How should I set up an arrangement with a supplier?

The main point to remember is that the arrangement should be documented in one central place (the supply agreement) rather than in many different emails or conversations.

Also, if there are any other special conditions or requirements you need in your arrangement with the supplier, these should be made clear and documented.

This certainly helps to ensure you and your supplier know exactly what the arrangement is to reduce potential disputes.

It is difficult to give an exhaustive list of things to watch out for in a supply arrangement and the Australian Consumer Law (ACL), for example, covers an extensive number of areas.

These include misleading or deceptive conduct and representations, pricing, guarantees, the content of statements and invoices, unsolicited agreements, product safety and manufacturer’s liability.

However here are a few important issues that I find myself raising with clients regularly:

Australian Consumer law – guarantees and rights

The ACL provides for a number of statutory guarantees that suppliers must give in relation to their products and services. In many circumstances these guarantees are also available to businesses if the purchase is less than $40,000.00.

In addition to these guarantees, manufacturers and suppliers may offer additional guarantees and warranties in relation to their goods or services that extend beyond those in the ACL.

However, if the ACL does not apply to you or if you require additional or specific guarantees and warranties in relation to the product or service, then you will need to ensure that these are specifically documented.

For example, if you require the product to do a specific task and the supplier has made a representation that it would do that task, then you should have that representation included in your arrangement to ensure that the supplier is standing behind that warranty.

Importing and overseas suppliers

If you are importing products from overseas for on-supply in Australia or you incorporate such products into your own products for supply in Australia, then under the ACL you may be deemed as the manufacturer of that imported good if the overseas supplier does not have an Australian presence.

This may mean that you have a heightened responsibility to customers under the ACL as the manufacturer.

In this case you should try to obtain back-to-back assurances and obligations from your supplier so that you are able to meet your obligations under the ACL.

These assurances should not only cover the cost of repairing the goods, but also specify who bears the cost of attending to the customer’s premises to install or fix the goods.

Incorporating supplied goods into your own product

If the supplied products are to be incorporated into your own product to be sold to customers, you may need to consider the consequences of your supplier’s product turning out to be defective and what you and your supplier may be responsible for.

For example, if the supplier’s part is defective and your supplier is required to provide replacement parts to you, you may still be out of pocket if you need to recall all your products at your expense to replace the defective part.

Certainty and timing of supply

This is particularly important if the supply of that particular product is critical to your business or it forms an integral part of the products you supply.

If this is the case, you should consider negotiating alternate suppliers or other arrangements so that if the supplier does not supply the relevant products to you in a timely manner, your business is not left stranded.

Similarly, if timing is critical, you should at first instance make it clear in the documentation that “time is of the essence”. Further, you may also consider back up plans if there are delays in the supply.

Returns and defects

As outlined above, there may be some minimum level of responsibility imposed on suppliers under the ACL. The ACL also specifies the type of remedies a person may receive. This often depends on how serious the failure is.

However if the ACL does not apply or if you require additional returns or rights on defective products, then these should be specifically included in your arrangement with your supplier.

For example, if the returns policies you have with your customers are different to the returns policy with your supplier (particularly overseas suppliers), there may be a gap where you may have to wear the costs of the return.

Therefore, where possible you may consider negotiating a back-to-back returns policy with your supplier.

Title and risk

Usually, titles to the products you purchase only become yours when you have paid for it. That said, it is usual for suppliers to pass that risk to you as soon as the products leave the supplier’s door.

Therefore you may need to understand and appreciate when you are responsible for the risk of the product (meaning you are responsible if it is damaged), even though you may not have title to the products.

While many of the above matters may not be 100% negotiable with your supplier, it is still important to understand them and agree an arrangement that works for you.

Even if they cannot be negotiated, you should at least understand what your areas of risk are, so that you are entering with your eyes open and can quickly implement alternatives if things don’t work out.