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Explanatory Notes
Chinese Long Term Supply Agreement
This is a general purpose agreement for a reasonably long period during which one party agrees to supply and the other to purchase annual quantities of products or materials. The agreement contains minimum and maximum annual quantities with provision for each sale to be made against a purchase order for a fixed quantity. This agreement can be used for manufactured products or for raw materials, although in the case of some raw materials, where environmental considerations apply, detailed provisions are likely to be needed. Dealing with the specific clauses: 1. AGREEMENT TO SUPPLY This establishes the basic agreement between the parties for the sale and purchase of Products which are defined in a Schedule. Those Products can be amended by agreement. 2. DURATION Here the Initial Period and Commencement Date are to be specified. Clause 2.2 provides for renewal at the end of the Initial Period on a yearly basis. 3. QUALITY The quality of Products is, in effect, defined by reference to the specification which will be in a Schedule to the Agreement. The Purchase must inform the Supplier if Products do not conform, in which case the Supplier is responsible for their replacement. There is also provision in 3.3 for independent testing. 4. QUANTITIES AND ORDERING PROCEDURES Here again, there will be a Minimum and Maximum Quantity contained in a Schedule - in some cases only a Minimum or Maximum may be required. 4.2 requires the Purchaser to give regular forecasts of quantities, thereby enabling the Supplier to be in a reasonable position to meet purchase orders. 4.3 deals with the requirements for the placing of an Order, within minimum time periods and provision for delivery dates. 4.4 makes it clear that the Supplier is not required to delivery more than the Maximum Quantity. Sometimes an agreement such as this will contain "take or pay" provisions. In such a case, if the Purchaser fails to take the Minimum Quantity, he will pay for the shortfall. Similarly, if the Supplier fails to provide the Minimum Quantity, he may be penalised. We have not catered for this here but it is worth considering. In effect, a "take or pay" clause is similar to a liquidated damages provision. 5. DELIVERIES, RISK AND OWNERSHIP This specifies where deliveries are to be made and when they are to be made. Both ownership and risk in Product passes from the Supplier at the delivery point. 5.5 is written in the alternative with regard to the precise point at which ownership and risk passes. The Supplier is responsible for packaging and the Purchaser is responsible for reimbursing the Supplier for any storage costs which are incurred as a result of failure to take delivery. 6. PRICE OF PRODUCTS Here the arrangements are that the prices at the commencement of the contract are shown in the Schedule. Whether or not transportation is included in the price, as stated in 6.1, is a matter to be determined contract by contact. Price adjustments in a long term contract are usually going to be necessary and we have assumed in 6.2 that there may be a formula for price adjustments. This could, for example, provide for a price adjustment each year by reference to the Retail Price Index published by the government in the Supplier's country. Alternatively, prices might be adjusted by reference to the Supplier's price list or, alternatively, if there is no formula, there will be a 3 month period of negotiation and if agreement cannot be reach, the Supplier has the right to terminate the contract (6.3). 7. PAYMENT Here we have two alternative provisions. Alternative A assumes payment on a monthly basis against invoices. Alternative B provides for the Purchaser to open a revolving Letter of Credit which will give the Supplier greater security, especially if Supplier and Purchaser are in difference countries. The Supplier is entitled to claim interest on late payment under 7.3. He is also allowed to suspend deliveries if payments are overdue for more than a specific period (7.4). 8. TERMINATION This allows the Supplier to terminate if the Purchaser is overdue in making payments and the Purchaser to terminate if the Supplier commits a material breach of the Agreement. Either party can terminate in the event of the other party's insolvency. 9. FORCE MAJEURE In a long term contract such as this, unforeseen circumstances could disrupt the supply arrangements. A force majeure clause such as this allows the contract to be suspended in such circumstances. If force majeure continues for more than a specified period, then either party can terminate - 9.2.10. MISCELLANEOUS This clause contains some short provisions restricting assignment and dealing with governing law and notices. For further provisions which might be considered, look at our Miscellaneous documents which are freely available on our website. The Chinese version contains the following text dealing with governing language, governing law and jurisdiction: “1. The governing language of this agreement is Chinese/English/other.
2. This agreement shall be governed by and interpreted in accordance with English/Chinese law.
3a. The parties will negotiate in good faith any dispute arising between them and if they cannot resolve the dispute within 15 days, either party may bring legal proceedings in the courts of [ ]; or
3b. The parties will negotiate in good faith any dispute arising between them and if they cannot resolve the dispute within 15 days, either party may commence arbitration in [Beijing, China/London, England] in accordance with the rules of the [China Arbitration Centre/ .....................]. There will be an arbitration tribunal comprising three arbitrators and the award of the arbitrators will be final.”
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