SUPPLY AGREEMENT
WHAT IS A SUPPLY AGREEMENT?
In a supply agreement, a buyer and seller strike a deal. Typically, the seller agrees to meet
the buyer's needs in a particular area, such as computer equipment or raw materials. The
buyer agrees to deal exclusively or mostly with the seller. Locking in the contract can be a
good deal for both parties, but a badly written agreement can cause problems for one or
both parties.
WHY USE A SUPPLY AGREEMENT?
From the buyers' perspective, a supplier agreement guarantees them the goods they need to
purchase at specified times and for a specified price. Whether you need iron ore, premium rye
flour, laptops or copier paper, knowing you have a source available and knowing how much
you'll pay can make budgeting and business planning simpler.
For the suppliers, knowing they have a customer who is committed to buying from them
makes planning easier. If a computer manufacturer, for instance, contracts with a supplier for
500,000 motherboards over the next six months at a set price, the supplier knows they have
an income source locked in. A supplier may offer a discount if the commitment to purchase is
large enough.
SUPPLY AGREEMENT CHECKLIST
The business world is full of disasters because of badly written contracts. Before signing a
supplier agreement contract, both parties should read it over thoroughly to confirm they get
everything on their supply agreement checklist:
Price and payment. Price is an essential part of any supply agreement, but the terms
are just as important. How long does the buyer have to pay? Is it one lump sum or is
a payment plan an option? Who bears the risk of insurance on the shipments?
Quantity. How much do you intend to purchase? Without specific amounts, the
contract might be found unenforceable if buyer and supplier wind up in court.
Duration. Do you want the contract to run for a specific time period or have the
option for either party to terminate it at will? The latter choice gives more flexibility
but also more uncertainty.
Warranties, disclaimers and guarantees. Even if the contract doesn't specify any
warranties, the supplier may be bound by "implied warranties" that come with any
contract. To avoid implied warranties, the supplier should include a specific
disclaimer to that effect.
SUPPLIER AGREEMENT POTENTIAL PROBLEMS
While some companies use standardized contracts or adapt a master supply agreement
template taken from the internet, "standardized" doesn't mean the supplier agreement
couldn't cause problems.
Does the contract commit the buyer to purchase from the supplier? Some templates
only bind the supplier, forcing them to keep the goods on hand without being sure
that the buyer will order them.
Do the warranties suit this particular contract? A master supply agreement
template warranty may include words like "fitness for purpose." Unless the supplier
has designed parts or equipment to the manufacturer's specifications, they can't
know for sure that what they're selling is fit for the buyer's purpose.
Does the purchase and supply agreement commit the supplier to more than they can
manage to deliver? Does it require the buyer to pay for more than they actually
need?
If one party has to concede something, do they get a concession in return? If the
price is higher than the buyer wants, can they get better delivery terms, for
instance?
Does the agreement give the buyer a unilateral right to renew the contract without
negotiation? That can work out badly for the supplier if their costs rise.
How easy is it for either party to terminate the contract?
Sometimes, one party will insist that the master supply agreement template is the
standardized form they use in all their contracts, and they never change it. You can negotiate
changes in a standardized purchase and supply agreement just like any other contract. If you
can't get the terms you want, it's up to you whether to sign or walk away.
SOURCE: https://bizfluent.com/facts-5158253-blanket-purchase-order.html
KEY TERMS IN A SUPPLY AGREEMENT
A supply agreement is an agreement for the sale of goods from one party, the supplier, to
another, the purchaser. Due to the broad scope of industries and businesses that a supply
agreement could apply to, it is vital to ensure that agreement appropriately reflects the
arrangement between both the parties. Often, some of the essential terms will be missing
from the agreement, which can lead to issues for both parties. This article highlights some of
the key terms to look for in a supply agreement, including terms about:
1. product appointment;
2. price;
3. forecasts;
4. order and delivery process;
5. product safety;
6. defects; and
7. title and security interests.
