This article is written by Hemal Shah, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from Lawsikho.com.
“Big Billion Days”, “Flipkart Diwali Sale” “Amazon Great Indian Festival” “Myntra’s Fashion Sale” are now common terms. By now, all of us already know about online shopping. It’s either the insane price offers people are talking about, or the fast distribution networks, or simply the incredible range of online goods and services, the importance of the growing e-commerce and their services are clearly something that’s boosting any country’s economic growth. With the rise of this Pandemic, e-commerce and its implications in the market industry is worth a sight!
Now, ever wondered what these intricate giant e-commerce industries such as Amazon, Flipkart, Snapdeal and Myntra worked like? What would their most intricate Agreement consist of and how can they protect their rights while dealing with the tens and thousands of sellers and buyers and parallelly taking care of their charges, profits, taxes, delivery and protection of their intellectual property rights. Order Fulfilment Agreements are one of the cornerstones of the corporate relationship model of the emerging “click and mortar.” The traditional Order fulfilment Agreement includes a scenario where an online company wants to enlist a producer, dealer or major retailer in “brick and mortar” to purchase and distribute goods or supply its customers with services as decided mutually between the Parties.
In a nutshell, an Order Fulfilment Agreement is a legal binding contract between the Manufacturer (also known as the Supplier), e-commerce platform (also known as the Retailer) and Service Provider (also known as the Logistics Company, wherein the Retailer can also be Service Provider) wherein the Retailer places the orders to the Supplier and the Service Provider provides such services in accordance to the details provided by the Retailer.
Process of an Order fulfilment Agreement
Image Source- Orderhive.com
When an end-user places an order on the platform, a notification regarding such order and quantity is received to the Retailer which is then passed on the necessary Supplier for such delivery.
On receipt of such information from the Retailer, the Supplier processes such order in accordance to the requirements by the Retailer.
The Service Provider collects such products either directly from the Supplier or a warehouse maintained by the Retailer and transports the same to the end-user.
The End-User may on receipt of such Product may complete the order or notify the Retailer of any exchange or damage in the Product or any other specifications divergent to the specifications mentioned.
Modes of Order Fulfilment
- In this entity the Retailer does not own the Products, own warehouses, owns logistics and the Retailer acts as a mere platform to transfer the Products to the end-user by hiring third party logistics. (e.g.-Amazon, Flipkart)
- In this entity the Retailer has no products and no third party nor any third-party logistics. (eg- OLX)
- In this entity the Retailer owns the Product, owns the warehouses and has its own logistics company as well. (eg- Big Basket, Nature’s Basket)
Essential Clauses in an Order Fulfilment Agreement
- Scope of the Agreement/Entire Agreement
This clause will provide an outline of the functionalities of all the Parties involved in the Agreement and will establish a premise of a mutual Agreement between all the Parties.
Services to be provided by each party:
1) The Supplier will supply the Products in accordance to the specifications received by the Retailer and make it available for the end-users by listing such Products on the Retailer’s website and in compliance to the Retailer’s policy.
2) The Retailer will provide the specifications relating to the Products to the Supplier and the instructions relating to specifications provided by the end-user along with packaging instructions.
3) The Service Provider on receipt of information either from the Supplier or Retailer will collect such Products from the Supplier or Retailer and deliver it safely to the end-user.
The term of the Agreement plays an extremely role here since it brings conformity amongst the parties to adhere to the terms and conditions either exclusively or non-exclusively along with their association. Ideally the term should be between 3-5 years. The ideal term period should be 5 years, because the Retailer may seek an exclusive association either with the Supplier or the Service Provider that may hamper future association prospects. The parties should also refrain from signing an auto-renewal between the parties as that may refrain the parties from changing the terms and conditions eventually.
- List of services to be provided
Each Party will provide a detailed description of the services to be provided by all the parties which may include the following factors such as:
- Stocking of inventory
- Inventory management on receipt of the order received
- Picking up Products from the warehouse
- Facilitate returns
- Losses to be paid for the damages
- Exclusivity Clause
This Clause will mention if the Parties will work exclusively for each other or not. However, an exclusive clause may work as a boon for some parties which shall be differentiated from case to case basis. This clause should also mention about the cooling off-period post termination for the Agreement wherein the exclusive party will be able to transact its business to any competitor of the given agreement that is managed either directly or indirectly by the competitor.
