7 Provisions for Smooth Sailing Vendor Contracts - Daniel Ross & Associates

Vendor contracts are agreements with other companies that provide you your product, or a component of your product or service, for use in your own business. From this definition alone, we can see the importance of a vendor contract in successful operations; and there are supplementary documents, key terms and provisions that can help ensure that all runs smoothly between buyer and seller.

1. Description of Goods. Also known as scope of work, a detailed description and parameters of what will be provided by the vendor is essential in a vendor contract. This should include the final product as well as such things like the quality of the base materials. You may choose to define the overall vendor relationship with a master service agreement (an “MSA”), which is a more technical term for a vendor contract, and build out each particular project with a supplementary statement of work (“SOW”).

2. Changes in Deliverables. The scope of work may change from project to project, or within a particular project. Anticipate changes by using SOWs. The most frequent change may be the amount of product you need; a requirements contract will address this, otherwise you will need to specify for each order. For intra-project changes, it’s vital to create an approval process for modifications, a system to identify when additional regulatory compliance is necessary, and, most importantly, when changes necessitate an adjustment in price.

3. Price and Payment. Oftentimes a vendor’s price for goods fluctuates with the market price for raw materials used in their production. It’s to your advantage to negotiate rates and lock in a favorable rate, although this can like (and indirectly is) playing the stock market. What you should avoid is a locked-in annual price increase, or at the very least cap that increase to the rate of inflation.

4. Proprietary and Confidential Information. It’s prudent to identify who owns the deliverable product as well as the base materials used in the manufacture, which in all cases will be the buyer. Often, a buyer’s intellectual property, confidential information, or other proprietary information which confers a competitive advantage will be used by the vendor to produce your goods. If this is the case, ensure that the vendor will take reasonable steps to protect that information; but keep in mind that doing so may have an effect on the vendor’s cost and ultimately the price to consumers.

5. Representations and Warranties. You should hold the vendor to at least the basic reps and warranties: its ability to enter the agreement, that its work won’t infringe third-party rights, that it has the necessary qualifications and expertise to perform under the contract, and that the products are free from defect, merchantable, and fit for your particular purpose. You may want to explore further warranties like annual compliance reports, insurance certification, and business continuity plans. And always, always have the vendor identify subcontractors and warrant that they are held to the contract’s standards, and that the vendor is responsible for their performance.

6. Indemnification. Indemnity provisions decide who bears the risk of loss or injury at each juncture. The vendor should bear this risk for a late or incomplete delivery (but may insist upon a forces majeure clause). You and the vendor should assign risk of loss for damage during transit, as that is often never defined and stands at the heart of many conflicts. Be careful of provisions that cap a vendor’s damages or create “basket” liability that requires a minimum dollar threshold to be recoverable.

7. Insurance. Insurance is the best way to offset the risk of loss or injury. Once risk is assigned, the vendor contract should mandate that the risk-bearing party carry sufficient insurance to cover the contemplated risk.

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