Contract manufacturers, system builders and many small distributors grow up around a single large customer. In the first year it looks like good news: steady orders, no need to find new customers, and capacity fully used. Over time, though, prices are pushed down, payment terms get longer, and the business has almost no bargaining power, because if this customer goes, most of the revenue goes with it.
This guide does not say you should stop selling to a large customer. A good large customer can be the foundation of a business. But owners should know how dependent they are, what a contract can protect, and which clauses close off their own ability to diversify, before the customer decides to change its plans.
The core answer
The risk of relying on one customer can be reduced in two ways: commercially, by continuously finding new customers and channels, and contractually, by making the large customer commit to what you have invested, such as notice before termination, minimum volumes, buy-back of stock and ownership of moulds. Clauses that ban sales to others should be reviewed and negotiated with care, because they close off diversification.
The rule (Thai law). Thai law lets parties agree terms widely, but in a standard-form contract, section 4 of the Unfair Contract Terms Act B.E. 2540 provides that a term giving the drafting party an unreasonable advantage over the other is enforceable only to the extent it is fair and reasonable in the circumstances. Section 57 of the Trade Competition Act B.E. 2560 concerns unfair trade practices, and the Office of the Trade Competition Commission has guidelines for certain businesses. A penalty used in a contract is governed by section 379 of the Civil and Commercial Code, and the court may reduce it under section 383.
Our practical view. Do not wait for the law to fix the contract later. Those arguments take time, are uncertain, and do not help a business whose cash runs out before the case ends. Your bargaining power is greatest before you invest more, for example before buying machinery or ordering moulds for the customer. Use that window to negotiate protective clauses.
1. Measuring how dependent you are (without needing neat figures)
No complicated formula is needed. Ask these questions directly and write the answers on paper.
| Question | Warning sign |
|---|---|
| If this customer disappeared tomorrow, how many months could the business still pay salaries? | A very short answer |
| Does most of your revenue or profit come from this customer? | Yes |
| Does this customer use most of your capacity or workforce? | Yes |
| Do you have machinery, moulds or stock that can be used only for this customer? | Yes |
| Does the customer set your prices, or do you propose them? | The customer sets them |
| Does the customer hold the brand, the end-customer data or the rights in the work? | Yes |
| Does this customer pay later than others, and you do not dare chase it? | Yes |
| Is the customer's decision-maker one person whose replacement would change the relationship? | Yes |
If you answer yes to several, you are highly dependent. That is not a reason to panic, but it means you need the following plans, both contractual and commercial.
Produce a quarterly report showing the share of revenue and profit by customer. Your bookkeeper can easily provide it from existing data. Compare it with the previous quarter to see whether dependence is rising or falling.
2. Contract terms that protect what you have invested
The biggest risk is not losing the customer but losing the customer after you have invested for it. Clauses to ask for:
2.1 Notice before termination
Large customers often reserve the right to cancel orders or terminate the contract without cause and on very short notice. Ask for:
- Advance notice long enough to adjust your workforce and find replacement customers. The more you have invested, the longer it should be.
- Payment for work done and materials ordered up to the date of termination.
- Equal rights, so that the seller can also terminate on reasonable advance notice.
A clause that lets one party alone terminate without reasonable grounds is one of the examples that section 4 of the Unfair Contract Terms Act addresses. It can be used in negotiation, but it should not be treated as a reason to sign.
2.2 Minimum volumes and order forecasts
A framework contract that does not guarantee volume usually leaves the seller carrying all the risk. If you must reserve capacity or stock, ask for:
- A minimum purchase volume per period, with a consequence for ordering less, such as paying for the capacity you reserved.
- Forecasts of future orders that the customer sends periodically, with the customer responsible for materials the seller orders on the strength of those forecasts.
- A provision that, when the customer cancels or reduces an order, materials and work in progress made specifically for the customer must be bought back.
