Disclaimer: I am not an attorney and cannot give legal advice. This series is from a supply chain practitioner’s perspective on negotiating contracts and is simply offering my perspective on common contract clauses. Seek professional legal advice for your own contracts.
Today’s article kicks off a series on supplier contract negotiation, which is where I usually “start” my analysis of the whole supply chain cycle. Not all businesses have their supply chain professionals negotiate supplier contracts/agreements, and some even have specialized personnel to do so, but I’ve always found it to be a useful skill in building a supply chain career. Contract negotiation is an art that starts with understanding contract clauses, so in this series I am going to walk through a contract and discuss common clauses. If I am missing a clause you would like to see, please let me know!
Let’s jump right in! I’ll be using my basic materials contract template, which is derived from multiple sources and is in no way definitive.
Introductory Clauses
SUPPLY AGREEMENT
This Supply Agreement (“Agreement”), effective the (date) of (month), (year) (“Effective Date”) by and between [Company Name], an [State of incorporation] corporation, with its principal place of business at [Company Address] United States (hereinafter referred to as “Buyer”), and [insert Seller name here in caps], a [insert what state Seller is incorporated i.e. Delaware; insert what type of entity Seller is i.e. corporation, LLC] corporation with its principal place of business at [insert street address, city, state, zip] (hereinafter referred to as “Seller”), either or both of which may be hereinafter referred to as a “Party” or the “Parties”, respectively.
RECITALS AND DEFINITIONS
WHEREAS, Buyer is engaged in, among other things, the business of designing and manufacturing of [Company’s primary product category] (“Buyer’s Equipment”);
WHEREAS, Seller is engaged in, among other things, the business of manufacturing, designing and selling [Seller to insert here what Products Seller is selling to Company]; and
WHEREAS, Buyer and Seller wish to enter into this Agreement pursuant to which Buyer will purchase from Seller those certain production products and service parts set forth in Exhibits A and B, in accordance with the terms and conditions set forth below;
NOW THEREFORE, the Parties hereby agree as follows:
This is the introduction of the contract, and should be very focused on the “what” and “who” of the agreement. The purpose here is to establish who exactly is participating in the contract and what it’s for. This is also where you establish the “shorthand” for each party in the rest of the contract. Clean contracts are very consistent about using the same shorthand throughout and don’t switch between them. For the buying side, this might be Buyer, Company, an abbreviated name of the business (Like “Passwall Solutions” without the “LLC” or “Co” or other incorporated suffixes), or some other unique name to be used throughout the contract. For the supplier side, this might be Supplier, Seller, Contractor, Consultant, an abbreviation of the Supplier’s company name similar to the buying side, or some other variation. If you are building a contract template, especially if you are weaving together multiple previous agreements, one of the first steps is to go through and make both the company shorthand and supplier shorthand consistent. This contract uses Buyer and Seller, primarily because it is for materials purchasing.
The introductory paragraph also outlines the legal names and addresses of the two businesses. This is important for billing and also for running Dun & Bradstreet reports, so ensure these are legal names and correct addresses for the headquarters of the legal entities.
The part where the agreement outlines what kinds of goods or services the supplier is providing is not strictly necessary and I do not always see it, but it can be very helpful to internal customers when they reference the contract later. Internal customers don’t always “just know” that Fastenal provides hardware like nuts, bolts, and PPE equipment and it can help them more quickly orient to what they are reviewing.
Note there are sections here to be filled in that are in square brackets. I like to use square brackets and to also highlight those sections in a bright color to ensure none of the “to be filled in” sections are missed. Square brackets are not commonly used in English, so using square brackets means either party can simply search for square brackets and replace them with content; the fields are complete when all square brackets are removed.
Agreement Term
1. TERM OF AGREEMENT
1.1 The term of this Agreement shall commence on the Effective Date and shall remain in effect through [insert date], unless terminated earlier in accordance with Section 20 (Termination) of this Agreement.
The agreement term is simply that – how long is this contract in effect? This is also a place to put optional extensions, such as allowing for two one-year extensions on a three-year agreement. This clause almost always refers to later termination clauses in the contract. I have seen longer articles talking about the term of the agreement, but they are usually fairly straightforward. I prefer to have this article either right up front in the contract (on the first page if possible) or right above the signature line at the end. Having it up front makes it much easier to find later as the first question people ask about a contract is “when does it expire?” The contract term located on the first page helps those who reference the contract later. Having the term just above the signature line ensures the signatories understand the term and the term is very clear to those parties. Either location is fine, the right answer is dependent on the company’s approach.
