A Big Customer Sent Us Its Contract: What an SME Supplier Should Check Before Signing

The core answer

A large customer's standard contract is written to protect the customer. That is normal, and it is not a reason to refuse the work. But a small supplier who signs without reading can end up with payment that depends on acceptance the customer controls, penalties and deductions with no ceiling, and liability that is unlimited for the supplier and limited for the customer.

The rule (Thai law). The Civil and Commercial Code lets parties agree a penalty for late or defective performance (section 379), allows a court to reduce a disproportionately high penalty (section 383), and allows two parties who owe each other due debts of the same kind to set them off (sections 341 and 342). The Unfair Contract Terms Act B.E. 2540 section 4 says that a term in a standard-form contract that gives the drafting party an unreasonable advantage is enforceable only to the extent fair and reasonable.

Our practical view. Do not plan on a court fixing the contract for you later. Read the document once for the money (when you are paid, what can be taken off), once for the risk (penalties, liability, indemnities, warranty), and once for the exit (termination, acceptance, ownership of what you deliver). Then redline the five or six points that matter and ask for them in writing.

For company set-up, procurement documents, VAT and withholding tax, see when a big client requires you to have a company. This guide is only about the clauses.

1. How are we paid, and what triggers payment?

Check the payment clause before anything else.

• Payment date. Is it a fixed number of days from invoice, or from "acceptance", "approval" or "receipt of a correct tax invoice"? A date tied to a step the customer controls can move indefinitely.
• Acceptance. Who accepts, by what test, and what happens if the customer does not respond? Ask for a deemed-acceptance rule (for example, no written objection within an agreed period means accepted).
• Partial acceptance and milestones. If the job is long, ask for staged invoices so you are not financing the whole project.
• Late payment. Ask for a late-payment consequence (interest on the unpaid amount, or the right to pause work). If the customer will not agree, at least ask that your own late delivery and its late payment be treated the same way.

If a customer later does not pay a valid invoice, see unpaid invoices from business customers.

2. Penalties and liquidated damages

A penalty clause (เบี้ยปรับ) says the supplier pays a stated amount if it delivers late or performs badly. Section 379 of the Civil and Commercial Code recognises such a clause. Section 383 lets the court reduce a penalty that is disproportionately high to a reasonable amount, and in deciding what is reasonable it looks at all of the creditor's lawful interests, not only the financial ones.

That is a safety net, not a plan. A reduction depends on the facts and needs a dispute. Before signing, ask:

• Is the penalty tied to a real, measurable delay or defect?
• Is there a cap, such as a share of the order value?
• Is there a grace period, and is the supplier excused where the customer caused the delay (late drawings, late access, late sign-off)?
• Is the penalty the customer's only remedy for that delay, or can it also claim damages for the same event?
• Can the customer deduct the penalty from your invoice automatically (see the next section)?

3. Set-off and deductions from invoices

The rule (section 341, 342). If two people owe each other debts of the same kind, and both debts are due, each can be released from the debt by set-off up to the matching amount, unless the nature of one of the debts does not allow it. Set-off is made by a declaration of intent to the other side, and cannot carry a condition or a time limit. Money owed for a lawful reason on each side is the usual case. Later sections add limits, for example a claim that the other side can still contest cannot be set off (section 344), so check them if a debt is disputed.

The customer's contract often goes further than the Code: it lets the customer deduct "any amount the customer considers it is owed", from "any invoice", including amounts owed under other contracts. That can turn one disputed claim into a hold on every payment.

Ask for these limits:

1. Deductions only for amounts notified in writing, with the reason and the calculation.
2. A right to dispute the deduction within a stated period, with the undisputed part of the invoice paid on time.
3. No deduction for claims under other contracts.
4. Any deduction counts only against sums that are due.

4. Liability caps and indemnities

Look for the one-way clause: the customer's liability is capped or excluded, and the supplier's is open-ended. Also check:

• Cap on the supplier's liability. A sensible starting position is an overall cap linked to the fees under the contract. Agree your own number with your adviser. The customer will usually want some items outside the cap, such as fraud, intentional misconduct and breach of confidentiality; try to keep the list short and explicit.
• Indirect and consequential loss. Lost profit and lost business of the customer can dwarf the order value. Ask for them to be excluded for both sides.
• Indemnities. An indemnity "for any claim arising from the goods or services" shifts the customer's own mistakes to you. Limit it to claims caused by your breach, require prompt notice and give you control of the defence.

How far a cap can go under Thai law is covered in MSA and SLA for monthly service contracts, so we do not repeat it here.

