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Supply of goods contracts

EM Law are experts in drafting, negotiating and advising clients on supply of goods contracts. Our lead contracts lawyer is Neil Williamson who has extensive experience in advising clients on a wide range of commercial law matters.

Main provisions in standard terms and conditions for the supply of goods

Supply of Goods contracts: the following is an overview of some of most important business-to-business terms in standard terms for the supply of goods.

Specification

A buyer’s terms will provide:

  • For the specification of the goods either to be prepared and submitted by the buyer itself or, if it is prepared by the seller, for it to be approved in writing by the buyer.
  • That the goods will conform to the agreed specification.

Quantity

Supply of Goods contracts should make express provision for the quantity of goods to be sold. Practical logistics may mean that the seller eventually delivers slightly more or less than the exact quantity specified in the contract, for example, because the goods ordered are difficult to count or weigh precisely. It is in the interests of the seller to cover this possibility by providing for tolerances to the contract quantity so that, for example, the seller is specifically entitled to deliver goods in quantities of up to (say) 5% more or less than the contract quantity. Failure to include an express provision along these lines will mean that rules unfavourable to the seller under section 30 of the Sale of Goods Act 1979 will apply. The effect of these, broadly, is that:

  • Any variation from the agreed quantity is a breach of contract.
  • The buyer may have the right to reject the goods in their entirety.

The issue of whether payment should be adjusted to reflect the excess or shortfall of goods contracted for should also be addressed. If the supply of goods contract allows for a tolerance of more than a very small amount, provision is likely to be made for pro rata adjustment to the price.

Delivery

Place of delivery

Unless otherwise specified in the supply of goods contract, delivery will be deemed to take place at the seller’s premises (section 29(2), Sale of Goods Act 1979).

Time of delivery

The parties will almost always wish to make specific provision as to the time for delivery since, in the absence of specific provision, the statutory rule merely provides that the seller is bound to deliver the goods within a reasonable time (section 29(3) Sale of Goods Act 1979. What is a reasonable time is a question of fact, to be determined by reference to the facts of each case, rather than as a matter of law (section 59, Sale of Goods Act 1979).

Failure to accept delivery

If time is not of the essence then the buyer’s failure to take delivery of goods at the time agreed does not in itself justify the seller disposing of them to someone else. Section 48 (3) of the Sale of Goods Act 1979 enables the seller to resell perishable goods without notice to the buyer if the price is not paid when due. If the buyer will not take delivery of, or collect, the goods, it is sensible to provide for the seller to be able to store the goods at the buyer’s cost or to make specific provision enabling the seller to dispose of the goods.

The buyer, on the other hand, may incorporate in its purchase terms an obligation on the part of the seller to store the goods free of charge if the buyer cannot take delivery. The buyer will also wish to make clear to whom delivery can be made and who can sign for the goods.

Damage in transit or non-delivery

The seller cannot completely exclude its liability for delivering damaged goods or not delivering the goods at all. It may, however, specify that delivery to the carrier is to be treated as delivery to the buyer.

Acceptance

If the seller commits a breach of any condition of a contract, the buyer is entitled to reject the goods and terminate the contract. The buyer’s right to reject is, however, lost if the buyer has accepted the goods. Under section 35 of the Sale of Goods Act 1979, the buyer is deemed to have accepted the goods (and so loses the right to reject) in three situations:

  • When the buyer intimates to the seller that it has accepted the goods.
  • When the goods have been delivered to the buyer and it does any act in relation to them that is inconsistent with the seller’s ownership.
  • When, after the lapse of a reasonable time, the buyer retains the goods without intimating to the seller that it has rejected them.

The seller will want to prevent the buyer from seeking to escape from the contract by claiming that the goods have not been accepted and rejecting them.

A buyer, on the other hand, will wish to protect the right to reject in its purchase terms (and may seek to extend it).

Price

Even if the parties have not addressed any other term of the contract in detail, they will almost certainly have considered the price to be paid. If there is no express agreement as to price, there will be an implied term that the buyer should pay a reasonable price (section 8, Sale of Goods Act 1979). However, a failure to agree a price in sale of goods contracts may well indicate that the parties have not yet reached a binding agreement.

If the seller wishes to vary the price after the contract has been concluded, there must be an express provision entitling it to do so.

Items included

Clear provision should be made as to whether the following items are to be included in the price or are extra:

  • VAT, customs duties and other taxes and duties.
  • Packaging.
  • Delivery and off-loading costs.
  • Insurance.

VAT will be treated as included in the price unless the contract provides otherwise (section 19(2) Value Added Tax Act 1994). Therefore, it should be made clear in the standard terms that all prices are exclusive of VAT, assuming that the seller wishes to quote its prices on an exclusive basis.

The buyer’s purchase terms will provide for the price to be inclusive of as many extra items as possible, although a buyer would generally accept that, subject to receipt of a VAT invoice, VAT should be paid in addition to the price.

Payment

Time for payment

This is a question of the seller’s actual working practices but should always be specified. The date on which payment must be made should be tied to a given number of days after the date of the seller’s invoice or delivery of the goods, rather than the date of receipt of the invoice by the buyer.

It is common to include a provision stating that if payment is not made on the due date, the buyer must pay interest on the amount outstanding.

Security for payment

The seller may anticipate a situation in which the buyer is unable to pay and there are a number of methods by which the seller may seek some degree of security for payment:

  • Incorporating a retention of title clause in the standard terms.
  • Requiring full payment in advance or a deposit.
  • Requiring the buyer to provide a bank guarantee or performance bond.
  • In international contracts, requiring a letter of credit.
  • Incorporating provisions in the standard terms that, on the occurrence of specified events such as the presentation of a winding up petition or the levying of execution over the buyer’s goods, entitle the seller to:
    • terminate the contract;
    • suspend future deliveries of goods (including any instalments); and
    • cancel any existing orders.

Risk and insurance

The risk in the goods will pass at the same time as title to them passes unless otherwise agreed (section 20, Sale of Goods Act 1979). In standard terms of sale, risk is usually stated to pass at the time of delivery of the goods. This is on the basis that the seller will not wish to remain responsible for loss or damage to the goods up to the time when title passes, given that the effect of the basic retention of title clause is that title does not pass until the buyer has paid for the goods. The result is that if the goods are destroyed after delivery the buyer will remain liable for the price.

Boilerplate provisions in supply of goods contracts

The standard terms should incorporate provisions covering the following areas and, when drafting, consideration should be given as to whether additional or more detailed boilerplate provisions may be appropriate:

  • Force majeure.
  • Notices.
  • Severance and illegality.
  • Waiver.
  • Entire agreement.
  • Third party rights.
  • Choice of law and jurisdiction.
  • Arbitration.
  • Alternative dispute resolution.

For any questions you may have concerning supply of goods contracts contact Neil Williamson.

EM Law Neil Williamson

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