Supply contracts vary tremendously in their size, shape and substance. Before you sign, it’s important to have a complete understanding of the whole document and its implications for your business.
That being said, the vast majority of supply contracts should cover a number of key areas that merit particular attention. Taking some additional time to review and consider these areas, and asking yourself – and, ideally, your lawyer – a few basic questions, can help you to focus the negotiations on the things that are most important to your startup.
Parties to the contract
Is the other party to the contract the one you’d anticipated doing business with? Have you done business with them before? Do you know enough about them? Is this the party that will actually be providing the goods, or performing the services, or will subcontractors be used? Are there any rights to subcontract or transfer the contract during its life?
Description of the goods or services being supplied
Does this description match your expectations? Is it sufficiently precise and comprehensive so that there’s no room for argument later? Does it stipulate when the goods or services will be delivered? Does it prescribe how? Is there a way of measuring quality and ensuring that you’re happy?
Payment
Is the amount to be paid correct? How is it to be paid? And when? Is payment linked to delivery or acceptance of the goods or services? If not, what triggers payment? What happens if you don’t pay on time?
Intellectual Property
Is there any licensing or transfer of IP taking place under the contract? Are you getting what you need to enjoy the full use of the goods or services? Are you giving anything away that you shouldn’t be? Is any IP likely to be generated out of the relationship? If so, who will own it? What happens after the contract ends? Will you still need a right to use any of the supplier’s IP?
Warranties
What warranties is the supplier giving, or not giving, about the goods or services? Are you being asked to warrant anything? If so, are you in a position to do so?
Liability
Is there a limit on your and/or the supplier’s liability? If there is, is it set at a reasonable level? If there isn’t a limit on your liability, are you comfortable with it being unlimited?
Term and Termination
How long is the life of the contract? Does it end at a sensible point? Does one or both of the parties have the right to bring it to an end early? If so, under what circ*mstances and are there financial or other consequences of doing so? Why else might you want or need to terminate the contract?
Of course, these are by no means the only things to think about. Just as every contract is different, so too are the priorities of every contracting party. That’s why it’s important for you (and not just your lawyer) to read and understand the whole document. The deeper your understanding of the contract, the more effective your negotiations will be.
