A draft supply agreement has landed on your desk. Perhaps a customer you have dealt with for months has sent their standard terms and wants you to supply on them. Perhaps a new supplier wants your signature before they will start shipping. Either way, you are being asked to sign a document that will govern every order, every delivery and every dispute for the life of the relationship.
A supply agreement sets out the ongoing terms on which one business sells goods to another: what is supplied, at what price, when it arrives, what happens if the goods are defective or late, and how the arrangement ends. It sits on top of individual purchase orders and replaces loose oral understandings. For a one-off sale a simple order form may be enough, but where goods flow repeatedly, the supply agreement is the contract that actually decides who wins when something goes wrong. This article walks through the clauses that matter most, from both sides of the table.
The clauses that decide what your supply agreement is worth
What is being supplied
The description clause defines the whole deal. If it is vague, every later dispute starts with a fight about what was actually ordered. The customer wants precise specifications: model numbers, grades, tolerances, packaging and labelling. The supplier wants to avoid promising more than it can deliver, so the description should match the product catalogue or a specification sheet attached as a schedule:
- Specifications: attach the full technical specification and make it the reference point for acceptance.
- Quantities: set minimum and maximum order quantities so both sides can plan production and stock.
- Variations: require any change to the goods or specifications to be agreed in writing, so an offhand email or phone call cannot change the deal.
- Packaging and labelling: state who is responsible for packaging, and whose standards it must meet.
The drafting choice that matters most is the variation mechanism. A clause that says no variation is binding unless recorded in writing and signed by both parties prevents scope creep and the classic "but you said you would throw that in" dispute.
Price, payment and getting paid
For a supplier, the payment clause is the point of the whole document. It should state the price, whether GST is included, when payment falls due, and what happens if the customer pays late. Common structures are a deposit with the balance on delivery, payment on 30 or 60 day terms, or milestone payments for larger orders:
- Timing: the longer the credit period, the more working capital the supplier funds. A deposit or payment on delivery is the strongest position.
- Late payment: interest and a right to suspend further deliveries while invoices are overdue.
- Set-off: customers often push for a right to deduct amounts they claim are owed to them. Suppliers should resist set-off rights or limit them to amounts agreed or determined by a court.
- Retention of title: a supplier offering credit can retain ownership of the goods until paid. Under s 12 of the Personal Property Securities Act 2009 (Cth), a retention of title clause is a security interest, and it only ranks ahead of other creditors if it is perfected by registration on the Personal Property Securities Register (PPSR). An unregistered clause can be worthless if the customer becomes insolvent before paying.
Customers should make sure the payment terms in the agreement match what was negotiated commercially, and that they keep any right to recover money if the goods never arrive or do not match the description.
Delivery, risk and delay
The delivery clause should say who bears the risk of loss or damage to the goods at each stage: before dispatch, in transit and after delivery. Whoever bears the risk wears the cost if a truck crashes or a pallet is dropped. International commercial terms, known as Incoterms, are a shorthand way of allocating cost and risk between buyer and seller, and many domestic supply agreements borrow the same idea:
- Timeframes: delivery dates should be realistic, and the clause should say what happens if they are missed.
- Force majeure: suppliers want the ability to extend timeframes for events outside their control, such as natural disasters, transport stoppages or supplier failure.
- Partial deliveries: state whether the customer must accept split shipments, and how short deliveries are handled.
- Consequences of delay: customers want the right to cancel, obtain substitute goods or claim compensation if delivery is late. Suppliers want those rights limited to genuine and material delay.
The trap on both sides is silence. If the agreement says nothing about late delivery, the customer's remedies come from general contract law, which may not give them what they actually need, such as the right to walk away and buy elsewhere.
Inspection, acceptance and rejection
Goods that arrive damaged or off-specification are the most common supply dispute, so the process for dealing with them matters as much as the liability clause. The customer should have a contractual right to inspect goods on delivery and a window, say seven or fourteen days, to notify the supplier of defects:
- Rejection window: a defined period in which the customer can reject non-conforming goods.
- Deemed acceptance: suppliers will push for a clause saying the customer is taken to have accepted the goods if it does not object within the window. Customers should make sure the window is long enough to actually test the goods.
- Returns process: how goods are returned, who pays freight, and whether replacement or credit is offered.
The trap for customers is signing an acceptance clause that deems goods accepted on delivery, before they have had any chance to check them. The trap for suppliers is the opposite: a silent agreement can leave them exposed to a rejection months later.
Consumer guarantees and the liability clause
This is the clause where Australian consumer law bites, and where many supply agreements are drafted incorrectly. The consumer guarantees in the Australian Consumer Law (ACL), which is Schedule 2 of the Competition and Consumer Act 2010 (Cth), apply to business buyers as well as individuals. A business that buys goods of a kind ordinarily acquired for personal, domestic or household use, such as laptops, office furniture or tools, is treated as a consumer unless the goods were bought for re-supply or to be used up or transformed in manufacture. So is anyone who pays $100,000 or less for goods outside those categories.
Where the guarantees apply, goods must be of acceptable quality: fit for all the purposes for which goods of that kind are commonly supplied, acceptable in appearance and finish, free from defects, safe and durable. A term that purports to exclude or limit those guarantees is void under s 64 of the ACL. A supplier cannot contract out of them, no matter what the customer signs.
