Friday, November 9, 2012

Key provisions in Supply Agreements

1.  Minimum Quantities. Liquidated Damages. Does the Buyer have an obligation to buy any quantities? If so, what is the fee for failing to do so?  Such a fee is called “liquidated damages.” Courts are sometimes reluctant to enforce liquidated damages unless the clause contains the language stating that the liquidated damages fee is not meant as a penalty but is a good-faith attempt to estimate actual damages since such actual damages would be impractical or impossible to ascertain.

2. IP, Confidentiality, Non-Circumvention, Non-Competition. Supplier will learn about the Buyer’s product, market, transactions, business partners. Buyer will want to make sure to retain all intellectual property rights in the product and to prevent Supplier from going over Buyer’s head to compete while using Buyer’s contacts and other information learned. This is a good place to include a Liquidated Damages clause (see above).

3.  Prevailing Language clause ensures that, if your contract is written in more than one language, your language will control in case of discrepancies and ambiguities in translation. This is especially important in countries with legal systems different from that of the US, and a lot of the American legal concepts don't translate well or simply don’t exist. For example, injunctive relief, intellectual property rights are often quite literally foreign concepts in countries like Russia, China and India.

4.  Term and Termination. Can both or either of the parties terminate the agreement early for any reason or no reason at all? Early termination fee? It’s usually better to include a fixed price in short-term agreements but give Supplier some flexibility with price if it’s a long-term contract (e.g. Supplier must give ___% discount off of its normal wholesale list prices, beat competitors’ prices, etc.).

5.  Acceptance. Outline the procedure for the Buyer to reject defective products upon inspection. Supplier must replace defective products or give refund.

6.  Warranties. Suppliers will want to disclaim as many warranties as legally possible, while Buyers will want to include such warranties into the supply contract.

7. Remedies Cumulative or Exclusive? Can a party seek all possible remedies listed in the agreement or does the suffering party have to pick one remedy?

8.  Shipping risk allocation (what if products are damaged, lost, stolen, delayed in the mail?).

9. Who pays taxes, fees, import clearance?

11. Indemnification. A party must be reimbursed for damages resulting from the other party’s negligence.

12. Governing Law, Jurisdiction and Dispute Resolution. This is particularly important if your supplier is in a country like China but you don’t want to end up having to go there to sue them in Chinese if anything goes wrong. One alternative would be to include an arbitration clause, so the disputes are resolved quickly, inexpensively and confidentially in your hometown or close by. Some countries restrict the use of arbitration clauses.

14.  Severability/Survival Clause ensures that even if some clause(s) of the agreement are held invalid by a competent authority, the rest of the agreement still remains in force. So, even if the arbitration clause or liquidated damages are not allowed or disfavored in that jurisdiction, you still have an otherwise valid contract.

 13. Entire Agreement. This is to prevent a party from introducing evidence contrary to what the contract says (i.e. “oh, it’s not in the contract but they did promise to do this, that and the other”).