Supply agreements

Supply agreements look routine until supply is constrained, at which point a handful of provisions decide who is protected.

Volume. Firm commitment, requirements, output, or a forecast-based arrangement with a binding window. Requirements and output contracts are enforceable but subject to a good faith limit on disproportionate demand. Forecast arrangements should state clearly which portion is binding.

Allocation. A supplier facing shortage may allocate among customers in a fair and reasonable manner. Buyers should negotiate an allocation provision guaranteeing a defined share or priority; sellers should preserve flexibility and define the allocation basis.

Price. Fixed, indexed, or subject to adjustment on defined triggers with a cap and a buyer termination right if exceeded. Open price terms are enforceable at a reasonable price, which nobody wants to litigate.

Term and termination. Notice periods long enough for the buyer to qualify an alternative source; transition assistance and last-time-buy rights on termination.

Quality and rejection. Specifications, inspection periods, revocation of acceptance, and epidemic failure provisions.

Continuity. Business continuity obligations, dual sourcing, tooling ownership and access, and escrow of designs where the component is single-sourced.

Force majeure and change in law allocations, and whether increased cost qualifies.