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Understanding Vendor Agreements: Key Components and Importance in Business Collaborations

To start with, the first W, i.e., What are Vendor Agreements? One has to look at the second one before, i.e., Why are these agreements implemented or what is their need? After knowing the reasoning behind the aforesaid question, only then can a person go on to comprehend the scope and motive of vendor agreements. So, to understand the backdrop of vendor agreements, one needs to look at their need. 


Now, it is quite well-settled principle in the business world that never do anything alone if you can do it better with the help of other. Companies are always looking for making such synergistic alliances for pushing their product in the market and consequently raising their profits.

But all this is always dependent upon not just one but myriad types of numerous vendors. A vendor is basically a person or supplier who in exchange for a specific consideration provides goods or services to an individual entity or a corporate entity. These goods and services are necessary to that company for carrying out its transactions and business activities. 

You hire different vendors for getting different types of goods or services. From event management to marketing and from consultants to software suppliers, the vendors are to be hired in each and every sector. Even technology suppliers, office supplies or office space vendors and vendor procuring vendors are available today. Any successful businessman or entrepreneur has to deal with several vendors at a time and that too, quite frequently. Therefore, vendor agreements are necessary in a diverse array of industries or sectors.  

The Need and Purposes of Vendor Agreements

Handshake after agreement
Handshake after agreement

Any vendor agreement basically establishes an enforceable and legally binding contractual promise between two or more parties. This in turn reduces the imminent risk of fraudulent acts being committed on either side as such acts come with a litigative repercussion post signing of a vendor agreement. It also reduces the losses that might be caused to a business through its compensatory clauses that can be enforced by a valid court. A vendor agreement is generally entered to quantify the commodities or services that will be supplied.

Vendor agreements lay down all the terms and conditions that are going to be followed by the parties involved in it. Such agreements cover not only the scope of goods and services that are to be supplied, but also the duration required for such supply, the costing and payment of such goods or services, and the liability that both the parties are going to bear. A vendor agreement is also known as a supplier’s agreement. 

Different entrepreneurs make vendor agreements with different kinds of vendors, depending on the services that they require. For instance, IT companies with high data traffic require server farm services so they hire them, or e-commerce businesses require vendors that provide logistic services or vendors that provide goods and raw materials to be sold on their platforms. Therefore, each different type of company in varied sector, enters into a separately formatted vendor agreement.

Essential Components of Vendor Agreements

Though the vendor agreements need to be custom tailored for every client according to their needs, demands, expectations and circumstances, there are still some common clauses or provisions that can be culled out from a sample set of vendor agreements. Amongst these standardized core clauses of vendor agreements, some are as follows:-

Firstly, like any other corporate document, a vendor agreement would delineate the parties that are involved in this contractual agreement. In doing so, the status of each party is specified, thereby the entity acting as a vendor demarcates a legally binding role for itself. This helps in identifying the vendor and drawing a clear line between the business receiving the goods and services and the one giving them. 

Building upon the said goods and services, another clause comes into the picture, which is the services clause. This clause of vendor agreement explicitly mentions different kinds or types of goods and services that are to be supplied by the vendor.

It is better to go ahead and mention even the quantity and expected quality of goods that are bound to be purchased. This defines the scope and extent of services of the vendor. 

The next clause is the most key clause in this whole agreement, which is the consideration clause. This basically prescribes and mandates the payment that is supposed to be done to or by the vendor or the other signatory.

Most civil disputes stem from this clause, whereby it is considered to be the most crucial one among all the other clauses in a vendor agreement. Therefore, this clause should be carefully and narrowly worded for avoiding any ulterior and manipulated interpretations of stipulated payment. It is better to specify the mode and method of payment for cementing the clause even more than usual.

Moreover, if the payment is to be done in installments then it should be categorically mentioned in this clause so as to have control on the paying party over each and every milestone. If the payment is supposed to be done in bulk, then also the duration within which it is supposed to be processed, should be clearly mentioned in the payments or consideration clause.

Delays in payments are a common happenstance in the business world. To fortify your company or business from such incidents of defaulted payments, you need to add an extra angle in the payments clause that specifies and prescribes the interest that would be charged for delayed payment of consideration. 

After these, comes another basic clause which is again a part of most corporate documentation, i.e., the duration and termination clause. This clause should clearly state the term of the agreement, which basically is the duration of its validity. Vendor agreement is a contract, in the course of which the signee vendor is obligated to provide goods and services in the manner, quantity and for the duration that is mentioned in the document. 

Vendor cannot revoke on his goods or services within the duration of the validity of vendor agreement. Though the duration of vendor agreements is limited, it can still be renewed after its expiry to continue the synergistic alliance between the vendor and the receiving party. 

Adding onto the aforesaid premise, it must be noted here that, if one of the parties, i.e., either the vendor or the receiving business party, wishes to terminate the said agreement before the maturation of its mandated validity period, then another termination clause must be added in conjunction to the validity duration clause. 

This helps to smooth out the transition when the contract ends before the expiration of its term. But a good attorney would not make it too simple for the signee party to escape the shackles of vendor agreements. It is to be ensured that the vendor does not disregard or disobey his duties as prescribed in the agreement, just because they’ve an outgoing clause at their disposal. 

Therefore, the grounds for such termination and consequences of such termination must be specified. The grounds may be triggered by anything from breach of a contractual term to non-performance of a contractual obligation. The consequences may include anything from clearing all the dues or penalties for pre-mature termination. 

Some clauses act in after the termination of the contract. Some of these are confidentiality, indemnity or limited liability clauses.

Lastly, there is of course the dispute resolution clause which specifies what is to be done in the event of any breach of contract triggered by either of the parties. It prescribes the procedure of enforcement of the terms of the contract. This clause further mandates whether the dispute would be settled before a court or whether the parties opt for arbitration. As regards to arbitration, all other clauses circumferential to it are also included within the fold of this provision, such as whether there will be a single arbitrator or a panel, the duration of arbitration, its venue and the applicable laws and jurisdiction

Concluding Remarks 

Every type of agreement possesses its own prerequisites and it has been thoroughly and extensively demonstrated that it is the same case, as regards to vendor agreements as well. But each and every vendor agreement would differ in terms and conditions as agreements between different parties would be tailored to suit their different demands.

Therefore, all such vendor agreements should be professionally drafted by a corporate attorney to specify the required goods and services from both sides and also prescribe the obligations or duties of both parties. A non-ambiguous and categorically drafted vendor agreement can lessen the risk of loss in case of non-performance of duties or disregard of services from either party. This is better for the overall business of any company. 

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Aayushi Chopra
Aayushi Chopra
Aayushi Chopra is a law student who is interested in creating content on education, lifestyle, law, health, and environment. She enjoys researching different topics and then expressing her views on them.

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