The Duty of Care in Supply Contracts

Supply contracts are one of the most critical models of commercial relationship keeping companies' production and sales processes running. In practice, however, serious disputes can arise over late delivery, defective performance, breaches of quality standards, problems originating with sub-suppliers, and knock-on losses. At the centre of "breach of contract" allegations, one question is usually decisive:

Did the supplier (and/or the buyer) act in accordance with its duty of care throughout the contractual process?

In this article we look at what the duty of care means in supply contracts, where it takes concrete shape, and how the parties can reduce their risks through the way the contract is drafted. Our perspective throughout is that of Turkish law.

1. What Is the Duty of Care?

At its most general, the duty of care is the obligation to take the attention and precautions necessary to prevent a foreseeable harm or infringement of rights within the scope of the activity one carries on.

Although this obligation may look abstract in theory, it takes very concrete form in supply relationships:

• compliance with the production plan;

• keeping to deadlines;

• operating quality-assurance processes;

• establishing control and audit mechanisms; and

• foreseeing risks and giving timely notice of them.

The duty of care is assessed to a higher standard in relationships between professional businesses in commercial life in particular. Under the "prudent merchant" approach of Turkish commercial law, the parties are expected to foresee and manage risks in advance.

2. Why Does the Duty of Care Matter in Supply Contracts?

Beyond classic sale-and-purchase contracts, supply contracts are often relationships that:

• give rise to a continuing obligation;

• are long-term;

• involve mutual trust and cooperation;

• depend on technical and operational processes; and

• directly affect the production line.

In models such as "just-in-time" (JIT) supply in particular, the supplier's role is not only to deliver goods but also to keep the production chain running without interruption. In these systems, features such as frequent, small deliveries and the shift of quality control to the supplier call for more intensive coordination between the parties. For this reason, in supply contracts the duty of care is not limited to "defect-free delivery"; it also carries a process-management and risk-management dimension.

3. How the Duty of Care Appears in Supply Contracts

Although supply contracts often look like a "sale" relationship in practice, continuing and repeated deliveries in particular — where the parties become integrated into each other's business processes — call for a more intensive standard of coordination and care. This becomes clearer in just-in-time systems: because the JIT model works with low stock, the supplier must continuously maintain delivery and quality standards. The duty of care can therefore take concrete shape in the following areas.

3.1. Managing Deadlines and Preventing Delay

In supply contracts, delay often does not remain a simple "missed delivery date"; it can have a direct effect on the buyer's production line, on the deliveries the buyer has committed to, and on its relationships with third parties. For the supplier, the duty of care therefore requires:

• realistic scheduling of deadlines;

• coordinated management of production and logistics processes;

• immediate notice the moment a risk of delay arises; and

• planning corrective steps to reduce the impact of any delay.

Here, an allegation of breach of the duty of care is usually not limited to "whether a delay occurred"; it is assessed by reference to whether the delay was preventable and whether the party foresaw and managed the process.

3.2. Quality Standards, Technical Specifications, and the Expectation of Defect-Free Performance

Quality disputes in supply relationships generally stem from two problems:

• the technical criteria not being sufficiently clear in the contract; and

• the absence of an acceptance/rejection mechanism by which the product's conformity can be measured objectively.

In this context, the duty of care requires the supplier to:

• manufacture in accordance with the technical specification;

• keep records ensuring product traceability (batch/serial/lot);

• standardise its quality-control processes; and

• inform the buyer in situations that give rise to the possibility of a defect.

In JIT systems, the shift of quality-control responsibility to the supplier effectively raises the standard of care, because the buyer minimises its stock and inspection processes in reliance on the product being supplied "ready for use".

3.3. Supply-Chain Management and Risks from Sub-Suppliers

In practice, suppliers may use sub-suppliers or subcontractors at certain stages of production. Disruptions originating with a sub-supplier, however, often do not remove the supplier's liability, because what is critical for the duty of care is the selection of the sub-supplier and the supervision of the process.

In this respect, the duty of care requires the supplier to select its sub-supplier by objective criteria, to verify the sub-supplier's production and logistics capacity, and to set up a control mechanism enabling the process to be monitored.

Whether the use of sub-suppliers is free or conditional between the parties, whether the buyer's approval is required when the sub-supplier is changed, and how liability is to be determined, all play a decisive role in the event of a dispute.

3.4. Information, Risk Warning, and Process Communication

In supply contracts, the duty of care includes not only "performing the obligation" but also foreseeing and managing risk-creating facts when they arise and informing the other party.

For example, situations such as:

• a raw-material supply problem;

• a production breakdown;

• a logistics obstacle; or

• a change in technical standards,

may look as though they arose "at the last minute", yet foreseeability and timely warning can still be assessed by reference to the party's process management and records. For this reason, it is important in supply contracts to design the notice and communication arrangements in a "provable" way (for example, written notice, email, registered electronic mail (KEP), and so on).

4. The Question of Proof: Where Disputes Are Actually Resolved

Theoretical debate in supply disputes usually begins with the question "was there due care?"; but the great majority of cases are shaped by the question of what evidence can be used to prove it. Two categories are especially important in such disputes.

4.1. Process Evidence (Operational Records)

• deadline plans and revision records;

• dispatch notes and delivery records;

• production schedules;

• quality-control reports;

• email correspondence and warning messages; and

• non-conformity reports.

4.2. Technical Evidence (Conformity/Standardisation)

• technical specifications and sample-approval documents;

• certificates and test reports;

• product-traceability (lot/serial) records; and

• independent inspection/expert reports.

In assessing the duty of care, the danger or importance of the situation and the standard of conduct are determined by objective criteria. Designing the contract so that it builds up the evidence set available to the parties therefore serves a dispute-preventing function.

5. Making the Duty of Care "Workable"

In practice, a significant share of supply contracts are set up on a mere "goods – price – delivery" template; because the deadline, quality, and compensation regime is not clearly regulated, the parties end up in broad interpretive arguments based on general provisions when a dispute arises.

This risk can be reduced by provisions such as the following.

5.1. Deadline and Delay Regime

• delivery-schedule / order-plan annexes;

• notice period in the event of delay;

• a make-up delivery / substitute-supply mechanism; and

• delay compensation and/or a penalty clause.

5.2. Quality and Acceptance/Rejection Mechanism

• technical specification and acceptance criteria;

• sample approval and change management;

• the period and method for notifying defects; and

• a return/re-manufacture procedure.

5.3. Sub-Supplier and Chain Risks

• conditions for using sub-suppliers;

• approval when a sub-supplier is changed;

• liability for breaches originating with a sub-supplier; and

• an audit right.

5.4. Notice, Record, and Evidence Arrangements

• a written-notice requirement;

• which communication channel is valid;

• a reporting obligation in the event of delay or defect; and

• retention of evidence in the event of a dispute.

6. Conclusion

In supply contracts, the duty of care is a standard of conduct that is not limited to "delivery" or "defect-free goods"; it also encompasses deadlines, quality, notice, and supply-chain management. In systems such as JIT in particular, because the supplier–buyer relationship calls for more intensive coordination, the scope of the duty of care expands in practice. A significant part of disputes is resolved not so much on the presence or absence of due care as on whether the parties were able to document their processes and whether the contract set up that documentary framework. For this reason, drafting supply contracts with a measurable and provable system that clarifies the deadline, quality, notice, and liability regime can increase the commercial security of both the supplier and the buyer.

This article provides general information on Turkish law and does not constitute legal advice. For advice on a specific matter, please contact OKAB — Oğuz Kara Avukatlık Bürosu.