This article has been written by Shruti Nair pursuing the Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.
Let’s assume you are starting a business. What are the elements that come to mind when you are itemizing? This component may not be the first in the list that strikes your mind but sure it is a significant one. The supplier can be an individual, organization, entity or even a country that provides for something to another individual, organization, entity, or a country, according to their requirements. So if you are looking to wrap your head around the concept of Suppliers’ Contracts, this article will make your job easier.
Definition and meaning
A Supplier Contract is a legal agreement between a business and a supplier for the delivery of agreed products or services. These contracts establish the stipulations of the working relationship between both the parties, i.e. the business and the supplier. The terms of the contract clarify the services the supplier has to provide and for what duration. In business, suppliers play a rather imperative role. They act as the middleman between the manufacturer and the customer. A sign of a principled supplier is to ensure building a relationship with his clients while complying with the terms of the contract religiously. Let’s say you have a business of printing t-shirts. Primarily, you will need to make arrangements for plain t-shirts, printing equipment, colours, material for packaging, delivery etc. In this scenario, you are the business and on the other side would be the supplier supplying you with all the essentials, could be one or multiple depending upon your requirements to run the said business.
Importance of Suppliers’ Contract
For a smooth functioning of a business, it is of significance to maintain a supply chain throughout the business. A dispute due to any reason can massively affect the output efficiency of the business. A suppliers’ Contract is not a mandate, although alarmingly advisable. This contract would significantly reduce the risk of any ambiguity that might arise in the future due to potential disagreements or miscommunications.
Before going ahead and drafting the Suppliers Contract, ensure the other party has all the necessary permissions to undertake the task. In case of a supplier, the necessary permission would include all the integral documentation related to transportation as legally required by the law.
Through Supplier Contract, both parties are made aware of each other’s obligations, rights and consequences of the breach which is why the contract is of paramount importance.
The contract must dedicate a section for performance security. Performance security is a financial guarantee that ensures committed compliance from the supplier’s side. The contract shall disclose all the details of and related to packaging including the precautions taken to ensure safe transportation. Along with the aforementioned clauses, specific clauses customised as per the requirements of the parties are to be incorporated to complete the contract.
Before drafting a Supplier contract
- The Supplier Contract has to be detailed and customised to protect your interest, make sure you clear any doubts before committing to paper.
- Be sure to ask about any underlying problems and maintain a record of all the assurances given.
- In case of delay in delivery or failure to meet the agreed standard, should penalties be imposed? And if so, how much?
- Consider including an exit clause so if either party is dissatisfied with the other, they can exit the contract.
A couple of points you need to consider while negotiating with the supplier before drawing the final contract in order for you to get the best deal:
- Quality standards
- Maintenance terms
- Payment conditions
- Delivery time
- Value for money
SLAs (Service Level Agreements)
Service Level Agreement is a contract between service provider and the customer that describes the level of service expectations that a customer has from the supplier. There are three types of SLAs and they are as follows:
- Customer service-level agreement
- Internal service-level agreement
- Multilevel service-level agreement
SLAs are important as they establish a scope of the services covered, performance metrics including response time and resolution time and penalties for breach or exclusions.
When you consider an SLA, choose fair metrics. This would involve the agreement reflecting factors within the service provider’s control. In other words, to penalise the service provider for the fault or inaccuracy of the customer would be observed as unjustifiable.
Supplier Management is a process involving selection, evaluation, identification and management of a supplier. This process aids in ensuring the suppliers are providing maximum value for the business. Effective supplier management establishes policies to govern the suppliers, manages the supplier’s performance, maintains record and information, negotiates with the suppliers and ensures religious compliance.
Benefits of supplier management
Owing to the complexities of the business, it gets challenging to manage suppliers, considering there are a myriad of factors to keep track of. This is where the supplier management comes into picture.
- Save more and yet no compromise on quality
Supplier management practices enable cost saving methods while keeping the quality in check.
- Performance evaluation
The management maintains records of the suppliers highlighting their performance, which would also help in identifying ways to improve strategies.
- Transparent transaction
Effective supplier management enables transparency in all aspects including but not limited to the supplier’s engagement, accounts and performance.
- Mitigating risk
Another supplier management benefit, the risks arising out of an undesirable event is narrowed.
Supplier management process
In a nutshell, the process of supplier management process is as under:
- Set objectives;
- Establish criteria for choosing suppliers;
- Evaluate selection of suppliers;
- Supplier’s performance evaluation.
Some of the standard clauses covered under the Suppliers Contract among others are as follows:
- Names of both the parties;
- Address and communication details of both the parties;
- Definition of products or services;
- Obligations and responsibilities;
- Terms and conditions;
- Pricing and payments;
- Breach and its consequences;
- Term and termination;
- Representations and Warranties;
- Force Majeure;
- Dispute resolution;
Sample clauses for reference
- Performance security
- The suppliers shall furnish a performance security in the amount equivalent to ____ (mentioned in figures and words) to be issued by a reputable bank or company.
- The amount mentioned under this clause shall not be construed as the limit to the supplier’s liability in the event of a breach of contract by the supplier.
- Force Majeure
Neither party will be liable for delay in performance or failure to perform of the contractual obligations contained under this agreement, if such a delay or failure is the result of an event caused by Force Majeure situation such as natural disaster, military action or any other event that is beyond the control of either party.
