There are many advantages to using overseas suppliers, but they can easily turn into a liability if you don't put formal agreements and contracts in place.
Importance of agreements with overseas suppliers
Language barriers, differences in business practices and increased rules and regulations are common challenges of sourcing overseas that can potentially cause difficulties between an importer and an overseas supplier.
A clear written contract is the best way to avoid problems. If disagreements do arise, they will be easier to resolve if you have a written contract rather than a verbal agreement. Your contract should make all aspects of the trading process as clear as possible - including what will happen, when it will happen, and exactly what each party is responsible for at each stage.
There are standard trading practices and systems to help you agree key issues. Incoterms are an internationally recognised set of trading terms used in contracts of delivery. See International Commercial Contracts - Incoterms.
What to include in a supplier contract?
Key things to cover in a contract with an overseas supplier include:
- Goods - what goods you are buying and what legal or technical rules (if any) they must comply with?
- Price - how much will you pay, in which currency and at which exchange rate?
- Payment method - when and how will you make payment? See paying overseas suppliers.
- Delivery - how will the supplier transport the goods to you? See international transport and distribution.
- Trading terms - use Incoterms to specify exactly who is responsible for shipping costs, duties, and customs-related formalities.
- Insurance - be clear about who bears what risks - eg for loss or damage - at each stage of the process. See insurance for international trade.
- Potential problems - agree procedures to follow in case of disputes, eg if one party's error causes delays or losses for the other.
- Service level agreement - define the level of service your supplier must provide. See more on service level agreements.
- Legal jurisdiction of the contract - establish where legal proceedings should take place if there is a dispute.
Bear in mind that the contracts you agree with a supplier will evolve with your trading relationship. While early contracts might be on a shipment-by-shipment basis, longer-term contracts might follow as familiarity and trust develop. Find out how best to negotiate the right deal with suppliers.