I’ve heard suppliers may include consequential loss within their contracts. For retailers, this might seem too good to be true,but what are the pitfalls of this kind of agreement?

Consequential loss opens the door for retailers to claim monetary compensation if a supplier breaches a contract in delivering goods and services, such as lateness in providing goods or services, even if it isn’t their fault directly.

This already appears in supplier contracts in industries such as the building trade, and is being discussed more and more in the retail sector.

Alistair Stewart, director at marketing firm Bezier, says: “It’s industries that have been hit hardest by the economic slowdown where it’s becoming more prolific - pushed by struggling suppliers desperate to stand out from competition.”

While in theory consequential loss appears to offer advantages for businesses and their suppliers - retailers will have a relationship with a highly motivated supplier - Stewart says that it has numerous pitfalls the retailers might want to avoid.

“Experience tells us that suppliers working to a contract full of financial liabilities are often doomed to failure and, in many cases, litigation.” He says it’s better for retailers and suppliers to set realistic targets at the beginning and build trust. “Retailers should judge suppliers on their expertise and knowledge to successfully handle the job in hand, rather than on their desperation for the business and willingness to be sued.”

He adds: “As is often the case in other industries where consequential loss is used, the only winners from such arrangements will be the lawyers.”