Supplier Contracts- What Small Business Owners Need to Know

Leer en Español

The Six common components of Supply and Service Contracts.

Editor’s note: This is Part IV in the contracts series. Prior pieces in this series: Part I:  Small Business Contracts Part I: A Different Perspective, Part II Contracts Part II: Laying the Groundwork and Part III: Contracts Part III: The Role of Legalese in Contract Drafting

For all start-up businesses, one of the first efforts is to secure from vendors a reliable source of supply of goods and/or services.

There are numerous kinds of Supply and Service Contracts, the terms of which can be affected, among other things, by the scale of the enterprise and the requirements of its industry, but there are common issues that arise in connection with negotiating these types of agreements.

Here are six components common to Supply and Service Contracts:

1. Scope of Service or Description of Product

The first question to address is what is the actual service and/or product that is involved. Services provided by a vendor outside the defined scope of the governing agreement can justify withholding payment from the vendor.

Even precision in defining services, however, may not prevent changes in circumstance that lead to mission creep. For example, services like maintenance services can end up expanding to include reconstruction and repair services, which expansion can become a source of controversy.

One approach to this problem is to add a clarifying “change order” provision that allows the scope of services to expand in response to unanticipated circumstances, after due notice is given to and permission obtained from the customer.

2. Time, Manner, and Place of Performance

A Supply or Service Contract should specifically recite the time, place, and manner regarding the provision of services or the supply of product. 

Supply Contracts, especially concerning product imported from outside the U.S., may include Incoterms, such as FOB, FCA, etc. that define a range of transaction terms such as the manner and place of delivery, which party should bear insurance costs and custom duties, and the point at which risk of loss passes.

If Incoterms are not utilized in a Supply Contract, then the issues covered by an Incoterm will need to be defined specifically in the Contract.

Service Contracts should specify how the service is going to be performed and clarify that quality standards need to be met before payment is authorized.

Parties should also understand that in addition to the terms and conditions set forth in the contract itself, there is an underlying fabric of law that can provide missing terms or clarify existing terms.

For example, each state’s law provides a Uniform Commercial Code that is designed to govern sales of goods contracts. There is also the UN Convention on Contracts for the International Sale of Goods which governs international sales of goods contracts.

Parties can expressly provide that such bodies of law do not govern, but then they should supply their own legal rules.  

Next-  Components 3 through 6 common to Supply and Service Contracts