeted the motorsport industry – advising on sponsorship deals, new contracts and building of personal brands. He has now expanded his remit to include entrepreneurs, aiding with contract law, dispute resolution and protecting and defending intellectual property rights.

On the up