How to produce contracts for use with your suppliers

Much of this blog is devoted to sales and marketing issues from the perspective of small business owners.  This post takes a look at some important aspects of the buying process for these small companies.  Every growing small business has suppliers.  Their owners need products/services to successfully run their business and they will buy from both large national suppliers and smaller local suppliers.

From what I have seen, small business owners rarely give enough attention to the terms and conditions governing how these suppliers perform.  The larger suppliers are experienced enough to look after themselves.  Smaller suppliers are more likely to put themselves at risk in the event something goes wrong.

Larger national suppliers will probably supply your small business on the basis that their standard terms and conditions apply.

This leads to an obvious question.  Have you understood, read or even seen these terms and conditions?  If the answer is “No”, then you are taking unnecessary risks with the future of your business.  If you implicitly agree to be bound by the terms of these supplier-produced contracts, you can be sure they are worded to fully-protect the supplier.  They may be written in a way to leave to you with little hope of recovering losses if something were to go wrong.

When you buy from a small supplier, it is more likely that neither party has got its act together regarding the terms and conditions of supply.  If there is a dispute and neither party has signed or implicitly agreed a contract, then Common Law will apply.  This can be a nightmare scenario soaking up considerable amounts of time and money.

As the buyer, it makes sense for you to develop a set of standard terms and conditions that you can impose on these small suppliers who have nothing of their own.

Once in place, you can insist that your suppliers all sign up to your terms and conditions as a condition of them supplying you.  If they are written in a fair and reasonable style, most small suppliers will be relieved they don’t have to deal with drawing up contracts.  In fact, most probably won’t even read them.  Larger companies will be more prickly about using your terms and conditions.

Drawing up your own set of standard terms is reasonably easy.  There are two ways to go about it, depending on your cashflow.  The best way is to get a Contracts Lawyer to draft something that is legally watertight.  If funds are short, the second way is to produce your own draft and let a Contracts Lawyer read and review it.  Pulling together your own draft contract might appear daunting but there is plenty of material available on the Internet.  Plus you can look at the terms your larger suppliers have in their contracts and see if any are relevant to your own terms and consitions.

From your perspective, there are no more than five areas to concentrate on.  These areas are liabilities, compensation for late or non-delivery, repair/servicing of goods, obligations on the supplier and obligations on you.

Let’s look at each area briefly.

Liabilities.  It is crucial that each contract you sign explicitly defines what your maximum liabilities are.  It might be expressed as a sum of money or a percentage of the order value.  I prefer the latter because you don’t want a large liability defined if the contract is worth a few thousand pounds.  Any supplier worth its salt will look for such a clause because if a cap on liabilities is omitted then liabilities are deemed to be unlimited.  Linked to liabilities, I would include a clause explicitly stating that consequential losses of any form are excluded.  If you are buying, make sure the cap is written to be two-way.

Compensation for late or non-delivery.  If the supplier is late delivering the products/services, this might cause you some inconvenience and extra costs.  This area of the contract defines what penalties the supplier will pay in this case.  For example, in the supply of bespoke software, this is often defined as a percentage of the order value per week or per month up to a maximum amount.  Start by thinking what your losses would be if your supplier was late.  If the potential losses are large, you might want to rethink your purchasing strategy and consider buying from a larger supplier with enough resources to guarantee delivery on time.

Repairs / Servicing.  Capture the level of service you require so there is no misunderstanding in the event of a dispute.  Do you want a service engineer at your offices within 2 hours? Do you want a replacement product while repairs are being effected?  Your requirements will depend on the nature of your business.  Whatever they are, get them written down.

Obligations on the supplier.  Document exactly what you expect from the supplier.  This might be deliveries at certain times of day or revisions to designs made within 24 hours.  Think of everything you need from your supplier to make your business operate at its most effective.  Incorporate them as deliverables into the contract, with penalties for late delivery.

Your obligations.  When you are selling, you should aim to make the obligations on the buyer as onerous as possible.  If you can build a history of the buyer failing to meet its obligations, you could avoid any late delivery penalties.  When you are buying, you want to minimise what you agree to as contractual obligations.  It is difficult to avoid having any obligations, however try to minimise them as far as you can.

 ACTION IDEAS

  1. Make a commitment to have a contract in place for all future purchases by your small business, bounding your liabilities and detailing the supplier’s obligations.
  2. When you plan to buy from a large supplier, make time to read their standard terms and understand your rights and obligations.
Posted in Contracts / Negotiation