In this article we shall talk about why it is important to ensure that you have a robust vendors’ agreement in place while conducting business.
Irrespective of whether you are a wholesaler, retailer or service provider. All businesses have to engage with vendors for something or the other. Some businesses might engage with vendors for their direct expenditures such as raw materials, packaging materials, logistics etc. Other businesses will engage with vendors for more indirect expenses such as printing paper, stationery, computer equipment etc. Basically, every business will have to engage with a vendor in the course of their business. So this is an area of a business that the management should iron out in terms of standard operating procedures, process and policy. After all, maintaining the supply chain, without any disruption, throughout is key to running a good business. And this includes ensuring a formal and robust vendor agreement to arrive at an arrangement with regards to all aspects of the transaction including price, deadlines, logistics, dispute resolution, etc. This arrangement or agreement is called a vendor’s agreement.
Important Clauses
Parties To The Agreement
This is always the first clause of the agreement that states the names of the parties to the agreement and in what capacity are they entering the agreement. In this case one party will be the ‘Buyer’ and the other party will be the ‘Vendor’. This portion also suggests why these parties are engaging ith each other. This portion will read as follows:
“WHEREAS X is a business engaged in abc which requires xyz for the purpose of conducting the business
AND
WHEREAS Y is in the business of selling and supplying xyz and is willing to fulfil the supply demands of X as per the conditions and provisions laid out under this agreement.”
Scope And Confidentiality
It is essential at the beginning of any contractual relationship to determine the scope of confidential information as well as information related to the business. Companies often devote a large number of resources towards the development of proprietary information. Protecting such information and ensuring that confidential information is only used in accordance with the terms and conditions of the agreement is of paramount importance.
Pricing And Payment Schedule
When it comes to negotiating prices for a contract then the process is usually simple when it is over a single good. However, in cases when there is a complex supply agreement with a variety of factors that influence the pricing, the negotiation for the pricing terms of the contract become more difficult. Pricing in contracts also needs to take into consideration a potential increase in prices of aspects such as licence fees, cost of labour and material.
While negotiating terms for payment, one needs to account for what is referred to as the “time value of money”. Thus, while negotiating payment terms, it is essential to ensure that the payments are as delayed as possible.
To Draft a Vendor Contract Agreement click here.
Possible Change In The Deliverables
Often in a vendor agreement, situations arise because of which there needs to be a modification to the clauses which deal with the scope or nature of the service or goods delivered. Thus, there needs to be a clause which provides for a defined set of exceptional circumstances under which a modification is permitted for a set of events that are likely to take place.
Termination And Remedies
While drafting an agreement, especially a vendor agreement, the question that needs to be asked is how one gets out of this agreement if the needs so arise. If such a need arises, then the manner in which such a termination takes place and the circumstances under which such termination takes place needs to be carefully determined. For example, a clause which provides you with a mechanism for unilateral termination of the contract does not make a lot of sense if you have already pre-paid for a long duration of services. Unless there is a proper mechanism for claiming remedies.
While drafting remedies for a vendor agreement one must keep in mind the law of the land, given the wide variance in the law pertaining to remedies according to different jurisdictions. Most monetary remedies include damages which can be termed as consequential, incidental, special, punitive and exemplary. Non-monetary damages can also be considered in the form of equitable relief which may come in the form of restructuring of the agreement such that the aggrieved party is restored to the extent that such a party has been damaged. Non-monetary damage can also be in the form of injunctive relief which is often done in cases of breach of confidential information.
Disclaimers and Indemnification
One of the purposes of an agreement from both parties’ point of view is to disclose certain facts, thereby reducing uncertainty and mitigating risks. There need to be clauses which disclose risks and by virtue of the same limit liability. Indemnification is also a key element to most contracts including vendor agreements, through which one party agreed to indemnify the other in case a particular set of events takes place. In order to ensure that there is no uncertainty regarding the number of damages that one is exposed to, limitation of damages is an important facet in agreements.
These are the few key elements which need to be looked at in a vendor agreement. However, it is important to keep in mind that a vendor agreement can greatly vary in its nature based on the nature of the goods or services for which the agreement is being entered into. Consequently, the nature of each of these key terms would vary, making it very important for drafters of the agreement and those negotiating the agreement to keep the nature of the business in mind.
Conclusion
An agreement contractually binds the parties to fulfil their responsibilities as per the agreement hence guaranteeing that the transaction for which the agreement has been drafted is legally bound to occur. Having a vendor’s agreement in advance ensures stability in pricing which helps with financial planning; gives the business a clear timeline on delivery and logistics which helps with better inventory planning; and it indemnifies both the businesses from any mistakes or defaults from each other. So putting an agreement in place, especially with vendors with whom you intend to engage with on a long term basis, is crucial. If you need help with drafting a vendor’s agreement for your business or have any othe legal or compliance related query, feel free to get in touch with us so our team of experts can get a better understanding of your requirements and assist you with them.
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