All notices and other communications under this agreement shall be made in writing and delivered by registered post and shall also be sent by e-mail at the addresses as mentioned under this agreement. In the event of Force Majeure, the party shall give immediate notice in writing to the other party mentioning the cause for delay or failure of performance.
- Independent contractor
The supplier shall comply with the terms of this Agreement as an independent contractor and shall not, under any circumstances assume any other relationship including but not limited to partnership, employee, representative or agent.
If any clause of the Agreement is found to be invalid or unenforceable, that clause will be severed and the remainder of the Agreement shall remain in force.
This agreement (the “Agreement”) is made on _____ day of _____, _____ (“Effective Date”) by and between:
_________, a company incorporated under the laws of ____, having its registered office at _____________________________, hereinafter referred to as “Buyer”;
_________, a company incorporated under the law of __________, having its registered office at___________________, hereinafter referred to as “Supplier”.
The Buyer and the Supplier will be referred individually as “Party” and collectively as “Parties”
WHEREAS the Buyer desires to acquire the supply of the Products defined under Schedule 1 and the Supplier wishes to supply and deliver such products to the Buyer.
NOW THEREFORE, in consideration of the premises and mutual covenants contained under this Agreement, and other good and valuable considerations, the Parties agree to the following:
- SUPPLY OF PRODUCTS
- As per the Agreement, during the term mentioned herein under and any extension hereof, the Supplier shall supply the products as set out in Schedule 2 to the Buyer and Buyer shall buy from the Supplier such Products on a non-exclusive basis.
- Every sale between the Parties shall be evident by an order placed by the Buyer to Seller in accordance with the terms and conditions of this Agreement and the Supplier shall accept such order or orders in writing within 24 hours working days after receipt of such order.
- If the Supplier fails to confirm the order within the time specified, the order shall be deemed to be accepted by the Supplier. Orders shall be placed in writing including, without limitation, by email, fax, and letter.
- The price of the product shall be as described in schedule 3.
- INVOICING AND PAYMENT
- The Buyer shall make the payment to the Supplier within 30 days of receipt of invoice.
- The date for delivery and minimum delivery time shall be as specified while placing the order. If the Supplier delays any delivery of Products, the Buyer shall be well within his rights to cancel the order of such Products at any time before delivery.
- RISK OF LOSS
- The Buyer shall assume all risk of damage or loss except for any damage or loss caused due to the negligence of the Supplier. Insurance and transportation charges shall be paid by the Buyer.
- FORCE MAJEURE
- A Party shall not be held liable for delay or failure to perform the contractual obligations under this Agreement in the event of Force Majeure situation such as natural disasters, war, accident or any other situation that is beyond the control of the Party.
- TERM AND TERMINATION
- This Agreement shall come into effect on the date as mentioned above and shall remain in force for a period of two (2) years.
- This Agreement may be terminated by either party at any time by providing a written notice with immediate effect in the event of;
- bankruptcy or insolvency instituted by or against the other party or a receiver, trustee or liquidator is appointed in respect of any part of the other party’s assets or any similar relief is granted under any applicable bankruptcy or equivalent law;
- The defaulting party shall be in breach or non-performance of any of its obligations in this Agreement and does not remedy the same within 7 days of notice of such failure by the other party (the non-defaulting party).
- INDEPENDENT CONTRACTOR
- The supplier is an independent contractor and shall not, under any circumstances, the supplier or its employees, assume any other relationship including but not limited to partnership, employee, representative or agent.
- All notices, requests, demands and other communications shall be in writing, in the English language and shall be sent to the address mentioned in this Agreement.
- If any provision contained under this Agreement is deemed invalid or unenforceable by any competent court, such determination shall not affect the validity or enforceability of the remaining provisions of the Agreement.
- The Supplier warrants that the Products shall conform to the technical and quality standard and specifications as set out in Schedule 4 hereto;
- The Supplier warrants that the Product is safe and free from any defect in manufacturing or material;
- The Supplier warrants that the Product corresponds strictly with any and all representations, descriptions, advertisements, brochures, drawings, specifications and samples made or given by Supplier.
The Buyer and the Supplier have executed this Agreement at the date as mentioned above
- Can I come to an oral agreement with my supplier?
In most cases, an oral agreement is legally binding. But to avoid any dispute and to leave no room for presumptions, it is highly advisable to draw a written document.
- Do I need a lawyer to draw the contract?
This may seem like going out the extra mile, but it is only fitting. A lawyer will make sure the contract has you covered and hence it is wise to consult a lawyer.
- Will I be able to terminate the contract?
If the supplier is responsible for breach of any or all provisions of the contract or if you are not satisfied with the supplier’s performance, terminating the contract becomes black or white.
- What if the supplier refuses to execute a contract?
After making sure the terms of the contract are fair, if the supplier still refuses to sign the contract, it stimulates lack of confidence in the supplier’s ability to perform the assigned task. It would be advisable to explore other options.
A Suppliers’ Contract or a Suppliers’ Agreement is an arrangement between the buyer and the supplier for the delivery of goods or services. The contract includes clauses customized according to the requirements of the parties. Acknowledging the complex nature of businesses and understanding the importance of having an uninterrupted supply chain, the need of supplier management springs up. Supplier management ensures maximum value for money from the suppliers. Consider involving a legal mind while drawing the Suppliers Contract. This will ensure the agreement has you covered.
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