Introduction

Procuring certain goods and services from vendors is essential for running a successful business. These can be internet services, raw materials, delivery services, office supplies, transportation services, technology services or any other required services or goods. Due to the importance of vendors in the functioning of a business, the concept of vendor contracts becomes imminent too. Different businesses would have different types of vendor contracts. For instance, an e-commerce website would have vendor contracts with logistic services, suppliers of goods, graphic designers for websites etc.

What is a Vendor Contract?

A vendor contract is a legally binding contract between the two parties that makes the business and the vendor agree to exchange goods and services for compensation subject to mutually agreed terms and conditions. This contract makes the parties aware of their rights, duties and obligations and the consequences of non-performance. As the contract is legally binding, it reduces the risks of fraudulent activities on the part of the vendors. It brings predictability to transactions, thus preventing the startups and vendors from facing losses. In other words, it can help avoid uncertainty by laying down the terms and conditions that are to be followed by both parties.

Critical Elements of a Vendor Contract

Given below are some key elements that must be included in vendor contracts.

1.Description of Goods or Services

The first essential element of a vendor contract is the precise description of the goods and services. The contract should clearly specify the kinds of goods and services expected from the vendor. In the case of goods, the quality and quantity of the goods should also be mentioned, while in the case of services, the contract should specify the type of services to be offered. The conditions for the delivery of goods and services should also be specified. The important component of this clause is specificity. If the parties do not specify the goods and services, there can be mistakes. Identifying the requirements will also bring the company’s expectations on record. The vendor will also know what is expected, and equally importantly, not expected from him.In the case of B.R. Herman And Mohatta vs Pran Ballav Majumdar (A.I.R. 1960 Cal 524, 64 CWN 798), the appellant-Company entered into two written contracts with the respondent for the sale of caustic soda to be imported from U. S. A, at the price of Rs. 32/8/- per cwt. Ex. Jetty Calcutta, on terms and conditions that shipment would take place in November-December 1948, the respondent would have to pay a 25% advance payment. On 15-11-1948, the respondent paid Rs. 8,125/-, which was 25% of the price of the products, as per the contracts. According to the plaint, the respondent’s allegation is that the products were not shipped during November and December 1948. The appellant failed to provide any goods from the November-December shipment or any goods at all, resulting in a breach of contract. The court ruled that the appellants had committed a breach of contract.

2.Consideration for the Contract

A valid contract also requires some consideration to be paid in exchange for the performance of the conditions of the contract by the other party. The terms of payment should be mentioned in the contract. The contract should say the acceptable mode of payment, for instance, cash, bank transfers or U.P.I., through letters of credit, etc. This clause should also include details on the amount to be paid and the period for the payment. The payment terms can also include the details about any advance payment or payment schedule that has to be made. The clause about the penalties for the delay in a payment like charging interest may also be included here.

3.Duration of the Contract

Being specific about the contract duration is another essential requirement for the vendor contract. The contract should specify the duration in which the vendor has to provide the goods or services. Most vendor contracts are for a fixed term or fixed quantity of goods. However, the contracts can be renewed after that term period.

4.Termination Clause

It is also necessary to include a clause for termination of the vendor contract before the expiration of the term. The termination clause provides the flexibility to the parties to choose to terminate the contract if they wish to do so. However, this clause should specify the grounds for termination and the consequences for termination. The sample grounds for termination can be non-performance of the contract, breach of contract, etc., while the consequences can be the clearance of all remaining dues. It should also mention what will survive after the termination of the contract. A wet lease freighter agreement was entered into between Gati Ltd. and Indian Airlines for the lease of aircraft in the case of Gati Ltd. vs Air India Ltd, 2015. The termination clause stated that a notice must be served within 120 days of the contract’s expiration date and that the contract will be cancelled if the notice is not received within that time frame. The agreement was terminated by GATI in a letter. Air India expressed its dissatisfaction with the contract’s cancellation in a letter. As a result of these events, the parties decided to arbitration. GATI invoked the arbitration agreement, alleging several claims against Air India. GATI stated that Air India did not adhere to the timelines and constant delays. According to the High Court of Delhi, the contract was validly terminated because non-compliance with the necessary process might occasionally be excused due to the party’s inaction.

5.Confidentiality Clause

It is critical to maintaining a confidentiality clause. At the start of the contract, the parties can specify which aspects of the parties’ relationship should be kept private. Confidential information should be safeguarded and utilized exclusively according to the agreement’s terms and conditions. The parties should also specify the duration or time limit for keeping the information private. If necessary, the parties can sign a non-disclosure agreement.

6.Warranty Clause

The warranty clause would specify that the quality of the goods or service would be as required. It also states that the vendor is duly authorized to provide the said goods or services to the company. The vendor’s capabilities to deliver the goods and services would not infringe any third-party rights. It describes the vendor’s warranty for handling and providing goods or services on time.

7.Indemnity and Limited Liability Clause

The term ‘indemnity’ refers to protection or security against financial liability. It usually takes the form of a contractual agreement between two parties in which one agrees to compensate the other for losses or damages. The Indemnity Clause requires both parties to make good or pay damages for losses caused to one party due to the other’s acts related to the contract. Further, in the event of a breach of payment or deliverables due to the other party’s negligence or fraud, the limitation of liability provision limits the vendor’s and the vendee’s liability. For example, if the startup faces any loss due to the vendor’s negligence, the vendor will be held accountable for the damages.

8.Force Majeure Clause

Force majeure events are acts, events, or circumstances beyond the parties control. Such events include natural catastrophes or the commencement of hostilities. When certain events beyond the parties’ control occur, a force majeure provision excuses a party from performing its obligations under a contract. This clause should also explicitly describe the parties’ obligations regarding payment for services in the event of force majeure events. Suppose the force majeure clause does not expressly say that the startup will not be liable for payment to the vendor or third party if the vendor or third party is unable to execute services. In that case, the startup may still be liable for payment even if the goods or services are not received. Thus, it is imminent to include a force majeure clause in the vendor contracts.The High Court of Delhi expressly declared COVID-19 to be a force majeure occurrence in the case of M/s Halliburton Offshore Services Inc vs Vedanta Limited O.M.P. (I)(COMM.). The court has noted, however, that whether COVID-19 would excuse non-performance or breach of contract must be determined based on the facts and circumstances of each case, and it would be justified as a force majeure event only in cases where the party was prevented or could explain its non-performance due to the epidemic/pandemic. The decision further states that a force majeure clause must be interpreted narrowly and that if a breach occurs before the COVID-19 time, the party will not be allowed to apply the Force Majeure clause.

9.Dispute Resolution / Arbitration Clause

This clause specifies how the terms of the agreement can be enforced in the case of a dispute between the parties. The parties might establish how any dispute between them will be addressed. This provision must determine who will settle the dispute, whether a single arbitrator or a panel of arbitrators, the arbitration’s seat or venue, the language in which the arbitration will be held, and the applicable laws and court jurisdiction will conduct the proceedings. The Patna High Court ruled in favour of the respondents in the case of Balaji Infraro Ltd V. Chanakya National Law University, holding that if parties to a contract are limited by a time restriction to exercise their legal rights, for instance, to proceed with the appointment of an arbitrator to settle the disputes, the contract is void.

Conclusion:

The importance of a vendor contract is immense for the vendors and the startups. The signing of these contracts simplifies the process and eases the parties’ tension otherwise. The Parties should draft the agreement to include all the essential elements. A well-drafted contract thus helps both parties avoid disputes and unnecessary and expensive litigation.