To draft a purchase or sale agreement for goods, it is essential to answer three important questions before writing or reviewing the contract:
1. How the Buyer Will Use the Goods:
Purchase agreements vary depending on the intended use of the goods. Will the buyer use the goods for testing in a laboratory, for manufacturing parts in a factory, or for combining them with other products to sell to consumers?
2. Type of Business of the Seller:
All customers expect the seller to stand behind their products, but these expectations vary depending on the type of business the seller operates. Is the seller merely a distributor of goods supplied by third parties, or is the seller, or one of its subsidiaries, the manufacturer?
3. Customizations:
The product design and the source of these designs influence many terms in purchase or sale agreements. It is important to determine whether the product is ready for use, customized with the seller’s design, or customized with the buyer’s design.
Seller’s Commitment to Sell
Many sales contracts require buyers to purchase a minimum quantity of products from the seller. These requirements can be included in the contract as binding forecasts, minimum purchase quantities, or monthly payments for a minimum level of purchases.
While these contracts obligate the buyer to purchase, they do not always obligate the seller to sell. Review the order placement process section to determine whether the seller has an unrestricted right to reject the buyer’s purchase orders.
If the buyer has many sources for the products, the seller’s right to reject purchase orders may not be a major issue. However, if the seller is the only source or the sole manufacturer of a custom product for the buyer, this issue becomes significantly important. In such cases, ensure that a contractual clause is added that obligates the seller to accept all of the buyer’s purchase orders for the products.
If the seller has limited inventory, you can limit the obligation to the quantities forecasted by the buyer and confirmed by the seller. If the buyer may need more than their forecast, specify a range of orders that the seller must accept. This concern can be addressed by including a contractual clause stating that “the seller will accept all purchase orders for products up to 120% of the monthly forecasted volume.”
When to Apply Service Levels for a Product or Service
Many contracts require that products meet specific performance standards. These standards may include performance warranties, key performance indicators (KPIs), and service levels. A contract will establish a benchmark—such as availability, uptime, or output—and a consequence for failing to meet that benchmark. For example, “The seller guarantees that the equipment will produce at least X units per hour.”
If your contract includes service levels, consider whether the performance benchmark should apply throughout the entire contract period. If the product is ready for use and becomes fully operational immediately upon installation or use, applying a benchmark for the entire contract term may be appropriate.
However, if the product or service requires implementation, setup, or customization, you may need to allow sufficient time for these processes. Consider the reasonable amount of time needed for the product to be fully operational.
Take the time to carefully review the operational and technical aspects of your contract. When it comes to performance benchmarks, there is no one-size-fits-all solution.
Source: Frederick, L. (2022). Practical Tips on How to Contract: Learn How to Draft and Negotiate from a Former Big Law and Tesla Commercial Contracts Lawyer. How to Contract LLC.
