Supply agreement template

Firm, requirements and output structures

A firm commitment obliges the buyer to purchase a stated quantity over the term, usually in exchange for better pricing. It gives the supplier certainty and puts the demand risk squarely on the buyer, who pays for the shortfall if their own market softens. Take-or-pay clauses make that explicit.

A requirements contract obliges the buyer to source all of its actual requirements for the product from that supplier. The buyer is not exposed to a shortfall payment if demand falls, but is locked to a single source. Open-quantity arrangements like this carry an expectation of good faith on both sides, which is easier to meet when the agreement records the estimate everyone was working from — so goHeather asks for it, and flags a requirements structure with no figure written down anywhere.

An output contract is the mirror image: the supplier sells its entire output of the product to the buyer. It suits a buyer who wants to lock up scarce capacity.

Whatever the structure on the buyer's side, look for a matching obligation on the supplier's. A buyer committed to 250,000 units a year needs the supplier committed to having them available — a capacity maintenance obligation, and an allocation clause governing what happens in a shortage. A one-sided commitment is the most common defect in supplier-drafted paper.

• Pick the volume structure deliberately, not by inheriting a template
• Match a buyer commitment with a supplier capacity commitment
• Add a fair-allocation clause for shortage conditions
• Say which part of a rolling forecast commits you and which is indicative

How price adjustment mechanisms usually work

Over a multi-year term, fixed pricing is unrealistic for anything exposed to commodity or labor costs. The question is not whether price can move but how.

A clause allowing the supplier to adjust prices on notice to reflect its costs is not a pricing mechanism, it is an open price term dressed as one. Costs are asserted rather than evidenced, adjustments can come at any frequency, and there is no ceiling.

Mechanisms in common use have four elements. A named external index — a specific Producer Price Index series, a published commodity benchmark, a labor cost index — so the movement is objectively verifiable. A stated base date and base price. A frequency limit, usually once per contract year with meaningful notice. And a cap on the annual movement, often with a floor as well so the mechanism cuts both ways.

Where a genuine extraordinary cost event occurs, a renegotiation clause is better than an uncapped adjustment right: the parties meet in good faith, and if they cannot agree within a period, either may terminate on notice. That preserves certainty while acknowledging that some shocks fall outside any index.

How force majeure clauses are usually scoped

Most force majeure clauses are boilerplate that nobody reads until it is invoked, at which point it usually turns out to be either too broad or too narrow.

Too broad looks like "any cause beyond a party's reasonable control", which suppliers have used to excuse performance when raw material prices rose. The UCC's own impracticability excuse under 2-615 sets a high bar and increased cost alone does not meet it, but a contractual clause can inadvertently set a lower one. Expressly exclude changes in market price, cost of materials, labor availability and a party's own financial condition.

Too narrow looks like a list of named events — war, fire, flood, act of God — with no catch-all, which leaves out whatever actually occurs. The answer is a named list plus a catch-all, with the exclusions above.

Then deal with the consequences, which most clauses ignore. Require prompt notice with an estimate of duration. Suspend rather than excuse the obligation. Require reasonable mitigation efforts. And critically, give both parties a right to terminate if the event continues beyond a stated period — sixty or ninety days — so a buyer is not trapped indefinitely with a supplier who cannot supply and has no obligation to release them.

What happens when the relationship ends

Single-source supply relationships create operational dependency that a termination clause alone does not address. Qualifying a new supplier for a critical component can take months, and the period between deciding to leave and being able to is the period of maximum risk.

Three provisions manage that. A transition assistance obligation requiring the supplier to continue supplying at agreed prices for a defined wind-down period after termination. Access to tooling, moulds and specifications that the buyer paid for, with clear ownership and a right of physical collection. And a last-time-buy right on end of life or discontinuation, with enough notice — six to twelve months for anything requiring requalification — to place a final order.

Consider a business continuity obligation too: a requirement that the supplier maintain a disaster recovery plan, hold agreed safety stock, or qualify a second manufacturing site. For a component that stops your production line, that is worth more than any damages clause, because the damages clause pays you after you have already lost the customer.