What to look out for when entering a supply contract

When entering a supply contract, it is extremely important to work out all the nuisances before signing to prevent complications down the road and make sure conditions are favourable for you. Here are a few key pointers to look out for in your supply contract.

Warranties

Warranties are promises within contracts to both parties that certain matters are correct and that certain criteria must be met for the supply of goods and services. Warranties can be expressly stated in a contract, whereby the virtues of particular products from a supplier are restated as warranties in a contract, and warranties are ensured by suppliers to be limited to those specifically stated in the contract.

Guarantee

A guarantee involves a third party, where they must honour the obligations of one of the involved parties in the event that they breach the contract. This offers protection for both contracted parties, almost like insurance in the case that something goes wrong. In some instances, personal guarantees involving personal assets may also be involved.

Risk and title

“Risk” refers to the responsibility for security and safety of goods that is passed onto the customer on delivery, while “title” refers to the legal ownership of goods which is not passed onto customers until a full payment is confirmed. You need to be aware of the differences between these two types of clauses so that the type and frequency of transactions between customers and suppliers can be determined.

Indemnity

Indemnity is a promise made from one party to protect the other from specified loss or damage. For customers, this means protection from damage arising from a breach of contract or the negligence of a supplier and vice versa for suppliers. Suppliers should also an insurance broker review their contract to ensure that there is adequate coverage for suppliers against claims under the indemnity clause from customers.

Defects liability period

The defects liability period is the period of time in which a customer can oblige suppliers to rectify any defects from goods or services performed. Customers need to ensure this period is long enough for any defects to be discovered or consider including a retention amount or some form of guarantee until the end of the period to act as a safeguard. On the other hand, suppliers need to agree on the period, reinstate the definition of “defect” and iron out any exceptions that may come as a result of customer misusage or negligence.

Limitation of liability

It is standard practice for both parties involved in a supply contract to limit their exposure liability and risk wherever possible. Suppliers in particular need to ensure that their contract excludes all implied warranties (where legally possible), reduces liabilities if a customer contributes to a failure to meet warranty and if a warranty is breached, removes liability for indirect loss of profits and limits aggregate liability to a numerical figure (e.g. a percentage).

Boiler plate causes

These are standard administrative clauses at the end of a contract which outline legal terms such as:

• Forced Majeure ability to delay without penalty,
• Jurisdiction and laws that govern the contract,
• Transferrence of rights.