Supplier Contracts- What Small Business Owners Need to Know
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3. Compensation
Parties should be clear with one another about what the price of the product or service will be and anticipate whether and how such term may be modified to address material changes in circumstances such as a substantial increase in the price of raw materials.
4. Representations and Warranties
A representation is a statement of fact made by one party to the other to induce a contractual relationship, i.e. The purchaser represents that it has the financial wherewithal to purchase the product for the term of the agreement.
A warranty is a statement of fact made by one party to the other to establish that as of the date the contract is concluded, certain foundational facts are true, i.e. the purchaser warrants that the financial statements (evidencing financial wherewithal) were audited in accordance with General Accepted Accounting Principles.
5. Force Majeure
Force Majeure provisions, sometimes called Act of God clauses, provide that if an event outside the parties’ control prevents one party or the other from fulfilling its contractual obligations that the failure of performance will not constitute contract breach.
A common risk associated with service contracts is that a vendor goes out of business. Such events are not covered by Force Majeure provisions, which are restricted to the disruption of a party’s performance caused by events beyond its control. However, the insolvency of a vendor may violate representations made to the customer concerning the vendor’s financial status.
6. Default and Dispute Resolution Provisions
An agreement should define what constitutes a default (also referred to as a breach) and provide for some opportunity to cure.
Where a default has occurred that has not been cured, or is not susceptible to cure, the parties may need guidance on how the resultant dispute should be resolved. Generally, there are two dispute resolution mechanisms, arbitration and litigation in a court of law. Each course presents a range of features that will be discussed in detail in a separate article.
The parties should also consider what law should apply since this can end up significantly impacting the way in which a decision maker may determine a dispute.
In our next article, we will examine common, boilerplate provisions found in almost all contracts and their significance.
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Contracts Part III: The Role of Legalese in Contract Drafting
