4 Key Supply Conditions That You Should Include In Every Agreement Or Purchase Order

Published date08 June 2022
Subject MatterCorporate/Commercial Law, Corporate and Company Law, Contracts and Commercial Law
Law FirmLogan & Partners
AuthorMs Usha Kumar and Jana King Allen

According to a 2018 McKinsey article, poor supplier performance can result in significant (10-20%) indirect costs. Proper planning and making sure you have the right terms and conditions in your supply agreement will reduce your company's financial exposure and protect it from litigation.

What type of conditions should you include in your supply agreements to protect your company in case of the need to change or cancel a legally binding agreement? In this first of two articles, we discuss 4 key conditions that you need to include in your next supply agreement or purchase order.

If there is one thing the last two years have taught us, even the best laid plans can go awry. That's why it pays to be prepared in case you need to modify, suspend or cancel a legally binding purchase order (PO).

Your ability to cancel a PO after its execution depends on the terms and conditions you've included in the supply agreement or related purchase order.

Because a PO is legally enforceable when incorporated into the supply agreement, it is important that you cover for all possible contingencies when you draft its terms and conditions, including a specific right to modify, suspend or cancel the PO. Otherwise, when conditions force you to cancel or modify a binding PO, the company could face claims if the agreed terms are violated.

You can protect your company and minimize any financial or legal headaches, by including a right to cancel, suspend or modify the purchase order should any of the following four conditions arise.

1. Detection of errors or defects during inspection prior to delivery.

Typically, a supply agreement contains provisions on the right to inspect goods either before or at delivery to determine whether they meet the agreed terms and specifications. This is not just a contractual right but also a legal right. For example, the Uniform Commercial Code (UCC)1 in the United States gives the buyer a right to inspect the goods.

A supply agreement should specify the buyer's inspection rights, including when and where the inspection may take place and by whom. A typical condition is for the buyer to give the supplier prior written notice of the inspection which is typically conducted once during a contract year. Less commonly, a 'surprise inspection' is conducted without giving the supplier prior notice. The provision should give inspection rights to the buyer as well as authorized personnel, entitling them to perform the inspection at the supplier's and any of its...

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