A Brief Introduction About the Multi Year Contract
The multi year contract definition says that it is a long-term contract that extends beyond a year.
With normal contracts with vendors that are made on a yearly basis, there is a kind of insecurity felt by vendors regarding the renewal of the contract and disruption in their income.
It is for this reason that this contract is entered into with the vendors in order to offer them some financial stability. They will not have to worry about renewal or look for new contracts.
Who Takes the Multi Year Contract? – People Involved
A common multi year contract example would be the railroad rolling stock industry where the seller of rail cars agrees to provide the required labor and equipment to help the buyer manufacture the cars.
Purpose of the Multi Year Contract – Why Do You Need It?
When it comes to goods and services supplied by vendors, you have numerous choices. In order to get your business, the vendors are ready to offer attractive discounts on the contract price.
However, this becomes a reason for concern for your existing vendor. They are always under pressure that you might perhaps switch to another vendor. This would mean that their income flow would be affected, and they would have to start looking for new customers.
If you are satisfied with the quality of goods and services provided by your existing vendor and feel that you would like to continue with them, you can enter into this contract with them.
[ Also Read: Supply Agreement]
Contents of the Multi Year Contract – Inclusions
The contract should contain all the required information as well as the clauses to protect the interest of both parties.
The information included in this contract is as follows:
- The effective date of the agreement
- The name of the parties to the contract, the buyer and the seller
- The tenure of the contract
- Scope of work
- Minimum purchase order
- Right to cancellation
- The escalation in the purchase price or current market price
- Modification of the order
How to Draft the Multi Year Contract?
Points to Consider While Preparing the Agreement
Multi Year Contract should be drafted in accordance with the laws of the state relating to such contracts.
Here are the points to be kept in mind when drafting such contracts:
- Eligibility of parties to the contract
- Consideration for the contract
- Contract terms
- Confidentiality clause
- Dispute resolution clause
- Termination of the contract clause
- Adherence to governing law
- Signing of contract
Before entering into this contract, the buyer should find out the rates offered by different sellers and offer the contract to the seller providing the best terms and conditions.
The seller should factor in inflation and see if the offer made by the buyer is at par with that or not. If the price is not at par, then they should negotiate with the buyer for a mutually agreed price.
Benefits & Drawbacks of the Multi Year Contract
The benefits of this contract are as follows:
- Interests of both parties: Both parties know that their interest is protected. The seller knows that they will be paid the inflation-adjusted price over the period of the contract subject to meeting quantity and quality standards. The buyer is assured of the uninterrupted quality of products and services over the period of the contract
- Procurement benefits: The buyer will get substantial discounts and can form strategic partnerships with the seller for higher gains
- Flexibility: The buyer can decide to reduce the units ordered by informing the seller in advance. The seller can modify the delivery schedule accordingly.
Here are the drawbacks of this contract:
- High procurement costs: The buyer will not be able to negotiate a discounted rate with the seller as there is no incentive on the part of the seller to provide any discounts
- Wastage of time and resources: The buyer will have to search for a new seller every year, and this will result in considerable losses
- Non-optimal selling price: The seller will not be able to quote the optimal selling price keeping in mind inflation as every time they will have to negotiate with a new buyer
What Happens in Case of Violation?
These contracts are entered into by buyers who need a reliable supplier for more than a year and sellers who need a buyer who will provide them with long-term business opportunities.
There are 5 remedies available to the parties to a contract in case of violation:
- Money damages
- Specific performance
This contract can provide huge benefits for both parties to the contract. The buyer can rely on the seller for the provision of goods or services at the required quality, and the seller can rely on a regular income stream over a longer duration compared to an annual contract.
In order to protect the interest of both the buyer and the seller, the contract needs to have certain clauses.
A non-disclosure clause should be incorporated to ensure that neither party shares information obtained through the contract with a third party.
The parties to the contract should protect each other from any sort of loss, damages, or costs (attorney fees) through the indemnification clause.
The severability clause(1) ensures that even if any provision under this contract is rendered invalid under the applicable law, then the remaining provisions shall be valid and hold good in a court of law.
Both parties to the agreement must read all the terms and conditions before signing the agreement.