Supplier Agreements

Contracts on a construction project are not limited to standard form contracts such as the JBCC, MBSA, FIDIC, GCC or NEC. On a construction project, one will often find supplier agreements used for material supply, plant and labour hire, purchase agreements etc.

A few standard form supply contracts are available, however the use thereof is not widespread. It is more common for suppliers to use bespoke supply agreements. This article delves into some of the basics of supplier agreements and provides a few pointers on good practice.

A supplier agreement has the same basic elements as a standard form contract or any contract for that matter. The fundamental requirements of any contract are:

• Both parties must have capacity to act.
• There must be an offer and acceptance.
• The agreement must have certainty.
• The objectives of the contract must be legal.
• The obligations of the parties must entail performance that is possible.

Contracts are largely governed by the common law, however, the additional legislation applicable to contracts in South Africa include, inter alia:

• The Constitution (the supreme law of the land).
• The Consumer Protection Act.
• Protection of Personal Information Act.

It is common for suppliers in the construction industry, when engaging with a new customer for the first time, to request the customer to complete a credit application form. This is usually done when the supplier provides payment terms for example, a 30-day period.

The general terms of the credit application include, inter alia, the following:

• Contact details of the applicant.
• Registration details.
• Personal and contact details of directors and other key contact personnel.
• Terms and conditions relating to the provision of credit.
• Sometimes include a surety agreement for the individual signing on behalf of the applicant.

The terms and conditions of supply are usually independent of the credit application form and ideally should address, inter alia, the following points:

• Details of both parties.
• General terms which include variations, lead times, responsibilities of the parties, price/rates, payment terms, delivery date etc.
• It is important to include terms relating to quality management. This may include quality interventions, standards and/or requirements that the supplier must adhere to or quality interventions that the customer has to implement on receipt of the material/commodity.
• Terms relating to liabilities and insurances.
• Supplier’s delivery guarantees during the period of the promised lead time.
• Processes of dispute resolution or termination clauses.
• Process to be implemented in instances of breach of agreement.
• When importing goods/material, to include terms relating to fixed exchange rate or forward cover.
• Penalties if applicable.

It is advisable to follow up regularly on the progress of supply contracts in the same manner as progress is monitored on construction contracts. From the supplier’s point of view, it is an opportunity to identify and raise any issues/concerns with regard to the progress of the order and obtain alignment with the buyer.

It also benefits both the supplier and contractor to establish a long-term relationship for regular items of supply. This provides an opportunity for the parties to become accustomed to working with each other and develop a symbiotic relationship. In addition, the supplier is able to offer better pricing and/or payment terms.

Bilaal Dawood

Head: Membership Services