Contracts with suppliers: tips and pitfalls

In practice, almost every business deals with (commercial) contracts on a daily basis. From large-scale agreements with suppliers and employment contracts with staff to the daily lunch that is served—while the latter category will usually cause little to no issues, agreements that carry more weight can lead to disputes, especially when parties disagree on what exactly was agreed upon or when no agreements were made on specific topics.

There are many pitfalls in contracting. When is there a true consensus, and therefore a valid contract? How should a clause be interpreted when parties argue about its meaning? Which party’s general terms and conditions apply to the contract (and the business relationship)?

In this article – Part 1 – we will discuss a number of common clauses found in business contracts and provide some practical guidance. In particular, we will focus on contracts with suppliers (also known as procurement contracts) and general terms and conditions. In a follow-up article, we will address issues such as long-term contracts and penalty clauses.

Formation of Contracts

A contract (or agreement—the terms are interchangeable) is formed when one party makes an offer and the other party accepts it. Contracts involving more than two parties are also possible; in such cases, the same requirement of offer and acceptance applies. What qualifies as a valid offer must be assessed on a case-by-case basis. It’s therefore crucial to be clear on this, especially if one party does not want a simple acceptance by the other party to already result in a binding agreement. It is also important to respond correctly to a quote (which, legally speaking, often qualifies as an offer). Accepting the quote will often already result in a binding agreement, even though a business might still want to negotiate specific (delivery) terms with the supplier.

A company can also ask a supplier to submit a quote—sometimes referred to as a request for proposal (RFP) or request for quotation (RFQ). This is essentially an invitation to make an offer. In that case, the submitted quote must first be accepted before a contract is formed.

In most cases, a written document is not required for a contract to be legally valid. Oral agreements between a business and a supplier are usually valid. However, it is often difficult to determine exactly what was agreed upon and whether there was true mutual understanding—especially if one party believes the other has not fulfilled the agreement properly. Therefore, it is generally not advisable to rely solely on oral agreements.

The benefit of a written contract lies not only in recording commercial terms such as price and delivery conditions, but also in allowing the parties to agree on additional matters, such as risk and cost allocation and contingency planning. For instance, the parties can agree on who bears certain risks, who is responsible for specific costs (e.g., transportation), and what happens if a crucial or time-sensitive delivery fails to occur.

Interpretation of Contracts

Even with signed agreements, disputes sometimes arise over what exactly was agreed upon—especially if things were not clearly recorded in advance. Even written contracts can contain unclear terms. At the outset, parties often don’t feel the need to dwell on exact wording, but once disagreements arise, they may suddenly interpret previously “clear” terms quite differently.

For example: “Party X shall deliver Y number of goods to Party Z every Thursday” seems like a clear clause. But can the delivery happen at any time? Can the recipient specify a different delivery address? If delivery doesn’t happen, can Party X still perform later, or may Party Z obtain the goods elsewhere? Can Party Z reject the entire shipment if it contains fewer than Y goods?

When interpreting clauses in agreements, the key focus is on the intentions the parties had when entering into the agreement and on what they could reasonably expect from one another. Judges have broad discretion in interpreting such clauses, which naturally leads to some uncertainty. It is therefore worthwhile to carefully discuss and clearly formulate all agreements. For important contracts (e.g., long-term or financially significant ones), obtaining legal advice is highly recommended.

General Terms and Conditions (Battle of Forms)

Businesses often include general terms and conditions when entering into agreements. These offer several advantages: the user can consolidate commonly used clauses—typically not subject to negotiation—into a single document. For instance, general terms often include provisions on penalties or compensation in case of late delivery.

The applicability of general terms and conditions also depends on offer and acceptance: before or at the moment the agreement is concluded, it must be clear to Party Y that Party X declares its terms and conditions applicable. Party X must also provide the general terms to Party Y no later than the time of concluding the agreement. Party Y must then accept the applicability of those terms.

A common practice is for Party X to refer to its general terms in its quote or draft contract. If Party Y accepts the quote or signs the agreement, the general terms of Party X apply to the agreement (in consumer or small business contracts, the terms must sometimes be provided in advance).

It also happens that both parties, in the lead-up to a contract, declare their own general terms applicable: Party X sends a quote to Party Y, referencing its general terms and attaching them. Party Y then sends back an order confirmation referencing its own terms and attaching those as well. This situation is known as the “battle of forms.”

Under Dutch law, in such cases, the general terms of the party who first referred to its terms (Party X in this case) apply, unless the second party (Party Y) explicitly rejected the applicability of the other party’s terms. Other legal systems may handle this differently.

When contracting with foreign suppliers, extra caution is advised. In many cases, the CISG (Vienna Convention on the International Sale of Goods) applies. This is substantive law that governs the formation and execution of a contract. Under the CISG, it is the terms of the party who referred to them last that apply. Even if the CISG is excluded, caution is still warranted, as other jurisdictions may have their own rules regarding the battle of forms.

If you would like more information on this topic, please contact Tony Vermeulen and Tijn Coppens.