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. A good supply agreement will also protect your interests if your supplier fails to meet their obligations. This article explains eight key clauses that your supply agreement should have.
The first issue your supply agreement will address is price. Key questions to ask when drafting your pricing clause include:
- How will you pay for the supplied goods?
- Is the price per unit or per storage unit such as a box or pallet?
- Is there a discount for buying goods in bulk?
- Does your supply agreement anticipate whether the price of goods will increase each year?
You may wish to secure a set pricing structure with your supplier for a specific period of time — one year, for example. Set pricing provides benefits to both parties. It allows you to budget for the year ahead and offers your supplier regular orders from your business.
The volume clause will address both the volume of the goods to be supplied and their delivery. A key point to consider is whether the supplier requires a minimum order. While large orders can come with discounts, you may not have the required storage space. In that case, a lower-volume, regular supply is best.
Therefore, you should also consider storage and delivery times:
- How will you store your items and what are the associated costs?
- How quickly can the supplier deliver items to you and at what cost?
- Are there regular delays in delivery or unavailable stock?
The payment clause will describe how you make payment to your supplier. Relevant questions to ask include:
- How will you pay your supplier?
- Are you going to pay in advance, once you’ve received and checked the goods?
- Will you alternatively pay at regular intervals such as monthly billing?
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 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.
Do you intend for the supply relationship to be exclusive or non-exclusive? If the relationship is exclusive, the supplier will only supply your business with those specific goods. For example, you may have an exclusive supply arrangement with an artist to paint unique artworks that are only available in your stores.
Have you considered how long you would like the supply arrangement to continue? Your agreement may be fixed term with a possible option to ‘roll-over’ and continue the arrangement. Alternatively, the agreement may be open-ended that continues without a defined end date.
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
The Australian Consumer Law (ACL) requires that all sold goods are safe, of acceptable quality and fit for the purpose they were bought. 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. Typically, you will want a right to terminate the supply agreement if there is a significant or ongoing breach by the supplier.
Are there any labelling requirements that you require your supplier to comply with? You should consider whether you need specific labels attached to the goods you are supplying to customers. 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 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.
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’ individual needs.
If you do not yet have a supply agreement, or you are unclear on whether yours covers what it needs to, call LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page.
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