Vendor Agreement

Overview of Vendor Agreement

A Vendor Agreement is a legal and written contract which states the conditions and terms of work that is to be done by the vendor. A vendor includes a person or entity that is providing a certain amount of product or service to its customer. A basic vendor agreement must include details such as the time, date and location where the vendor needs to perform the required services.

If a businessman is in the sector of doing a vendor business, he/she might require forming a vendor agreement every time he/she enters into a contract for providing services from the business. A vendor agreement acts as a safe tool and insurance between the parties making it by mutually agreeing to the terms and conditions. Whenever a businessman is accepting to perform a service to his/her customer as his/her part of the business service, he/she needs to enter into a vendor’s agreement.

Applicable Law

There are several laws prevailing in India which govern a vendor agreement to make such an agreement valid and legally enforceable.

• The provisions of the Indian Contract Act of 1872 govern a vendor’s agreement.
• For the sale of goods and services, the Consumer Protection Act is applicable. It does not include a service involving the resale of goods or for commercial services or for the goods sold or service provided without any consideration under a contract for personal service with a party. Such an Act protects the rights of a consumer from being violated. It includes the right to be informed, the right to safety, the right to choose, etc.
• The Goods and Service Tax Act (GST) is also applicable whenever a businessman supplies his/her services to a customer. There are various rates for different services mentioned under the Act along with some exceptions also.

Negotiation for a Vendor Agreement

If a vendor is negotiating with a customer who is a known business partner, then they can enter into such an agreement without making it in writing by simply mutually agreeing with each other. But, it is mostly suggested that the vendor should make a vendor agreement in proper written form. As the terms and conditions related to guarantee, accounts, finances and security deposit, etc are included a vendor’s agreement, it protects the rights and liabilities of both parties. A sound vendor agreement requires some preparation to be done before actually drafting the same. It should start with introducing the parties to the agreement and statements highlighting the agreed terms and conditions.

After reading the draft of the agreement, the customer can request some changes in the conditions along with concession on rates. Such a customer analyses the draft and evaluates the proposal made by the vendor in the agreement. If he/she does not consider the proposal good against the money which is being paid, he/she can ask for a lowering of the consideration value. A small change in the value of the product creates a huge impact on the overall budget of the customer.

Advantages of a Vendor Agreement in India

There are several advantages to the parties to a vendor agreement in India. These are as follows:

Increase in Efficiency

The parties to such an agreement can have a clear picture of the security policy, finance, dispute resolution and other essential information which will help them to perform better. It will lead to effective and efficient working culture and the development of supplier and vendor business relationships.

Risk Identification and Management of the Vendor

As all the rights, liabilities, rules and regulations of parties are mentioned in the agreement the amount of risk is reduced and helps the vendor to identify all the types of possible risks.

Requirement of Vendor Agreement

A vendor agreement is said to be complete and valid if it contains the below-mentioned details:

• The personal details of parties such as name, residential address and the date on which the agreement has been signed by both parties.
• A statement clarifying that the vendor has a valid vending license as such an organization has permission to engage with a certain type of product.
• A statement in brief mentioning the expectations of the vendor through the agreement.
• Levying of taxes on services and goods unless exempted.
• The details with regard to delivery such as place, time and date should be specified.

Need of a vendor agreement

There are various reasons specifying a need for parties to enter into a vendor agreement. These are as follows:

Defines the business transaction

A vendor agreement covers a proper business transaction between a vendor and the customer as such an agreement contains information like details of the parties, agreed terms and conditions, rules and regulations with regard to transfer of goods or services for consideration, etc.

The parties to a business transaction must enter into a vendor’s agreement so that the vendor and the customer can have a clear idea about all the mutually agreed conditions and details of the agreement. It is preferable for parties to have the agreement in writing to avoid any future conflicts or misunderstandings.

Increases efficiency

As a vendor agreement contains all the terms, conditions and process for the performance of a task, the employees have a road map for working efficiently without any interruptions in the workflow. It also reduces the time required to perform a task, reduces the chances of error and ambiguity, increases in efficiency of business and aims at achieving optimal performance level.

Outlines consequences

There might be a situation where either party to the agreement refuses to perform his/her part of the contract or commit fraud.

Thus, to avoid such situations, it is suggested to the parties form a vendor agreement. Such an agreement must contain a clause related to dispute resolution mechanism and punishment for violating the terms and conditions of the agreement.

