Determine the goals of the supply agreement
Before signing, both parties should determine exactly what the agreement's goals are. If you are the supplier, decide how many product items you can realistically provide to the buyer within the designated time.
If you are the buyer, decide how many product items you realistically need for your business within the designated time. A good agreement accurately captures the parties' intentions.Before finalizing the draft, ensure the parties are on the same page.
Duration of the agreement
A supply agreement is usually effective for a specific period of time. Sometimes, however, it can be drafted to continue indefinitely (i.e., with no particular end date). For example, you can set the duration of your agreement to one year, and if you’re happy with the supplier, you can extend it after discussion.
Pricing details of the products
A product supply agreement should include both price and payment terms. For short-term agreements, it is often better to agree to a set price. For long-term agreements, it may be better to provide details about changing prices at regular intervals.
For example, a long-term contract could specify a discount from the supplier’s pricing list. Alternatively, the parties could set a price in a schedule to the agreement and agree that it may be changed at any time.
Entering into an exclusive business relationship
Before entering into an agreement in which a supplier agrees to deal with a buyer exclusively (i.e., not to give products to any other company for sale), make sure both parties understand the supplier’s business. Suppose the supplier offers a unique product or service, and the buyer’s competitors need that unique product or service to compete in the market. In that case, the parties may be unable to have an exclusive deal. This may be considered illegal if it restricts competition.
Either party should review the supply agreement thoroughly
Give each party time to review the supply agreement. They must ensure that all discussed and agreed-upon terms and conditions are mentioned and clauses aren’t misinterpreted.
The parties must sign two copies once the supply agreement is ready after the changes. The buyer keeps one copy of the agreement, and the supplier retains the other.
Depending upon the complexity of the supply agreement, if the supplier or purchaser wishes to have a witness, then the needed arrangements should be made during the signing ceremony.
You can appoint an attorney to help you draft a document that meets your needs.
Important components included in a product supply agreement
The following instructions will help you understand the terms of your product supply agreement.
Introduction of parties
This section identifies the document as a product supply agreement. You need to provide the effective date (the date when the contract was signed) and the details of the parties involved in the agreement. If applicable, mention what type of organization(s) they are.
In a product supply agreement, the “supplier” is the party who agrees to supply the products, and the “buyer” is the party agreeing to purchase them.
Recitals
The “whereas” clauses, referred to as recitals, define the world of the agreement and offer key information about the parties. Describe the supplier’s business in general terms here. Also, give a detailed product list that the supplier will be selling to the buyer. Be specific. If there are serial numbers or titles to the items, include those as well.
Term
The time period during which the products are supplied is called the “term.” The term starts on the date when the agreement is signed. Provide the number of years you want the initial term to run.
In this clause, you can also mention whether you want the supply agreement to be renewed automatically at the end of the initial term. If you include this clause, consider how long you want additional terms to be. Depending on your arrangement, this can be the same as the initial term, longer or shorter. In an auto-renewal agreement, you must also give an advance written notice to stop a renewal term from taking effect.
Agreement of purchase and sale
This section states the supplier’s promise to sell and the buyer’s promise to buy the products in supply agreements.
Minimum quantities
It is the buyer’s promise to buy at least a certain amount of products within a given time frame. Enter this number or quantity and the time within which the buyer must buy them. Depending on your agreement, this can be days, months, or years. You can also designate how this supply of products will be measured (e.g., in units, pounds, volume, cost, etc.).
Failure to purchase minimum quantities
This clause states that if the buyer doesn’t buy the minimum quantities and those amounts are available, it must pay the supplier a certain amount. Provide the amount and deadline by which it must be paid.
This provision is for “liquidated damages,” which is simply an agreement by the parties to set a specific damages amount in case of a breach. This can be any reasonable amount.
Failure to supply minimum quantities
This part states that if the supplier doesn’t supply the minimum quantities, it must pay the buyer a certain amount. Enter this amount and the time frame within which it must be paid.
Exceptions to purchase requirements
In supply agreements, thisprovision provides certain exceptions to the buyer’s requirement to buy from the supplier. These can be:
- Emergencies
- If the buyer’s customer requests different items
- If the supplier can’t or won’t supply the items
Inspection and acceptance
This section allows the buyer to examine the products received and determine whether they are acceptable. Give the buyer the time period to perform such an audit. Under this section, the supplier agrees to replace the defective product or refund the cost of such product if the buyer finds it unacceptable.
Warranty and limitation of remedies; disclaimer
In this section, the supplier promises not to deliver defective products and gives assurance that the products will be of the assured quality. If the products happen to have any defect after their shipment, the supplier promises to repair or replace such products. There may be a specific period for which such defects should be reported to the supplier. For example, if the buyer receives a defective product but reports it after six months of the receiving date, then it might be considered as an invalid request.
During such an event, the supplier party expressly disclaims that the quality standards weren’t compromised from their end. Such defects might have happened either from manufacturing facilities or during transit.
Issuance of purchase order
This provision requires the buyer to make written requests before the products will be supplied. If this is a long-term contract that requires multiple deliveries, having this provision helps. However, if your arrangement includes only a small number of deliveries, it can be outlined in the supply agreement.
Cancellation and amendment of purchase order
This part states that if your arrangement requires a purchase order to place orders, the buyer is allowed to cancel or change the orders if it provides advance notice.
Delivery of products/shipping
This section provides the details regarding the delivery of products such as:
- The delivery schedule: Depending on the type of product, the delivery schedule can be weekly, monthly, quarterly, or yearly basis.
