What Is A Supply Of Goods Contract?
What is a Supply of Goods Contract?
• 14 Jan 22
Goods are needed for the optimal operation of any business and the supply of goods fuels commercial activity. A Supply of Goods contract exists to protect the rights of both supplier and client, and clearly states the terms of engagement. In this way, the client knows exactly what to expect upon delivery of goods and the supplier is aware of their responsibilities. A well-drafted Supply of Goods Contract should form part of every businesses’ contracting infrastructure. In this article, we examine the top 10 points to understand within a Supply of Goods Agreement.
What to look for in a Supply of Goods Contract?
Each party needs to be clear about the scope and nature of the goods being supplied and received, which the contract should highlight with sufficient clarity and precision. The phrasing and terminology used in the specifications should never leave room for any alternative interpretation.
Details that ought to be covered include:
- Quantity of goods supplied
- Specifications of the goods supplied
- Name and nature of goods
- Payment and delivery
When contracting in the position of a supplier, it would be wise to examine the scope of goods, and to remove phrases such as “and all other items necessary” or “etc”. These phrases introduce the risk of scope creep (i.e. an undue expansion of the scope of goods that need to be supplied) and a supplier may find themselves short-changed with the inclusion of these phrases.
Liability provisions may be split into 3 general categories, namely ‘’no liability clauses'', “limited liability’' clauses and “unlimited liability” clauses:
- “No liability” clauses include terms where a party has no liability under the agreement
- “Limited liability” clauses set out specific limitations on a party’s contractual liability
- “Unlimited liability” clauses set out terms where a party’s contractual liability is unlimited
It is important to scrutinise these liability provisions. Failure to do so could either mean potentially extreme liabilities that could cripple your business, or a lack of recourse towards counterparties who engage in egregious behaviour.
A contract lawyer can assist you in drafting a limited liability clause as a goods supplier, which will exclude any liability on the supplier’s part where there is damage or loss caused by the client or events out of the supplier’s control.
If, as a supplier, you receive a supply of goods from the client, any indemnities (protection against loss or financial burden) should be deleted from the contract. Should it not be possible to delete indemnities, consult with a contract lawyer to help you limit the reach of the indemnity clause.
Representations and warranties (“R/Ws”)
R/Ws are a form of performance assurance. Where a party believes that a contractual obligation is particularly important to the supply engagement, it may wish to negotiate for such obligation to be elevated to an R/W. The effect of elevating an obligation to an R/W is that a breach of such an obligation would entitle the innocent party to a broader scope of solutions.
A breach of a representation (“R”) would generally entitle the innocent party to rescind the contract (i.e. terminate the contract and restore parties to their respective positions prior to their entry into the contract). A breach of a warranty (“W”) would entitle the innocent party to monetary damages.
As a supplier, it is important to scrutinise the range of R/Ws in the contract to verify that it is not unduly wide. As a customer, one should ensure that important obligations are captured within the range of R/Ws – these may include an R/W that the goods are in accordance with the specifications.
‘’Title’' typically refers to the legal owner of goods. Should the title be transferred from a supplier to the client, the client becomes the new owner and the supplier loses all rights to the goods. The ‘title to goods’ transfer will only be complete and legally binding once total payment has been made for the goods. A warranty from the supplier should be included stating that they possess legal title to the goods and that said goods will remain free of any hindrances and third-party rights.
Risk makes reference to whoever is responsible for looking after the goods. If goods risk is transferred over to you (the client), it is within your responsibility to ensure that no damage is incurred and the goods are correctly stored and transported. Once the goods are physically in your possession, it is accepted that risk has been transferred to the client, regardless of whether it has been personally collected or if it has been delivered. Insurance is an essential in the case of risk being transferred from supplier to client.
Indemnity is an obligation by a party (the “Indemnifying Party”) to compensate another party (the “Indemnified Party”) for losses that the Indemnified Party incurs as a result of the occurrence of an event (the “Indemnified Event”).
A party may wish to consider obtaining an indemnity for a particular event if it believes that such an event is out of its control and the risk of potential losses arising from such an event are very high. As an Indemnifying Party (usually a supplier), it would be prudent to examine indemnity clauses closely to ascertain the following:
- Is the event being covered by indemnity within your control?
- Are the risk factors for potential losses very high?
- Does the obligation to indemnify cover only the counterparty or its affiliates as well?
- Is the indemnity clause subject to any of the liability provisions stated above?
Once these factors have been closely examined and determined, speak to your lawyer about including an indemnity clause for high risk scenarios.
Intellectual Property Rights (“IPR”)
Intellectual Property (“IP”) is generally defined to mean “creations of the mind” – these include inventions, literary and artistic works, and symbols/names/images used in commerce. IP clauses become particularly important where the goods in question are IP-intensive (i.e. they relate to a novel idea, a distinctive mark, a trade secret, etc). This means that a supplier is providing a client with their Intellectual Property as ‘goods’, which should be sufficiently covered within the Supply Contract.
Termination provisions set out express grounds upon which a party can terminate the contract, and with that, the further provision of the goods. Since termination is rather extreme in nature, provisions with respect to termination would need to be scrutinised. Make sure you keep these questions to keep in mind when reviewing termination clauses:
- What are the grounds for termination?
- Do parties have a right to terminate for convenience (i.e. terminate for no specific reason)?
- Do parties have a right to terminate for cause (i.e. upon the occurrence of specific grounds)? If so, what are these grounds?
- What are your obligations upon the termination of the contract?
- What is the notice period for termination?
It is not uncommon for businesses to disclose sensitive information to each other over the course of a supply engagement. Such disclosures may be required for a host of reasons, including:
- The specifications required for certain goods may provide indications of a businesses’ trade secrets
- The supply engagement itself ought to be confidential and should be kept out of the public eye
- The supply relates to the pending release of a new product that should not be disclosed to the public yet
Under these circumstances, it is crucial to ensure that such sensitive information is kept confidential, and it is certainly not uncommon for a Supply Agreement to contain confidentiality clauses.
When examining confidentiality clauses, it would be prudent to examine matters such as:
- Scope of confidential information
- Consequences of confidentiality breach
- Representations and warranties with respect to the confidential information
9. Dispute resolution
Differences between parties may arise. Under such circumstances, it is crucial to clearly define the discourse for supplier-client disputes. Ideally, disputes should be resolved as amicably, cheaply and quickly as possible. Doing so will ensure that parties continue collaborating on good terms, without experiencing a significant drain on time and money.
10. Governing law
Last but not least, it is crucial to pay attention to the governing law of the Supply Agreement. The governing law dictates which jurisdiction’s laws will be used to interpret the terms of the contract. As the laws of each jurisdiction will differ, it is key to ensure that you choose a governing law that lends enforceability to the rights and obligations that you had bargained for.
There must be absolute clarity and certainty concerning the scope of the agreement, which needs to be set out in unambiguous terms. We hope that this article has been helpful to you as a start-up trying to make headway in the exciting, yet uncertain, world of commerce.
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*The above content does not constitute, nor is it offered as, legal advice of any kind. GLS Solutions Pte Ltd is not a law firm and any support provided pursuant to this entity is not regulated legal advice or legal opinion.