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 the specified area. For example, Vera Wang dresses in Australia.

If exclusivity is relevant, the rights of exclusivity are usually limited to a specific area. If the appointment type is non-exclusive, the supplier may be able to supply the goods to numerous purchasers within any area.

Should the supplier wish to ensure that the purchaser only purchase goods from them, they may want to insert a clause that restricts the purchaser from buying the same or similar goods from other suppliers. For example, a shop can sell Haigh’s chocolates but no other premium chocolates.

 

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 supplier may wish to request that the purchaser provide them with estimated forecasts of future purchase orders. This will help the supplier plan accordingly, allowing them time to manufacture the necessary amount.

A purchaser may wish to request that the supplier provide a forecast on the availability of the goods. This will allow the purchaser to be aware of the number of goods it can order from the supplier and whether they will need to source other suppliers.

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.

When reviewing or drafting a supply agreement, ensure that you pay close attention to these terms to ensure that your needs are best protected. If you have any questions, contact LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page.

Kristine Biason
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