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Your business’ reputation depends on your supplier delivering quality products on time so you can fulfil customer orders. A supply agreement, a contract between the supplier and your business, helps ensure this happens. Furthermore, a good supply agreement will protect your interests if your supplier fails to meet its obligations. This article explains eight key clauses that your supply agreement should have.
The first issue your supply agreement should address is price. Some key issues to consider when drafting your pricing clause include:
- how you will pay for the goods;
- whether there any minimum order requirements that the parties must agree to;
- whether the price is per unit or delivery unit such as a box or pallet;
- whether there is a discount for buying goods in bulk; and
- whether your supplier has the right to change the price of the goods, for example, through a schedule of prices published online or a CPI adjustment.
You may wish to secure a set pricing structure with your supplier for a specific period of time, such as one year. Set pricing provides benefits to both parties. It allows you to budget for the year ahead and offers your supplier a higher likelihood of receiving regular orders from your business.
The volume clause will address the volume of the goods to be supplied and their delivery. You should consider whether the supplier requires a minimum purchase volume for the supply contract term. Alternatively, they may impose a minimum order amount for each delivery. While large orders can come with discounts, your business may lack the necessary storage space. Consequently, a lower-volume, regular supply may be more suitable for you.
Therefore, you should also consider storage and delivery times such as:
- how you will store your items and the accompanying costs;
- the speed and price of delivery;
- whether there are regular delays in delivery;
- likelihood of stock availability;
- the point at which risk and liability over the stock pass to you. This may be upon dispatch from the supplier or once you receive stock; and
- any obligations on the supplier following delivery to buy back goods you do not want.
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The payment clause will describe how you make payment to your supplier. Relevant questions to ask include:
- how you will pay your supplier;
- whether you will pay in advance or once you receive and check the goods;
- whether you will pay at regular intervals, such as monthly billing; and
- whether you will pay for taxes, transportation insurance (if any) and delivery costs.
If you do not have a trusted, established relationship with your supplier, you may wish to pay through a payment platform such as PayPal or Stripe. These platforms are PCI DSS compliant in their storage of credit card and account information and have established dispute-resolution processes. For example, if you receive goods of unsuitable quality, PayPal allows you to file a dispute and will put the payment on hold until you reach an outcome.
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.
|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.|
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.
Do you intend for the supply relationship to be exclusive or non-exclusive? If the relationship is exclusive, you may require the supplier to only supply your business with those specific goods in a particular area. For example, you may have an exclusive supply arrangement with an artist to paint unique artworks that are only available in your stores in Australia. Remember, exclusivity considerations should take into account the requirements of the Competition and Consumer Act 2010.
You should consider the duration of the supply agreement. Your agreement may be for a fixed term with a possible option to ‘roll-over’ and continue the arrangement. Alternatively, the agreement may be open-ended and continue without a defined end date. The duration of the agreement will be relevant to your consideration of pricing changes, exclusivity and minimum volume requirements.
When you have an open-ended arrangement, either party can terminate the agreement by following the steps in the termination clause. This typically involves giving notice to the other party and making sure you have met all outstanding obligations. For example, by paying any unpaid invoices or supplying undelivered goods.
Product Quality, Recalls and Unusable Products
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.
Australian Consumer Law
The Australian Consumer Law (ACL) requires that all sold goods are safe, of acceptable quality and fit for the purpose they were bought. If the ACL applies, it applies regardless of the contractual arrangement between the parties. Nevertheless, your supply agreement should contain a provision where your supplier confirms that the products meet all the requirements of the ACL and any other applicable laws and regulations.
This clause would mean that if your customer complains that any goods are defective or unusable, you will, in turn, have recourse against your supplier. You may prefer to receive a refund rather than being resupplied with the goods. In any event, you will want the right to terminate the supply agreement if there is a significant or ongoing breach by the supplier.
Consider whether your supplier must comply with any labelling requirements. For example, this may include needing specific labels on the goods you are supplying to customers. Similarly, you may need your supplier to provide detailed ingredient or component lists, notification of potential allergens or certification. For example, certification should accompany products advertised as ‘organic.’ Your agreement should specify that all labelling is compliant with any laws relating to the goods, including the Competition and Consumer Act 2010, which imposes obligations concerning misleading and deceptive conduct.
As a business owner, you have a legal obligation to provide a safe workplace for your employees and customers. This free guide explains how.
Your supply agreement should describe a detailed dispute resolution process. A dispute resolution clause ensures that both parties agree to follow a specific process. While you cannot predict what another party will do in a dispute, an agreed process provides some certainty and can assist in minimising legal costs if there is an allowance for mediation.
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.
A supply agreement helps ensure that your supplier makes timely, reliable delivery of the goods you need to run your business. A typical agreement will contain at least eight key clauses. However, every business is different, so you should ensure each clause is tailored to your business’s individual needs.
If you need help with a supply agreement, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
A supply agreement is a contract between the supplier and the purchaser outlining the product being supplied, cost, volume and frequency. It is important to have a robust agreement to protect your commercial interests.
A dispute resolution clause ensures that if a dispute arises between the parties, they will follow a specific process to resolve the dispute. This is not a guarantee of resolution, however, it provides some direction on what the parties should do and can potentially minimise dispute-related costs.
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