2.3 Buy-back of stock
When you buy raw materials or make parts specific to the customer, provide that if the customer terminates or changes the design, it must buy the remaining materials and work in progress at an agreed price. Otherwise the stock becomes your cost. The result is money that should go to suppliers tied up in goods you cannot resell. For the link to liquidity, see profitable but short of cash.
2.4 Ownership of moulds, tools and jointly developed work
Who pays for the moulds, who owns them, and who can take them to another manufacturer must be written down before production starts. If the customer pays for the moulds, it will usually want to own them and be able to move them to another factory. You should ask the customer to pay the actual mould cost or to pay it in instalments through the price, and make clear that your process rights and specific know-how remain yours. See switching OEM factory, which explains this from the commissioning party's side.
2.5 Payment terms and deductions
Large customers often control the payment date through inspection and approval, which makes a seller dependent on one customer afraid to chase. The terms to adjust are a fixed payment date, an inspection period with a time limit, and limits on deductions, as explained in the guide to checking a large customer's contract. If the customer really does not pay, see unpaid invoices.
3. Exclusivity clauses and restrictions that close off diversification
Some contracts with large customers contain terms that directly conflict with finding other customers.
- Exclusivity. A ban on producing or selling similar goods or services to anyone else.
- Right of first refusal. New products must be offered to this customer first.
- Most favoured customer. You must give it a price no higher than any other customer's, which also pushes down the price you can charge others.
- No contact with end customers. A ban on selling directly to the customer's buyers.
- A ban on serving the customer's competitors.
These restrictions are not automatically unlawful. The parties have freedom to agree. But their effect on a smaller seller is severe. Ask:
- How wide is the restriction? Does it cover every product, or only goods made for this customer?
- What is its duration and territory, and does it continue after the contract ends?
- What does the customer give in return that is worth the restriction, such as guaranteed purchase volume or compensation?
- If the customer cuts its orders, does the restriction still apply? Ask for it to lapse if the customer orders below the agreed volume.
- What happens if you breach it: a penalty or a right to terminate?
Two bodies of law are relevant. The first is the Unfair Contract Terms Act B.E. 2540, under which a term in a standard-form contract that gives an unreasonable advantage is enforceable only to the extent it is fair and reasonable in the circumstances. The second is trade competition law, which some kinds of competition-restricting agreements may fall within if they affect competition in the market. Whether they do depends on market power and the facts. We should not conclude that any restriction is or is not unlawful without reviewing the contract and the actual market.
A further point to watch is the penalty for breaching the restriction. The court may reduce it under section 383 if it is disproportionately high, but you should not sign in the hope of relying on that.
4. When a large customer uses bargaining power excessively: how far the law helps
When a customer presses on price, delays payment, makes unjustified deductions or changes terms midway, sellers often ask whether the law prohibits it. The answer has several layers.
- The contract. If the contract provides for it, the customer may be entitled to do it. The problem therefore lies at signing.
- The Unfair Contract Terms Act B.E. 2540. It applies to standard-form contracts and to terms that give an unreasonable advantage, so the court enforces them only to the extent fair.
- The Trade Competition Act B.E. 2560, section 57. It concerns unfair trade practices, and the Office of the Trade Competition Commission (OTCC) publishes guidelines for certain types of business, such as wholesale and retail. A person who considers themselves affected must see whether the conduct matches the guidelines and has the effect the law requires. Check the latest notifications and guidelines on the Office's website before relying on them.
Neither route is a main tool. Both take time, need evidence, and may end the relationship with the customer. A seller dependent on one customer is usually unwilling to take that risk. A more effective approach is to build bargaining power through other customers and good clauses from the start.
5. Diversifying without breaching the contract
The recommended order:
- Read the existing contract first. Check for bans on selling to others, bans on contacting end customers, confidentiality clauses and the customer's rights in designs and moulds, before approaching new customers.
- Separate what is yours from what is the customer's. Your know-how, processes and general tools can be used for others, but the customer's designs, confidential information and moulds cannot.
