What do I put in my supplier contract?

This article first appeared on October 4th, 2010.

I have sourced a supplier for my business but am not sure how I can protect myself with our contract.

What are the main things I need to make sure are in the contract to ensure timely delivery of quality products with favourable payment schedules for me?

As with any negotiation or deal, the essential elements will be determined by which of you and your supplier needs/wants the deal the most – as that will dictate who has the most bargaining power.

If you are only starting out, my guess is that the supplier has the whip hand. That is not to say you cannot negotiate past their standard terms, provided what you seek is reasonable, and provided they in turn are a reasonable business. The general rule is that the bigger the supplier, the less likely they are to agree to anything non-standard.

There is a mountain of areas where you can be crucified by the “fine print” that you always find (but never read) on the back of credit applications and supplier invoices, but here are three particular tips that might stand you in good stead and override these terms.

The first comes into play when you really need the goods or services delivered on time. While you are still shopping around for suppliers, they will all tell you how reliable they are. It’s only once you are on the hook that this commitment can become a bit fuzzy.

So before you commit, get the supplier to put in writing its commitment to supply on time – which might be expressed as “within five days after the date of order”, and also a commitment to a “liquidated damages” amount which they will pay if they don’t comply with the agreed timeframe.

This might be a certain dollar amount or percentage of the purchase price for every day they are late, like in a building contract, or it might be like the pizza that is free if not delivered within 30 minutes. It is up to you to come up with a proposal that works for you and the supplier.

The second tip is to make sure your paper trail with the supplier includes some form of statement that you are “relying on the supplier’s experience and expertise” – this can then be used to bring in the implied warranty under the Trade Practices Act that the goods/services are “fit for your purpose” – which is a warranty that cannot be contracted out of. (Although they can limit their liability for its breach to the cost of the goods, or re-supply.)

A final suggestion is to have your own set of “fine print” – setting out your terms and “conditions of purchase”, and get it printed on the back of your purchase orders. This should include a statement that your fine print overrides their fine print!

Whether or not any of this works, at least it will give you some bargaining power if things go wrong and you have to resort to lawyers.