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.
Contract drafting tip
When drafting a contract, you should avoid legalese and use simple terms whenever possible.
Legalese should only be used for certain "magic words."
Magic words include words or phrases that have been interpreted by courts to have a very specific meaning.
Legal jargon like "Notwithstanding the foregoing," "hereto," and "shall" can be replaced with "Except in Section X," "In this Agreement," and "will."
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 to draft a vendor agreement.
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.
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:
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?
Can the agreement be renewed for an additional term?
How will the parties renew the agreement?
Can the buyer or seller terminate the agreement before completion?
What are the events of default?
Will there be a remedy or consequence for termination?
Additionally, the 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.
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.
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: How will the products be transported, and when will the title to the products pass from the seller to the buyer?
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.
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:
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.
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?
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?
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:
The assignability or transferability of the agreement;
The process for modifying the agreement;
The process for resolving disputes between the parties;
The state law that will apply to interpreting the terms of the contract;
The ways terms will be construed;
The state where legal action can take place.
Miscellaneous provisions also confirm the writing is the complete agreement between the parties, confirm how the agreement can be signed, and confirm that the signing parties are authorized to sign the agreement.
Master agreement tip
Buyers and sellers can streamline business by executing a master agreement to govern all contracts between the parties. Master agreements contain most of the key legal terms and conditions that control the relationship while reserving the scope to a separate agreement. This allows individual documents to define the scope (key parts of vendor contracts). The scope can be prepared quickly as the relationship develops, and this approach reduces legal costs and minimizes friction as the legal terms in the master agreement are already agreed upon.
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.
Vendor agreements play a pivotal role in business dealings within the global marketplace. These documents are designed with meticulous detail to offer tailored protections for both buyers and sellers engaged in the transfer of goods or raw materials across varying industries. They serve as a binding document that clearly outlines each party's responsibilities, thus creating a mutual understanding of expectations.
Whether you want to learn more about business law, need templates for business contracts, or are looking for more general legal information, Lawrina can provide invaluable resources. You can also connect with lawyers who can craft tailored vendor agreements that can mitigate potential risks in your business dealings. Remember, while templates are beneficial, nothing can replace personalized advice and services from a trained legal professional.
Waldrop & Colvin
Derek Colvin is a graduate of Penn State Law and Old Dominion University. He started his legal career in public service as a prosecuting attorney from 2009 through 2021. Derek gained extensive experience as a trial lawyer and earned a reputation as a tough but fair prosecutor. In 2022, he joined John Allen Waldrop in the legal department of an umbrella franchise company. By working with business executives under the mentorship of John Allen, he quickly developed a passion for business law and franchising. In forming Waldrop & Colvin, Derek took the final step in merging his own entrepreneurial aspirations with his passion for business and litigation. He can be found on LinkedIn, Twitter, Facebook, and our Lawrina Match.
Frequently Asked Questions
What are the main components of a vendor agreement?
Vendor agreements typically cover several critical aspects of a business transaction. This includes the scope of work (which details the specific goods or services to be provided), pricing, duration of the agreement, payment terms, and delivery schedules. They further delve into liability clauses, termination conditions, as well as dispute resolution mechanisms.
Beyond these terms, vendor agreements also address intellectual property rights, which is particularly essential if the vendor will be creating anything unique for the buyer. These agreements undergo meticulous development by business-trained attorneys to ensure compliance with all aspects of both contract law and business law to protect the interests of all parties involved.
Do I need a lawyer to draft a vendor agreement?
While not a legal requirement, it is highly advisable to engage a lawyer when drafting a vendor agreement. Given their complexity and the high stakes involved in each business transaction, a lawyer can help ensure that the agreement is robust, fair, and beneficial for you.
Working with a seasoned attorney not only ensures that the written agreement accurately reflects your understanding of the terms but also aids in including appropriate legal protections. This can be invaluable in preventing potential disagreements or disputes down the line. So, while it might seem like an extra expense, a lawyer's expertise can save you much more in the long run.
How often should a vendor agreement be reviewed or updated?
A well-drafted vendor agreement should be comprehensive enough to cover the duration of your business relationship with your vendor. However, it's recommended to periodically review the agreement and make necessary updates to respond to significant changes such as new laws, changes in business operations, market dynamics, or lessons learned from disputes.
Change is the only constant in business, and your vendor agreement should be flexible enough to adjust to these changes. This practice ensures that the agreement stays relevant and continues to protect both parties' interests adequately. Regular reviews every 12-18 months or when significant business changes occur are generally recommended.