Supply Agreement in Saudi Arabia: Key Clauses and How to Draft It Properly

A supply agreement is a contract under which the supplier undertakes to deliver specified goods or materials to the buyer, either once or in successive instalments, in return for an agreed price. The strength of the agreement depends on how precisely it sets out the specifications, quantities, delivery dates and inspection and acceptance procedure, because these are the most common points of disagreement between the parties.

When do you need a supply agreement?

You need one whenever the relationship with the supplier is ongoing or of significant value, for example:

• Supplying raw materials to a factory or workshop.
• Supplying products to an online store or a chain of shops.
• Supplying food to restaurants and hotels.
• Supplying equipment and machinery to projects and facilities.

An invoice or purchase order on its own is usually not enough for a long-term relationship, because it does not deal with delays, defects or price changes.

What are the key clauses in a supply agreement?

1. Identification of the parties and their capacity: legal details, commercial registration (CR) and who represents each party.
2. Subject matter: a description of the goods, their technical specifications, brand and country of origin where needed, ideally with a detailed technical annex.
3. Quantities: are they fixed, or set by periodic purchase orders? What are the minimum and maximum?
4. Prices: are they fixed for the term of the contract or subject to review? Do they include transport, insurance and tax?
5. Delivery: the place and date, who bears transport costs, and when risk passes to the buyer.
6. Inspection and acceptance: the inspection period after arrival, the right to reject a non-conforming shipment, and how non-conformity is proved.
7. Payment: instalments and due dates, and the documents required for payment, such as the invoice and delivery note.
8. Warranty: the warranty against defects and its duration, and the supplier's obligations to replace or repair.
9. Delay and breach: the penalty clause or compensation, and the right to buy from an alternative supplier at the defaulting supplier's expense.
10. Term, renewal and termination.
11. Force majeure and dispute resolution.

How do you protect yourself as the buyer?

• Require a right of inspection before final acceptance, and do not sign a final acceptance certificate before checking.
• Link payments to actual delivery that conforms to the specifications.
• Include a right to source from an alternative supplier if the supplier's delay harms your business.
• Ask for appropriate guarantees if the contract value is large or there is an advance payment.

How do you protect yourself as the supplier?

• State clearly when the buyer is deemed to have implicitly accepted the goods if it does not object within the inspection period.
• Include a price review clause for when costs change materially, especially in long-term contracts.
• Set a cap on your liability and exclude indirect losses such as loss of profit.
• Reserve the right to suspend supply if the buyer is late in paying.

It is also advisable to appoint a representative for each party to receive notices and approve purchase orders and delivery records, and to state the approved method of notice, such as email or the National Address.

Should you choose a framework agreement or a contract for each deal?

If purchases are recurring, it is usually better to sign a framework agreement containing the fixed general terms, such as quality, warranty, payment, liability and dispute resolution, and then issue later purchase orders setting the quantity, price and delivery date for each batch. This saves time and avoids renegotiating every time. If the deal is a single large transaction, such as supplying equipment for a particular project, a detailed stand-alone contract may be more suitable, with a timetable for delivery, installation and commissioning where relevant.

In either case, the contract should set out the order of precedence between documents: the main agreement, then the technical annexes, then the purchase orders. This prevents anyone relying on a term printed on the back of a purchase order that contradicts what was agreed in the contract.

What are the recurring mistakes in supply agreements?

The most frequent are: relying on a general description of the goods without a technical annex, not specifying when risk passes, overlooking how partial shipments are handled, and not stating whether later purchase orders are subject to the framework agreement's terms or to their own. Another mistake is relying on scattered correspondence to change prices or quantities without an annex signed by both parties. These small gaps turn into costly disputes. You can use our contract drafting and review service to build a framework agreement suited to your supply chain.

Frequently Asked Questions

Q: What is the difference between a supply agreement and a sale contract? A: A sale contract is usually a single transaction, whereas a supply agreement is characterised by continuity and delivery in instalments over a period of time, so it needs clauses that govern an ongoing relationship.

Q: Can the supplier raise the price during the term of the contract? A: Not unless the contract provides a price review mechanism or the parties agree to the change in writing.

How can we help?

FATIMA AL ASMARI Law & Intellectual Property Company in Jeddah drafts and reviews supply agreements for suppliers and buyers across all regions of Saudi Arabia. Contact us or call +966 56 685 9556 to discuss your contract.

Legal sources

This article is for general awareness and is not legal advice.