What Is A Supply Agreement & What Should It Include?

• Company Commercial

A supply agreement is the bedrock for critical business relationships. 

These agreements are legally binding contracts that set out how a supplier and a buyer will work together in relation to their goods and/or services, helping ensure clarity, consistency, and accountability in business.

Supply agreements are naturally varied, as every situation is different. However, there are consistent elements that are included in and are relevant to every agreement, which we have summarised in this article. Understanding these is key to not only understanding ‘what is a supply agreement?’, but also how having one in place can enable positive business relationships.

1. Contractual Clarity

When forming business relationships, it can feel obvious who you are dealing with and what is being supplied. From practice, however, we often see that handshake deals do not always consider fundamental details. To ensure contractual clarity, a supply agreement can set out the following important terms:

Parties Involved: In a complex business structure, it is important that all parties understand who they are dealing with. The supply agreement should clearly outline this and identify the involved parties.

Goods/Services Description: Detailed specifications of what is to be supplied should also be included to avoid ambiguity or disparity in quality control.

Quantity and Delivery: In many situations, a supply agreement can also provide contractual clarity by stating how much a customer is due to order, when and where deliveries should take place, and how often.

2. Pricing and Payment Terms

Clear pricing (including total costs and applicable taxes) and how pricing may change based on different parameters or change over time are crucial to agree on at the outset of any business relationship. These terms can be outlined in a supply agreement, including how and when payments should be made (including schedules and timescales where necessary), methods for payment, and whether there are penalties for late payments.

3. Quality and Standards

A detailed system for dealing with quality standards should always be included in the agreement. Parties may otherwise have widely different expectations on standards, which will often lead to disputes, extra costs and delays.

• Compliance: Ensure goods/services meet relevant legal standards and regulations.
• Inspection and Acceptance: Clear set procedures for quality checks and when goods/services are deemed as accepted.

4. Risk and Title Transfer

It’s important to remember that accidents happen. Ensuring all parties understand how risk is shared provides certainty, lowers the risk of a dispute and can help to reduce the chances of mistakes when it is clear who is responsible. A supply agreement can ensure this happens by laying out the following:

• Risk Transfer: Determine when the risk passes between the parties.
• Title Transfer: Often separated from risk, it is also common to specify when ownership of goods is transferred.

5. Warranties and Liabilities

Parties should ensure it is clear if the supplier is providing a warranty in relation to goods supplied. In the case that they are, outline what they are guaranteeing and for what duration and circumstances. 

Limitation of liability is also crucial in supply agreements. Parties can agree how and when they may become liable and any limitations that may apply based on the circumstances. 

6. Termination Clauses

Whether the agreement relates to a temporary relationship or it plans into the long term, it is vital to understand how the agreement can be terminated if circumstances change. 

It is common to see a specific notice period and/or specific conditions/circumstances that can be a cause for termination.

7. Dispute Resolution

Whilst the agreement should aim to cover almost all aspects of the business relationship, there may still be elements or unforeseen circumstances that lead to disagreements. 

Having a pre-set procedure for dealing with any disputes that arise can save on costly delays and court fees through out-of-court mechanisms such as mediation or arbitration. 

9. Force Majeure 

Force Majeure (extraordinary, unforeseeable events outside of a party’s control) events are often described as acts of god. Floods, fires, man-made disasters or pandemics can severely disrupt a business’s ability to function. 

A supply agreement can be used to plan for what would happen next if one of these events did occur. Including a Force Majeure clause can define certain events that would relieve parties from their obligations under the agreement and set out what happens next.

The Importance of Obtaining Legal Advice

Before entering into a supply agreement, it is strongly recommended that all parties involved seek legal advice from a specialist corporate and commercial solicitor. These contracts often involve complex legal terms, significant financial commitments, and potential risks that may not be immediately apparent.

Obtaining legal advice helps to:

• Identify hidden, unclear, or one-sided clauses
• Tailor the agreement to suit your specific business needs
• Negotiate more favourable terms
• Address issues related to supply chain disruptions
• Ensure the contract is clear, precise, and enforceable
• Establish a well-defined exit strategy in case the arrangement needs to be terminated

How We Can Help

At GA Solicitors in Plymouth, we offer a comprehensive contract review service dependent on your needs. Whether you have received a draft supply agreement or would like to prepare an agreement from scratch, our corporate and commercial solicitors are here to help you fully understand your rights and obligations before signing. 

In addition, we can assist in negotiating the terms of the agreement. While we appreciate that some supply agreements may be non-negotiable, it is still crucial to understand what you are agreeing to and be aware of any associated risks. This knowledge can help you avoid costly pitfalls in the future.

If you would like to discuss your business plans and how a supply agreement may aid them, do not hesitate to get in contact with our expert solicitors in Plymouth by calling 01752 203500 or emailing us at enquiries@GAsolcitors.com. 

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