Legal Counsel for Food Supplier Agreements
The Food Law Firm will work with you to draft supplier agreements that mitigate risks and better position your business for success. Contact us today to get started.
What Are the Different Types of Supplier Agreements?
Supplier agreements are a class of agreement that regulates the sale of goods between one party and another. This class of agreement can be very broad, potentially encompassing the following types of transactions:
- Retail Supplier Agreements: The agreements that major retailers like Kroger and Whole Foods require from manufacturers before they let the manufacturer’s goods onto the shelf.
- Bulk Supplier Agreements: Producers of raw ingredients and bulk commodities have agreements with manufacturers to whom they sell. These are the purest form of supplier agreement and generally only discuss major warranties, product specifications, and business points like delivery dates and payment terms. There is not generally much room for negotiation and they are not in the business of sharing any more risk than they have to. The only “heavy lift” document in a Supplier Agreement like this is the “product specification”, which is the detailed, objective description of the product to be purchased.
- Manufacturing Supplier Agreements: This includes co-packer agreements and private label agreements. These are also types of supplier agreements because they are contracts for the purchase of goods. For food businesses that use contract packing, a manufacturing supplier is at a pivotal point in the production chain.
Don’t think of supplier agreements as individual obligations between two parties. In the food system, supplier agreements are links in your production chain. A product marketer will sign supplier agreements down the chain to retailers, then back up the production chain to manufacturers and ingredient suppliers. A business leader needs to be able to spot the weak links and then make the entire chain stronger.
How Do Supplier Agreements Affect the Food Business?
A good retail supplier agreement puts maximum responsibility onto the manufacturer or marketer for all legal liabilities. Big retailers understand that it’s a privilege to get access to their customers, and this reflects in their supplier agreements. The bigger the retailer, the more oppressive the terms will be for the food business. The terms are usually non-negotiable, “take it or leave it” deals. In these agreements, food businesses routinely agree to things like recall expenses, which is a potentially huge liability.
If a food business sells ingredients or commodities, the “bulk supplier” agreement needs to address a few basic warranties. It also needs to clearly describe the characteristics of the product to be sold, in as much detail as possible. The document used to describe the product is called the “specification” or just a “spec”. The details in the spec set the commercial expectation of the buyer.
Things get very interesting, though, for food business that leverage manufacturing supplier agreements. Food companies usually agree to anything to get onto retail shelves. They sign the “take it or leave it” deal presented by the retail supplier agreement and take on all the liability that comes with it. What they often fail to understand is that they are relying on co-packers and suppliers to perform to the very high standards set by the retailer. It is therefore essential to consider how manufacturing suppliers and bulk suppliers create risk and how they can participate in mitigation.
Right in the middle of these relationships stands the food business with a product to sell. There is clearly an imbalance of liability between the different supplier agreements, and the imbalance creates risk for the food business that are pinched in between retailers on one side and manufacturers and suppliers on the other.
How to Manage Supplier Agreement Risks
The risks are manageable if you know what you are doing. The solution is systemic. Most of the tools you have to address the risk are contractual. Here are the steps we recommend:
- Know that the retailers set the standard for risk management in your chain. A well run food business is going to audit its retail supplier agreements and put all of its liabilities into a stack. Retailers require things like minimum levels of insurance coverage, third party food safety audits, food safety documentation, and recall insurance or recall expenses. Once you’ve identified the full spectrum of liability, you can start to push the liabilities onto other parties in the chain.
- Vet suppliers and buy from reputable companies. Bulk supplier agreements will generally contain very lean warranties. Take a close look at the Specification Sheet for each ingredient you are purchasing. The objective product criteria described in the Spec essentially define the scope of your warranty. Look for unambiguous promises about the product. For example, if you need a gluten free flour for your product, the Spec is where you will see the warranty that the ingredient does not contain gluten.
- Use strong copacker agreements. If you have set up your copacker with the right supplies, the co-packer agreement ensures follow-through by the manufacturer. Essentially, the obligations of the copacker should mirror as closely as possible the obligations imposed by the retailer’s supplier agreements.
- Consider recall insurance. Product recalls are a real probability even when companies are focused on the risks. However, it is not uncommon for retailers to give themselves the unilateral ability to recall your product and send you the bill.
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