Following Tips for Supply Agreements

The number of large multinationals that don’t do a great job with their supply agreements is surprising. You do have to make your agreements as concise and clear as possible (if you hand potential suppliers documents as thick as the Bible, no one will sign them); however, you shouldn’t skimp on some areas. The tips that follow don’t make for a complete contract in and of themselves. Rather, these are areas where companies often mess up their contracts.

Avoid using the supplier’s contract, which is likely one-sided and full of potential pitfalls. Make sure you negotiate the final contract.

Product description

Closely and carefully describe the product you want, referring to any samples you’ve already approved (hopefully by mutually signing and dating them).

If you don’t yet have approved samples, state that the product must be exactly like (or similar to, depending on the product) the samples that you’re going to approve. In that case, write the sample approval process into the contract. Also, make sure you describe the quality of the product. If you have detailed prints and designs, reference them in the contract. The more specific, the better protected you’ll be.

Delivery date

You want to specify the date on which the products should be delivered. Putting in a penalty for late delivery — for example, $100 per day late — is often a good idea. You may not want to actually enforce the penalty, though, which can lead to other problems (such as the supplier’s cutting corners). However, the penalty is there as a disincentive for late delivery, and you have the option of enforcing it.

Payment terms

The agreement should clearly state what payment terms you’ve agreed to. Also, as we discuss later in “Placing Orders,” your agreement should usually state that the supplier will pay all miscellaneous fees and expenses involved in getting your goods onto the ship. Use the phrase including without limitation when specifying these costs in the contract.

Insurance

The agreement should state who will pay for cargo insurance. The terms of sale determine who’s obligated to make arrangements for insurance. For instance, if you buy FOB Shanghai (see the upcoming “Purchasing goods via free on board arrangements” section), you’re responsible for insuring the goods after they’re loaded on board the overseas conveyance.

No toxic substances

Remember that toxic substances can be a really big problem for your business. Your supplier should agree not to use any toxic substances including without limitation the ones we mention later in “Including substances that are toxic to your business.” Do additional research to find out what other toxic substances you should specify as prohibited.

Indemnification

Ideally, you can get suppliers to agree to broad indemnification. With broad indemnification, suppliers agree to protect you against any and all costs, fees, liabilities, losses, and so on that arise from their performance (or nonperformance) under the agreement.

In reality, few suppliers are likely to go for something that broad. You may have to cap liability or limit indemnification to certain situations. You should seek fairly broad indemnification for liability for their using toxic substances, though. In addition, you may want to make them responsible for all costs and legal fees for enforcing the contract.

If indemnification ever becomes a major sticking point in a negotiation, be realistic about how much the supplier can actually afford to indemnify you for. This provision doesn’t help anybody if the supplier ends up going bankrupt because of the indemnification.

Binding arbitration

You’re almost always better off having binding arbitration clauses in your agreements in China. Protectionism is much less likely, you usually get a more competent adjudicator, and arbitration is more transparent than with Chinese courts. We discuss arbitration in more detail in Chapter 17.