Use a Supply Agreement to detail a business relationship between a buyer and a seller, typically between one business and another who is a manufacturer or supplier. Below, you can learn more about a Supply Agreement and download a free template in PDF and Word format.
What is a Supply Agreement?
A Supply Agreement outlines the parameters of a business relationship between a distributor and their manufacturer or the supplier of their products. For example, your company designed its product. To sell the product, you might partner with a manufacturer who could produce that product and supply it to your business so that you could distribute the items for sale. A supply agreement outlines all the terms of this business partnership.
When determining the terms of the contract, any current or future distribution contracts should be considered. For instance, if your company already has distribution agreements that stipulate orders will be filled in a set amount of time, the agreement must allow for this provision. These stipulations will also need to be considered when negotiating future distribution contracts.
This agreement provides the structure to determine pricing and profits for a company producing a product. This agreement will not only have clauses to ensure the timeline for delivery. The manufacturing cost will also be itemized, and any savings for ordering in larger quantities. In essence, the provisions for this contract are essential to the success of an endeavor that hinges on the distribution of a product.
Your business is unique, so the terms and clauses for your agreement should directly reflect your business model and the constraints of your manufacturer and supplier.
When Do I Use a Supply Agreement?
A Supply Agreement should be used in any business partnership between a supplier and a distributor. If, for example, your company devises a new design or entirely new product for the marketplace. Finding the proper manufacturer and supplier is only part of the process. You’ll also need to discuss the terms of this business agreement and create a legal contract stipulating each party’s responsibility. Different industries will need various clauses.
In some cases, proprietary information is an integral portion of the contract. If, for example, the product is a new invention that no other business manufactures, there must be a clause in the contract ensuring confidentiality between the companies. You could also use a confidentiality agreement.
It’s also essential that there’s a clause indicating where this product can be sold. If you invented a machine to show the future and no other company had anything similar, you would want a clause so that the company putting together the machine couldn’t then sell the device to a competitor.
Your business model might not need confidentiality or discuss proprietary products. For instance, a Pharmaceutical distributor might have contracts with numerous manufacturers. In this case, the Supply Agreement might not stipulate that the product can only be sold to your business. But it would likely include information on liability and clauses to meet the many regulatory requirements in that industry.
These contracts become essential when there is a dispute. Often, the arrangements might stipulate a way that disputes should be settled, and they will always include termination clauses to protect both parties if the partnership needs to dissolve.
In most cases, disputes can be solved through a process. Initially, officers of both companies might discuss the business situation to attempt to reach an agreement. If the companies cannot agree amicably, it might be stipulated that the matter goes to arbitration, or it may be a matter of litigation.
In short, if your business sells products you do not manufacture in-house, you will likely need a Supply Agreement to ensure that your legal needs are covered.
Common Situations For Using a Supply Agreement
- If you regularly supply or receive products or services to or from another party
- If you supply or receive a product or service with a high-risk content or a high price
- If you want to enter into a special relationship with a supplier or buyer in any form
Common Sections in Supply Agreements
Supply Agreements include clauses specific to the business they’re created to serve. However, some common uses for these contracts are routinely retained to protect businesses in case of possible issues. Here are a few of the considerations when drafting your Supply Agreement:
- Terms of the Agreement. The term is the length of time the agreement is in place. You might create a good deal for one year or five years. You might set the terms so that the agreement automatically renews. The contract might also stipulate that a new contract must be signed annually.
- Grant of License. Buyer represents and warrants to the supplier that all trademarks, trade names, trade labels, trade dress, packaging, and other intellectual property supplied by the buyer to the supplier for the products do not infringe upon or otherwise violate the intellectual property rights of any third party.
- Ownership of the Products. State that the buyer owns all the rights to the products produced by the supplier. You should also prohibit the sale, resale, or distribution to any entity other than the buyer, of the products produced by the supplier unless written permission is made.
- Confidentiality and Proprietary Information. In some cases, confidentiality between business entities might be integral. This should be directly addressed within the contract to protect proprietary information from competitors.
- Product Specifications. There are often specifications that need to be met for the product to pass safety protocols and other considerations before being sold to the public. This contract area would consider any federal requirements in the particular industry. The product should also discuss the protocol for a situation where the products do not meet standards – i.e., what’s the process for returning faulty products to the manufacturer and the timeline for replacement?