- Deliberately reserve part of your capacity or workforce for other customers, even if the large customer asks for all of it.
- Find new customer groups that use the same capability, or expand into supplementary services. See choosing B2B customer segments, which compares government, large corporations, SMEs and overseas customers.
- Change the revenue model, for example monthly contracts or after-sales services, so that revenue is predictable. See the business model guide for SMEs.
- Set targets and track them. Write the diversification target down and review it every quarter.
If the large customer is a distributor or partner through which you sell, and the relationship has to end, see terminating a distributor agreement.
6. When a large customer cuts orders or asks to change terms
Prepare in advance for this to happen. The order of response:
- Ask for it in writing. Ask the customer to state the change and the reason by email or letter.
- Check the contract. Is the customer entitled to do this under the contract? Is there a notice period, a minimum volume or a stock buy-back?
- Gather the commitments tied up. Purchase orders already issued, materials ordered, work in progress, moulds and employment contracts tied to this customer.
- Calculate the point at which the new terms still make a profit before you answer.
- Offer trade-offs, such as a reduced price in exchange for a minimum volume or a longer contract term.
- Carry out the diversification plan immediately, without waiting for the revenue to vanish.
- If there is a breach, for example cancellation without the notice the contract requires, or non-payment for work already done, send a notice under the contract and seek advice. See demand letters.
Be careful not to act in a way that gives the customer grounds to terminate, such as slowing deliveries in retaliation without any right under the contract.
7. Example protective clause
Illustration only; it must be adapted to the actual transaction.
Clause ... Termination and outstanding obligations
(1) A party wishing to terminate this contract without any breach
must give written notice of at least ... days.
(2) On termination, the Buyer agrees to pay (a) for goods and work delivered or completed,
(b) for materials and work in progress that the Seller ordered or produced under
purchase orders or forecasts sent by the Buyer, at documented cost, and (c) the
unrecovered part of the mould cost in the attached document ... The Buyer is
entitled to receive whatever it has paid for.
(3) The restriction on selling to others under clause ... lapses if the Buyer orders
below the minimum volume in two consecutive periods.
This example is no guarantee that any customer will accept it. The real effect of each clause depends on bargaining power and the facts of the business.
8. Checklist for reducing dependence on one customer
- Prepare a report of revenue and profit share by customer, and review it every quarter
- Have answered how many months the business can survive if the large customer disappears
- The contract has a reasonable notice period before termination, and payment for work and materials ordered
- There is a minimum purchase volume or compensation for reserved capacity, if you invest specifically for the customer
- There is a clause for buying back stock and work in progress made specifically for it
- Ownership of moulds, tools and each side's know-how is clearly written down
- You have checked for a ban on sales to others, a right of first refusal or a most favoured customer clause, and negotiated their scope
- A fixed payment date, an inspection period with a time limit, and limited deductions
- Part of capacity or workforce is reserved for other customers
- There is a plan to approach new customer groups that does not breach the existing contract
Further reading
- Checking a large customer's contract before signing — clauses on payment, penalties, liability and termination
- When a big client requires you to have a company — for freelancers and small operators who need to change their business form
- Unpaid invoices from business customers — when a large customer does not pay
- Terminating a distributor agreement — when a trading relationship ends
- Choosing B2B customer segments — options for diversifying customer groups
- Switching OEM factory — ownership of moulds and formulas
Having a large customer is not the problem. The problem is investing for it without protective clauses. Negotiate notice periods, minimum volumes and stock buy-back before you invest, and diversify your customers at the same time.
We help SMEs review contracts with large customers, identify the clauses to change, prepare proposed amendments, and prepare demand letters or notices when there is a breach. For an initial consultation, call +66 92 254 2045 or send us the details. See also contracts and documents and demand letters.
This guide is published by Suwanvara Law Firm — a Khon Kaen law firm established in 1986. General information only, not legal advice on a specific matter.
