Contract structuring: procurement risk in times of crisis

Pandemics, wars and climate change lead to supply bottlenecks and shortages of raw materials. This also raises many legal questions regarding the drafting of contracts: Who bears the risk for goods that have already been sold if an upstream supplier cannot or will not deliver? Can the seller contractually adjust his obligation to deliver or his liability for damages vis-à-vis the buyer? How should he actually structure the contract with his supplier?

Who bears the procurement risk?

In case of a purchase contract, the seller is obliged to hand over the sold goods to the buyer and to provide him with their ownership. This can be difficult if the seller is just an intermediary and the item is not yet even in his possession. Especially in cases where he still has to purchase the item himself, the question often arises as to who bears the risk of procuring the goods.

Usually, in case of sold goods, this is a so-called "generic obligation". Here, the seller does not owe a specific individual item (examples of this would be the sale of a specific used item or of individual items), but rather an item from a (whole) type of goods. The type of goods is made up of items with the same characteristics. The procurement risk in the case of a generic obligation is generally borneby the seller. By concluding the contract, he declares that he is able to procure the corresponding goods of the agreed type.

However, in times of crisis in particular, the distribution of the procurement risk is critical and has a massive impact on the business of both contractual parties. From the seller's perspective, it is possible to exclude or at least reduce this risk initially borne by him, both in individual contracts and, to a limited degree, also in general terms and conditions. On the one hand this can be done by specifying or extending the deadline for performance and, on the other, through contractually agreed rights of withdrawal in the form of so-called self-delivery clauses.

Non-binding performance deadlines to be included in the contract

The seller can reduce its procurement risk by keeping the performance date open. To this end, he can, for example, set a non-binding performance deadline that is extended in the event of delivery difficulties.

The determination or extension of performance deadlines is subject to certain conditions, at least in GTCs. A clause, if it is considered to be a general business condition, is impermissible if it sets deadlines that are unreasonably long or too imprecise. This is especially the case in business transactions with consumers, but essentially also in purely entrepreneurial business transactions.

Different variants of permissible performance deadline clauses have developed in case law. The core of these clauses is a set performance period, possibly non-binding, which can be extended under certain circumstances if performance is not provided on time.

"Figurative" grace periods

For better practicability in legal transactions, delivery times may be given as "approximate deadlines". Although the determination of delivery dates is fundamentally binding, a clause that grants the user a further specific performance period after the expiry of an initially "non-binding" deadline is permissible. This second deadline must be binding and postpones the due date of the performance.

The permissible length of such a "grace period" depends on the original deadline and must be reasonable as a whole. For example: in the case of an individually assembled fitted kitchen it is permissible to initially describe a delivery date as non-binding. This is subject to the proviso that, once the deadline has been surpassed by four weeks, the customer may set another "reasonable" delivery deadline. This must be binding for the seller. However, it does not have to be specified in greater detail in the clause. In contrast, the GTCs of a furniture dealer, according to which he was allowed to exceed a non-binding delivery date by three months, were considered invalid.

Extension clauses

Instead of "figurative" grace periods, extension clauses can also be included in the contract between the buyer and seller. Extension clauses require that a predefined condition or specific event must occur in order to trigger the extension of the deadline, such as disruptions in the seller's business operations or those of the upstream supplier for which the seller is not responsible, or extensions of the construction period.

The deadline cannot be extended if the seller himself is responsible for the occurrence of the event or condition. However, not every extension of the deadline on grounds of an event for which the seller is not responsible is automatically permissible. This is because the purchaser’s interests also have to be reasonably taken into account. After all, any permissible extension of the deadline curtails his right to withdraw from the contract for this period.

Here, the precise wording is crucial: First of all, the seller may not be responsible for the occurrence of the predefined event or condition. Secondly, the purchaser may only be bound for a period of time that is reasonable in terms of subject matter, period and time of performance of the contract.

Hence, the agreement to deliver as "as soon as the goods are available again" is not permissible in GTCs. Rather, the period must be determinable by the contracting party and reasonable in length. Under certain circumstances, however, it may be permissible in business transactions to first set a reasonable deadline once the seller is unable to perform.

Protection of the seller through self-delivery clauses

Unlike performance time clauses, so-called self-delivery clauses affect not only the due date of performance and thus the time of performance, but also the performance obligation per se, i.e., the obligation as seller to actually fulfil the contract.

Such a clause grants the seller a contractual right of withdrawal if its own supplier cannot or will not deliver and the seller is therefore unable to fulfil its contract with the buyer. However, such clauses are subject to strict conditions if they are to be valid.

Validity of a self-delivery clause only in case of a "congruent" covering transaction

The most important prerequisite for the validity of a self-delivery clause is the conclusion of a "congruent" covering transaction. This means: On the day of the conclusion of the contract, the seller himself must have a supply agreement with his supplier, according to which, if all goes smoothly, he can supply his customer with the same certainty as he promised the customer.

The decisive factor is that the contract with the supplier was concluded in such a way that it coincides with the contractual modalities of the purchase contract with the seller’s own customer in terms of the type of goods, their quantity, quality and delivery date. If, for example, a delivery period of six months has been agreed with the buyer, a covering transaction with a supplier who - with in reference to delivery bottlenecks - intends to deliver within one year at the latest, would not be a congruent covering transaction.

The congruence of the covering transaction depends solely on the contractual commitment of the supplier. It is therefore advisable to have the contract modalities with the supplier mirror the contract with the buyer and thus also pass on delivery deadlines congruently.

If the seller does not conclude a congruent covering transaction, he assumes the procurement risk and bears the blame in the event of non-delivery. As a result, the purchaser may hold the seller in default, possibly through a previously required reminder, and may be entitled to compensation for damages.

Further prerequisites of the self-delivery reservation

A reservation of self-delivery can only be validly agreed if the failure to deliver is based on a future and uncertain risk and not on a foreseeable event.

The decisive factor is that the seller has literally been let down by his supplier and is therefore not responsible for the non-delivery. In particular, the seller may not invoke the reservation of self-delivery if it has not carefully selected the supplier. In contrast, the seller is not liable for fault on the part of the supplier, as the supplier is not a vicarious agent of the seller.

If there is a delay in performance, the seller is not automatically released from his obligation to perform in the case of agreed self-delivery clauses. He must actively declare his withdrawal from the contract.

Conclusion

In principle, the seller is responsible for ensuring that the goods he sells can be delivered on time. However, there are some contractual ways to reduce this risk.

In case of performance deadlines, one must ensure, in particular in general terms and conditions, that these deadlines are not excessively long and that they are also clearly determinable. An extension of the delivery period is possible within limits, provided that the seller is not at fault for not delivering on time. Also permissible are initially non-binding performance deadlines that become binding after a reasonable subsequent performance deadline has been set.

In case of self-delivery clauses that exempt from performance, which can provide protection in the event of the supplier’s failure to perform, special attention must be paid to concluding a congruent covering transaction. Contract modalities and delivery deadlines of the supplier should be passed on to the customer accordingly. In this way, if the entrepreneur himself is just a link in a supply chain, he avoids the occurrence of a discrepancy that is to his detriment. If the conditions passed on are legally invalid, however, in case of doubt recourse must be taken against the supplier. In this situation, it is important to secure one's own legal rights in good time.

We advise you on all questions of commercial and distribution law. We also offer special expertise to clients in the following sectors: trade and consumer goods. 

Contact the author Dr. Hanna Schmidt (commercial) directly here.

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