Negotiating supplier contracts

Agree supplier contract terms

Guide

After you negotiate terms and conditions and agree a deal with your supplier, it's best to draw up a written contract.

Both parties should sign this document. Although verbal contracts are legally binding, they're very hard to rely on in court.

What are supply agreements?

A supplier contract or supplier agreement is a pact between a business and a supplier for the delivery of the agreed products or services. It is a legal document which you can use as the basis for measuring the supplier's performance.

As well as the description of the items to be supplied, supplier contracts also typically include the following:

  • the name and addresses of both parties
  • timeframes
  • responsibilities of both parties
  • pricing and payment details, including schedule and invoicing process
  • performance criteria and review process
  • confidentiality clauses
  • refunds and compensation terms
  • level of after-sales service you require
  • contractual terms and conditions, such as for renewal or exit

It can also include very specific supplier contract terms or clauses, such as stating the supplier's right to ownership of the goods until they're fully paid for, or clauses limiting the seller's contractual liability - taking into account the purchaser's statutory rights.

Both parties should agree what the contract will cover. Depending on who holds the bargaining power in the contract negotiation, the terms and conditions used may be your own, the supplier's or a mixture of the two.

Read more about supplier service level agreements.

Drafting supplier contracts

Free templates and sample agreements are available online. However, a supplier contract should be thorough and specific to your circumstances, so default wording is unlikely to suffice.

You should consider getting legal advice when drawing up your terms and conditions.

When drawing up a supplier agreement, you will want to:

  • write the contract in a way that protects your interests and, if possible, shifts legal responsibility for any problems to the supplier
  • notify the supplier in writing how you intend to use its supplies and ask for written confirmation that what it is selling you is suitable
  • explicitly ask about any hidden problems and keep a written record of all assurances given
  • build into the contract what will happen if there are any problems with the goods or services - for example, will the supplier replace individual faulty goods or the whole batch and within what time period
  • agree penalties for failure to meet delivery times or quality standards, such as a future discount

You should also consider including any dispute resolution or exit procedures that must be followed if either party is dissatisfied with the relationship or wants to end the contract.

For more information on contracts, see business to business sales contracts.