Supply agreements, the things you should know before signing

Supply agreements (rather than informal arrangements) are becoming increasingly common in today’s business world, particularly in the restaurant industry.  But how well do you know your supply agreements?

A supply agreement should be viewed as any other binding legal contract, and should never be entered into lightly. Supply agreements can support and enhance your business or can be the source of significant disputes.

Outlined below are a few aspects to consider when entering into supply agreements which could contribute to a supply agreement being a positive addition to your business.

1. Although it may seem like a common sense first step, actually read the entire agreement prior to signing.  Don’t accept a comment from the supplier that this is just a normal formality at face value.  Unfortunately, many people fail to carry out this crucial first step and often have no idea what the terms of the agreement are until a dispute arises.
2. If after reading the agreement you do not understand it (or a specific provision in it) make further enquiries.  If you seek clarification from the party who supplied the agreement, we suggest that all communications between you be recorded in writing.  Alternatively, or as a further step could hire a lawyer to review and advise you on the document.
3. Make sure that the agreement actually describes what you expect to have supplied to you.
4. Is the price right?  Can your business sustain the cost of the goods/services for the duration of the agreement?  Are there any minimum quantities that must be ordered or bought weekly, fortnightly or monthly and if so what are those quantities?  Are any of the terms subject to change and if so, on what basis?
5. How long is the initial term of the agreement?  Does the agreement provide an automatic right of renewal for either or both parties or are there timeframes within which these rights must be exercised.
6. Is entering into the supply agreement in the best interests of your business?  Don’t be pressured into signing by someone else; if in doubt don’t sign it.  Remember that you are the customer and the supplier wants to sell to you.

It is important to note that no two supply agreements will be the same.  They will differ depending on the context in which they are used.  However, considering these relatively simple and easy to follow steps can increase your understanding of your supply agreement and will leave you in better shape if there is ever a dispute.

These comments are for general information only and should not be used as a substitute for seeking independent legal advice.  If you wish to obtain more information about any of the above the authors welcome any and all enquiries.

For more information please contact Julika Wahlmann-Smith, Senior Solicitor (DDI:  375 8719 or email:  julika.wahlmann-smith@heskethhenry.co.nz )