Key Point:
To keep contracts clean, I always recommend that redlines never remove a section entirely. If the buyer and supplier both agree to strike a clause, replace that clause with “intentionally omitted” or something similar instead of removing it. Removing it renumbers the entire contract and messes up all the references to article numbers that tend to run throughout a contract.
Confidentiality Clause
1. PROPRIETARY RIGHTS AND CONFIDENTIAL INFORMATION
1.1 Non-Disclosure Agreement. The Parties are bound by the terms and conditions of a Non-Disclosure Agreement (the “NDA”) with an NDA Effective Date of [Insert Effective Date as defined in the NDA that was executed]. The terms of this NDA are incorporated herein by reference and will apply to all information exchanged between the Parties pursuant to this Agreement or any Purchase Orders.
1.2 Proprietary Rights. Seller shall not use any trademarks, trade names, logos, or other marks which are owned by Buyer or which Buyer is licensed or authorized to use (“Trademarks”), except as authorized in writing by Buyer. All materials including, but not limited to, any inventions (whether or not patentable), works of authorship, trade secrets, know-how, ideas, concepts, processes, techniques, methods, methodologies, practices, processes and materials (collectively “Inventions”) created by or prepared for Buyer pursuant to this Agreement shall be the sole and exclusive property of Buyer. All Inventions shall conclusively be deemed “work made for hire” under Copyright Act, 17 U.S.C. Section 101. To the extent that the Inventions do not qualify as a “work made for hire” under the Copyright Act, Seller hereby agrees to assign, transfer and convey, without any requirement or further consideration, all title and interest in and to any and all Inventions to Buyer and its assigns, and to sign such documents and to cause its employees to sign such documents and take such actions as are requested by Buyer to effectuate and confirm Buyer’s ownership rights to the Inventions throughout the world.
1.3 Buyer’s Confidential Information. Any and all technical, Product and other knowledge or information including, but not limited to, Buyer’s designs, specifications, Inventions, Trademarks, customers, vendors and other suppliers, personnel, financial information, marketing and sales information, Product forecast data and requirements obtained from Buyer or learned by Seller in the course of its performance pursuant to this Agreement and all technical and other information furnished by Buyer or jointly developed by Buyer and Seller (collectively “Confidential Information”) shall remain Buyer’s property and shall be maintained in confidence and safeguarded by Seller. Seller shall use the Confidential Information solely as needed to perform its obligations pursuant to this Agreement and any applicable Purchase Order. Seller shall restrict disclosure of Confidential Information only to those Seller employees who have a need to know such Information and are bound by confidentiality terms that are no less restrictive than those contained in this Section, or the NDA. Upon completion or termination of this Agreement or any Purchase Order or upon Buyer’s request, Seller shall promptly return to Buyer all materials and any copies thereof that consist of or include Buyer’s Confidential Information. This obligation of confidentiality and non-use shall remain in effect for a period of five (5) years following completion of a Purchase Order, provided that as to any item of information that rises to the level of, and remains, a trade secret under applicable law, such period of confidentiality and non-use shall continue for the maximum period of time under applicable law.
Chances are good the company and supplier already have a signed Non-Disclosure Agreement (NDA) before working on a contract together. It is still common to have at least some confidentiality protections in the main contract, and to reference the existing NDA. This is often redundant with the existing confidentiality agreement, and it is the contract negotiator’s responsibility to make sure the two documents do not conflict. Conflicts between documents in a contract can cause both documents to be disregarded in a dispute. So if there will be redundancies, make sure they match. This is also why I encourage writing scopes of work without contract terms.
I have this clause early in my template for practical reasons – there is a field to fill in here about the date the existing NDA was signed. I try to put as many of the fields to be filled in at the beginning of the contract as possible so they are less likely to be missed. Scattering fields throughout the contract nearly guarantees blank fields on fully executed agreements.
Definitions Section
A very common early section in a contract includes definitions of the capitalized terms within that contract (such as “Work”). This template does not have that section, instead defining capitalized words as they appear in the document. Either method is valid, but the contract negotiator must ensure consistency between a definition clause and the rest of the contract. If a contract negotiation results in removing the only use of a defined term, that defined term should also be removed from the definition section to avoid confusion. It can also feel excessive to define words in a definition clause to then only use them once. Know that any word which is Capitalized in the middle of a sentence (not simply capitalized as the start of the sentence) is considered a defined term, which has legal implications. While it is not good English grammar to capitalize non-proper nouns in the middle of a sentence, it is good legal practice and a contract negotiator should keep their eye out for which words are capitalized (and therefore legally defined) and which are not.
Next week we’ll go through the pricing and quality requirement clauses as we continue through the contract template. If you’d like to talk to me about your company’s contract clauses, schedule a time to chat.
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