With a help of a vendor’s agreement, a party who has been aggrieved can take the mutually agreed legal action against the opposite party for breach of the agreement. 

Minimizes risks

There are risks attached to a business always. The percentage of risk increases when the business deal involves other business parties as well.

Therefore, if the vendor makes a vendor agreement, it can help him/her to access the situation and find out any potential risks related to quantity, cost and delivery, etc and prepare himself/herself to find a feasible solution to lower the risk involved.

The agreement also contains a clause with regard to unforeseen occurrences such as floods, accidents, etc which might affect the business transaction and a potential solution for the vendor to be prepared in case any circumstantial event occurs.

Maintain business relationships

Whenever a vendor makes an agreement mentioning all the terms, rules regulations and conditions for performing work, it shows his/her responsibility towards a business deal. It is considered highly professional as valid proof of an agreement entered between the parties.

It ensures smooth and proper functioning in an organization and helps in maintaining a healthy professional relationship with his/her clients.

Essential requirements of a Vendor Agreement in India

A well-structured and drafted vendor agreement portrays professionalism and clarity about each and every term and condition to the parties. It is important to use clear and specific words in the agreement to avoid any confusion. For making a well-structured agreement, the draftsman needs to follow certain steps which will help the parties to cover every aspect of the agreement. The steps are as follows:

• The very first step is to mention the date on which the agreement is being made on the first page of the agreement along with the personal details of both parties involved in the vendor agreement. Personal details include the name, address and contact information of the parties to the agreement.
• The second step is to provide a statement clarifying that the vendor has legal permission to sell the goods and services which are mentioned in the agreement. It is essential for the vendor to provide his/her vending license along with the vendor agreement.
• The vendor is then required to provide a diagrammatic presentation of his/her expectations before composing the real frame. The diagram can include details of taxes, delivery dates, mode of payment, compensation, duration, the cost involved, etc.
• The vendor is required to mention a statement in the agreement that both parties have mutually agreed to the management and payment of taxes being imposed on the product or service for which the contract is being entered into.
• The last step is to mention the mode of delivery and payment for the order.

Common elements of a Vendor Agreement in India

There are certain common elements which are required to be mentioned in the vendor agreement irrespective of the type of industry of the vendor. These are as follows:

Pricing

It is one of the basic clauses displays that what consideration will be paid to the vendor by the vendee for the sale of goods or services in the contract. Without consideration, there is no valid agreement in the business transaction. The price for goods or services can be fixed or variable depending upon the market situation and type of business involved. The price of such goods or services can vary as per the need and time.

Delivery Terms

The agreement should clearly mention the time and terms for delivering the products or services to the customer. A vendor can provide delivery in several installments also.

Payment Terms

The agreement should also contain a clause which mentions the penalty amount or interest to be charged in case of delay in payment for goods or services. The vendor is required to provide a specific mode to receive payment.

Indemnity Clause

In case of receipt of defective or damaged goods, it should be the responsibility of the vendor to indemnify for losses incurred to the customer, if any. This should be mentioned in the indemnity clause of the vendor agreement.

Exit/Termination Clause

There should be a termination clause added to the agreement so that whenever a party to the contract is not willing to perform his/her part of the contract can do so in a legal manner using the termination clause. This option is also available when both parties mutually decide to terminate the agreement between them.

Representations and Warranties

The parties should mandatorily include a warranty and representation clause in their agreement. This clause includes all the terms and conditions related to the agreement which have been mutually agreed upon by both parties.

Confidentiality Issues

This clause includes an obligation to the parties not to disclose material information to any third party who is not a party to the agreement. The parties are required to maintain confidential information among themelves.

Procedure for a Vendor Agreement in India

The process for a Vendor Agreement in India is described in the following manner:

• A party who is willing to enter into a vendor’s agreement needs to contact a professional lawyer who has experience in drafting agreements. He/she will explain the whole process, common clauses and the need to form a vendor agreement.
• After the discussion with both parties, the primary objective for drafting the agreement is clear. The lawyer will draft the agreement. This service is being provided by our expert lawyers to a lot of clients. You can contact Corpbiz for the same.
• The lawyer will provide a copy to the parties to the agreement for review.
• After the review process is completed, the lawyer makes a final draft of the agreement as per the modifications required by the parties, if any.
• This process requires 3-4 days.