Companies depend on supply chain contracts to run businesses smoothly, as supply chain contracts are the legal underpinnings that ensure needed resources arrive in a timely manner. Despite this, many companies neglect to scrutinize these types of contracts carefully, which can give rise to serious problems that span the operations of your business. Consulting a supply chain lawyer from the Priori network allows you to make sure appropriate due diligence is completed.
Defining Supply Chain Contracts
Supply chain contracts are quite varied and complex, because supply chains themselves are complex and span the entire process of product creation. Your supply chain generally refers to the network of entities that bring a product from its conception all the way through its design, manufacture, sale and delivery to the end user. Key participants in supply chains may include manufacturers, distributors and providers of raw materials. Supply chain contracts with these and other participants include sale of goods contracts, distribution agreements, reseller agreements and manufacturing agreements.
All supply chain contracts are uniquely adapted to fit the circumstances, industries, and economic realities facing companies involved, but certain key provisions should be included in any well-written supply chain contract. The following are some of these key provisions.
Risk in supply chain contracts must be clearly allocated to limit your liability and divide risk in an equitable manner. These kinds of provisions include indemnification, limitation of liability, warranties, termination clauses and post-termination obligations. It is also important to establish when ownership of products passes hands, determining who carries the risk at what point in the transfer of goods. Risk allocation must be done carefully, especially in order to ensure that goods are properly insured once your company assumes risk for them.
Payment and Pricing
Payment and pricing provisions are always important to include in any contract, but especially supply chain contracts. Not only is the amount of payment important to establish, but also the manner of payment and the point at which the payment transfers hands. Many conflicts arising from supply chain contracts involve payment, so these provisions need to be very carefully constructed and can involve issues like escrows, product inspections and transfer methods.
Material Breach Termination Clause
It is important to ensure that if a contract has been seriously breached that your company has remedies for it. This provision allows you to end your relationship after a breach if you so desire and defines what you are due after such a termination.
Obligation to Observe Labor Laws and Social Responsibility Code of Conduct
With complex labor laws and issues like child labor, worker safety and safe working conditions affecting international supply chain contracts in often unexpected ways, it becomes vital to establish these standards within the supply chain contract itself. Far too many companies have faced serious penalties, not to mention terrible public relations problems, due to violations of these types of standards.
Subcontracting is common, but it has its risks for all parties involved. It is important to define if and when subcontracting will be allowed, how these subcontractors will be vetted and who ultimately assumes the risks associated with working with subcontractors.
Term and Termination
Contract term and termination provisions establish not only when a contract ends, but also the process of a possible renewal and renegotiations, any post-termination obligations and other related issues. These provisions are key to maintaining a positive relationship with suppliers after obligations of a contract have been basically fulfilled.
Supply Chain Contracts and Due Diligence
Because of the complex nature of supply chains, supply chain contracts require a high level of due diligence on the potential contract partner and the provisions of these contracts themselves, even when they contain mostly standard provisions. When due diligence is not done well, conflicts arising out of the contract can have very unexpected outcomes, negatively impacting the operations and bottom line of your business.
The price of supply chain contracts can vary based on a number of factors. Priori attorneys typically create flat-rate packages for contracts that range from $350 to $5000. In order to get a better sense of cost for your particular situation, put in a request to schedule a complimentary consultation and free price quote from one of our lawyers.
What happens if I run into problems with a supply chain contract?
When you run into problems arising from supply chain contracts, negotiation and arbitration can usually resolve them. Each conflict, however, is unique and requires a unique solution, so you should contact a supply chain lawyer right away to discuss your options.