Should we bother with a Supply Agreement?
For a lawyer, the above question is akin to asking “should I tie my shoe laces?” but putting the legal ‘nerd alert’ to one side, there are many good commercial reasons why it is important to have a supply agreement in place. Whilst the list of benefits is lengthy, below is a short and sweet top 5:
- Price: Locking in a price is an obvious advantage to a longer term supply agreement. It not only provides certainty against random price increases but also allows you to plan and budget with confidence well into the future, an advantage which can be integral in fast developing markets.
- Exclusivity: If the item to be supplied is innovative or a differentiating component of your finished product then you may want to lock in that competitive advantage by ensuring your supplier does not sell it to your competitors (perhaps within a set geographic territory). Sure you may have to commit to purchasing a minimum quantity in exchange for the privilege of exclusivity, but in circumstances where the item is an integral component, it may well be a small price to pay to lock out a competitor.
- Forecasting: Supply agreements can be formulated to include forecasting obligations, requiring parties to share information about rolling demand and production capacities. This can make both parties more efficient in their production efforts and avoid missed opportunities while awaiting key components on order.
- Intellectual Property: A common concern when securing a supplier for specialist items is that, in sharing valuable design intellectual property with the supplier, there is a risk that the supplier could sell the innovative component to other parties or commercialise it for themselves. A good supply agreement can guard against such risks by ensuring an appropriate confidentiality regime is in place, expressly setting out ownership of IP rights and restraining commercialisation by the supplier.
- Avoid the supplier’s standard T&C’s: Many organisations will fail to appreciate that, without a formal supply agreement, the contract upon which the commercial relationship is based will be the supplier’s own terms and conditions of sale. This is the 1 to 2 pager in microscopic grey print that nobody reads and which is usually attached to the back of an invoice or purchase order.
Such T&C documents are often weighted very heavily in the supplier’s favour and disclaim liability for all sorts of nasties like defective products, late delivery and even loss resulting from a supplier’s general ineptitude. By having a formal supply agreement you can displace those standard terms and know exactly where you stand when it comes to faulty goods and product returns.
If you would like assistance in preparing a supply agreement (or advice in relation to a supplier’s standard terms), contact a member of our team for practical commercial guidance.