Manufacturing Agreements

What is a Manufacturing Agreement?

Manufacturing agreements are between a manufacturer and a customer for the manufacture of goods or products. Whilst it could be of the position that the customer is looking to purchase the manufacturers standard products, more often than not, this type of agreement is more suited to where a customer has designed / developed a product and they now require a third party to mass manufacture and supply that product.

What terms should be included in a Manufacturing Agreement?

A manufacturing agreement should set out the key obligations of the manufacturer and the customer. Depending on whether you are the manufacturer or the customer may result in you having different requirements from the agreement, most agreements should address the following as a minimum :

• the various details, specifications and technical descriptions of the goods the manufacturer will make;
• the commercial terms applicable to the agreement (e.g. the length of the agreement and the price and payment terms); and
• provisions in respect of, inter alia, technology, equipment, ownership of intellectual property rights, warranties and indemnity provisions.

The manufacturer, due to the amount of time and resources required to manufacture the products, may require some form of volume commitment from the customer, whether that is on a monthly or annual basis. In addition to this, to help the manufacturer plan ahead, an easy to follow forecasting system should be put in place.

In addition the following key terms that should be considered for inclusion:

Order process

• Regardless of whether minimum volumes and/or forecasting provisions are agreed, the parties should consider the process for placing orders whilst understanding the point at which these orders may be accepted or rejected.

Lead Times and Delivery

• Many manufactures don’t commence with manufacturing until firm orders are received, however, it is important to consider the lead time of the product – that is the time it takes from the order being accepted up until delivery.

Intellectual Property Provisions

• When a party is purchasing manufacturing services, it is vital that their intellectual property relating to the product are protected to ensure that the manufacturer only uses it for the specific purpose. An agreement can also go further in protecting who owns the rights to improvements to the product.
• It is also crucial that the use of any third party’s intellectual property has been considered and whether there are sufficient agreements enabling the use of their intellectual property.

Confidentiality

• The inclusion of a non-disclosure or confidentiality clause within the agreement can ensure safeguarding of information relating to the product and the business which may be disclosed during the transaction.

Quality Control

• The expectations of the parties on the quality of the product should be defined prior to manufacturing. This can include expected timescales, production targets and ability to inspect the manufacturers workplace if required, as well as any quality control procedure that either party may need to implement to demonstrate compliance with any applicable specification.

Price

• Manufacturing agreements often continue for a number of years and as a result costs relating to raw materials, labour, utilities and delivery may change. Equally, if the parties are working on establishing efficiencies, costs may reduce. Therefore, during a long-term contract, it is not unreasonable to include provisions that enable a party to alter the price.

Liability

• As with all transactions, there is an element or risk when entering into the contract. The parties can look to reduce the risk and limit their exposure by including appropriate terms to limit their liability and exclude certain heads of loss and damage.

How can we help?

No two manufacturing deals are ever the same. Manufacturing can be complex so the drafting of an agreement can be just as complex. It is important in ensuring smooth business that the legal consequences are properly negotiated and drafted. We, at Berry Smith, consistently draft, advise and review manufacturing agreements for our clients.

If you have any queries or need any assistance relating to terms and conditions, please do not hesitate to contact us at commercial@berrysmith.com or on 029 2034 5511.