A Brief Introduction About the Vendor Agreement
As per the vendor agreement definition, it is a legal contract where the owner of the business hires a third party to provide certain goods or services that are required by the business. There are different industries like software, event planning, office supplies, and so on, where a vendor agreement is required.
A vendor plays an important role when it comes to organizations, as the productivity of the organization depends on it. They need to ensure that they supply the products or services according to the quality and quantity stipulated in the agreement within the deadline. The company hires the vendor for the supply of specific products or services as it can focus on more critical aspects of the business-like, improving services to existing clients and trying to expand the business.
The vendor agreement contains the nature of the product or service being supplied, including the agreed fee for the same. All the details regarding the product or service need to be specifically mentioned in the agreement to avoid any disputes in the future.
Who Takes the Vendor Agreement? – People Involved
A vendor agreement is entered into by a company requiring a certain product or service and a vendor who is responsible for supplying such a product or service. So, the parties to the agreement are the company and the vendor or supplier. The company agrees with a supplier who has proven expertise in a product or service, as well as the reputation.
Purpose of the Vendor Agreement – Why Do You Need It?
A vendor can be linked to the profitability of a company that hires it to supply specific goods or services. The company needs to ensure that the vendor not only supplies goods and services that meet the quality benchmarks laid down by the company. Apart from this, these need to be delivered to the company on time. In the case of software vendors, there is a more frequent requirement of prompt after-sales service to ensure that the business runs smoothly.
If the vendor fails to supply the required quality and quantity of goods or services or after-sales service on time, it could spell disaster for the company. As far as the vendor is concerned, timely payment from the company is essential to sustain themselves as a business. Failure to get paid even though they have met the time and quality standards set by the company would mean serious cash flow issues.
A vendor agreement ensures that all relevant details relating to the product or service being provided, including the quality and delivery requirements as well as the payment schedule, are mentioned in the agreement. The issues about payment or delivery of goods and services are minimized with such agreements.
Contents of the Vendor Agreement – Inclusions
A vendor agreement needs to be comprehensive when it relates to the information regarding the product or service being supplied by the vendor and payment by the company to ensure that there are no disputes later on. If there is a breach of contract by either party, then necessary legal action can be taken.
A vendor agreement sample should contain the following information:
- Parties to the agreement: The names of the company and the vendor should be mentioned
- Registered office: The details of the registered office of both parties need to be incorporated
- Date of the agreement: The time from which the contract becomes effective
- Nature of goods or services: The complete details of the nature of goods and services being supplied by the vendor to be stated. A statement of work containing the details are attached to the agreement
- Delivery schedule: The delivery schedule of the vendor in complete detail
- Quality parameters: The quality standards that are set by the company regarding the goods or services and penalty for not adhering to them
- Payment method: The due date for the payment, the frequency of fee, and the penalty for delay in payment.
- Extension of contract: The extension of the contract may be considered if agreed mutually
- Governing law: The laws of the state applicable to the contract
- Notice of termination: The notice period in days for termination of the agreement
- Intellectual property: This is applicable, especially in the case of software contracts, so that there is clarity regarding the ownership of the software.
How to Draft the Vendor Agreement?
Points to Consider While Preparing the Agreement
You can use a vendor agreement template as a reference while drafting the agreement and then customize it according to your needs. While drafting the agreement, it is important to understand the laws of the state which relate to such agreements, the nature of the product or service being supplied, and penalties for nonperformance.
These are the points which need to be considered:
- Parties entering into the agreement: The names of the parties involved in the agreement and the relationship between them
- The date from which the agreement becomes effective
- The category of goods or services: It is important to know the category of goods and services and the regulations regarding them. You must determine the nature of goods and services, the quality requirements stipulated by the company, the quantity, and the delivery deadlines agreed by both parties. The deliverables must be mentioned
- If there are intellectual property rights involved, then it must be determined who owns it and the purpose for which it is going to be used. The nature of the license being provided to the company by the supplier must also be understood and stated in the agreement
- Representations and warranties relating to the category of goods and services being supplied. The vendor should have the capacity to agree; there should be no infringement of third-party rights, and the products or services should conform to industry standards.
Negotiation Strategy
In the case of a vendor agreement for services, it is important to verify the experience and the reputation of the vendor is selected. You should consult companies in the same industry you belong to regarding the credentials of the vendor and then negotiate the financials with the vendor. The vendor should also try and negotiate the best terms possible and justify the same in terms of value-added services.
Benefits & Drawbacks of the Vendor Agreement
The benefits of a vendor agreement are as given below:
- Protection of rights of both parties: With such agreements, the company hiring the vendor is assured of a minimum acceptable standard when it comes to the quality of goods or services being supplied. The vendor is aware that they will get the agreed payment if they meet their quality and time obligations.
- Mutual benefits: With the company receiving quality goods and services, their productivity will go up. This will also lead to higher profits. The vendor will also have a captive client and will have a better cash flow
- Focus on priorities: When the company does not have to worry about quality or timely delivery of goods being supplied, they can concentrate on more important issues like providing better service to existing clients and expanding the business by acquiring new clients
The drawbacks of a vendor agreement are:
- Lack of flexibility: If the vendor is supplying the goods and services of the right quality and within the given deadlines, then the company has no choice but to continue with the vendor even if they find vendors later on providing the same goods and services at a more economical rate
- Fixed price: The vendor has to continue to supply the goods and services at a fixed rate even if due to market demand, the rates they can charge are much higher.
What Happens in Case of Violation?
When there is a violation in case of a vendor agreement, then the party which has been adversely affected by the breach of contract has the right to take the other party to court. The agreement clearly states the rights and responsibilities of both parties. The company hires a vendor depending on the experience and reputation of the vendor. The vendor is informed about the quality specifications and the quantity of the required goods and services. The delivery deadlines are also discussed beforehand so that there are no disputes later on.
If the vendor fails to supply the required goods and services to the company, then depending on the importance of the goods or services, the company’s profitability will be adversely affected. The company, in this case, will have the legal rights to claim the loss in profits as well as the loss in goodwill due to the nonperformance of the supplier along with this, whatever the company has incurred legal costs for taking legal action.
The vendor or supplier must be paid the required fee for providing quality goods and services within the delivery deadlines. If the company fails to pay the agreed fee within the due date, then it amounts to a violation of the agreement. The vendor has the right to take the company to court for claiming not only the fees but any other penalties which are payable due to this violation(1).
If you are a company looking to appoint a vendor for providing certain goods or services or a vendor who is looking to supply goods or services to a company, a vendor agreement is required. Vendors play an important role as they supply certain products or services which have a direct effect on the profitability of a company. It is, therefore, essential to look at the experience and reputation of the vendor. Price should not be the only consideration for the selection of the vendor(2); you should also look at value-added services being provided by them.
Once you have selected the vendor, it is essential to understand whether they will be able to provide the quantity required along with industry-standard quality. If you have an agreement, these problems can be minimized. The deal is also essential for the vendor who can approach a court of law if the company defaults in payment.