This article is written by Arushi Agarwal, pursuing Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from LawSikho. The article has been edited by Ruchika Mohapatra (Associate, LawSikho).
Have you ever ordered any products online? Would you like to know how the process works, who are the parties involved from the beginning of ordering the product to the supply of the ordered product? To make this whole chain of the procedure work, various parties get involved in this by entering into an agreement termed as an order fulfilment agreement (“OFA”).
An OFA is a legal contract entered between a product distribution business and a manufacturer or supplier of products to fulfil the demand of orders placed by the customers through an e-commerce website.
There are various steps involved in this process, such as receiving, processing, delivery and returns of the orders placed by the end customers through e-commerce websites.
Parties to an OFA
There are 3 parties involved in an OFA namely;
- The supplier, i.e., the entity which sells/manufactures the products.
- The retailer i.e., the e-commerce websites which take the order.
- The service provider, i.e., the party who provided services to fulfil orders such as Ekart or Delhivery.
The service provider needs to be compensated for the costs incurred for shipping and packaging. The OFA captures these details after the order is placed with the website i.e., the retailer in such agreement. Order fulfilment could be a third-party, such as Delhivery or Ekart, or the process could be company-owned. Websites such as Amazon.com engage third-party logistics providers for the entire process of order fulfilment. They need to enter an OFA clearly demarcating the rights and responsibilities of the parties. The cost and pricing for order fulfilment need to be mentioned under the agreement.
Websites like OLX, Quicker which provide a platform between buyers and sellers do not engage in the logistics of the transactions and hence, they do not need to enter OFAs. In such cases, sellers and buyers need to enter the shipping arrangement themselves. You must have noticed that when you book some furniture on OLX, you have to go and pick up the furniture from the seller’s house. Websites like eBay provide larger sellers with the option of order fulfilment services. The same is not extended to their smaller sellers.
When do parties enter an OFA?
This is a tripartite agreement i.e., an agreement or contract between three parties. An OFA is entered among the three parties to fulfil the needs of the customers. As soon as the customer’s order the product all the 3 parties, i.e., supplier, retailer and service provider get into work.
- As a supplier, we need to enter an OFA with the retailer to showcase our products to e-commerce websites and give customers an option to order those products.
- As a service provider, we need to enter an OFA with the retailer for taking the products from the supplier/s by setting out the terms of the agreement about the damage, risk of the product etc. and finally delivering it to the ned customer and to return the product/s to the supplier/s in case of default of product/s through a retailer.
Essential clauses to an OFA
The essential clauses to an order fulfilment agreement are discussed below:
Scope of the agreement
This clause ensures that the supplier, the retailer, and the service provider have agreed to establish an online store to carry out the transactions of the products ordered by the customer
Functions of the three parties
- The supplier will manufacture the product which is ordered by customers and make it available for customers. These products will be listed on the retailer’s website.
- The retailer will be responsible for running the website and will also be involved in marketing, order collection, and transmission of orders to the service provider.
- The service provider must collect the product, pack, and ship it to the customers.
“The Parties hereby have entered into this agreement for the purpose of conducting valid prescription medication transactions via an online telemedicine physician/patient consultation.”
The term of the agreement should begin on the date of the agreement, The expiry date of the agreement or a renewal period should be mentioned under this clause. Usually, e-commerce entities enter short-term 1–2-year agreements with suppliers and service providers on a renewable basis.
“This Agreement commences on __ for a period of _____ years and is to be renewed for a further period of 1 year based on mutual consent.
The retailer may insist that the service provider should be the exclusive supplier for all order fulfilment services of the retailer. If exclusivity is not possible, the retailer will insist on ‘white-labelling’ i.e., specifying the branding of the retailer on the packaging with little or no mention of the order fulfilment service provider’s name on the packaging.
“X will be the exclusive supplier for medication and related product fulfilment services for Y.”
This clause includes mainly 3 things:
- Risk loss,
- Choice of the carrier,
- Shipping costs.
Title and risk concerning all orders and products shipped by the service provider or supplier should pass to the retailer or its customers upon the delivery of the products to the carrier at the point of shipment. The service provider must ship the products with the carrier chosen by the retailer to the customer. The retailer should have the option to re-transmit such order by an alternative service provider supported carrier. The retailer should pay the service provider shipping costs as agreed between the parties.
“Service Provider shall be responsible for risks of loss, theft, destruction or damage to the product until it gets delivered to customers.”
License grant clause
The service provider grants a license to the retailer to use its database for an annual fee
“X, hereby grants to Y a limited, revocable, non-exclusive license to use the database for an annual fee of INR_____ payable on ___.”
Product pricing clause
The service provider will deliver the product at the prices mentioned in an exhibit, subject to the exceptions provided in the agreement.
“Suppliers shall have the sole authority to set pricing for the products.”
