Case Study – When Overseas Supply Contracts Go Bad

Problem

A large Australian manufacturing company engages us to advise on difficulties they were having with an overseas supplier of material crucial to the client’s production process.  The supplier was located in Italy, and had supplied faulty products which were created significant production line stoppages, and were deemed potentially dangerous to end users.  The client had paid the supplier a six figure sum, and was seeking to terminate the supply contract and recover the monies paid.

Issue

The supply contract that the client was seeking to rely on was a sample document extracted from the web for another industry, and while it contained some relevant terms and conditions, fell far short of what would be required for such a significant and crucial supply arrangement.  Notwithstanding this, we provided advice as to the client’s general rights and the options available to them.  The supplier rejected any form of negotiation and refused to respond to any correspondence.  Given the amount at stake, the client instructed us to commence proceedings against the supplier in Australia.  The supplier provided a defence to the action claiming Australian jurisdiction did not apply, and rather than counter-sue, commenced separate proceedings against our client for damages arising from the termination of the supply contract.  Unfortunately, the sample contract extracted from the web was silent on the matter of jurisdiction so the case proceeded in both jurisdictions on the question of what countries law applied, and what countries courts could hear the matter.  To say the matter was complex was an understatement.

Solution

We engaged solicitors in the country where the supplier commenced proceedings to defend the matter on behalf our client.  At the same time, the matter proceeded in the State’s Supreme Court, initially on the question of which jurisdiction applied given the ultimate case relied on a favourable result.

We engaged both senior and junior counsel to represent the client, and the jurisdictional question was heard over a number of days.  Thankfully, we succeeded in obtaining a judgement in our favour that the relevant jurisdiction was the local Australian court.  Thankfully, faced with the prospect of fighting a significant legal battle in an Australian court, the supplier sought to negotiate a settlement of all outstanding legal matters, and our client achieved its objective (albeit at significant cost in time and money).

Lessons

  • A bad contract is a bad deal – Never use contracts sourced from the internet (or another source) for a different industry (or even for your own industry). Not only could it be a breach of copyright, but it is unlikely that it contains terms and conditions specific to your arrangement.  In this example, the supply contract was lacking in the most basic areas.  We are often asked to prepare contracts with the qualification of “keep it simple, no more than a page”.  While we would all like a simple contract, if it doesn’t contain the basics required to adequately protect the parties it is barely worth the paper it is written on.
  • Small things matter – A lot of people gloss over what lawyers call ‘boilerplate clauses’. They sit at the end of contracts often under a ‘general’ heading, after all the more interesting matters.  Jurisdiction is often one of those clauses, and barely raises an eyebrow.  As can be seen in this case, the entire matter hinged on the jurisdiction clause (or in this case the absence of one).  All clauses matter and should be given the attention they deserve.
  • Lawyers may not be cheap, but we are be valuable – In this case, the parties thought they would save a few dollars by using something they found on the net. Given it was ultimately a multi-million deal crucial to the production of a significant product line, not getting the lawyers to check the contract is a false economy, and ultimately cost the client a significant sum.  Even if the client has asked a lawyer to review what they had downloaded from the net (which is never a good situation, but happens), any lawyer worth their salt would have immediately identified the deficiencies.

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