What to consider when entering into a supply contract

The devil is in the detail! Before signing on the dotted line, make sure that understand what you're agreeing to!

There are a number of key aspects that should be considered and covered in a well-drafted supply contract. Some of these items may not necessarily be included in standard contracts and therefore you should understand the terminology before considering signing.

Key terminology and how they can form a supply contract:

Price: Is the price fixed during the term of the contract or can the supplier increase the price in certain circumstances (i.e. increased price in raw materials, fluctuation of foreign currency exchange rates)?

Product: Define the type/model, quantity and other specifications of the product to avoid dispute on whether the right product is delivered.

Warranty: The contract often sets out the supplier's obligations in relation to product liability, defects and other warranties. Businesses which import goods from overseas should note that they may still be liable for manufacturer warranties. They should therefore ensure the products are of acceptable quality from the outset or request indemnity from the supplier.

Delivery: If the delivery time is critical for the customer, it should be set out clearly in the contract. The customer may also consider whether compensation from the supplier is necessary if the delivery is not on time. The contract should also clarify when the risk in the goods passes to the customer (especially for international supplies).

Payment: The supplier should specify the timing and method of payment required, as well as the right to charge interest, cease delivery or terminate the contract if the customer defaults in payment.

Retention of Title: If customers are to take possession of the goods before making full payment, the supplier should consider a retention of title clause so that ownership of the goods remains with the supplier until full payment is received.

PPSR: The supplier should also request a PPSR clause allowing the registration of a security interest on the Personal Properties Securities Register over the customer's assets to secure outstanding payments. This will allow the supplier to take priority over other unsecured creditors in recovering the debt if a customer becomes insolvent.

Director's Guarantee: In any event, both the supplier and the customer (usually companies) should request the other side to provide a director's guarantee for the respective obligations under the contract.

There may well be additional, important issues to be included, business by business. When entering into any supply contract, it is always important that you consult a legal practitioner who can guide you through the process. This may save you considerable time and stress in the future.

What if a party wishes to terminate the arrangement?

Usually each individual contract will stipulate terms outlining how each specific contract can be brought to an end. However, if you are seeking to end a contract, then it is definitely advisable to seek legal advice prior to exercising this option. This is because it can become incredibly costly if you fail to end a contract properly and for good reason.

Under contract law, if you purport to end an agreement but do so incorrectly, then the other party may claim that you are illustrating an intention not to fulfil the contract (called a repudiation of the contract). This might then make you liable for damages that you otherwise may not have incurred if you had correctly ended the contract.

How Can Sharrock Pitman Help?

It is important to understand your legal rights when negotiating and entering into supply contracts. For expert legal assistance with supply contracts, please feel free to contact Mitchell Zadow (Accredited Specialist in Commercial Law) on 1300 205 506 or complete the form below.

The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.

Liability limited by a scheme approved under Professional Standards Legislation.

For further information contact  
Mitchell Zadow

Mitchell is the Managing Principal of our law practice.

He is an Accredited Specialist in Commercial Law (accredited by the Law Institute of Victoria). He also deals with areas of Employment Law, Wills & Estate Planning and Probate. For further information, contact Mitchell on his direct line (03) 8561 3318.


For fifty years Sharrock Pitman Legal has made a significant and long term contribution to meeting the legal needs of business owners and residents in the City of Monash and greater Melbourne area.

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