Agreements between vendors and buyers are of the utmost importance because these agreements will define the relationship between the parties, have clear goals and objectives, and save both parties money in resolution of a dispute if it should arise. Below are some key questions addressing important components of agreements that should be answered to ensure that both parties are satisfied with the contract.
Make sure that the specific parties are defined, as well as the effective date of the agreement, the specific products that are subject to the agreement and other definitions that are noteworthy to the parties. Usually in the definitions is where parties indicate if the agreement between the two parties is “exclusive” or not. Make sure that these specific terms are defined even if you believe that both parties assume a certain date or definition.
I recently reviewed a commercial lease where there was no definition of what the due date was for the rent. Did the parties probably assume it was the first of the month? Sure, but that assumption will not help if a dispute arises because of a “late” payment, especially because the contract did not define when a payment would be considered late.
It is important to figure out how long the agreement is, as well as what happens at the end of the term. Does it automatically renew or do the parties have to sign a new agreement or written extension? When does the agreement begin? Is it when the agreement is signed and finalized or when the buyer accepts whatever product the supplier is providing? Is this a “shipment” or “destination” contract? This is an important term to figure out because it directly effects risk of loss, which is discussed below. Under the UCC there is a strong presumption that a contract is a “shipment” contract if the terms of the contract are ambiguous.
What are the specifications of the product? Are there
federal rules and regulations or other laws that impact the specifications? What happens if the buyer rejects a product for failing to meet specifications? Is notice of rejection needed within a specific time period?
How are the products going to be ordered? Is the buyer going to submit separate purchase orders and get invoices or are the products going to be ordered on an ongoing basis? How often are purchase orders going to be sent? Daily? Monthly? When will the product be shipped?
Payment and Pricing
What is the product going to cost? Does that include raw materials? Are the invoices going to be net 30 or net 60? What happens in the instance of late payment?
Freight, Shipping Provisions, Risk of Loss
How much will shipping and freight costs be? Is it a F.O.B arrangement? Who will be responsible for risk of loss if the product/goods have been damaged prior to delivery? This is a very important point because oftentimes damage to the product is not due to either party’s breach of the contract, so it needs to be discussed at the outset which party will bear the expense of damaged products so a dispute does not arise.
Discuss the applicability of the warranties of merchantability and fitness for a particular purpose to determine if they should be included or disclaimed. What warranties are implied or express? What happens with defects in workmanship?
Confidentiality and Intellectual Property
Will the one of the parties have access to the other party’s intellectual property or confidential information? If so, how will it be protected? What about trademarks, trade secrets and copyrighted information? Is it an issue? Is any product or modification developed during the relationship considered “work for hire?”
Are the parties going to indemnify each other? Under what circumstances? Does the indemnification extend to employees, directors or agents of the parties? Is there any limitation on liability?
Does either party have to add the other as an insured? Under what type of policy? Is there a certain amount of coverage needed? What type of coverage?
Terminating the Contract
Under what circumstances can either party terminate the contract without penalty? Assuming some sort of notice is required, how much notice is required? Can either party “cure” the defect within a certain amount of time? Where should notices be sent to? Is there a particular medium in which it must be sent (i.e., over-night mail, email, USPS)?
Other Important Provisions
There are a number of other important provisions to include that do not address the “meat” of the contract and usually address what happens if some other dispute arises.
Are there any unforeseeable events (also known as “force majeure”), such as “acts of God” that would relieve the party of their obligation under the contract? Some of the more common ones are fires, floods, windstorms, explosions, riots, civil disobedience, insurrections, natural disasters, pandemic or epidemics, terrorism, sabotage, or declared or undeclared war. On the flip side, I have also seen defined what is not considered a force majeure event namely, vendor’s ability to sell the product at a higher price, increases in vendor’s production costs, a strike or other legal labor disruption, vendor’s inability to obtain labor and/or significant increase in the vendor’s cost of raw materials.
Can the contract be amended? Does the amendment have to be in writing? Can it be an oral amendment?
Can the contract be assigned to another party? Most parties prohibit assignment of the contract absent written consent.
What happens if a portion of the agreement is unenforceable under the law? Does that negate the whole agreement or just the portion that does not conform? Most agreements allow for the “severability” of the offending provision, which means the remaining contract provisions stay intact.
Is there a “merger clause,” meaning is the contract the entire agreement between the parties?
What are the remedies to either party if the other breaches? Are there monetary damages, injunctive relief or some other sort of relief? Further, what is the venue if litigation does arise?