If you just sign your supplier contracts without reading the terms and conditions, you are at risk of signing up to contracts with unfavourable clauses and contracts you may struggle to get out of.
Contracts with suppliers vary when it comes to the size ,shape and the substance of the contract. Before signing anything, it is important you understand what you are agreeing to. You need to know exactly what you are signing, what it means and how the agreements impact your business. Avoiding anything your business doesn’t need or want is vital.
With some research and time spent understanding your supplier agreements, you can ensure your negotiations are focused on the most important things, rather than wasting time on issues that aren’t important.
Being well-equipped means you know what to look out for, why you need certain clauses and the methods to achieve a favourable outcome. Here are some key things you looking out for:
Extension clauses tell you when the contract automatically extends. For example, this could be after 12 months from the signing date and you may have a restricted time period within which you can “cancel” the automatic extension, for example 90 days before contract expiry.
Its best to avoid these clauses, as if you are late with your notice, even one day on that 3 month notice, the contract will automatically extend and you might be in a situation where you are paying for something that you don’t need. You need to know exactly what happens if you decide to leave the contract early and not extend. You should have a tracker(or software) and regularly track pending extension trigger clauses.
Auto-increase clauses are more common than you may think and they also closely link to Extension clauses above. This clause allows the price of the contract to automatically increase upon extension. So, if you are unaware of when your contract ends and it automatically renews, you could be paying out for something you don’t want or need, for a much higher price. These are simple issues to avoid with some focus, but often companies sign contracts without review and miss such bear traps.
A Relief Event refers to several different circumstances where the supplier can claim that any non-performance is legitimate. This includes, but is broader than your typical Force Majeure (“Act of God”) clause, and may even any failure caused by actions from you, the customer.
Therefore it is critical and advisable to understand what dependencies the supplier has on you, and deliver those so that the supplier has the best chance of success. On the flip side, you should review which areas the supplier proposes constitute relief. You don’t want them to be able to wriggle out of penalties or liabilities for non-legitimate causes.
Parties to the Contract
Did you anticipate doing business with the other party involved? Have you done business with them before? If not, have you done enough research and do you have enough knowledge about them to feel comfortable embarking on a new working relationship with them? You need to know if this supplier are the company actually supplying the goods and services or if this will be carried out by a subcontractor.
Basic background checks and financial stability / credit checks are a good starting point. It is also important to include provisions that state the supplier can’t assign the contract to other parties without your prior consent. Suppliers will usually push back on this, however if they are open regarding the supply chain (and this is included within the contract) then the assignment clause is already agreed for those parties where its agreed, and the assignment clause only relates to any future assignment post contract of which you aren’t made aware.
There are of course other clauses and areas to look out for and be clued up on, the above are just some of the most important ones to ensure you avoid any unpleasant bumps in the road. It is always advisable sitting down with someone in the know who can help you run through things so you are fully equipped and ready to negotiate for what your business needs.