How Supply Agreements Can Help Supply Chain Issues

Given the current landscape where COVID-19 is prevalent around us, many businesses are facing shipping delays and supply issues. However, this is something that happens to businesses every now and then so being on top of your supply agreement is very useful. A well drafted supply agreement can help you overcome these challenges and will help steer your business through rocky times.

What Is A Supply Agreement?

This is a contract that describes the arrangements between a supplier (party providing the goods) and purchaser (party receiving the goods in exchange for payment).

There are a broad range of businesses that rely on them, so it is important to ensure that the specific roles and responsibilities agreed by you and your supplier are accurately represented within the context of your business.

The supply agreement protects your purchases, so that you receive the correct goods on time while safeguarding business assets.

If you’re wondering whether you need a supply agreement in the first place, you can check out our article on why you should have a supply agreement.

In terms of supply chain and shipping issues, the following components of the agreement are highly useful:

Conditions to effect contractual performance and to tackle delay issues
Protections related to the product’s design (including intellectual property, confidentiality, and exclusivity)
Obligations related to product quality including damages during manufacturing as well as shipping
Agreements on price and payment process
Clauses on contract length and termination
Description of the process for settling disputes

Potential Issues You Could Solve Using A Supply Agreement

Here are a few examples of issues and how they can be tackled with an appropriately drafted supply agreement:

1. Delays In Receiving Or Non-Provision Of Goods By The Supplier

Say your customers have made purchases but the business you are buying from is not supplying the goods, what can you do?

Well, a carefully drafted supply agreement gives you several options here. These are specifically related to contractual performance and supplier obligations in preventing delays.

Remember, it is also important to communicate with your customers to know their priorities when deciding which of the options in your agreement is the best way forward.

Contractual Performance Clauses

When a supplier is failing to perform their contractual obligations in providing the goods to you, a supply agreement can offer you protections based on what provisions you have included.

Some of these can be:

Rights to terminate
Damages paid to you for non-performance by the supplier
Performance guarantees by the shareholders or the parent company of your supplier
Performance bonds

This is not an exhaustive list and there are many different clauses that can apply to your individual circumstance. You should think about things like whether you want to continue the relationship or just want your money back when picking the right way forward.

However, this relies on ensuring that the provisions are correctly drafted in your supply agreement.

Delay Clauses

It is important to have liberal lead times during this COVID-19 impacted environment we live in.

Key materials for your business should be ordered well in advance. However, your supply agreement can help prevent unnecessary delays by providing for financial penalties paid to you by the supplier or rights for you to terminate in some cases of delays.

If your supplier can’t perform due to Covid-19, here are some suggestions.

2. Intellectual Property and Confidential Information

If you are worried that counterfeit versions of your product may arise or that confidential business information may leak during the supply chain process, you may be able to rely on some intellectual property and confidentiality provisions for some peace of mind.

These aspects are what give a business its competitive advantage and it is important to ensure that they are safe when working with third party companies in the supply chain process. When there are appropriate and helpful clauses in the supply agreement, the provider of the goods would be more wary about protecting these business assets.

Intellectual Property

Your trademarks, copyright, designs and patents can be protected by registering them as per Australian law standards. In a supply agreement, damages clauses incentivise your supplier to not misuse your intellectual property in the provision of goods.

This is basically a penalty that the supplier must pay you for breaching your intellectual property protections. Furthermore, clauses can also give rise to the right to bring an injunction. An injunction is essentially an order that makes your supplier stop doing anything that is breaching the intellectual property clause.

Confidentiality

This includes aspects of your business such as trade secrets, pricing and client information. The supply agreement should identify what the confidential information is and how the supplier should go about protecting it. This may include the supplier signing Non-Disclosure Agreements or including confidentiality clauses in contracts with their employees and suppliers too. Other aspects include having people in roles to protect confidentiality or limiting access to this information to only those who need to know it in the supply process.

