Five key provisions of a supply of goods contract

 As part of their day-to-day trading activities, businesses have to deal with supply of goods contracts.

Whether you have the supplier or customer’s interest in the contract, the failure to look closely at a supply contract’s terms and conditions can have disastrous consequences for your business.

The five main areas in which risks arise in supply of goods contracts are:

1. Definition of goods and specifications

This is the heart of the contract: you want to ensure that the quality and the quantity of the goods to be supplied are clearly defined, and that both parties fully understand what the purpose of the contract is.

Although your lawyer may have limited opportunity to review the specifications of the goods, it is crucial that you clearly explain to your lawyer what your expectations are in terms of the quality and quantity of the goods, so that those expectations can be included in the contract. You can have the best terms and conditions in the contract, however they will be of no use if the specifications of the goods are not clearly drafted. Specifications are normally documented in an annexure (i.e. schedule) to the contract.

2. Price and payment

Payment terms must also be clearly drafted, because suppliers will inherently want prompt payment whereas customers will generally want to be able to put the goods to use before making payment.

If payment terms are subject to specific milestones (e.g. sourcing of raw materials, delivery, and installation), always ensure that these milestones are clearly specified in the contract.

If, as a supplier, you have doubts about the credit worthiness of a customer, you should specify in the contract the required form of security, such as payment of a significant deposit, a bank guarantee or a parent company guarantee.  

At law, there is no implied right to charge interest on amounts owed; if a party to a contract wants the right to charge interest, it must be clearly specified in the contract.

 

3. Delivery of the goods

The supplier’s main contract obligation is to deliver the goods. ”Delivery” needs to be defined in the contract, as it will trigger several other contract obligations, including payment of the amount owing; the customer’s obligation to take delivery; the starting date for any defect liability period or warranty period, the release of bank guarantees etc.

The “delivery” event also transfers risk (in the goods) from the supplier to the customer. “Risk”, in this context, is the responsibility for securing the goods; the insurance responsibility transfers from the supplier, and in turn, the customer needs to insure the goods.  Ownership (also known as “title” to the goods), does not usually occur until the goods have been paid for in full.  Therefore, assumption of risk in the goods by the customer, and the customer’s ownership/title to the goods are two distinct events.

 

4. Warranties, guarantees and defect liability period

Warranties are promises by one party to another that the supply of goods will meet certain criteria. Those promises can be contractual or implied by law. Note that in practice the words “warranty”, “guarantee” or “defect liability” are used loosely and using a particular term is not necessarily conclusive of the terms’ legal status.

Most supply of good contracts include contractual warranties often called “defect liabilities”. Under these clauses, the supplier usually commits to fix some defects with respect to the goods supplied free of charge and for a certain amount of time. These clauses are equivalent to “free maintenance”, embedded into the supply contract. Suppliers and customers should always review the contract warranty/guarantee/defect liability clauses and ask the following questions:

1. Scope of warranty
Which defects are covered and which are excluded? Does the supplier’s defect liability cover goods which have been modified by the customer, or already integrated by the customer into other goods? Does the defect liability cover goods which have already been replaced or repaired by the supplier? Does the warranty cover costs or expenses caused by the defect (e.g. costs of returning the goods to the supplier, costs of immobilisation)?

2. Length of warranty
Is the defect liability period capped in time (i.e. of fixed duration) and when does it commence and end? How long is the warranty on goods which have already been replaced or repaired?

3. Pre-conditions to activate the warranty
Is there a specific notification period or a specific process that needs to be followed by the customer to “activate” the warranty?

4. Financial impact of the warranty (for suppliers):
Are my warranty obligations fully costed into the contract price?

You should also note that warranties can be implied by legislation. For example, goods valued at less than $40 000, or acquired for domestic or household use, are subject to “consumer guarantees” set out under the Australian Consumer Law. Those consumer guarantees apply over and above any express warranty provided in the contract and cannot be excluded, limited or modified.

5. Limitation of liability

Although it is almost impossible to avoid being exposed to “any” liability in a commercial transaction, astute suppliers and buyers always endeavour, via the terms of a well-drafted contract, to limit their exposure to the fullest extent possible. In the absence of a contractual limitation of liability, your exposure for any risk under the contract is unlimited. Suppliers should always pay particular attention to include a liability clause that:

- expressly excludes liability for the customer’s loss of profit, productions, revenue or any consequential losses;

- limits their aggregate liability under a contract to a percentage of the contract sum; and

- ensures that the liability provisions apply to any sources of liability (e.g. breach of contract, negligence, indemnity, legislation etc..).

 

If you have any questions regarding this article, please contact Source Legal Online at always@sourcelegalonline.com.au or 1300 609 450. 

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