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Feb
04

Important Clauses in Supplier Contracts

Industrial Processes

Image by Flickr user Lauren Keith (Creative Commons)

Many small businesses hire other businesses as suppliers for materials.   Below are several contract clauses that warrant special attention:

Term.  The duration of the contract should be very clear.  It should end on a specific date like “one year from the (defined) contract effective date.”  If this is a supplier that you foresee a continued relationship with, the contract could “automatically renew.”  For example, the language could read:

“The term of this Contract is one year from the Contract Effective Date (“Initial Term”).   This Contract will automatically renew after the Initial term in subsequent one-year terms unless either party provides the other with XX days advance written notice of termination prior to the end of the then-current term.”

Termination.  Think about how long you would need to find a new supplier if your current one stops providing materials to you every month.  Is the material rare?  Will it take fifteen days to find a new supplier?  Thirty days?  More than thirty days?  After you determine this, make sure the contract does not allow the supplier to terminate the contract without giving you advance written notice of termination for that amount of time.

The termination clause could read:

Either party may terminate this Contract by providing the other with XX days advance written notice of termination.”

If you are bearing more risk in the relationship, you can make the termination clause non-mutual so that you are able to terminate immediately BUT the supplier can not.

For example:

Acme may terminate this Contract immediately at any time, for any reason whatsoever, by providing Supplier with notice.  Supplier may terminate this contract for any reason whatsoever by providing Acme with XX days advance written notice.”

Payment and payment terms.  Here the price, quantity, and description of materials should be extremely clear.  Also, request a discount for future orders (especially if your order volume is likely to increase).  Put this discount amount in the contract up front.  Payment terms should also be laid out.  Will the supplier invoice you?  If so, a clause such as the one below would work. (Acme is a hypothetical small business).

Acme agrees to pay supplier the fees detailed in this contract within thirty (30) days from Acme’s receipt of a correct invoice from supplier.  Acme will make payments via ________________ (specify check, credit card, wire transfer)”
Most small businesses rely heavily on uninterrupted delivery of materials from their suppliers.  Ensure that your contract protects you.

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