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If you run a business that supplies goods, you will be well aware of the need to have a good working relationship with your customer. The same applies if you are a customer; it is important to have a good relationship with your supplier. You should document this legal arrangement in a supply agreement. Having a clear supply agreement can minimise the risk of disputes happening later on. This article will address both sides of the coin; what to look for in a supply agreement as:

  • a supplier of goods; and 
  • the customer purchasing goods.  

What to Look for in a Supply Agreement as a Supplier

Payment

How and when a customer pays you is incredibly important as a supplier. You might have a standard position which you stick to with each of your customers. For example, a deposit upfront, and payment upon delivery. Or you might negotiate fees and payment with each different customer. Receiving payment upfront is often the best way to ensure that a customer pays you. However, this is not always an attractive option for your customers. Your payment clause will set out how: 

  • and when you take payment; and
  • you will enforce your rights to be paid. 

Suppliers might choose to offer credit terms, and if you do this, you will also need an accompanying credit application along with your supply agreement. It is important that if your customer is paying you on credit, that you actually get paid. 

Delivery

The shipping and delivery process should be very clear in your supply agreement. Both parties should understand who is responsible for the goods: 

  • before they are dispatched; 
  • while being delivered; and 
  • once delivered. 

Your obligations to deliver within a specified timeframe should be fair and reasonable.

It is helpful to have clauses which address how this timeframe might be extended (particularly if there are events outside of your control which impact how quickly you can deliver). 

Liability

Your supply agreement should contain clauses which address your exclusions and limitations to your liability. As a provider of goods, you cannot contract out of the Consumer Guarantees. In other words, you are required to provide goods that are (among other things):

  • of acceptable quality; 
  • new and free from encumbrances; 
  • free from defects; and
  • fit for the purposes described in the supply agreement. 

A contract lawyer can help you to effectively exclude and limit your liability to the extent possible in your supply agreement. For example, you may want to exclude your liability, where the loss is caused by:

  • your customer; or
  • events outside of your control. 

If, as a supplier, you receive supply agreement from your customer, ideally any indemnities should be deleted. If the indemnities cannot be deleted, your contract lawyer can assist you in limiting the reach of the indemnity clause. 

Warranties

Your supply agreement should set out any warranties that you provide beyond what is required by the Australian Consumer Law (ACL). You will need to address your processes around exchanges, refunds and returns, including whether: 

  • customers can get a refund for change of mind; and 
  • how customers can exercise their rights to a remedy if your goods do not meet the ACL Consumer Guarantees. 

Termination of a Supply Agreement

It may be that you sell goods to your customer once-off, or you may have a relationship with them to supply goods on an ongoing basis. Your termination clause should set out the instances when you can terminate the supply agreement immediately, for example for:

  • not paying in accordance with the payment clause; and
  • infringing your intellectual property or confidentiality rights. 

Termination clauses should not be unfair. However, if you have customers who you regularly supply to, it may be extremely detrimental to their business if you can terminate without notice and at any time. Chances are, the customer wouldn’t agree to such a clause. Normally there is a notice period that is required to terminate a supply agreement. You should check these notice periods to ensure that they are reasonable.

Unfair Contract Terms

While, as a supplier, you will want to protect your business, you must ensure that you do not get into Unfair Contract Terms territory. These sorts of terms can be considered ’void’ and soon there will be penalties for including unfair contract terms in your contracts. 

What to Look for in a Supply Agreement as a Customer 

As a customer, the perspective is slightly different than if you are a supplier. You will want to make sure that you are getting what you paid for. Below are some of the key things you should look out for in a supply agreement you receive from a supplier. 

Description of the Goods

What goods are you receiving? It is important that the agreement is clear on what it is that you are getting for your money. The more precise the description of the goods, and the quantity, the less likely that a dispute will arise down the track due to confusion around what was to be supplied. 

Payment

You may negotiate your payment terms with the supplier. Whatever you agree to commercially, should align with what is set out in the agreement. You should ensure that there are clauses that give you the right to recover your money if something goes wrong. For example if:

  • you do not receive the goods;
  • the goods do not match their description; or
  • the supplier breaches some other part of the agreement. 

Delivery

The delivery clause should set out who is responsible for delivery, and the timeframes for delivery. The agreement should also spell out your rights if they do not deliver on time.

Australian Consumer Law and Warranties

Your rights to the Consumer Guarantees apply automatically. However, if the supplier is offering any additional warranties against defects, these should be clearly set out in the supply agreement. Additionally, it should include the process for how you can enforce your rights and access any remedies for the supplier’s failure to provide these rights. 

For example, suppose you purchased 100 pairs of headphones for your company, and some of them arrived damaged. Then the supply agreement should address the process around how you send them back and get a replacement or a refund. 

Key Takeaways

While there is some overlap in what to look for in a supply agreement as a supplier and as a customer, it is clear that the perspectives differ. As a supplier, you will want to get paid for what you are selling. As a customer, you will want to make sure that you receive what you paid for. If you are looking to have a supply agreement reviewed or drafted, contact LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions

What is a supply agreement?

A supply agreement is a document that outlines the legal arrangement between a supplier and purchaser of goods. Having a supply agreement that clearly sets out the terms will minimise the risk of disputes happening.

What terms should be included in a supplier agreement?

A supply agreement should include a description of the goods and should cover payment (how and when you will pay or be paid), the delivery process, warranties and termination of the agreement. 

What are unfair contract terms?

Unfair Contract Terms laws protect consumers and small businesses from unfair contract terms. They can be considered ’void’ and penalties may apply for including these sorts of terms in your contracts. 

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