The 5 Key Clauses You Should Have in Your Supply Chain Contracts

The pandemic placed enormous stress on supply chains around the globe. With many businesses renegotiating existing supply chains and many more exploring supply chain diversity, we’re sharing 5 key clauses you should considering placing in your supply chain contracts going forward:

Strong Contractual Protection of Your Confidential Information.

Your confidential information should be protected by clear identifying language and strong prohibitions on wrongful disclosure in your contract, alongside strong terms to safeguard it. You should consider:

• Limiting access to the confidential information;
• Practical steps to reduce staff access (like physical walls);
• Ownership of the moldings and tools used by your to create your products;
• Control over subcontractors;
• Auditing procedures;
• Processes for the return of any confidential material once the contract concludes; and
• Liquidated damages clauses covering any instance of misuse of confidential information.

A key component of this is also considering the legal system governing your supplier. A contract is only going to protect you if it can be practically enforced. So, you’ll need to give proper consideration to the effectiveness of your supplier’s judicial system. Arbitration (or other alternative dispute resolution clauses) can offer additional protection in some cases.

Detailed Materials and Quality Requirements in Your Supply Chain Contracts.

Many brands rely on warranties and guarantees to sell their products. If this is the case for you, all your supplier agreements should comprehensively outline materials requirements and quality requirements. Doing so prohibits your suppliers from switching in cheaper materials, which reduces the number of recalls as well as reputational injury from reduced product quality.

Protect Your Company IP from Counterfeits.

While you should register any registrable intellectual property in all major markets, including the one in which your supplier operates, your contracts should also work to protect your company’s IP. Liquidated damages clauses can be used to protect your company from your supplier improperly using your registrable IP, as well as company know-how and trade secrets.

Include Conditions to Promote Performance.

Here are some of the more commonly used mechanisms legally available to you to promote contractual performance:

• Performance guarantees from a parent company;
• Contractual rights to impose financial penalties for delayed performance;
• Strict contractual rights to suspend or terminate a contract in the case of non-performance or delayed performance;
• Escrow arrangements;
• Performance bonds; and
• Step in rights.

Legal Termination of the Supplier Contract.

Your contract should very clearly outline the circumstances in which the parties can terminate the contract. These provisions should include details like the notice period, a party’s rights in the event of a termination, and what events would lead to a ‘termination for cause’. These events are usually related to the unsatisfactory performance of a contract. They would encapsulate quality concerns, timeline delays, or issues with the quantity being supplied.

Don’t hesitate to reach out if you need any assistance building a safer supply chain in a post-COVID world. We’re here to help!

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