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Supplier contracts: 5 steps to avoid costly problems

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Having a well-drafted contract with your suppliers can protect you from costly delays and disputes.

Conflicts often happen when a contract doesn’t clearly define the roles and responsibilities of both parties, says Mathieu Belleville, Assistant Vice President, Legal Affairs at BDC.

“Disputes can delay projects, cause problems in the supplier relationship and even impact your ability to serve your clients,” he says. “It just makes sense to draft solid contracts with your suppliers.”

Here are five tips on drafting supplier contracts aimed at protecting your business. (Note these tips aren’t legal advice. Consult a lawyer about your situation.)

1) Agree with your supplier—The first step should be to sit down with your supplier and agree on the expectations and responsibilities of both parties. This should happen before you put pen to paper.

“If everything is agreed on beforehand, plugging it into a contract could be the easiest part,” Belleville says.

2) Define responsibilities—The heart of the contract is a detailed description of the roles and responsibilities of both parties in fulfilling the contract.

“The contract should be detailed,” Belleville says. “It should describe what needs to be done, when and by whom. Delays and contractual disputes are often the result of a lack of clarity, or things being taken for granted.”

Responsibilities can include such matters as obtaining necessary permits, licences and/or ensuring regulatory compliance. The contract should specify which side will be responsible for such issues.

If the contract is with a supplier outside your home province or territory, it’s also important to realize which jurisdiction will govern the contract. Certain jurisdictions could force you to manage a dispute far from your office.

3) Make a payment schedule—The contract should give the amounts and schedule of payments. It’s common for payments to be tied to the timing of various expenses. For example, a supplier who is providing and installing equipment may require payment for the machine upon delivery and then milestone payments as installation work proceeds.

Also, state the circumstances under which you have the right to delay making a payment—such as the non-fulfillment of certain milestones.

4) Outline termination terms—Specify under what circumstances and how the parties can terminate the contract. For example, you may want to be able to terminate the contract at your convenience and not necessarily only due to a breach by your supplier.

In the event of a termination, the contract should specify the effect of such termination on payment and other obligations.

5) Clarify confidentiality issues—The contract should cover any confidentiality issues you may have.

For example, you will probably want to ensure the supplier is prohibited from disclosing financial and other information about your business to third parties. You may also want to protect intellectual property from being disclosed or claimed by your supplier.

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