The Essential Guide to Product Supply Agreements and Terms of Trade for NZ SMEs

By On Your Terms co-founder Natalie Fennell
October 2024

What is a Product Supply Agreement?

A Product Supply Agreement is a formal contract between a supplier and a specific buyer, detailing the terms under which products will be supplied. Each party will need to sign it, and it will include delivery schedules, payment terms, pricing, and quality standards.

What are Terms of Trade?

Terms of Trade are a generic set of terms that are applied to all sales (can be sales of products and/or services) and are often attached to proposals or quotes. They are designed to be automatically accepted when the customer accepts a quote or proposal.

Key differences between a Product Supply Agreements and Terms of Trade

Scope

A Product Supply Agreement is more specific, focusing on the supply of products between two parties. Terms of Trade are broader and can apply to various types of transactions and business relationships (eg. once-off or ongoing).

Detail Level

Product Supply Agreements are detailed, all-encompassing documents, while Terms of Trade provide an overarching set of rules and guidelines for conducting business.

Application

Product Supply Agreements are typically used for significant, ongoing supply arrangements. Terms of Trade are used for everyday business transactions and can apply to multiple customers or suppliers.

Let’s take an example, Bob manufactures computer parts and sells them to computer repair businesses. He posts his terms of trade on his website and attaches them to all quotes. However, one customer wants a custom design and exclusive supply arrangement. For this unique scenario, Bob needs a Product Supply Agreement. While Terms of Trade are good for everyday business transactions, Product Supply Agreements are ideal for significant, ongoing supply arrangements.

Why does my business need a Product Supply Agreement or Terms of Trade

Clarity and transparency

Ensuring clarity and transparency in your business dealings will prevent misunderstandings. Clearly defined product specifications, pricing, and delivery schedules foster smoother business relationships and reduce the likelihood of disputes.

Legal protection

In the event of a disagreement, a written contract will serve as a legal reference point. It will outline the agreed terms and conditions, making it easier to resolve disputes. Without such documentation, your business could be vulnerable to claims and losses, which may be costly and time-consuming to resolve.

Reduce risk - peace of mind

A robust product supply agreement or terms of trade can help reduce business risk by:

• Quality Assurance: Specifying quality control standards ensures the customer’s expectations are clear from the start.
• Price Stability: Including pricing adjustment mechanisms helps manage financial risks associated with market price volatility.
• Termination and exit strategy: Outlining procedures and consequences for termination protects both parties from unplanned product or cash flow disruptions.
• Payment: Mitigate the risk of late payments by setting clear trigger points for payment and consequences for failure.

 IP protection

A written contract will protect your intellectual property (IP). For example, if you are doing design work for custom products, the agreement can outline the ownership of any proprietary technology or designs as well as confidentiality obligations.

Enhance Business Relationships

Clear agreements improve your business relationships. When both parties know what to expect and have agreed on the terms, it builds trust and confidence. This trust can lead to more opportunities for collaboration and growth.

Compliance and accountability

Businesses must ensure compliance with various laws and regulations, including those relating to product safety and environmental standards. A product supply agreement or terms of trade can include clauses requiring the supplier to be responsible for meeting specific legal requirements and industry standards.

Meet Modern Slavery and Sustainability Requirements

Meeting modern slavery and sustainability requirements is becoming increasingly important in business. By incorporating ethical labour practices and sustainable production method requirements into your agreements, you not only protect your business from potential legal and reputational risks but also contribute to a more ethical and sustainable supply chain. This can enhance your brand’s reputation and appeal to socially conscious consumers and business partners.

Ensure exclusivity and protection from poaching

By including non-solicitation clauses your customers/suppliers can be prevented from directly hiring your staff. This is important in industries where talent poaching is a common threat. Similarly, exclusivity clauses can ensure that the supplier or customer can’t work with a competitor. These restrictions can safeguard your business interests and help maintain a competitive edge.

Key takeaways

For SMEs in New Zealand, having robust Product Supply Agreements and/or Terms of Trade is not just a legal formality but a necessity for protecting and streamlining your business operations. These documents provide clarity, legal protection, risk management, and consistency, enhancing your business relationships and facilitating smooth transactions. Moreover, they can help you meet modern slavery and sustainability requirements, while protecting your business from poaching risks and ensuring exclusive supplier relationships.