6 Key Terms in Customers & Suppliers Contracts
What are the key terms of contracts with customers and suppliers?
The 6 key terms in these agreements are:
1. Time & Method of Delivery
From the question of “who pays the delivery costs” to “the agreed back order policy”, the time and method of delivery of products is important, particularly if stock is managed on a ‘just-in-time purchasing’ method. Late deliveries, stock shortages and mistakes on the part of your supplier will more often than not cost money, both in the lost sales and in the goodwill lost through inability to meet obligations.
If “time is of the essence”, then it should be stated in the contract. It is a good idea to include a schedule for deliveries to which both parties can refer and enforce. A term may also be agreed that where the supplier cannot provide a product or service when due, the customer may obtain it from another source. This will prevent the possibility of the customer waiting unnecessarily or receiving a double-dose when the original supplier fills the first request on back order months later.
2. Payment
Upon determining the creditworthiness of a customer, it is important to set out at the outset the expectations for payment. Issues include:
- Mode and schedule of payments?
- Deposit requirements?
- Security over the customers business or other assets for payment?
- Is the supplier still required to deliver products or services if payment is late?
Agreement can also be reached that ownership in the goods are retained by the supplier until payment is received in full. This allows the supplier to repossess the goods should payment not be made, even if the customer becomes insolvent. Such a term would also set out the method of collecting such goods eg. right to enter upon the customers premises etc.
3. Quality
To protect the customer and prevent compromise of the quality of a businesses own product or service, stipulated levels of quality can be adopted. If measures such as a right to inspect goods upon delivery, refunds or warranty are required or excluded, they can be enforced by their inclusion in the contract.
4. Change of Ownership
Clauses should include whether or not the agreement is to continue if either the customer’s or the supplier’s business is sold. Purchasing a business without suppliers is not appealing to most buyers, neither is purchasing one without any customers. Also, a “special deal” may have been entered into because of a relationship with the particular customer or supplier that the party does not want transferred.
5. Default
A default on the agreement by the other party will inevitably cost money and possibly goodwill. Default clauses must outline a number of remedies for these contingencies. Examples include: payment of interest on outstanding amounts, payment of costs incurred in collecting debt, a percentage of sales lost by the default and the option to discontinue supply of the product or service.
Consideration should also be given to mandatory dispute resolution clauses. These are generally cost effective, faster and more likely to result in a ‘win/win’ outcome and a continuing relationship.
Limitation of liability in the case of default must also be considered. If applicable, this will reduce or eliminate a party’s responsibility to pay damages in the situation of default.
6. Cancellation and Termination
However indefinite an arrangement may seem, there is a need to plan for its conclusion. The contract may be for a defined period or require a set amount of notice to cancel the contract. In addition, obligations that will continue after the deal, such as confidentiality and restraint of trade, should be laid out clearly.
Joe Kafrouni, Legal Practitioner Director, Kafrouni Lawyers
Disclaimer
The information provided by Kafrouni Lawyers is intended to provide general information and is not legal advice or a substitute for it. The parties to an agreement should always consult their own legal advisors to discuss their particular circumstances. Kafrouni Lawyers makes no warranties or representations regarding the information and exclude any liability which may arise as a result of the use of this information. This information is the copyright of Kafrouni Lawyers.
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