This article is written by Ayush Sahay, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from Lawsikho.com.

Introduction

Rich Weissman in his article talks about his first-hand experience of a case relating to supply chain, at the end of which he realized the importance of contracts. The importance of a contract, 50-60 years back was nothing, because the supply and delivering cycle took place in a small area where people were interconnected with each other. But in the 21st century, the reasons for a contract to exist are quite a lot. When we talk about the food industry and contracts, at the first instance we think that whether there is a requirement of a contract in the food industry is. In this article we shall discuss further about the Supply Chain Contracts in the Food Industry. 

A supply chain is a network between a business and its suppliers to manufacture and sell a particular product to the consumer. This network includes numerous operations, individuals, organizations, data, and resources.  The supply chain often illustrates the measures it takes to get the commodity or product or service to the consumer from its original condition.

What are supply chain contracts

Supply Chain Contracts are agreements that are deliberated and signed by the companies and the seller/producer/manufacturer which specify and hold either party responsible for their responsibilities on specifications which include and are not limited to:

1. The method in which the payment will be made.
2. The stage at which the payment will be made.
3. The discount that can be applied on an order placed above a particular quantity.
4. The policy regarding the return of the order, in case of any defect or any other situation. 

In order to run businesses smoothly, companies rely on supply chain contracts, as supply chain contracts are the legal frameworks that ensure that the required resources arrive in a timely and predetermined manner. Despite this, numerous businesses fail to properly formulate these contracts, which can lead to significant issues in terms of the business concerned. 

Essentially the Supply Chain Contracts aims to smooth the process from source to consumer of products, information, money and other inputs, it also ensures that the quality of the said product is in line with the one agreed upon.

Significance of supply chain contracts in the food industry

Ensuring the quality and brand name in today’s age is a major factor for a business to survive in the 21st century. A significant factor as to why there is a requirement of supply chain contracts in the food industry is related to the security towards the quality and other factors associated to it.

The quality of food is now the food industry’s most top challenge. There are four reasons why food safety is more important to consumers as well as producers today than ever before:

1. Advanced and constant advancements in diagnostic methods make it easier for foodborne pathogens to trace diseases.
2. More consumer affordability has led to increased demand for healthy, better-quality foods.
3. New food sources which has led to the use of new processing processes which in turn has introduced new risks into the food supply chain.
4. Consumers are shopping away from home for more packaged food and food than ever before.

As mentioned above the affordability of consumers has increased which means that the demand for such products has also increased. It is a common phenomenon that whenever the demand for a product has increased from what it earlier was like, the probability of there being a depreciation in the quality of the said product is quite high. So if such depreciation were to occur, the brand name of the company would take the blow. The companies do not want to suffer such losses therefore they will take the initiative to set-up a framework so that the producer only provides them with the product according to the specifications that they have deliberated and decided upon. The industry is very well conscious of the need for food standards in the market and seeks to evolve and adapt methods to meet this requirement. 

One such evolution that the industry has adapted is making use of the supply chain contract. Companies have made it clear that in order for a producer to get the benefit they aim to get by associating with the brand name of the company then they have to agree to the terms in the supply chain contract. Their terms help the company in segregating safe and unsafe suppliers, because the contract that the company presents would not appeal to an unsafe supplier but a safe supplier will be comfortable in signing that contract with the company. 

Essential clauses in supply chain contract

Every contract has a few clauses that are specific to it. These clauses exist to fit the industry’s requirement in which the agreement is centered. Similarly a supply chain contract too has a few essential clauses that will find their way into these contracts. A few of these essential clauses are as listed below:

• Cost and Method of Payment.

Every contract essentially needs this clause to be added in it, but in the case of a supply chain contract this clause is extremely important because this clause not only specifies the cost at which the company will purchase the product but it also specifies the method of the payment of this cost and also include at what stages (if applicable) will they be paid.

• Allocation of Risk.

