Key Elements of a Vendor Agreement

Business owners exchange contracts as they buy and sell every day. As a new business owner, you may find yourself asking – “what is a vendor agreement?” or “what should be included in a vendor agreement?”

Vendor agreements protect buyers and sellers as raw materials and goods are manufactured and transported across the globe. Business-minded attorneys ensure that these legal documents are tailored to each client and contain certain key terms to define the relationship, set expectations, and mitigate risk. Regardless of the designation (Vendor Agreement | Supplier Agreement | Sourcing Agreement), these contracts contain the terms and conditions that govern orders placed between a buyer and seller.

Key Terms for Buyers and Sellers

Vendor agreements can be drafted in a form that is buyer-friendly, seller-friendly, or anywhere in between. Throughout this article, I assume that the vendor agreement is documenting a business-to-business transaction. While many provisions are standard, buyers and sellers should work with legal counsel to evaluate their goals, objectives, and risk tolerance in order to tailor agreements to meet their business needs. Certain key provisions can shift responsibility and liability at each stage of performance. Knowing the following key terms, you’ll get a basic overview of how do you draft a vendor agreement.

Scope

The vendor agreement should clearly define the obligations between the buyer and the seller. For example, you may have a vendor agreement for the purchase of lumber. The scope would define the type of lumber, the size of the lumber, the quantity of lumber, and delivery requirements. The buyer and seller should be aligned in defining what the buyer is purchasing and what the seller is providing.

Duration

Buyers and sellers must determine how long they want to be governed by the terms and conditions of any contract. The term provisions define the effective period of the contract and plan for the possibility of renewal or termination.

When drafting the term provisions of a vendor agreement, the buyer and seller should consider:

1. Term:
   • How long will the agreement be in force? 
   • Will the agreement be in force for a specified length of time? 
   • Will the agreement be based on the last performance under the contract?
2. Renewal:
   • Can the agreement be renewed for an additional term?
     • Some agreements may contain an “evergreen provision” where the contract auto-renews.
   • How will the parties renew the agreement?
3. Termination:
   • Can buyer or seller terminate the agreement before completion?
   • What are the events of default?
   • Will there be a remedy or consequence for termination?

Additionally, buyer and seller should clearly define the parties’ duties on termination, establish if any terms survive beyond the termination date, and establish if there is a right to injunctive relief in the event of a breach.

Financial

Buyers expect to receive the product or service they order, and sellers expect to receive payment for delivering those products or services. There is more to the financial component than the price paid. The financial terms included in the vendor agreement affect the costs incurred by the buyer and the price paid by the seller, while also establishing when payment is due. An all-inclusive model with long payment terms will typically benefit a buyer, while a seller may want to shift fees to the seller and obtain upfront payment. Buyers and sellers may negotiate over these key points:

• Pricing: What is the cost of the goods or services?
• Terms: When is payment for the goods or services due?
• Taxes: Are any taxes included in the price? 
• Payment: What payment methods will the buyer accept?
• Expenses: Will the buyer reimburse the seller for any expenses?
• Set-off: Does the buyer have a set-off right if the seller owes money to the buyer?  
• Audit: Does the buyer have an audit right?
• Most Favored Nations: Is the buyer entitled to receive the best price offered by the seller? 

Each of these issues is important to consider.

Delivery

The vendor agreement should establish key terms for delivery to ensure the expectations of the buyer and seller are mutually aligned. These terms establish which party is responsible for the goods while they are in transit and set expectations for delivery.

Terms benefiting Buyers. A buyer of goods typically benefits when they are not responsible for the products until they are in hand, they are guaranteed by a particular date, and they have the ability to reject nonconforming goods.

Terms benefiting Sellers. A seller typically wants to shift responsibility and limit their own exposure by transferring title to the goods at their own facility or at a point while the product is in transit.