- Pricing. The contract should stipulate the pricing per item and account for any savings for larger orders. For a long-term contract, this clause might offer insight into how to handle price increases over the contract term. There should be a protocol for increasing prices as the costs of materials and overhead fluctuate.
- Payment. Whether payment will be made after submitting a purchase order, after delivery of the products, or according to the statement of work. You should also include what happens if any payments are late and if the buyer will be entitled to any discount if payment is made early.
- Logistics. The contract should discuss the cost of logistics. Which entity will pay for logistics, and which entity will be responsible for the shipping/packaging of products? Other considerations in shipping include the time frame of delivery and any guarantees on the timeline of receiving products.
- Clauses for Acts of God. While hopefully rare, there are cases where whole inventories have been lost due to natural disasters. This should be a consideration in the contract so the responsible party can adequately cover products with insurance when they become their possession.
- Clauses for Damage During Shipping. In some cases, products can be damaged during transit due to no fault of the manufacturer or distributor. The agreement should have a provision for this aspect of the process.
- Termination Clauses. There should be a clause in the contract discussing the termination of the agreement. There might be several reasons that termination becomes necessary. One company might wind up insolvent or unable to meet the agreed-upon contract. In this case, the remaining company needs to be able to sever the agreement to continue its venture with a different manufacturer or distributor. You may need to use a notice of contract termination.
- Liability. When products are eventually sold to the public, liability must be discussed in the agreement. There might be clauses containing warranty information from the manufacturer, and the contract can stipulate which entity is responsible for liability to the public.
- Force Majeure. Neither party will be liable for the costs or expenses arising from any failure or delay in the performance of the supply agreement due to causes beyond the control of either party.
- Amendments. Outline how the agreement can be amended, typically in writing and signed by both parties.
- Notices. Outline that any notice or communication under the supply agreement must be in writing and the order in which it must be sent.
- No Waiver. Include that no party shall be deemed to have waived any provision of the supply agreement or the exercise of any rights held under the agreement unless such waiver is made expressly and in writing.
- Assignment. The parties agree that their rights and obligations under the supply agreement may not be transferred or assigned without the buyer’s prior written consent.
- Governing Law. Detail what state law will govern the agreement.
- Disputes. Outline how any disputes that arise from the supply agreement will be handled, either through court litigation, binding arbitration, mediation or mediation, then binding arbitration.
A supply agreement is essential for any company distributing products manufactured by a different entity. There are many possible stipulations your agreement can include to protect your assets better and aid you in addressing potential disputes in the future.
Three Reasons Why You Need a Supply Agreement
The truth is that many companies, even large corporations with impressive legal departments, have contracts that they don’t pay enough attention to. It’s routine for contracts such as supply agreements to be drawn up, signed, and filed away. That being said, there are several consequences of not having an agreement in place:
1. Your business won’t have a concrete manufacturing and distribution timeline
Perhaps the most significant component of the agreement is the timeline. If the manufacturer doesn’t meet the agreed-upon schedule, the distributor cannot deliver promised products to their customers.
2. Vital information about packaging and logistics will be unclear
There are, of course, other essential aspects to this agreement. Information such as packaging and logistics are often discussed in these agreements. When you consider the cost of shipping one package to a relative, you’ll recognize that these “small” considerations can amount to a significant expenditure.
3. Your business won’t be properly protected
Often companies look closely at these terms when the contract is drafted and signed. Then the agreement is filed. Until there’s a problem.
The problem – is business entities not meeting their contractual obligations, insolvency of one company in the agreement, or legal liability issues from consumers. All of these issues can pose a severe risk to your business. And all of these issues can be discussed within the agreement. If you’ve created a well-thought-out contract, there should be provisions for the worst-case scenario to protect your company and investments.
Without an agreement, there are virtually no protections from these scenarios. Your company may be liable for manufacturer errors, and your partner company’s difficulties can impact your own.
Having an agreement is not enough. Your agreement must be tailored to your business model and dealings. A good practice is to review your contracts regularly to determine whether the clauses and stipulations best meet your current needs.
Supply Agreement Sample
Here’s what a typical Supply Agreement looks like:
