For many Amazon sellers, the contracts they establish with suppliers may be the first business contracts they have ever entered into.
It can be nerve-wracking that first time you sign an agreement – have you done the right thing? Is this a good deal? What do all the legal bits mean?
Hopefully, you’ve taken a few steps ahead of signing an agreement, including product research to establish demand, ordering samples and checking out suppliers, then arriving at a decision on a suitable supplier.
You’re now at the point of putting pen to paper and creating an agreement, which, as with any other type of legal agreement should be taken seriously. What should you be aware of and look into? Let’s take a look at those contracts:
What should sellers be aware of first?
As part of your due diligence when assessing possible suppliers, learn about the company and understand the financial resources they have behind them. Basically, you want to avoid signing a contract with a third-party sourcing company or any shell company of the manufacturer.
You want to do business with an entity that has substantial assets behind them, giving you recourse legally if necessary. Some sellers have been caught out when they discovered their agreement was signed with a shell corporation that has no significant assets.
One suggestion is that if you are signing an agreement with a US-based sales subsidiary of a foreign manufacturer, have the foreign manufacturer co-sign or guarantee the performance of the agreement.
A second point to note, particularly if you’re doing business with a supplier in China, is that many companies there don’t legally have an English name. This means you want them to sign the agreement identifying themselves by their Chinese name, as well as the English name they use.
Thirdly, make sure that your supplier does have their own export license to ship goods out of China (or wherever you are importing from). Some smaller manufacturers have been known to go ahead and ship through a third party anyway, but having that license is like an extra layer of assurance that their goods have been measured up to standard. There’s also the possible situation that the goods don’t leave the country if the manufacturer doesn’t have that license!
Fourth, know whether your products, or any component contained within your products (such as batteries) requires special certification or approval. If this is the case, you’ll want to make sure your supplier has the appropriate documentation before entering into any agreement with them. One certification that is not always a requirement but is definitely something to look for is a QMS certification such as ISO 9001. Factories that hold this certification have been found to comply with international QMS standards and it’s a good sign that they manage quality and can meet your requirements.
NOTE: We are not qualified lawyers and cannot offer legal advice here, so it’s always a safe plan to consult with an attorney if you need help with supplier contracts!
What does a supplier contract contain?
In this next section, we’re going to look at key points from a very basic contract. Of course, yours may look a bit different depending on what you and your supplier agree upon, but one thing we’d highlight here is the importance of having that contract.
A contract isn’t just protection for you and your supplier, it outlines exactly how you’re going to do business together so that hopefully, you avoid miscommunication or gray areas. Most sellers draw up the agreement themselves (or with the services of a lawyer). There are a few templates for supplier agreements floating around online, which you can find if you Google “FBA supplier agreement template.”
Let’s look at some key points in a supplier contract:
Naturally, everyone is concerned with pricing as a mainstay on any supplier contract. This is something that you will usually negotiate based on the number of units you will order.
The key here is to ensure that the pricing in the contract is inclusive of everything you’re going to need with the product, including any packaging or insert requirements. If you were to come back later on and request those things, you will probably find that the supplier adds on additional costs, which may significantly impact your margin.
Include all of your product specifications in the contract so that everything is 100% clear. This includes detailed product and packaging specifications, down to materials used and any specific details that must not be missed (for example, if your product requires a certain kind of finish or part).
To ensure clarity, you might like to:
- Include product photos in an appendix to show specifically what you expect the product to look like and how it should be finished. You can also use these pictures to clarify any specific features.
- Include requirements for packaging, both for the inside and outside of the box or packaging. Anything coming into the United States must be clearly marked on the outside of the carton with the following information:
– Weight in pounds and kilos.
– Number of packages and size of cases, in inches and centimeters.
– Safety markings (such as “this side up”).
– Country of origin (shipments HAVE been rejected where this was missing!).
– Product description.
– Port of entry.
– Handling marks (the pictorial symbols for “fragile” etc.).Additionally, if you can get the manufacturer to attach the FNSKU barcode to the outside of the box (it must be able to be read by a scanner), this will save a lot of time on your end!
As a general rule, try to avoid any agreement which has you paying 100% upfront. The more reputable factories don’t require this when dealing with customers who they believe are trustworthy. Common terms might be 50/50 or 30/70, with the latter percentage being paid at shipment.
Once they know you better and you’ve established a trusting relationship, you might move onto terms such as NET 30 or NET 60, where you have 30 or 60 days to pay the full balance. Don’t expect this upfront though – the supplier has to protect themselves too!
Under payment terms you should also state how invoices will be paid. Most commonly, this is by telegraphic (bank) transfer (TT), but if you’re going with a supplier through Alibaba, there are now many who will use Alibaba Trade Assurance. This is like an escrow service which holds the funds for you and transfers to the supplier once conditions are met, as a form of protection. More and more suppliers are now using this.
Your contract should establish any inspections and procedures for determining product quality. For example, you might want a third party (whom you will have to pay) to inspect the goods before they are shipped.
You should establish the points of inspection that are required, for example, detailed pictures of specified parts of the product or pictures of the loaded cartons. Another stipulation many sellers often include is what will happen if those products fail inspection. For example, it might be that the supplier pays for a second inspection if the first one failed.
You might also have in here a clause dealing with returns. For example, if returns get above a certain percentage, perhaps you have a deal worked out with the supplier about refunds or discounts. If they fail first inspection, they must pay for second inspection.
These days, more manufacturers seem to be willing to give some kind of product warranty to cover anything that is their responsibility (such as quality of manufacturing). This is worth asking about. Usually, the warranty will begin from the shipment of the product as the manufacturer doesn’t know when it was sold.
This is the period of time from when you order the product, to when it is dispatched for shipping and should be agreed upon by both parties. Some sellers have managed to get a penalty clause written in here, often offering 7 days grace period before deducting a certain percentage off the cost of the order if it is late
This clause is to establish where a manufacturer’s responsibility ends and a freight forwarder’s begins. For example, it might be part of your agreement that the manufacturer is responsible for getting the shipment to the nearest port.
Many sellers will include a confidentiality clause, prohibiting the manufacturer from dishing the details of your product, business, or brand to potential competitors. This is something where it doesn’t hurt to include it, but you may find it difficult to have enforced upon foreign suppliers. Different countries have varying laws and levels of enforcement when it comes to confidentiality.
Entering into a contractual agreement with your supplier is a big step! It doesn’t have to be especially daunting though; you can reassure yourself by doing some homework on key sections of the contract or getting qualified legal help.
As a final point, we’d emphasize that it’s important to develop a “human” relationship with your suppliers. Contracts and negotiations are always made easier if they know and trust you, and feel that you’re a reliable client. Be reasonable and remember that they’re a business too! There may be allowances that need to be made by both of you.