The supply of goods and services is ubiquitous in the world of commerce. Businesses supply goods and/or services to obtain revenue, while receiving goods and/or services to fuel operations.
A supply of goods and services agreement (a “Supply Agreement”) is a contract that documents the terms upon which a party supplies both good and services to another party, and lends enforceability to parties’ rights and obligations under the supply engagement.
Given that the supply of goods and services is such a common activity in the world of commerce, a supply of goods and services agreement ought to form part of the backbone of a business’ contracting infrastructure.
In this article, we examine the top 10 issues to look out for in a Supply Agreement.
Issue 1: Scope of goods and services
Parties need to be clear about the scope of services and goods that are being supplied, and the Supply Agreement would need to set out such scope unambiguously and precisely.
In the case of services, it would be important to set out the services standards that the supplier is required to meet. In the case of goods, it would be important to set out the specifications that the goods supplied are required to meet.
Where contracting in the position of a service provider, it would be prudent to examine the scope of goods and services, to remove catch-all phrases such as “and all other things necessary” or “etc”.
Such phrases introduce the risk of scope creep (i.e. an undue expansion of the scope of goods and services that need to be supplied) and a service provider may find itself short-changed if such phrases are included.
Issue 2: Liability
There are 3 general categories of liability provisions, namely “no liability” clauses, “limited liability’ clauses and “unlimited liability” clauses.
As their respective names suggest, “no liability” clauses set out the scenarios where a party has no liability under the agreement, “limited liability” clauses set out caps on a party’s contractual liability, and “unlimited liability” clauses set out scenarios where a party’s contractual liability is unlimited.
“No liability” scenarios would typically cover loss scenarios that are unforeseeable and/or remote in nature (e.g. various forms of indirect loss, such as loss of profit).
“Unlimited liability” scenarios would cover scenarios where a party’s contractual liability ought to be unlimited. These typically relate to losses arising from conduct that is extremely egregious (e.g. gross negligence, wilful misconduct etc).
The caps set out in “limited liability” clauses could take reference from various values – e.g. the purchase price of the goods and/or services, the amount spent on goods and/or services over the past ‘x’ number of quarters, etc.
It is important to scrutinise these liability provisions – a failure to do so could mean sky-high potential liabilities that could cripple tour business.
Issue 3: Representations/warranties (“R/W”)
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 a 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 with a wider range of remedies.
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.
Accordingly, where a R/W is breached, the innocent party has the option to claim monetary damages or to terminate (even rescind) the contract.
As a service provider, 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.
Issue 4: Indemnities
An 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 its potential losses arising from such an event are very high.
As an Indemnifying Party, it would be prudent to examine indemnity clauses closely to ascertain the following:
● the event covered by such an indemnity – is the event within your control? Are the potential losses arising from such an event very high?
● whether the obligation to indemnify covers only the counterparty, or its affiliates and personnel as well
● whether the indemnity clause is subject to any of the liability provisions listed above
Issue 5: Title/risk
Title/risk clauses are particularly applicable for the supply of goods.
“Title” relates to the legal rights of ownership. A party with “title” in goods has the legal rights of ownership in relation to such goods. From a financial perspective, this could mean that these goods are “on your books” (colloquially speaking).
“Risk” relates to the bearing of risk in relation to loss of and/or damage to goods. A party that bears the “risk” in goods bears the risk of loss and/or damage in relation to such goods.
Both “title” and “risk” are distinct concepts. “Title” in goods can pass from one party to another without “risk” following suit, and vice versa.
Typically, a customer would prefer to have “title” in goods as quickly as possible and to receive “risk” in such goods as slowly as possible, and vice versa.
Issue 6: 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 and/or services in question are IP-intensive (i.e. they relate to a novel idea, a distinctive mark, a trade secret etc).
Parties should examine the following when reviewing IPR clauses:
● Are you required to represent/warrant that your provision of goods/services does not infringe upon the IPR of third parties? If so, are you prepared to do so?
● Has the counterparty granted you a licence over a sufficient amount of his/her IP, in order to enable you to (i) enjoy the full benefit of the contract and (ii) perform your contractual obligations?
● Do you get to own the IPR that you create during the duration of the contract?
Issue 7: Termination
Termination provisions set out express grounds upon which a party can terminate the contract. Given that termination can have draconian effects (it ends the contractual engagement), termination provisions would need to be examined.
While reviewing termination clauses, you should examine the following:
● What are the grounds for termination?
● Do parties have a right to terminate for convenience (i.e. terminate for no specific ground)?
● 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?
● What clauses survive (i.e. continue to remain in effect) the termination of the contract? How long do they survive for?
Issue 8: Confidentiality
It is not uncommon for a businesses to disclose sensitive information to each other over the course of a supply engagement. Such disclosures may be required for a whole host of reasons, including:
● The specifications required for certain goods may provide indications of a business’ trade secrets.
● The supply engagement itself ought to be confidential and should be kept out of the public eye.
● The supply and goods and services relates to the pending release of a new product that should not be disclosed to the public yet.
Under such 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 breaches of confidentiality
● Representations and warranties with respect to the confidential information
Issue 9: Dispute resolution
Differences between parties may arise. Under such circumstances, it is crucial to set out clearly how disputes are to be resolved.
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.
One way to do so is to implement informal dispute resolution mechanisms before moving on to other more formal dispute resolution mechanisms (e.g. litigation, arbitration) that tend to be most costly and adversarial. Such informal dispute resolution mechanisms may include:
● Consultations between the management teams of the business partners
Issue 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 do 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.
Besides, certain jurisdictions have specific legal requirements that need to be fulfilled, in order for a contract to be enforceable. For example, the Indonesian language must be used in any contracts involving state institutions, government agencies of the Republic of Indonesia, Indonesian private institutions, or individual Indonesian citizens. A failure to use such language would result in the contract being deemed null and void.
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.