Vendor Agreement: Why is it important?

Vendor Agreement: Why is it important?

Legal & Compliance

Vakilsearch Staff

Vakilsearch Staff

22 May 2019, 10:06 — 7 min read

Background: A vendor agreement is an arrangement under which a business owner hires an external entity to provide them products and services. From office supplies to professional and consultancy services, marketing and event management etc., a vendor agreement can cover a wide spectrum of products and services. The nature of products and services to be provided, duration of contract, service level agreements (SLA), terms of payment and termination of the contract, all form an integral part of a vendor agreement. If you are dependent on someone to provide you with products and services that are vital for the smooth running of your business, it is imperative that you have a rock-solid agreement with your vendor. A contract will minimise the risks of future litigation by laying down terms and conditions and rights and duties for both parties. This way you can protect the interests of your company. Vakilsearch in their previous article covered the laws and trends governing the Indian e-commerce sector. This article is all that you need to know about the importance of a vendor agreement and its key elements.

 

Every business at some point or the other has to rely on outside vendors for the delivery of their goods and services in order to run their business. It could be simple goods such as office supplies that need to be delivered or it could be products which help in smooth running of your services. It is in this context that a vendor agreement gains immense significance since the rights and obligations of both parties have to be clearly laid down in order to avoid a dispute with the supplier. Since maintaining a smooth supply chain throughout is key to running a good business, a dispute with a supplier can lead to a massive decrease in the output efficiency of the business. Thus, a vendor agreement through which each party is aware of their duty and consequences of non-performance of their duty is of paramount importance. The following are some of the key elements of a vendor agreement:

1. Confidential information

It is essential at the beginning of any contractual relationship to determine the scope of confidential information as well as information related to business. Companies often devote a large number of resources towards the development of proprietary information. Protecting such information and ensuring that confidential information is only used in accordance with the terms and conditions of the agreement is of paramount importance.

2. Price and payment

When it comes to negotiating prices for a contract then the process is usually simple when it is over a single good. However, in cases when there is a complex supply agreement with a variety of factors that influence the pricing, the negotiation for the pricing terms of the contract becomes more difficult. Pricing in contracts also needs to take into consideration a potential increase in prices of aspects such as license fees, cost of labour and material.

While negotiating terms for payment, one needs to account for what is referred to as the ‘time value of money’. Thus, while negotiating payment terms, it is essential to ensure that the payments are as delayed as possible.

3. Possible change in the deliverables

Often in a vendor agreement, situations arise because of which clauses, which deal with the scope or nature of the service or goods delivered, need to be modified. Thus, there needs to be a clause which provides for a defined set of exceptional circumstances under which a modification is permitted for a set of events that are likely to take place.

While negotiating terms for payment, one needs to account for what is referred to as the ‘time value of money’. Thus, while negotiating payment terms, it is essential to ensure that the payments are as delayed as possible.

 

4. Termination and remedies

While drafting an agreement, especially a vendor agreement, the question that needs to be asked is, how does one get out of this agreement if the need arises? Under such circumstance, the manner in which such a termination takes place and the situation under which such termination takes place needs to be carefully determined. For example, a clause which provides you with a mechanism for unilateral termination of the contract does not make a lot of sense if you have already pre-paid for a long duration of services, unless there is a proper mechanism for claiming remedies.

While drafting remedies for a vendor agreement one must keep in mind the law of the land, given the wide variance in the law pertaining to remedies according to different jurisdictions. Most monetary remedies include damages which can be termed as consequential, incidental, special, punitive and exemplary. Non-monetary damages can also be considered in the form of equitable relief which may come in the form of restructuring of the agreement such that the aggrieved party is restored to the extent that such a party has been damaged. Non-monetary damage can also be in the form of injunctive relief which is often done in cases of breach of confidential information.

5. Disclaimers and indemnification

One of the purposes of an agreement from point of view of both parties is to disclose certain facts, thereby reducing uncertainty and mitigating risks. There needs to be clauses which disclose risks and by virtue of the same limit, liability. Indemnification is also a key element to most contracts including vendor agreements, through which one party agreed to indemnify the other in case a particular set of events takes place. In order to ensure that there is no uncertainty regarding the number of damages that one is exposed to; limitation of damages is an important facet in agreements.

These are the few key elements which need to be looked at in a vendor agreement. However, it is important to keep in mind that a vendor agreement can greatly vary in its nature based on the nature of the goods or services for which the agreement is being entered into. Consequently, the nature of each of these key terms would vary, making it very important for drafters of the agreement and those negotiating the agreement to keep the nature of the business in mind.

Interested in reading more articles on legal and compliance? Check out our other articles here:

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Safeguard your business’ Intellectual Property assets

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Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views, official policy or position of GlobalLinker. 

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