Business Law: A Brief Introduction to Vendor Contracts

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Just about everybody who does some form of business has vendors. Even vendors have vendors. That’s why it is critically important for business owners to understand the basics of vendor contracts and why they play an important role in most businesses.

Vendors come in all shapes and sizes. For example, the office supply store where you buy your printer paper is a vendor, as are the global suppliers of wood for IKEA. No matter the size of the vendor, it is always a good idea to have a written contract in place that sets forth the conditions and requirements of your relationship with them.

The best time to enter into a vendor contract is before the business relationship starts. At this stage, both parties have an interest in being fair to each other to avoid losing the contract. Negotiating a vendor contract after the relationship is already established will likely favor one party over the other because the bargaining positions will not likely be equal. The business may have become reliant on the vendor’s products or materials, which makes seeking an alternate source inconvenient and potentially costly.  On the other hand, a vendor may itself have become reliant on the customer’s business and find itself having to lower its prices to remain competitive and retain the customer.

The contract should cover issues such as price, quantity, and delivery times. If the supplier is providing “protected” products – such as a proprietary spice blend that is only intended for one fast-food chicken business – the vendor contract should also contain confidentiality and non-disclosure provisions. Careful consideration should also be given to the circumstances under which either party can terminate the agreement.

Even if you don’t have a written agreement with a vendor, you still likely have a legal contract – it’s just a lot tougher to know for certain what its terms are. This can be especially dangerous in situations where the relationship hums along with both sides fulfilling the needs of the other for a long period. When the vendor/customer relationship breaks down, the lack of a written document can be devastating. Without a written agreement, the parties not only have no reliable record of their contract terms, but they also have no agreed-upon method for resolving their dispute. The dollars spent on costly litigation will be exponentially greater than what even the most detailed written vendor contract would have cost.

One reason for this increased expense is that, compared to a typical contract dispute, each party will have the added burden of trying to convince the court that their version of the “contract” is the correct version. Without a written document, depositions and other means of discovery will be pursued in the quest to retroactively discern the terms of the agreement between the parties. Ultimately, the parties will leave the interpretation of their agreement in the hands of a third party. This almost always leaves both parties dissatisfied with the outcome.

In cases where a vendor and its customer have a written contract in place prior to the beginning of the relationship, litigation is far less likely. Even if the parties end up in a dispute, resolving it will be less expensive since the parties don’t have to expend the time, effort and dollars to try to prove the contract’s terms.

There are countless important tasks business owners must handle, and often negotiating and finalizing written agreements with vendors can seem like an unnecessary waste of time and funds. In my experience, ensuring you have proper legal documentation in place for all business relationships saves time and money in the long run. We understand and are well-versed in vendor contracts – contact The Law Office of Chris Clark today for a full range of contracts assistance for your business.

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