Intellectual property and confidentiality are a complex field and the words chosen in the supply agreement need to be deliberate and encompass all the protections your business needs.

3. Agreeing on Orders, Delivery, Price and Payment

It helps to be deliberate and specific about what you are buying from the supplier, what the price will be, the delivery process and payment process.

Price and Product

A description of what is being supplied and the price for it should be detailed so there is no confusion between you and your supplier.

Orders

Exclusivity

Exclusivity clauses specify things like restrictions on your supplier providing goods to other businesses in your area. These can help protect your competitive advantage.

Defects

A refund or a replacement can occur when defective goods are provided. This varies based on provisions agreed to by you and your supplier. Details on how long you have to let the supplier know about defective goods should also be included.

Furthermore, a minimum quality requirement can be detailed based on your specific industry’s standards. Provisions on whether samples should first be provided and approved by you before the order quantity is manufactured are important. Any inspections that should be conducted should also be specified.

Title and Security

You need to agree on when the ownership of goods transfers from your supplier to you and who holds liability for the safety of the goods at each point in the process. For example, you may agree that the supplier holds this responsibility until delivery has occurred. In this case, the goods become your responsibility after delivery. Make sure you draft these provisions and check to ensure what you want is accurately represented.

Delivery

The numbers, location and dates for delivery should be described as well as any specific methods. Sometimes, there are minimum order quantities when it comes to wholesale supplies. This can also be mentioned in the supply agreement including any special transport requirements like refrigeration. Checks on quantities that need to be done by the supplier before the goods are loaded for delivery should also be detailed here.

Payment

Agreements on how and when payment for the goods is to occur should be written in the supply agreement. One way to protect your business is to have a 50/50 payment split where half the payment occurs when you see samples of the goods and the other half after delivery. This becomes especially important when facing shipping delays.

4. Agreement Term and Conclusion

You should think about how long the agreement with the supplier will last and what exit options should be included for your protection.

Term

The length of the business relationship between you and your supplier must be specified. You should think about whether this is a 1-year agreement, shorter or longer. It could even be an agreement for just this one-off specific order.

Termination

Aside from failure to perform or delays, there may be other situations where termination might be provided in your supply contract. This varies based on industry and individual preferences. It is important to be clear about what your business needs.

5. Dispute Settlement

These clauses detail how you and your supplier will resolve a disagreement. Disputes may arise in various scenarios – like delays in delivery or the product not meeting your requirements. It is important to agree on a procedure to tackle them. There are two main components in a dispute settlement clause:

a description of the communication between the parties and
actions that the parties should take.

Communication

This includes aspects like whether a formal notice is required to outline the aspects that need to be sorted. This notice can also describe steps forward and should legal proceedings start, it also helps show the court that you took adequate steps in coming to a resolution.

Actions

The actions that parties can take are decisions by a third party (arbitration or legal proceedings), or a discussion with or without a third party’s presence (mediation or negotiation). Details about how these third parties will be selected become useful when these situations arise.Furthermore, as legal proceedings are expensive, there can also be clauses that limit the when and where one party can sue the other.

Always consider whether you want the relationship with your supplier to continue. Settling things amicably is usually beneficial to both sides.

Our Supply Agreements

Supply agreements have a lot of different aspects which need to be moulded to suit your specific situation. This becomes important to protect your business when facing supply chain and shipping delays.

It can get easily overwhelming but we can help you get your contracts sorted.Whether you need help reviewing a supply agreement or need help drafting one up, we have a team of expert contract lawyers to give you a hand. Let us know how we can help! Whether you’re unsure of what terms to include or not sure where to start, you can reach out to team@sprintlaw.com.au or contact us on 1800 730 617 for a free, no obligation chat.

Naga Aditya Koneru

Aditya has experience in consulting, reinsurance, and government. He holds a double degree in Actuarial Studies and Laws from the University of New South Wales, and has a keen interest in public sector work.

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