Checking a supply agreement

Oct, 18 2021

Contents:

A supply contract formalises the purchase of goods for subsequent resale. Every supplier is aware of the problems and intricacies of the supply chain, so every supplier has his own copy of the agreement. It is not always possible to make adjustments in favour of the customer, so it is necessary to know all the nuances of the contract to be signed, pay attention to the terms and conditions. A lawyer’s review of the supply contract is essential in this case.

What is a supply contract

In accordance with the Civil Code of the Russian Federation, a supply agreement is an agreement whereby the seller (supplier), who is a professional market participant and conducts business activities, is obliged to deliver the ordered goods to the buyer at a specified time. The buyer undertakes to pay the price and to use the goods received for business purposes. 

The agreement is characterised by the fact that the civil law treats the contract as a type of sale and purchase agreement (SPA). Therefore, the general regulations governing the signing of a SPA are relevant for the document, as are the specialised rules governing the conclusion of a supply agreement specifically.

The agreement shall be as follows:

  1. Reimbursable (the person pays for the goods when they are purchased).
  2. Bilateral (there are 2 parties involved – the supplier and the buyer, each with their own obligations and rights). 
  3. Consensual (the agreement is considered to be valid when all significant conditions have been agreed by the parties).

A non-signed agreement has no legal effect and does not have any consequences for the failed parties to the transaction.

What should be checked, features and nuances of a supply contract

When checking a supply agreement, it is advisable to pay attention to the essential conditions, which must be compulsorily specified. If one of the conditions is missing, the contract is considered to be not concluded.

Article 432 of the Civil Code of the Russian Federation contains essential conditions:

  • the subject matter of the agreement (the condition of the goods is deemed agreed upon if the name and quantity for delivery are defined in the text);
  • term of the delivery. 

The title, subject matter, terms of delivery, payment and quantity of the goods are written in the text. Without this information, there is no agreement and the supplier is under no obligation. 

Usually, the goods are briefly mentioned in the subject of the agreement – what is to be transferred. Details of the assortment and quantity are set out in a separate document, the specification. The document is signed by both parties and stamped by the organisations.

In this case, it is advisable to check the bill of quantities and the agreement carefully to ensure that the correct information has been entered (the correct product has been added). For suppliers, documentation is handled by managers and this is a flowing job for them, so it is not uncommon for errors to be detected. 

Regarding the time and periods of delivery the issue is regulated by Art. 508 of the Civil Code – if the parties to the agreement defined the delivery of goods over the contract period but did not prescribe the arrival of the order in separate batches and the time of arrival of these batches, then the goods are delivered in equal monthly groups. 

Furthermore, the agreement may specify the frequency of delivery of the order. Early delivery will be discussed with the recipient and only after his approval (e.g. the customer will only start using the storage facility in August, so delivery in July would be inconvenient for him).

If a party accepts a consignment delivered in advance, it will go towards the next consignment. 

The distinguishing feature of this document is the fact that it may only be signed in the course of business between a sole proprietorship and a legal entity. It is therefore worth paying great attention to the verification of the agreement. If there are mistakes or inaccuracies, the execution of the agreement can lead to negative consequences for the parties involved, unnecessary litigation, as well as significant financial losses. 

To verify the agreement it is not superfluous to involve a qualified lawyer who will initially advise the client of the pitfalls and reduce the risk of material expenses. All in all, early verification before an agreement is signed will ensure:

  1. avoiding the existence of contradictions in the text of the agreement with civil law.
  2. elimination of the risk that the agreement will be deemed invalid.
  3. protection of the interests of the trustee (the content will not contain conditions that carry the risk of loss or unprofitability of the transaction).
  4. cancellation of potential risks specific to the supply agreement.
  5. assurance of good faith of the opponent.

Financial terms and conditions

The settlement clause specifies the value of the goods and the period of transfer. The terms of delivery, loading or unloading should be specified here (whether these services are to be paid for separately). 

The price is for one unit or the entire order. 

The payment period has to be estimated. Whether it is suitable for the buyer, because in case of delay the supplier is legally entitled to charge a penalty at the refinancing rate approved by the Central Bank of the Russian Federation (and the agreement may specify a higher amount). 

Often a supply agreement is signed for a long period of time and in order to avoid losses the supplier makes a price change clause. In such a case, a notification provision must be made in advance in the case of a change in price.

Repudiation of the agreement, penalties for infringement

The recipient of the goods is entitled to withdraw from the agreement in the following cases:

  1. Unsuitable goods (defects) are delivered.
  2. The seller fails to meet the delivery deadline more than 2 times.

It is quite possible that the customer may find the goods more interesting in terms of assortment as well as attractive in terms of price. It is therefore worth including in the agreement the possibility of repudiation of the agreement by ordinary notice to the supplier without specifying a reason. 

The list of infringements for which penalties are to be imposed on the infringer can be written in the text of the agreement. The amount of the penalty is also included in the agreement. 

The amount of compensation may be set as a fixed sum or as a percentage of the value of the goods. However, a court may reduce a disproportionate penalty. 

Thus, only business entities – sole proprietorships or companies – may be parties to the agreement, and the goods to be purchased are intended solely for use in business. Each party has prerogatives and obligations to be fulfilled. Before signing the agreement, it is advisable to check the document. It is better to entrust the verification to a professional lawyer who is familiar with all the subtleties of the law and has experience in legal support of transactions.  The procedure will allow you to minimise the risks, avoid the resulting material costs, and protect your interests if the other party fails to comply with the terms of the agreement.

Author of the article
Checking a supply agreement
Valentina Khlavich
Managing Partner
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