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.

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:

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:

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:

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:

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:

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.

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:

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.

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.