Guaranteed fees clause
The retailer under the agreement should agree to meet the minimum annual sales volume as promised to the service provider.
“The responsibility shall lie with the retailer to meet minimum annual sales agreed with the service provider as decided in the agreement.”
Invoice preparation clause
The service provider is required to create a customer invoice with the retailer’s logo. Product return and customer service information are printed on the same under this clause.
“Service providers shall submit the invoice of the payment, before the payment can be made, under the agreement for the supplies delivered, which would contain the retailer’s logo and customer information.”
Order placement clause
The retailer is responsible to collect orders and sending such orders to the service provider.
“Retailers will be responsible to collect the orders from the Supplier and further send it to the Service Provider, who can do the delivery of the Product.”
Order fulfilment clause
This clause can have multiple kinds of order fulfilment practices like priority, standard and peak period. Priority orders are usually shipped overnight or delivered through second-day air freight across a country. Standard orders are usually shipped over a period of one week. During the peak period, the inability to adhere to the policies laid down will not be considered as a default under the agreement.
“Orders shall be delivered to the customers as per the requirements of the customer, inability to fulfil the demand of customers n delivery orders during peak period won’t render the agreement void.”
A good fulfilment agreement may include these features:
- 99% of all orders will be shipped the same business day.
- 100% of rush orders received by___will ship that day.
- There should be a picking accuracy greater than 99%.
- 100% of all returns should be processed within 48 hours.
- 100% of all inventories should be received within 48 hours.
- 80% of all calls received should be answered within 1 minute.
- 100% of all incoming calls must be answered.
Fulfilment fees clause
The retailer is required to pay the packaging and handling fees to the service provider. The surcharge can be applied as follows:
- International shipment surcharge.
- USPS priority mail insured surcharge.
- Manual processing surcharge.
“Retailers will pay the cost incurred from packaging along with handling fees to the Service Provider arising under this Agreement.”
Product return clause
This clause provides different situations in the case of the return policy such as;
- Rejected returns.
- Opened product.
- Defective product.
“Within ten days following termination of this Agreement and payment in full of outstanding amounts of due and payable to the Supplier. Hereunder, the Supplier shall provide the remaining balance to the Customer.”
Optional service clause
This clause comes into the picture, whenever any extra service is asked by any of the parties to the order fulfilment agreement. Extra Services can include Paper Inserts, Merchandise Inserts, Exclusive merchandise, Inner barcodes, Custom price stickers.
“Supplier/Retailer/Service Provider enters into the agreement with the other party to fulfil the demand of the other party according to the terms and condition of the agreement.”
Representation and warranty clause
These are the following representations usually given by the Service Provider:
The service provider and retailer have the right and authority to enter into the agreement and must adhere to the terms and conditions of the agreement. The service provider represents that the products delivered by it will be substantially in the same condition as they were received by it from the suppliers.
This is the main representation given by the retailer:
The retailer represents that any content on the website will not infringe any intellectual property rights including the copyright marks of any third party.
“With the knowledge that X is relying upon, thereon, entering into this Agreement, Y hereby represents, warrants and covenants as follows:
- Y is a duly organised corporation and in good standing under the laws of India.
- This Agreement constitutes the legal, valid, and binding obligation on the Y enforceable against X in accordance with the terms under this Agreement.
- Neither the execution and delivery of this Agreement nor the consummation or performance of any obligations hereunder shall, directly or indirectly with or without notice or lapse of time in any material respect, contravene, conflict with or result in a violation or breach of any provision of, or give any person the right to declare a default or exercise any remedy under, or to accelerate the maturity or performance of, or to cancel, terminate, or modify, any material contact to which Y is a party.
- Y during this whole Agreement will adhere to the laws, rules, and regulations of India.”
Intellectual property clause
There should be a copyright and trademark notice along with the product and all promotional, packaging and advertising material indicating to the customers that all intellectual property rights are owned by the supplier. It is an obligation of the service provider to include through the product packaging.
This clause will have the details of who will obtain insurance for goods in transit and up to what value must be specified; a formula for the same can also be created.
Retailers are required to obtain and maintain a license from a qualified insurance company at its own cost and expense.
“Insurance of the products picked from the Supplier till the delivery of products to the customers and back to the supplier themselves, Retailers are responsible to obtain and maintain a license at its own cost and expense.”
An OFA is a legal contract entered between a product distribution business and a manufacturer or supplier of products to fulfil the demand of orders placed by the customers through an e-commerce website. The commercial incentive to enter into this agreement is that the parties are protected from future damages which may arise due to miscommunication between parties regarding their duties. The OFA covers the procedure to be followed right from the order placed by the customer to the e-commerce website to the delivery of the ordered product at the doorstep of the customer and by entering into the agreement, the parties to the contract ensure that their rights and liabilities are detailed properly and that the risk of any dispute that might arise in the future in either minimised or its resolution process is laid down properly.
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