Key areas for buyers and sellers to negotiate include:

• Transportation: (i) How will the products be transported; and (ii) when will the title to the products pass from the seller to the buyer? 
  • Buyers and Sellers benefit from using Incoterms.
  • Incoterms are internationally recognized rules that define the responsibilities between buyers and sellers.
• Customs Documentation: If the products are being shipped internationally, who will be responsible for customs documentation?
• HASCOM reporting: If a contract includes “hazardous or toxic chemicals,” will the seller provide Product Safety Data Sheets?
• Shipment: If the product is being delivered to the end customer (drop-shipped), who is responsible for freight charges?
• Delivery Schedule: When will the goods or service be delivered to the Buyer?
• Rejections: Is there a right to inspection, and what happens in the event of rejection?

Ensuring the parties are aligned on these key terms is important.

Liability

Buyers and sellers want to reduce their risk and exposure. Vendor agreements should include key provisions that are carefully crafted to define liability between the buyer and seller during and after the performance of the vendor agreement. Small variations in these types of provisions can create or limit the legal remedies available to the buyer or seller.

Key liability provisions to negotiate in every vendor agreement include:

• Indemnification: Will either party (or both) have a duty to indemnify, defend and hold the other party harmless from all claims for damages caused by their conduct?
  • What type of claims?
  • How are damages defined?
  • What type of conduct warrants indemnification?
• Insurance: Will either party (or both) be required to maintain insurance?
  • If so, will the other party be named on the insurance policy?
  • Will the insurance policies be modified to waive the rights of subrogation?
• Incidental and Consequential Damages: Often sellers attempt to manage the liability through the use of:
  • Disclaimers
  • Insurance
  • Caps

Representations

Representation clauses help ensure that the products delivered meet certain minimum quality standards. Buyers want representations to ensure the products are delivered to their specifications and standards. Sellers will want to ensure the representations do not encompass elements outside of their control. The extent of these representations needed in a vendor agreement often depends on the Scope of the vendor agreement.

Common representations include:

• Strict Accordance: A strict accordance provision is included when the buyer wants to ensure the goods will be manufactured and provided according to the plans and specifications provided by the buyer. 
• Best Industry Standards: A provision representing best industry standards is included when the buyer wants to ensure that products or services are provided in accordance with industry standards. These standards may be specific or general. 
• Compliance With Laws: A provision representing that products and services are provided in compliance with laws helps insulate a buyer from certain risks.

Warranty

Does the seller stand behind the product? If so, for how long? Article 2 of the Uniform Commercial Code (“UCC”) dealing with sales assumes an inherent warranty of merchantability and fitness for a particular purpose unless it is disclaimed.

• Is the seller providing a warranty on the product or service?
  • How long is the warranty?
  • What remedies are available under the warranty? For example: repair, replacement, refund, or labor allowance.
• Is an extended warranty available for an additional cost?
• Disclaimers: Will the seller include a statement that they are not bound by any warranties or representations?

Miscellaneous

Vendor agreements include several miscellaneous provisions that do not fall squarely within another key area. While other key provisions define the relationship between the parties, the miscellaneous provisions generally define how the agreement will be interpreted and how disputes will be managed.

Miscellaneous provisions may be used to establish each of the following:

1. The assignability or transferability of the agreement;
2. The process for modifying the agreement;
3. The process for resolving disputes between the parties
   • Will disputes be resolved in Court? Business parties may agree to alternative dispute resolution to avoid the high costs of litigation.
4. The state law that will apply to interpreting the terms of the contract;
5. The ways terms will be construed;
6. The state where legal action can take place.

Miscellaneous provisions also (a) confirm the writing is the complete agreement between the parties, (b) confirm how the agreement can be signed, and (c) confirm that the signing parties are authorized to sign the agreement.

What Is a Vendor Contract?

Buyers and sellers need to understand what should be included in a vendor contract. Working with an experienced attorney who knows how to write a vendor contract can be an asset to any business.