Creating legally compliant supply contracts - What needs to be considered?

Supply contracts are a challenge because they can be diverse in their character. Depending on whether externally produced goods are to be delivered or own products are to be manufactured, different legal provisions are applicable, those of the law on sales or those of the law on contracts for work and services. And the different products and services that can be the subject of a contract, from beer to electricity to aircraft parts, require individual and detailed regulations.

 

Important provisions that a supply contract should contain

First of all, the parties to the supplier contract must be clearly defined. In the case of a complex network of companies, this is where the first problems can arise. As soon as it is clear who is entering into the contract with whom, it must be checked whether the signatories have the necessary powers of attorney.

Next, the subject matter of the contract and the method of delivery must be described in detail. Depending on the goods to be procured, agreements may also have to be made on costs incurred, for example, for the use of licences (data transfer) or pipelines (water or electricity supply).

Next come provisions on delivery dates and, if applicable, contractual penalties in the event of non-compliance. On the other hand, the payment modalities are to be determined. The parties are free to negotiate whether they want to agree on a down payment in advance or allow payment in instalments, whether the total amount is to be due on delivery or only a certain time after invoicing.

Since, according to the statutory rule, the recipient can only demand goods of “average kind and quality”, the contract should contain a precise description of the desired product quality as well as individual warranty provisions.

The recipient should insist on a provision on the transfer of risk for his protection. Otherwise, the risk of loss may be borne by the recipient from the moment the goods are handed over to a carrier.

On the other hand, the supplier should reserve ownership until the goods have been paid for in full.

In the case of contracts with a foreign element, some further points must be clarified, such as regulations on the place of jurisdiction and the application of national law.

 

Further optional regulations

If it is to be expected that the parties will gain knowledge of confidential information during the performance of the contract, a non-disclosure agreement is recommended.

Since German commercial law requires the buyer to inspect the goods without delay and to lodge a qualified complaint immediately in the event of defective delivery, it may be advisable to agree on a longer obligation to inspect and lodge a complaint.

In certain cases, the parties can also insert a price escalation clause. This allows the supplier to pass on to the customer any price increases in production or purchasing. In Germany, price escalation clauses are generally prohibited, but the law does provide for some exceptions. According to § 1 PrKG, for example, so-called performance reservation clauses and tension clauses are permissible. The former gives the parties leeway to redefine the price at their reasonable discretion in the event of an increase or decrease of x %. In the case of the tension clause, the increase in value is linked to a comparable good that must be similar or comparable to the product owed.

 

These are the mistakes to avoid  

Supplier contracts harbour a wide range of risks which, by their very nature, only become apparent when it is too late. Therefore, all eventualities must be thoroughly considered and all possible points of conflict clearly regulated before the contract is concluded. Even a lawyer can forget or overlook something, so he should benefit from the fact that legal tech and artificial intelligence are already at home in the German legal landscape. Even those who do not want to create the entire contract automatically can check their draft for missing text modules and contradictions in a flash using modern contract management software. 

A common mistake is to agree on general terms and conditions or other external conditions without attaching them to the contract or publishing them on the homepage. In this case, however, the additional terms and conditions do not become effective. In the international field, it is also often forgotten that all annexes must be written in the language of the contract. 

Often, different terms are used in a contract to describe the same goods or services. However, if some clauses only refer to a synonym, the agreement may deviate from what was intended after interpretation. Therefore, only one term should be used consistently for a particular good or service. 

It is not uncommon that the contracting party is in fact not the owner or authorised signatory of the company with which the contract is to be concluded. Even between parent companies and subsidiaries, a precise breakdown is advisable in order to avoid surprises later on. 

When drafting contracts with a foreign element, it is sometimes forgotten to specify which law is to apply. Without an agreement, however, the law of the country in which the supplier is domiciled applies. If the provisions of the German Civil Code or the UN Convention on Contracts for the International Sale of Goods are to apply, these must be explicitly agreed. In addition, a jurisdiction agreement must specify in which state claims are to be brought. 

 

Control after conclusion of the contract  

But pitfalls do not only lurk during the drafting of the contract; the parties must also remain constantly vigilant during its term. Even in well-functioning, long-standing business relationships, all agreements and developing practices must always be set down in writing. Otherwise, in the event of a change of management or even absences due to holidays, not only difficulties arise in the execution of the contract, but also problems of proof. 

In addition, many things can change over time on both sides, not only ownership and power of representation within a company, but also its solvency. Lawyers or syndicates should check the social circumstances at regular intervals by means of an extract from the commercial register and use up-to-date software to check creditworthiness. 

 

Checklist: Structure of a detailed supply contract 

Heading: Supply contract on … 

Preamble: Purpose of the contract 

Contracting parties: full names and addresses of the supplier and buyer and, if applicable, of the authorised signatories 

Subject matter of the contract: precise description of the goods or services to be supplied 

Elements of the contract: Enumeration of the annexes attached and reference to national and European law 

Nature and scope of performance, quality characteristics 

Quantity contracts 

Delivery dates, transfer of risk, retention of title 

Obligation to pay 

Default provisions 

Warranty 

Term, right of termination 

Liability 

Limitation 

Other contractual provisions: Written form requirement for ancillary agreements, place of jurisdiction, applicable law, severability clause 

Place, date and signatures 

Share this article

Share on facebook
Share on twitter
Share on linkedin
Share on email

More articles