Essential Provisions in Supply Agreements Every Business Should Know

Many businesses identify themselves as suppliers of raw materials, finished goods, or services. However, fewer businesses consider themselves as recipients of goods or services. It follows that many organisations pay attention to their supply terms, whether they are generic "standard" terms of trade used for each transaction or more comprehensive, purpose-built supply agreements tailored for specific deals. However, far fewer businesses give equal consideration to the supply terms they receive from others.

This article explores the key provisions of a supply agreement, focusing on warranties, defects liability, limitation of liability, risk and title, indemnity, guarantees, and boilerplate clauses.

Warranties

Warranties are promises by one party to another that certain conditions are true, or that goods or services will meet specific standards. Warranties can be implied by statute, such as under the Trade Practices Act 1974 (Cth), which implies that goods must be fit for purpose and services must be provided with due care and skill.

Warranties can also be explicitly stated in a contract. Here are some key points for both suppliers and customers:

1. Customers: Ensure that all representations made by the supplier are reflected in the contract as warranties.
2. Suppliers: Limit warranties to those explicitly stated in the contract and ensure they are tailored to the specific transaction. For instance, if a customer designs a product, the supplier cannot guarantee that the product will function in a particular way.

Defects Liability Period

The defects liability period refers to the time during which a customer can require a supplier to rectify any defects in goods or services.

A customer should (among other things):

• Make sure the period is adequate to allow any “bugs” to be ironed out; and
• Consider including a retention amount or some form of guarantee (of x% of contract sum) until the expiry of the period as a safeguard.

A supplier needs to ensure (among other things):

• There is a sunset date (so that regardless of when the warranty starts, whether its delivery of a product or ultimate commissioning, you know when the period will finish);
• The definition of “defect” is adequate, and is exhaustive; and
• It specifically excludes any defects arising out of or connected to the misuse, negligence or continued use (after defect arises) by the customer.

Limitation of Liability

Limitation of liability, also known as an "exclusion clause," seeks to minimise a party's exposure to risk and liability. While total avoidance of liability is not feasible in commercial contracts, parties should aim to limit it as much as possible.

Suppliers should ensure contracts include a clause that:

• Excludes all implied warranties (where legally permissible);
• Limits liability for warranty breaches (to the cost of replacement or repair);
• Reduces liability for breaches caused by the customer;
• Excludes liability for indirect or consequential losses, such as loss of profits;
• Limits aggregate liability to a defined figure, such as a percentage of the contract value or insurance proceeds.

Risk and Title

Risk and title, often referred to as a "retention of title" or "romalpa" clause, determines when the responsibility for goods passes from the supplier to the customer. The critical point here is that risk in the goods typically transfers to the customer upon delivery, while title (ownership) only transfers once full payment is made.

There are different types of retention of title clauses, including "invoice-specific" and "all monies" clauses. Each has unique effects depending on the nature of the transactions between the parties.

Indemnity

An indemnity is a promise by one party to compensate another for a specific loss or damage.

• Customers should ensure that the contract contains a robust indemnity clause, backed by appropriate insurance coverage.
• Suppliers should aim to limit indemnities to direct damages resulting from a breach and reduce liability where the customer has contributed to the loss. Importantly, indemnity clauses should always be reviewed by an insurance broker to confirm that the supplier has adequate coverage and that entering the contract does not void the insurance.

Guarantee

A guarantee is a commitment by a third party, often a director, to fulfil the obligations of a contracting party if that party breaches the contract.

• Suppliers and customers alike should seek guarantees in cases where there is uncertainty about the other party's financial stability.
• Guarantors must carefully consider the potential risks involved, as personal guarantees can place personal assets at risk.

Boilerplate Clauses

Boilerplate clauses are standard administrative provisions that often appear at the end of a contract. Though these may seem routine, they should be reviewed carefully as they can significantly impact contractual obligations. Common boilerplate clauses include:

• Force Majeure: Allows for delays in fulfilling obligations due to unforeseen events without penalties;
• Governing Jurisdiction: Determines which laws and courts will govern the contract;
• Entire Understanding: Excludes all prior negotiations and representations not included in the final contract;
• Assignment: Dictates which party has the right to transfer their rights under the contract.

Summary

It’s crucial for businesses to review supply agreements from both the supplier's and customer's perspective before entering into a relationship with third parties. Engaging a lawyer experienced in supply agreements and terms of trade is essential to ensuring that the agreement meets your business's needs and protects your interests.

At NB Commercial Law, we can assist with preparing and reviewing your supply agreements, ensuring you understand and are comfortable with the terms before signing. Contact us today to secure expert legal advice tailored to your business.