- Costing Mechanism and Invoice preparation and Reports
The parties will decide the cost mechanism charged to each party and losses or damages to be paid in case of losses caused by either party.
The Costing Mechanism may include following models such as:
- Lump sum Model= Listing Charges + Marketing Charges In SaaS charges (if any) +Logistics Charges + Commissions
- Service Fulfilment Model= Listing charges + Margin
The Parties will decide the invoice preparation made to each party and the debit along with the credit note that shall be passed on each transaction. For eg- The Retailer shall prepare a debit note to the Supplier while sending instructions about the requirements from the end-user and the Supplier shall send a credit note for Commission based on the model to the Retailer.
Reports will consist of accurate information regarding the orders placed, orders delivered, orders returned and damaged in accordance to the system required by each party that should provide a clear analysis of the services performed. An ideal reports clause should mention either weekly, monthly, daily report system that tallies with the accounts of the Parties. (E.g.-Amazon, Flipkart has daily report mechanism)
- Intellectual Property Rights
In this clause each Party will have their own set of specifications to protect the intangible rights. There should be protection of the right, title and interest in each of either manufacturing the products, know-how, services to be provided by each party, trademark, copyright and sources of the supply of the materials for Supplier, know-how of conduct of business and worldwide rights of the packaging materials for Service Provider. A disclaimer amongst all the products and all promotional activities that all the intellectual property rights belong to the Supplier and the retailer is merely a platform for the delivery of such products.
- Representations and Warranties
Representation can be defined as ‘a presentation of fact either by words or by conduct, made to induce someone to enter into a contract’. Representations can be explicit or implied and apply to either a past or present fact.
A warranty is a promise that a condition or an assertion of fact is true and is typically supported by an implied promise of indemnity if the condition or assertion is false. A warranty may apply to the present and future. A warranty is a contractual statement that a condition is, and/or will be, true when made and/or for a period of time, often for the term of the agreement.
With the amendment in the Consumer Protection Act, the parties while representing and warranting to the end-user has to be more careful as there are some severe penalties involved in case of wrong representations and warranties and the retailer shall also be held liable for such wrongdoings on the part of supplier or service provider. The clause should also mention the indemnity involved in case of any misrepresentation by either party.
Products being manufactured, transported and delivered pose a high risk of damages, manhandling and destruction and in order to ensure the security of the Products, an insurance clause should be highly negotiated. This clause will ideally contain a series of the instances and their liability attached to the happening of those instances. The clause should also mention the limit on liability along with the party that shall be responsible for maintaining the license and the premium for insurance along with the renewal charges and maintenance.
- Order Placement and Order fulfilment
In the Order Placement clause the Retailer will be responsible to provide accurate details of the product and in case of any errors on the part of the Retailer, the Supplier and the Service Provider shall lose to the Retailer.
Order fulfilment clause is succeeding to the Order placement wherein it shall depend on various parameters such as fulfilling orders during priority, standard and peak periods. The Retailers sets such standards to the Supplier and the Service Provider and failure to adhere the same during such peak period shall not rescind the contract unless parties responsible for such fulfilment.
For eg: Priority orders are shipped overnight or the other day (Premium Members of the e-commerce platform).
Standard orders are usually shipped overnight or delivered through second-day air freight across a country.
During the peak period, the inability to ship the products overnight under the policies laid down shall not be considered as default and shall not be rescinded by either party.
- Guaranteed Supply of goods
The Retailer under this agreement should provide a minimum order quantity (MOQ) to the Service Provider as annual sales volume promised. It should also consist of the charges to be paid by the Retailer in case of failure to pay to provide MOQ as discussed.
Rules pertaining to the amended Consumer Protection Rules, 2020 should also be taken into consideration while framing the order fulfilment agreement. Each agreement shall vary according to the types of the business that can be either B2B, B2C, C2C, C2B, B2B B2C. It’s important to mention that parties may not be able to forecast every incident that may protect the rights, but it is up to the party’s imagination to understand the possible circumstances, their outcomes and liabilities attached to it. With the growth of online businesses, the ever-growing demands of the end-users have not only been a fascinating sight but developed a protective wall amongst the parties that shall not only protect them but ensure to stay out of strict liabilities.
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