Supply Chain Contracts: 5 Must Have Provisions

The supply chain contract is the key factor when questions arise or when things unfortunately go wrong. The contract will set expectations, outline each parties’ obligation and when the obligation ends, and outline the process for dispute resolution. Getting the contract right is crucial. Detailed provisions of a supply chain contract will vary based on the business and the business industry. However, there are certain provisions that should rarely, if ever, be excluded from your contract. Here are 5 provisions that should always be included in your supply chain contracts.

Material & Quality Requirements

Having a diverse supply chain will help you meet consumer expectations, innovate, increase profits, and stay competitive in your market. Unfortunately, they also make it more demanding to manage and guarantee high quality. Providing a clear and concise supplier contract will mitigate material and quality issues.

Incorporating a clause that details exact material requirements can help prevent suppliers from switching to a lower quality material. You must detail the size, weight, type, color, shape, and acceptable sources of the supplies.

In regards to the quality requirements, outline firm minimum standards for quality. Specify the purpose of the product and detail that the products delivered must be fit for that purpose. Any quality assurance testing that is required must be clearly defined, as should the consequences of failing to meet the required standards or specifications.

Protect Confidential Information

Protecting your confidential information and know-how helps maintain your competitive advantages. Strong confidential information protection in a supply chain contract must include the following:

  • Clearly define confidential information. Detail exactly what constitutes confidential information in your supplier contract. You will want to consider including financial information, business projections, product pricing, designs, tooling/molds, tools, equipment, details of other suppliers, specialized processes, and more.
  • Limit access to confidential information. In this clause, outline practical steps your supplier must follow to prevent staff (including 3rd party vendors and subcontractors) from accessing your confidential information and know how. Steps to achieve limited access might include, restricted access to digital assets, security measures, physical barriers, including third parties in the confidentiality provision within your agreement, ensuring confidential information will be returned when the contract ends, and assigning responsibility for maintaining confidentiality to a particular member of the supplier’s team.
  • Detail who owns any intellectual property (IP) developed during the relationship. The supplier may develop IP while working on your project. The contract outlining your agreement should clearly define and assign rights of the IP to your company, if you desire to claim ownership of it.
  • Define auditing procedures. You should always have the ability to visit your supplier sites and review documentation and records to ensure the measures required are in fact being adhered to. You can detail the frequency and how these audits will take place.
Protect Your IP From Counterfeits

Intellectual property law where you operate offers some protection from counterfeits, provided you register your IP there. This protection can be intensified by liquidated damage provisions, which offer strong incentives for supplier to protect your IP and provision for immediate injunctive relief where it is being infringed.

Liquidated damages provisions outline that, where your IP is being misused, sold, or “held hostage” during a dispute or following termination of the contract, your supplier will be required in most cases to pay you a predetermined sum of money.

An injunctive relief provision gives you the ability to legally require your supplier to stop doing whatever it is they’re doing that contravenes the terms of your contract. In the context of IP, your supplier would immediately need to stop selling the counterfeit products.

Non-approved 3rd party sales should also be covered in the liquidated damages clause. This prevents your supplier from selling off any excess products or products you reject. You can also achieve this by requiring your supplier to provide a third-party certification of destruction, or return the products to you.

Conditions To Promote Contractual Performance

The importance of performance clauses in your supply chain contracts has never been more apparent than throughout this Covid-19 pandemic. Courts will be full of cases, and the negotiations of settlements relating to non-performance during this pandemic will continue for years. Performance provisions can be beneficial in these cases. Examples include:

  • Financial penalties for delays
  • Suspension or Termination clauses for delayed performance
  • Performance bonds
  • Rights that will allow another supplier to take over where the supplier has failed to deliver
  • Performance guarantees from a parent company
Planning The End Of Your Contract

Your supply chain contract should detail the circumstances under which parties can terminate the contract, and what happens once the termination occurs. Be clear about what is owed to each party, and what steps must be taken before and following termination. If a termination occurs, it sets clear expectations on the next steps, limiting the scope of any dispute.

Implementing these contractual protections and having strong and strategic supply chain relationships, your company will be better positioned for success now and into the future.

Contact us at MCDA CCG for a free no-obligation discussion to find out how we can help improve your supply chain performance. Contact us at (714) 872-2393 or by completing the form below.

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