Do you have a business that requires sourcing products or services from suppliers? Many companies engage with overseas suppliers for a variety of reasons, including cost-saving and product availability. Whether you work with local or international suppliers, entering into proper legal agreements with your suppliers is essential.
In this article, we outline the five main legal areas you should consider before engaging with suppliers, to ensure that you maintain constructive business relationships and stability within your business.
1. Supply Agreement
Entering into a supply agreement is the l first step to take when engaging a supplier. Although, on some occasions and depending on the circumstances, some suppliers may not ask for, or require a supply agreement. As a buyer, it would be in your best interest to have a detailed and comprehensive supply agreement.
In general, a supply agreement should include the following terms:
- Product or service description –providing precise product specifications and clearly identified services that are to be provided.
- Price – of the product or service you are sourcing. In various circumstances, these prices might change and as such, you should include clauses that cover how prices might fluctuate in the future or for the term of the agreement. This will ensure you have a clear expectation of your cost and expenses.
- Payment – this will include the terms of payment, such as how payment will be made, where the payment will be made to and how often the payments will be made. It is important to have clear payment terms because cash flow may impact the flow and operation of your business.
- Warranties – product and service warranties are critical to include in the supply agreement. As a business dealing with end consumers, you are most likely liable under the consumer laws for faulty products. However, if your supplier does not provide warranties or guarantees, your business might find itself liable for dealing with faulty items. Having clarity on what your warranty terms are with your supplier will also ensure your supplier is committed to giving you the best quality possible.
- Liability – When dealing with international suppliers, it is common practice to negotiate and provide for the liability on the parties in the event of a legal dispute regarding the products.
- Termination – in the event that either party wish to terminate the business relationship, what are the rights and obligations of each party and how will the transition occur?
Confidentiality – like any other business arrangement, working with another business entity means that they might have access to confidential information about your business. It is crucial to have confidentiality clauses together with a non-disclosure agreement to ensure your information is protected.
2. Distribution Agreement
If you only engage local suppliers, a supply agreement will be sufficient. If you work with overseas suppliers, it is likely that you will need to enter into an Import/Export Agreement, also known as a Distribution Agreement.
A distribution agreement is a form of commercial contract between you and the international supplier that outlines the responsibilities and obligations of both entities. A distribution agreement may cover many of the terms in a supply agreement covers but is more contextualised to the import of goods from a supplier.
3. What if your supplier fails to deliver?
If a supplier fails to deliver on the terms of the agreement, in most cases, you can terminate the agreement. A such, it is essential to understand how and under what circumstances termination can occur.
First and foremost, if the supplier fails to deliver because of performance-related reasons, a well-drafted supplier agreement will give you enough leverage to opt-out and end the business relationship. In some cases, the supplier may not be able to deliver on the terms due to unforeseen circumstances. For example, the supplier may have little to no control over the product shipments.
The country in which your supplier is based might impose a new trade restriction, new export laws, or even temporary restrictions that directly impact the supplier’s ability to deliver their end of the deal. For example, in the last 15 months, we have witnessed a lot of businesses face delays in product shipments due to Covid-19 international restrictions.
This is known as a Force Majeure event. When drafting a distribution agreement, it is essential to have a Force Majeure clause to protect your interest if your supplier is no longer able to fulfil their obligations and to give you the right to terminate the contract and find a new supplier.
4. Enforcing An International Agreement
It is important to consider how disputes will be handles between you and your supplier.
Entering a business relationship with an overseas vendor is more complex than working with a local supplier. Generally speaking, when drafting your agreements with overseas parties, you want everything to be under the Australian law (this makes things a lot easier on your end). Having said that you still need to be aware of any local laws that your supplier might be subject to.
For example, each jurisdiction is governed by different laws on how to draft and execute documents, so there’s potential uncertainty around the validity of your agreements.
There are two considerations regarding the international enforceability of a contract:
- What is the governing law?
- Who has jurisdiction
The governing law refers to which country’s laws will apply to the contract, whereas jurisdiction refers to who will hear the disputes if the contract is enforced. Ideally, you and your supplier should reach an agreement around whose laws will apply, but if no agreement is made, another option is to adopt a uniform international convention that both countries are party to.
5. Liability – What happens if things go wrong?
Business relationships are not permanent. At least most of them. Like any business relationship, when and if something goes wrong, you need to be prepared and have legal protectionin place to handle it and move forward. In the case of a supply or a distribution agreement, you need to outline how you will ascertain fault and liability when a product is faulty.
Under the Australian Consumer Law, consumers have the right to take legal action against a business that supplies or manufactures a product or a service. When you source products from an overseas supplier, by default, product liability falls to the importer of the products – which is you. Having liability clauses in your contract can minimise your risk. However, it is important to have product liability insurance to protect you should a consumer take legal action against you.
In additon, you need to take the following business measures to minimise the risk of faulty products
- Have an extensive supplier selection process; ask for samples and do rigorous testing.
- Speak to their clients to understand what their product quality is really like.
- Ask your prospective supplier about all the quality measures and certifications they have in place.
- Test your products when they arrive and before selling them to your end customers.
- Ask your supplier to add a clause to replace faulty items.
Take Away
Working with suppliers is a key business decision that will impact your business on many levels. Having the right agreements in place will help protect your business in the event things do not go according to plan.
At Lazarus Legal, we have a team of business lawyers that can help you draft the right agreements and to protect your business.
Get in touch and leave the rest to us.
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Mark Lazarus
Mark Lazarus, the visionary behind the business and the fresh blood of the Lazarus Legal team, Mark (or Laz as he is often known) owes much of his success to his past experiences. And he’s made it his personal goal to bring that wisdom and formula to the firm.