5. Warranty, defects and acceptance testing

• How long is the warranty, and from what date: delivery, installation, acceptance or go-live? A period that runs from "final acceptance" that the customer controls can be open-ended.
• Is the remedy repair or replacement within a stated time, with refund only as a last step?
• Does the customer have to notify defects in writing, and do you get a chance to inspect?

6. Termination for convenience and exit

Large customers often keep a right to end the contract or an order for any reason on short notice, while the supplier cannot. If you buy stock, hire staff or reserve capacity for the customer, ask for:

• a minimum notice period, or payment for work done and materials ordered up to the date of termination;
• a buy-back or payment for custom stock;
• an equal right for the supplier to terminate on reasonable notice for non-payment.

Section 4 of the Unfair Contract Terms Act lists, among examples of terms that may give an unreasonable advantage, terms that let one side end the contract without good reason or not perform without good reason. That is a possible argument later, not a clause you should accept now.

7. Who owns what you deliver?

For custom work, software, designs, drawings or moulds, check:

• whether ownership passes on delivery or only on full payment (ask for the second);
• whether the customer gets a licence to your pre-existing tools, templates and know-how, and whether that is limited to using the deliverable;
• whether your own confidential information and know-how stay yours;
• whether the customer can use what you built to find another supplier without paying for it.

8. Quotation, PO and master agreement: which terms win?

A common pattern: you send a quotation, the customer sends a master agreement, and then a PO arrives, each with its own terms. We do not rely on a statutory rule to settle which one prevails, because the answer depends on what each document says and what the parties actually accepted. The practical rule is to decide it in writing.

1. Put an order of precedence clause in the master agreement: for example, the signed master agreement first, then the agreed SOW or order, then the quotation.
2. State that pre-printed terms on a PO, invoice or delivery note do not apply unless a person authorised by the supplier signs them.
3. If there is no master agreement, write on your quotation "these terms apply to any order" and have the customer accept it before the first order.
4. Read each PO when it arrives. Check delivery date, price, payment term and any new penalty or return clause. Do not start work on a PO whose terms you have not read.

9. Does the Unfair Contract Terms Act help?

Section 4 of the Unfair Contract Terms Act B.E. 2540 covers, among other contracts, a standard-form contract (สัญญาสำเร็จรูป). A term that gives the party who set the form an unreasonable advantage binds only as far as it is fair and reasonable in the circumstances, and doubts in a standard form are read in favour of the party who did not draft it. Its examples include terms that exclude or limit liability for breach, terms that let a party end the contract without good reason, terms that let a party perform late or not at all without good reason, and terms that increase the other side's burden after signing.

Treat this as a back-up argument only. Whether your contract is a standard form, and whether a term is unfair, is decided on the facts, and a dispute is slow and uncertain. The time to protect yourself is before signing.

10. How can a smaller party negotiate?

• Redline the five or six clauses that matter most instead of the whole contract: payment and acceptance, penalties and deductions, liability cap and indemnities, warranty, termination, ownership.
• Offer a solution, not only an objection. A cap, a grace period, a notice period and a dispute procedure are easier to accept than a deleted clause.
• Ask for a schedule. Put commercial terms (price, delivery, payment cycle, service level) in a schedule that you can change without re-opening the whole contract.
• Know your walk-away points. If the customer will not move on unlimited liability or deductions from unrelated invoices, decide whether the order is worth the risk.

Customers often accept some changes, so it is reasonable to ask. We cannot promise that any particular customer will agree.

11. Checklist before you sign

• Payment date, acceptance test and deemed-acceptance rule are written down.
• Penalties are capped, tied to real delay, and excused where the customer caused it.
• Deductions need written notice and reasons; undisputed amounts are paid on time.
• Liability cap exists for you; indirect loss is excluded for both sides; indemnity is limited.
• Warranty period runs from a date you can verify.
• Termination for convenience includes notice or payment for work done and stock.
• Ownership of deliverables and your own tools is clear.
• Order of precedence between agreement, PO and quotation is stated.
• Signing authority is checked: the person signing for your company can bind it.

For a general contract checklist, see our news post on the business contract checklist.

Further reading

• When a big client requires you to have a company
• MSA and SLA for monthly service contracts
• Unpaid invoices from business customers
• Contract review and approval without a legal department

A big customer's contract is negotiable at its edges: fix the payment, penalty, deduction, liability and exit clauses before you sign, not after a dispute starts.

We review customer and supplier contracts for Thai SMEs, mark up the clauses that matter and prepare demand letters if a customer does not pay. For an initial consultation, call +66 92 254 2045 or send us the details. See also contracts and documents, legal retainer 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.