For goods that are not of a kind ordinarily acquired for personal, domestic or household use, the ACL does allow a supplier to limit its liability for a failure to meet most guarantees to repairing or replacing the goods, or paying the cost of either. The guarantees as to title, description and sample quality cannot be limited this way. That is the correct structure for a business-to-business liability clause: a cap on total liability, an exclusion of indirect and consequential loss, with carve-outs for the things that cannot be limited and for matters such as fraud or deliberate breach.
The remedies the ACL gives a buyer also shape the clause. If goods fail a guarantee in a way that is a major failure, meaning they would not have been bought at all, are substantially unfit for purpose, or are unsafe, the buyer can reject them and get a refund or compensation. For a minor failure the buyer can require the supplier to fix it, and only reject if the supplier refuses. Suppliers should make sure their liability clause does not try to convert those statutory remedies into something weaker.
Indemnities deserve separate attention. A customer will often ask the supplier to indemnify it against claims from third parties arising from the goods. Suppliers should resist open-ended indemnities and push to cap them consistently with the rest of the liability clause. Customers should check that the indemnity actually covers the downstream losses they are most worried about, such as product liability claims from their own customers.
Warranties and the returns process
Beyond the ACL guarantees, suppliers may offer express warranties against defects, such as a twelve-month warranty on a machine or a lifetime guarantee on a component. The agreement should set out what the warranty covers, how long it lasts, how the customer claims under it, and what remedy is provided:
- Refunds and exchanges: state whether change of mind returns are accepted, and any conditions such as original packaging or restocking fees.
- Claim process: how the customer reports a defect, what evidence is needed, and who bears the return freight.
- Relationship to the ACL: the warranty cannot take away rights the customer has under the ACL, so the clause should say the express warranty is in addition to, not instead of, the consumer guarantees.
Termination
Supply relationships end, and the termination clause decides how. It should set out the events that allow immediate termination, typically non-payment, a material breach that is not remedied, and insolvency of the other party. For ongoing arrangements it should also set out notice periods for termination without cause, which are usually 30 to 90 days:
- Consequences of termination: what happens to goods already ordered, payment for work done, and the return of materials or confidential information.
- Survival: which clauses continue after termination, usually payment obligations, confidentiality, intellectual property and limitation of liability.
- The unfair terms trap: a standard form contract that lets one party terminate at will with no notice can be an unfair contract term. Under s 23 of the ACL, a term of a standard form small business contract is void if it is unfair, meaning it causes a significant imbalance in the parties' rights, is not reasonably necessary to protect the legitimate interests of the party relying on it, and would cause detriment. The test of "small business" is broad: a contract is caught if at least one party employs fewer than 100 people or has turnover under $10 million. Since the 2023 reforms, proposing or relying on an unfair term is itself a contravention carrying penalties of up to $100 million for a body corporate, so a supplier's termination clause is no longer just a drafting nicety.
Situational clauses worth adding
Depending on the goods and the relationship, these clauses earn their place:
- Minimum purchase commitments: worth adding when the supplier invests in tooling, stock or capacity on the strength of the customer's orders, with a take-or-pay obligation to make the investment worthwhile.
- Exclusivity: the customer may want the supplier locked in as the only source of a product line, and the supplier should ask for volume commitments in return.
- Assignment and change of control: prevents either party from quietly handing the contract to a competitor, and lets each side exit if the other is taken over by a rival.
- Insurance: requires the supplier to hold product liability and transit cover at stated minimums, which matters most where goods are consumed or installed by the customer's own clients.
- Dispute resolution: an escalation clause, from negotiation to mediation before litigation, plus a governing law clause, saves cost when a disagreement does arise.
How an Artificer Legal lawyer reviews a supply agreement
Supply agreements are negotiable, and the version you are handed is rarely the version you should sign. An Artificer Legal lawyer reviewing a supply agreement would start with the commercial terms, price, volumes and delivery, then work through the liability and termination provisions, and finish with the boilerplate that usually hides the traps:
- What we push back on: blanket indemnities in favour of the customer, unilateral rights to vary price or specifications, liability caps that try to exclude the consumer guarantees (void under s 64 and worse than useless, because they create false confidence), deemed acceptance on delivery, and termination at will with no notice.
- What we insist on: a precise specification with a written variation mechanism, an inspection and rejection window, a cap and carve-out structure for liability, reasonable notice periods, a survival clause, and registration of any retention of title interest on the PPSR.
- Where the negotiation happens: suppliers should hold firm on payment and set-off, while conceding ground on delivery timeframes and rejection windows. Customers should hold firm on the liability carve-outs and termination rights, while conceding on price mechanics.
The liability clause and its carve-outs
When a supply relationship goes wrong, the dispute is decided in the liability clause. It is the most misdrafted clause in Australian supply agreements: suppliers write blanket exclusions that are void because they try to override the consumer guarantees, and customers accept a cap without checking what it carves out. The version that works is a cap on total liability, an exclusion of consequential loss, and explicit carve-outs for the consumer guarantees that apply, for fraud and deliberate breach, and for the indemnities that actually matter. If only one clause gets proper drafting attention, this is the one.
The rest of the agreement supports it. A precise description of the goods, clear payment and delivery terms, a workable inspection process, honest warranties and a fair termination clause all reduce the chance the liability clause ever has to do its job. Drafted properly, a supply agreement protects both sides. Drafted carelessly, it simply determines which side's lawyer wins later.