In any agreement, every party aims to limit their liability which is what this clause aims to do. Allocation of risks in a supply chain contract is often aimed to divide the risks equally between the parties involved. This clause shall include the following clauses:

1. Limitation of Liability,
2. Representations and Warranties,
3. Indemnification, 
4. Termination,
5. Obligations of Parties Post-Termination.

• Code of Conduct for the Parties involved.

Like already mentioned, companies can suffer huge losses if they themselves or are associated with other parties who aren’t working as per the laws and not responsible socially, which is why it becomes essentially important to establish these Code of Conducts for the Parties involved in this contract. For example: A party might be involved in child labor which might be against the laws of the country but is not acceptable in public eye, now if such news would be out in the public, the company would suffer backlash causing them losses, which is why a code of conduct clause is an important clause in the supply chain contract.

• Term of the contract.

A supply chain contract must state the term until which it will last. This does exclude one-time purchases which are orders placed by the companies from the supplier that are different from what is specified in this contract. This clause is quite an important clause in this agreement, because this industry or any other product manufacturing industry for that matter the entire cost of producing the contracted product is quite high and incase the other party finds a better seller and if there is no term clause in the contract, the party can simply end the contract which causes loss to the supplier. 

• Quantity and Quality Clause

This clause specifies the quantity of the product that the parties have agreed to buy and purchase. This quantity in this clause is decided upon after the deliberation between the parties and quality that is a part of this agreement will set down the requirements of the company and no liability will be acted upon on the producer until the time they produce products as per the specifications of the quality decided upon. 

Cases and examples

In a hypothetical situation, let’s say MifflinDunder is a company that sets out to let the consumers order groceries (let’s say vegetables and fruits in this case) from their application. The company would approach several producers and inform them of their application (“App”) and tell them about the benefits that they can avail if they were to sell their product through the company’s App to provide them a medium to sell their products. The company during the course of convincing would make these producers understand that they would be getting into a contract (a supply chain contract in this case) along with the other parties (logistics company, etc.) in order to make sure that a procedure is followed by all the parties involved and the requirements are met. In this case there are 2 producers, Producer A (Farms of the Schrutes) and Producer B (Bernard Farms).

The contract prepared by MifflinDunder has specifications regarding when this contract will be valid, the quantity of each order and quality of each order as well. Let’s say both the producers agreed to sign the contract, but over time the quality of the produce that came from Bernard Farms started getting deteriorated and is shipped in less quality than what it was earlier decided upon and MifflinDunder was getting complaints regarding orders that had been produced from Bernard Farms. The company then discusses the problems with Bernard Farms and informs them that they are bound by the contract and must make sure that the quality and quantity of the produce they send over should be as per the specification in the contract. But keeping in mind that there is a supply chain mechanism set-up, Bernard farms explains that the quantity of the product is sent as per the specifications in the contract. After the due diligence the company realizes that in this case the logistics company which was also responsible for the delivery and storing up inventory of the products is at fault. 

The company then, at its discretion can take necessary actions against the party at fault as per already provided provisions in the contract or through litigation. 

Conclusion

The era of finalizing business transactions and deals by handshake have come and gone for a long time. An organization opens itself up to the creation of financial and reputational liability by not creating legally enforceable commitments, which potentially may lead to lawsuits and/or huge financial losses. A consumer is mistaken if he thinks that the products they purchase reaches them directly. They forget to count in the countless hands their package is passed on through. Therefore, having a contract, and in this case a supply chain contract is a real important factor for any business if it wants growth and reliability from the customers. The supply of one final product usually involves the interaction of multiple producers, logistics agencies and service providers in the food industry. Businesses depend on arrangements between the parties involved to handle or control these interactions and these contracts help in maintaining such an arrangement to exist and allow a smooth flow in the activities and keep all the parties satisfied. 

References

1. https://www.supplychaindive.com/news/contract-management-supplier-performance-UCC/446811/
2. https://www.b2bcentral.co.za/the-importance-of-contracts-in-the-food-manufacturing-industry/
3. https://www.foley.com/en/insights/publications/2017/11/key-provisions-for-supply-chain-contracts

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