What is a Supply Agreement?

15 February, 2024 | Chantal Laidler

In short, a supply agreement is a commercial contractual arrangement that defines the terms and conditions between a supplier and a buyer. Supply agreements are increasingly common, and a well-drafted agreement can ensure that you minimise disputes and have a successful arrangement.

Understanding Supply Agreements:

A supply agreement is a legally binding document that outlines the terms and conditions governing the sale and purchase of goods or services between commercial parties. Its primary purpose is to establish a clear understanding of the rights and obligations of both the supplier and the buyer, to foster a mutually beneficial relationship. Supply agreements may be for one-off transactions, or long term, ongoing arrangements.

There are many key components of supply agreements, most of which are bespoke to each business. We have included some key components for consideration below:

• Parties need to be clearly identified and definitions should be provided for any key terms to avoid uncertainty and disagreement.
• The scope of goods and/or services needs to be set out. This may include specifying quantities which need to be supplied, any minimum order amounts, standards of goods and/or services, delivery schedules and any other details relevant to the particular transaction.
• The price of the goods or services should be set out, as well as the payment terms, including due dates, methods of payment, who is responsible for payment of any applicable taxes or shipping costs and any scheduled reviews of price. You will also need to ensure any fixed prices can be sustained for the course of the contract.
• The delivery process should also be specified. You may wish to include shipping terms, inspection procedures, and conditions for accepting or rejecting delivered goods or services.
• Specific clauses should be included outlining the duration of the agreement and the conditions under which either party can terminate the contract. Include provisions for early termination, renewal, and any associated penalties.

Legal Considerations in New Zealand:

It is important to have supply agreements drafted or reviewed by a legal expert to ensure that the arrangements are consistent with applicable laws and regulations.

Some considerations include:

• Fair Trading Act 1986: Ensure compliance with the Fair Trading Act, which prohibits false or misleading representations, deceptive conduct, unsafe products and unfair practices in trade.
• Consumer Guarantees Act 1993: Understand the implications of the Consumer Guarantees Act, and ensure goods are of acceptable quality and fit for purpose. If the goods are not of acceptable quality or fit for purpose the agreement needs to outline remedies available.
• Privacy Act 2020: If personal information will be collected, the different protections and methods you have in place will need to be set out.

Drafting of Effective Supply Agreements:

Effective supply agreements need to carefully set out the obligations and responsibilities of each party. It is important to have clarity on the expectations of both parties at the outset and define these so that there is no room for ambiguity. Indemnity clauses and liability limitations need to be carefully considered and stated to allocate risks appropriately between the parties.

Force Majeure Clause
It is common for agreements to contain a force majeure clause to address unforeseen events, such as natural disasters or political instability, that may affect the ability to fulfil contractual obligations. The supply agreement should define what is considered a force majeure event, each party’s obligations should such an event occur, and when the contract may be terminated as a result of a specified event.

Disputes
The supply agreement should set out the governing law of the contract to provide clarity on the legal framework that will be applied in case of disputes. This is especially important if one party is based outside of New Zealand. It is also sensible to include mechanisms for resolving disputes, such as negotiation, mediation, or arbitration, to avoid costly and time-consuming litigation.

Special Considerations for Long-Term Supply Agreements:

For long term supply agreements, it is important to manage the relationship and ensure continuing success. This can be achieved by adding in Key Performance Indicators (KPIs) to measure and evaluate the performance of both parties. This not only promotes accountability and fosters continuous improvement, but also sets clear standards.

Ongoing Reviews
Long term agreements should also have a review clause to ensure there is a clear process for reviewing the agreement. This helps to ensure the agreement continues to be relevant and gives the parties the ability to adapt to change in business over time. The timeframe of each review will depend on the term of the agreement.

Intellectual Property
As the relationship will be ongoing, ownership of any intellectual property created during the relationship needs to be clearly set out including any licensing terms and whether any rights to intellectual property will be transferred to the other party, either during the term of the agreement or at the end of the term. It is also important to set out what happens to intellectual property upon the termination or at the end of the agreement so that the relevant party’s rights are protected.

Confidentiality
Any supply agreement should also include robust confidentiality provisions to protect sensitive information shared between the parties during the course of the agreement, and ensure this obligation continues after the agreement ends.

Exclusivity
In some cases, the parties may wish to insert an exclusivity clause which sets out that the seller may only provide goods to a specific customer, or that the customer may only sell specific goods within a defined area. Any such provision should be carefully considered to ensure that it is practical for both parties involved and complies with the competition and cartel provisions of the Commerce Act.

Need Expert Guidance on Crafting Your Supply Agreement?

Understanding the intricacies of supply agreements is crucial for any business looking to secure successful and legally compliant partnerships. Whether you’re establishing new relationships or navigating long-term arrangements, the importance of a well-drafted supply agreement cannot be overstated.

Chantal Laidler specialises in guiding businesses through the complex landscape of supply agreements. With a deep understanding of both the legal considerations in New Zealand and best practices for drafting effective agreements, Chantal ensures that your business relationships are built on a solid legal foundation.

Don’t leave your commercial success to chance. Contact Chantal today to ensure your supply agreements are precisely tailored to meet your business needs, mitigate risks, and foster thriving commercial relationships. With Chantal’s expertise, you can navigate the legal intricacies with confidence and secure the success of your supply arrangements.

Reach out now to transform your contractual challenges into strategic advantages.

Chantal Laidler
Phone: +64 9 837 6833
Chantal.laidler@smithpartners.co.nz