- Delivery date: The time and date by which the supplier will deliver the products.
- Shipping costs: Add details regarding the transfer price and who’ll bear the costs incurred for the shipping.
Use this section also to define each party’s responsibility during shipping, e.g.,
- Until the products reach delivery, the supplier will be responsible for any damage to, loss of, or delay in providing the products.
- Once the products are at the delivery point, this responsibility is transferred to the buyer.
Pricing
In this part, enter the applicable prices for the products sold (and supplied) under the product supply contract. Be sure to indicate if these prices may change over the term. According to the terms of this section, the prices include all taxes and fees, so keep that in mind as you negotiate the prices for the products.
Payment terms
This section specifies how many days after receipt of the supplier’s invoice the buyer has to pay the amounts owed. Give the number of days you and the other party have agreed to.
Intellectual property rights
Here the supplier expects the buyer to safeguard their intellectual property and keep trade secrets private. If the supplier owns any intellectual property (e.g., trademarks, copyrights, designs, drawings, etc.), including provisions spelling out ownership rights in that property is a good idea.
This provision requires the buyer to use the supplier’s intellectual property on the products and the supplier to help the buyer’s staff use the supplier’s trademarks or name. However, the buyer is not given any direct or indirect ownership rights to the supplier’s intellectual property. The buyer is only granted the right to use the supplier’s property.
Confidentiality
This optional provision allows the supplier to require the buyer to keep information mentioned in the agreement private. Both Parties are required to keep information about the products confidential as well.
Termination
This clause states that the agreement can end before time if certain actions or material breaches occur. For example, if the buyer doesn’t pay the supplier and continuously defaults on the payments, the supplier has the right to end the agreement. The parties should also notify each other of the intent to terminate the agreement and its reason.
Default and remedies
Define each party's rights if either party defaults under the supply agreement.
Force majeure
Contracts may contain a clause known as "force majeure" that releases parties from liability for unforeseen and unavoidable disasters that disrupt the planned course of events and prohibit parties from carrying out their duties. These provisions typically cover both human-caused and natural calamities, such as war and man-made illnesses, and disasters like hurricanes, tornadoes, and earthquakes. During such instances the parties should give a written notice as soon as possible.
Such notification helps the parties prepare for contingencies and promotes business relationships.
Indemnification
This provision allocates responsibilities between the parties if problems arise in the future and protects each party from the financial consequences of the other’s illegal or harmful conduct.
For example, if the supplier fails to produce products of the agreed quality or sells defective products, the buyer will not be held responsible for any issues arising.
The supplier is also protected if the buyer doesn’t meet its obligations under the conditions of the agreement.
Arbitration
This commonly used optional provision requires the parties to resolve disputes in arbitration (rather than in the courts). There may be local restrictions (or limitations in your industry) about using these clauses, so reviewing laws governing arbitration in your area and your field is a good idea.
Successors andassigns
This part explains that if the involved parties get acquired by a new company or the ownership gets transferred to their successors or heirs, then all the rights and obligations will also be transferred to the new company or successor.
Entire agreement
Here, the parties agree to sign the agreement according to the terms and conditions mentioned in the document as a whole.
Modification
This section indicates that any changes to the document are only effective if prior written consent is taken from the involved parties.
Notice
This section lists the addresses to which all official or legal correspondence should be delivered. Provide the mailing address for both the supplier and the buyer.
Governing law
This clause allows the parties to choose the applicable law regarding the product supply contract. Once the state and local laws are decided, those applicable laws shall govern and interpret the agreement.
Severability
This section protects the terms of the agreement as a whole, even if one part is later invalidated. For example, if a state law prohibitsarbitration clauses, it will not undo the entire agreement. Instead, only the section dealing with arbitration would be invalidated, leaving the remainder of the document enforceable.
Counterparts; electronic signatures
If the parties involved are based in different locations, this clause allows them to sign the agreement using electronic devices or electronic signatures.
Affirmation of the parties
The parties state that they have entered into the agreement voluntarily, without relying on any promises, and that they understand its contents.
Headings
This section states that the headings at the beginning of each section are meant to organize the document. The headings should not be used to interpret the agreement.
A product supply agreement can be long and exhaustive, and creating an agreement from scratch can be tiresome. A product supply agreement template helps you create your supply agreements much quicker and easier. LegalZoom provides a comprehensive agreement template that is easy to use and readily available.
A product supply agreement ensures that both parties understand their rights and obligations. With careful drafting, yourproduct supply agreementwill lay the foundation for a profitable (and long-lasting) relationship between supplier and buyer.
Frequently asked questions
What’s a product supply agreement?
A product supply agreement, sometimes called a supply agreement, defines the rights and responsibilities of a company that will supply goods (usually a manufacturer or wholesale distributor) and another that will receive them to sell at retail.
A supply agreement clarifies the terms of product orders and secures the inventory needed to keep sales flowing. It helps to set and maintain the supply in the time frames and inventory amounts that are best for both businesses.
What details are needed to complete a supply agreement?
The information you'll need to have handy to complete your supply agreement are:
- Who it's coming from: Have the business name and address ready
- Who it's going to: Know who this document is going to and have their contact information handy
- Which state will govern the supply agreement: Specify the state so it's clear what laws apply
- Time period: Be clear about how long each party has to notify the other about missing products, damaged merchandise, changes in inventory, or disputes
- Product information: Know precisely what product lines will be provided, the shipping frequency, trademark information, and prices per unit
