Raw Material Supply Agreement

Raw materials form the lifeblood of any manufacturing industry. Any sector that involves in sales of materials including service industry requires raw materials; for instance – the food and beverages industry. Raw materials may be in the form of natural resources or semi-finished products that need processing in order to become a finished product. For instance, for making Pizzas, wheat may be considered as a raw material either as itself, as refined flour, or as a ready made crust.

Raw materials are the building blocks of any product which are either sold or used in service industry. Any industry that constantly needs raw materials tend to be located at places where raw materials are available at lesser costs. This avoids high costs on fuel and transportation and increases profit margins. It is not just the geographical availability of raw materials that matters, but also an understanding with sellers which does the trick of getting ahead of the competition. This is where a good Raw Materials Supply Agreement comes into picture. A successful business is one which procures high-quality inputs at a lesser price and sells them at a good selling price. Any agreement entered into by an organisation should aim at safeguarding its legal position and enumerate the rights generated and limit its obligations.

What Is A Raw Material Supply Agreement?

A Raw Material Supply Agreement is essentially an agreement to Sell as defined under the Sale of Goods Act, 1930. It may as well be a Contract to Sell under the same Act, if the ownership of the subject matter is transferred immediately- as compared to the former where two parties agree to supply goods in a future date. In other words, it is a sale agreement where one party agrees to sell and the other agrees to buy definite goods of economic value. The vesting of rights may be immediate or in future. There can be two parties, namely the seller and the buyer. It is not necessary that any of them be incorporated.

Any entity including natural persons who are not barred from contracting under Sec 10 of the Indian Contract Act, 1872, may agree to supply raw materials in India.

What To Include In A Raw Material Supply Agreement?

A Raw Material Supply Agreement should contain the detailed description of the parties beginning with the type of entities that they are: for instance, the buyer may be a company incorporated under the Companies Act, 1956; whereas the seller may be a One person Company incorporated under the Companies Act, 2013.

A brief introduction may also be given about the nature of their business and the circumstances that led to the agreement. Once the intention of the buyer to buy and the seller to sell is highlighted along with details about the raw materials, the introductory part of the agreement is complete. For example, it may be about A, a textile company that approached B who is a manufacturer of cotton yarn with the intention to procure two quintals of yarns at Rs 200 per kg of A grade for the purpose of manufacturing textiles.  

Then comes, the terms and conditions of the agreement. Given below are some of the points that can be included to create an effective Raw Materials Supply Agreement:

1. Sale, third party sales whether allowed
   The details of the sale should be mentioned along with the clause that specifies whether the buyer may buy or the seller may sell identical or similar materials from/to third parties.
2. Non-Competition
   One major aspect of raw materials is that there is always a fear of the seller emulating the ideas of the buyer and ending up as a competitor to the buyer. So, an effective agreement must restrict the number of years for which the seller will not be allowed to manufacture competing products to that of the seller.
3. Non-Solicitation
   Since the seller may be in a position to manufacture products similar to the buyer, it would be prudent to add a Non Solicitation Clause which would prevent both parties from soliciting business from the clients of each other.
4. Quality
   Perhaps the most important aspect of a product is quality. Quality of a product is directly proportional to the quality of its raw materials and processes. Thus, there is a need to fix the terms related to quality.
5. Shipping, Packaging and Formalities
   The responsibility of shipping needs to be assigned to one of the parties as agreed by them. Not just the shipping- even the packaging, labelling and preservation of raw materials are of utmost importance and deserves explicit mention in the agreement
6. Inspection of Goods and Records
   The buyer may be allowed to inspect the goods and facilities of the seller at any reasonable time as described in the agreement. Besides, both parties may request for records pertaining to the terms and conditions of the contract
7. Seller’s Warranties
   The obligations and warranties of the seller should be made explicit in the agreement. It may deal with rights of third parties, quality of materials,
8. Validity of the Agreement
   The term during which the agreement shall persist needs to be mentioned.
9. Statutory Requirements
   Certain industries enjoy more freedom in terms of doing business compared to others. Many industries have strict rules to be complied with in order to obtain legal validity for their business. It may be related to pollution, child labour, women’s rights, human rights, among others. The responsibilities of the parties pertaining to the compliances need a mention.
10. Legal Remedies and termination
    The long arms of the law have inscribed solutions to most legal problems that may arise between any two parties. The preferred channel of action may be specified and also the ways in which the agreement may be terminated legally.
11. Indemnification
    Any agreement where two parties are interdependent can lead to losses arising due to any negligence of the other party. This makes indemnification the need of the hour.
12. Independent Contractors
    The exact contractual relationship between the parties can find a mention. This is to avoid ambiguities in future regarding the nature of their relationship as contrasted with principal-agent; employer-employee, etc.
13. Assignment
    Agreements of such nature cannot usually be assigned to third parties. It would be next to impossible to coordinate with another third party due to the lack of capacity of one party in fulfilling their part of the agreement.
    

Besides these listed above, there can be a number of other clauses which further makes it clear about the rights and responsibilities of the parties in detail.

Are You A Manufacturer?

If the nature of your business involves purchase or sale of raw materials, make sure that you are protected from malafide contracts/parties. This can be done by creating legally foolproof documents. If your requirement is a Raw Material Supply Agreement, look no further. All the pre-drafted documents available on LegalDesk are lawyer verified. If you require any customisations, contact our support team who will be able to help you out with it.