1. Product Appointment Types
A supply agreement may often include a specification as to how the supplier will supply goods
to the purchaser. This may be on an exclusive area or exclusive product basis.
Exclusive Area Exclusive Product
The supply of goods may be on an exclusive basis,
which means the supplier will only supply the
goods to the purchaser named in the contract, in
Should the supplier wish to ensure that the purchaser only
the specified area. For example, Vera Wang
purchase goods from them, they may want to insert a clause
dresses in Australia.
that restricts the purchaser from buying the same or similar
If exclusivity is relevant, the rights of exclusivity
goods from other suppliers. For example, a shop can sell
are usually limited to a specific area. If the
Haigh’s chocolates but no other premium chocolates.
appointment type is non-exclusive, the supplier
may be able to supply the goods to numerous
purchasers within any area.
The product appointment type should be considered thoroughly before drafting the supply
agreement, as it is one of the main clauses that will affect the other obligations of the parties.
2. Product and Price
The supply agreement should provide a precise description of the goods, including:
any specifications, if necessary; and
the price.
This is often an attachment in a separate price list, making it is easy to add products and change
prices by the method agreed in the agreement. The supply agreement should address pricing
mechanisms and reviews, including details about how price changes are calculated.
3. Forecast
A requirement to provide regular forecasts is a useful clause to insert into the supply agreement
for both the supplier and purchaser. The forecast is often about the number of goods that a
purchaser is required to purchase, that is, the minimum purchase order.
Supplier Purchaser
A purchaser may wish to request that the supplier provid
A supplier may wish to request that the purchaser a forecast on the availability of the goods. This will allow
provide them with estimated forecasts of future the purchaser to be aware of the number of goods it can
purchase orders. This will help the supplier plan order from the supplier and whether they will need to
accordingly, allowing them time to manufacture the source other suppliers.
necessary amount. This is particularly common in perishable goods such as
fruits or vegetables.
4. Order and Delivery Process
You should set out the order process clearly in the supply agreement. The order process may be
relatively simple. For example, completing an order form or calling the supplier to make the
appropriate order. The delivery time-frame needs to be clear, and the delivery method needs to
be agreed. For example, if the product needs to be delivered by midday in a refrigerated truck.
Some businesses have specific processes for making orders, particularly if the supplier needs to
liaise with the manufacturer of the goods. Usually, orders made by purchasers should set out:
the number of goods to be ordered;
any preferred dates for delivery; and
the location for delivery.
5. Product Safety
Another important clause to include in a supply agreement relates to product safety. With
regards to product safety, you should make the following considerations:
whether an inspection will occur in relation to the supply of the goods;
if samples of the goods are needed and whether approval is required; or
whether the supplier needs to notify the purchaser of any changes to their
manufacturer.
In addition to the above considerations, the manufacturer needs to provide a guarantee or
warranty that the goods supplied are safe and fit for purpose.
6. Defects
The supply agreement should address what will happen if there is a supply of defective goods.
In many supply agreements, the purchaser often has a certain period in which they can notify
the supplier that they have received defective goods. The outcome will differ depending on the
different arrangements between the parties, and this may include, for example, the requirement
for the supplier to resupply the goods or to provide a refund.
7. Title and Security Interests in the Goods
Both parties should look out for clauses relating to title and security interests in the goods. For
example, many supply agreements do not allow the title of ‘owner’ to pass to the purchaser
until the purchaser pays for the goods. Further, although the purchaser may obtain possession
of the goods, the supplier may still retain their rights concerning the goods. Both parties should:
consider the inclusion of a title and security interests clause in the supply agreement;
and
review the agreement to determine whether it aligns with their interest.
Key Takeaways
The supply agreement is a common contractual arrangement between two parties. Within the
agreement, there are often terms relating to:
1. product appointment;
2. price;
3. forecasts;
4. order and delivery process;
5. product safety;
6. defects; and
7. title and security interests.
SOURCE: https://legalvision.com.au/key-terms-in-a-supply-agreement/
