The supply contract: key clauses

The supply contract governs a continuous or repeated relationship between those who produce or distribute goods and those who purchase them to resell or use them in their own business. In Switzerland it is largely governed by the rules of the Code of Obligations on sale, supplemented by the provisions on continuing contracts. The difference between an agreement that holds up and one that generates litigation almost always lies in the clauses: a well-written contract anticipates conflicts instead of suffering them. Let’s look at the points to keep under control.

Object, quantity and specifications

The first clause defines what is supplied. Indicating the product is not enough: you need technical specifications, quality standards, any certifications and tolerances. In continuing relationships you must clarify whether the quantities are fixed, guaranteed minimums or subject to orders from time to time (framework contract with successive orders). An ambiguity here almost always translates into a dispute over the conformity of the goods.

Price, revision and payment conditions

The price must be fixed in a determined or determinable manner. In multi-year contracts it is prudent to provide a revision clause linked to an objective index (cost of raw materials, price index), to prevent inflation from eroding margins. On payment the following must be defined:

• terms (for example 30 days from the invoice) and methods;
• any discounts for early payment;
• default interest, bearing in mind that in the absence of an agreement the statutory rate is 5% per year;
• payment guarantees (advances, sureties, letters of credit) for significant amounts.

Delivery, transfer of risk and Incoterms

The delivery clause must indicate the place, terms and who bears the costs and risks of transport. In international relationships the Incoterms are used, which must be referred to with the reference version. It is essential to clarify the moment of transfer of risk: from that moment any loss or damage to the goods falls on the buyer, even if they do not yet have physical availability of them.

Reservation of ownership

In Switzerland the reservation of ownership is permitted but, to be enforceable against third parties, it must be entered in the relevant register at the debt enforcement office of the buyer’s domicile. It allows the supplier to remain owner of the goods until they are paid for: it is a concrete protection in the event of the customer’s insolvency, but it must be handled with the required formality, otherwise it remains valid only between the parties.

Warranty for defects and inspection of the goods

Swiss law imposes on the buyer a duty to inspect and to give notice: once the goods are received they must be checked as soon as possible in the ordinary course of business and defects notified without delay, on pain of forfeiting the warranty. The contract can regulate in detail:

• the terms and methods of notifying defects;
• the remedies (replacement, repair, price reduction, rescission);
• the duration of the warranty, which the parties can adjust relative to the statutory terms.

Defining these aspects drastically reduces disputes over quality.

Penalties, limitations of liability and force majeure

A contractual penalty for delivery delays or non-performance gives strength to the contract and simplifies compensation, because it avoids having to prove the actual damage. Beware, however, of the liability limitation clauses: those that exclude liability for wilful intent or gross negligence are void. A force majeure clause is also useful, defining the events that suspend or release from obligations (disasters, production stoppages, supply chain disruptions).

Duration, withdrawal and applicable law

In continuing contracts the term, the renewal and above all the notice of termination must be regulated: a termination without adequate notice can generate liability. Finally, the final clauses: applicable law (in international relationships it is advisable to choose Swiss law if it is the reference forum) and place of jurisdiction or arbitration clause. These are clauses that are noticed only when the conflict breaks out, but that is when they are worth the most.

How we work at SIH ONE

We draft and review supply contracts and framework contracts, adapting them to the sector and to the real risk of the relationship, keeping the clauses that count under control: price, reservation of ownership, warranty, penalties and jurisdiction. The aim is a text that protects margins and holds up before the judge.

Do you want a solid supply contract tailored to your business? Discover the services of our tax-legal division and secure your commercial relationships.