In the current climate of economic uncertainty, organisations across sectors are looking to drive efficiencies and cut costs. Getting a written manufacturing contract signed can seem like a secondary priority at the outset of a relationship with a supplier or customer. However, the agreement that nobody negotiated before signing can lead to unwelcome consequences. Addressing certain key considerations at the outset can mitigate the risk of unexpected liabilities later.
Do not be tempted to develop a key relationship based on a non binding memorandum of understanding or letter of intent. Make sure all the legal terms are clear and signed. Beware of long term agreements which can be construed as merely an option to purchase or supply in the event of dispute. This could alleviate your supplier or customer of an obligation to deliver on their promises.
Product liability is one of the biggest risks for manufacturers. Consider what promises you need from your supplier and what promises you are willing to give your customer regarding the design, manufacture, function or life of your product? Make sure these align and correspond with your insurance cover. Be aware of the liabilities you can and can’t exclude, particularly if your customers are consumers. Avoid indemnities, which are broad promises to pay in the event something goes wrong.
A well drafted contract will spell out who owns the intellectual property (IP) rights that are incorporated into the product or used in manufacture. If you will not own IP that is critical to a product, you must have adequate exploitation rights, or you could find yourself hostage to the owner of the IP or responsible for payment of royalties.
If your product requires particular tooling or packaging, establish who will pay, especially if the tooling or packaging needs to be refurbished or replaced. Assumptions about costs can erode margins.
Change creates risk, and in manufacturing, changes are abundant. It’s not just fluctuations in currency and raw material pricing. It can also be adjustments to shipping charges and delivery schedules, industry wide regulation and product specifications. Make sure your contract gives you a clear process to accommodate change, by re-negotiating prices, amending specifications and passing through increases in supply chain cost if you need to.
Often manufacturers are required to provide spare parts and servicing for extended periods. The agreement you offer must match the agreement you can obtain from a supplier. Your contract must define each party’s responsibilities regarding servicing and spare parts, including such matters as tooling refurbishment, service literature, special packaging obligations and pricing.
Manufacturing agreements are often long term. Predicting the future at the outset of a relationship is very difficult. Forecasts can prove inaccurate, the profile of products change, commodity prices fluctuate. Sometimes you can renegotiate pricing, but it’s important to understand the termination options that exist in your contract. Can either party terminate for good cause, bad cause or no cause at all? What rights do each of you have in the event of a termination? Do not overlook the force majeure clause. If widely drawn, this can provide an “easy out” for a supplier in a wide range of circumstances.
Large companies have specialist teams of in house lawyers to assess and manage risk. Smaller manufacturers are more exposed when trying to navigate contractual negotiations. If in doubt about any aspect of your manufacturing contract, Holmes & Hills' team of manufacturing lawyers is here to provide specialist advice and guidance.
A Mackman Group collaboration - market research by Mackman Research | website design by Mackman
