Steps for Preparing a Vendor Agreement: Lawyers Advice
A business procures goods and services to engage in commerce efficiently on a day-to–day basis. Each product or service is acquired by a vendor dealing in the respective category of such goods. When dealings with vendors are frequent and involving transactions worth huge sums, entering into a vendor’s agreement facilitates things for a business. It ensures that the vendors deliver, which facilitates smooth business operations.
A vendor agreement is a legal document which stipulates the terms and conditions of the vendor’s services to be hired by the business, outlining the expectations of both the parties. A meticulously drafted agreement will reduce the risk of lawsuits in the future, as the rights, liabilities and responsibilities of the parties to the contract are stipulated. This document has a legal standing in court, in case of disputes arising out of breach of the contract. Depending on the type of industry and the kind of services being hired from a vendor, there are different kinds of vendor agreements. However, every business requires a well- drafted agreement with clauses tailored to its own specific needs. However, there are some key clauses which are integral to every agreement, which are discussed below.
Key Clauses of a Vendor’s Agreement:
The following is a brief discussion on the pivotal clauses in a vendor’s agreement. Therefore the essential clauses to keep in mind are:
Details of Business and the Vendor: An introductory clause stating the name of the parties signing the agreement, must be clearly mentioned, with the addresses of the local and head offices of both the parties, to avoid any confusion.
Details/Scope of the Products: This clause should be precise and detailed, as it defines what product or services the business will receive. The agreement must stipulate the kind, quality and quantum of goods to be purchased from the vendor. And in the case of services, the type of services required and the standard to which the services must be provided must be clearly elucidated. Specificity in this clause is of paramount importance, as any ambiguity in conveying the requirement sought will lead to errors.
Pricing & Mode of Payment: A vendor agreement is required to specify the consideration at which the goods are procured or the services are availed from the vendor. Various factors must be taken into consideration which have the potential to impact the pricing. Along with the price, the terms of payment must be specified. The terms must state to whom the payments must be made, which mode of payment is preferred, if the amount is to be paid as a lump sum or in installments, if any grace periods are applicable or not and if there are any late payment penalties. Conventionally, the vendor asks for a deposit to secure his services to the business, and a balloon payment is included or a series of payments over the course of service.
Deliverables & Exceptions: This clause in the vendor agreement states the time period within which the deliverables need to be delivered by the vendor need to be stated, as it may directly influence the business operations of the business owner. This clause is highly admissible in case of perishable or consumable goods. Frequently such situations arise in a dynamic business environment, where some modifications need to be made in the clauses dealing with the nature of the service or goods to be delivered. Hence, a clause must provide for a definite set of such exceptional circumstances, wherein such modifications are allowed to be made, if such events were to actually happen.
Term & Termination of the Contract: The agreement must by all means specify the duration of the business relationship with the vendor. The terms of renewal must also be stated, if so required. It must also specify the provision wherein the grounds of termination are stated for either party, if the need so arises. The formalities with regard to such termination taking place must be clearly determined.
Confidentiality: It is imperative for a business to ensure that any confidential information shared by the parties is only used in accordance with the terms and conditions of the agreement. The confidentiality clause is of paramount importance in protecting any proprietary or trade secrets of the business, during the course of the contractual relationship between the parties and beyond.
Jurisdiction & Dispute Resolution: This clause details the mode in which a dispute shall be resolved and what law applies. Businesses may enter into agreements with vendors across state or even national boundaries. It becomes a prerequisite to mention the governing authority under the agreement which is legally enforceable. The common modes of dispute resolution include arbitration, mediation, and litigation in courts.
Remedies: The law of the land must be kept in mind while drafting vendor agreements. This clause includes monetary and non-monetary remedies which can be claimed by the parties. Monetary remedies involve damages. Non-monetary remedies involve injunctive relief or equitable relief.
Disclaimers and Indemnification: The indemnification clause is a key component in vendor agreements. Indemnification entails that a party agrees to indemnify the other party in case a particular set of events occur. This clause plays a major role in disclosing risks and limiting liability for both the parties.
Limitation of Liability: This is a quotidian clause in vendor agreements, which limits the type and kinds of liabilities undertaken by a party. An alternative is setting a monetary cap is also set to a parties liability.
Ownership of Intellectual Property: This clause stipulates the ownership of the intellectual property created from service, under the respective agreement. It also mentions the terms and conditions for the usage of such intellectual property, and whether a license is to be granted to the other party for the usage of such intellectual property.
Amendment: The amendment clause elucidates how parties to the agreement may modify the agreement, if circumstances change during the course of such contractual relationship. It is an important clause, as it provides much required flexibility for the parties.
These are some of the key essentials that can be found in a vendor’s agreement. These days, vendors are gravitating towards standard form contracts, however it is important to have a mutually negotiated contract with a vendor. This will protect business owners and give them a sense of control in their contractual relationship.
Authored By: Adv. Anant Sharma & Rainna Jain