This manufacturing agreement is for use by a company selling goods that requires a manufacturer to make those goods or, perhaps, components to be included in the company’s goods.
As a template, this agreement contains a number of blanks and some items in [square brackets]. Before finalising the agreement for signature, you should fill in the blank spaces and remove the square brackets after making whatever adjustments are appropriate for you. Many of the square brackets contain time periods that you may want to alter.
At the beginning of the Agreement the full name of the Company and Manufacturer should be inserted and, in the case of a limited company, its registered office or other official address.
This clause contains certain defined terms.
Clause 2 specifies the initial term of the agreement as six months, and then continuing for successive 6 month periods until terminated by the Company on one month’s notice expiring at the end of a six month period. These periods will need to be negotiated in each case. The nature of the Agreement requires that the Manufacturer has a degree of certainty to allow forward ordering of raw materials etc.
It is expressly stated that the Company is free to contract with other manufacturers in respect of similar products.
3. ORDERS FOR PRODUCTS
Clause 3 deals with the procedures for placing and confirming orders and makes it clear that each order is governed by the Agreement unless the parties agree otherwise. In order to ensure that there is clarity and certainty, each Order is treated as a separate contract requiring an express confirmation or acceptance by the Manufacturer.
4. OBLIGATIONS OF MANUFACTURER
Clause 4 sets out the obligations of Manufacturer including both “generic” obligations (such as compliance with orders, fitness for purpose and adherence to legal/regulatory requirements) and “specific” obligations such as a requirement to deliver within a set time scale and the maintenance of product liability insurance.
5. INSPECTION & TESTING
Clause 5 reserves a right for Company to inspect Manufacturer’s works, to inspect products in situ and to have its customers visit the works. While it can be helpful for both parties to have occasional visits planned in advance, if Company demands visits on little or no notice, this can meet with resistance and might weaken the mutual goodwill necessary for any long term commercial contract. Care in structuring these arrangements is recommended.
Clause 6 contains some relatively straightforward provisions relating to delivery: packaging, delivery and liability for the condition of the Product is the responsibility of Manufacturer and Company’s acceptance of delivery does not constitute acceptance of the products (see clause 7).
If the Manufacturer does not accept responsibility for delivery, the clause will need to be altered and some wording inserted that the Products are to be collected by Company from Manufacturer’s works and that Manufacturer will store all Products safely and mark them as Company’s property pending collection.
Clause 7 allows for Company, within an agreed timescale, to inspect delivered Products and formally to reject or require replacement (again within an agreed timescale) of Products that are not in accordance with either the Agreement or the specific order. Manufacturer is liable for Company’s wasted costs/losses arising from rejection/replacement. The timescales will need careful commercial consideration and will largely depend upon the type and complexity of the Product.
Company should expect detailed negotiation as to the precise scope of the liability to reimburse the wasted costs/losses. As drafted, the liability is widely drawn and open-ended. Manufacturer may insist upon either a capped liability per delivery or carefully specified types of loss only.
8. WARRANTY & INDEMNITY
Clause 8 provides for a 12 month warranty in Company’s favour in respect of delivered Products and a rather widely drawn indemnity in favour of Company. Company should expect some detailed negotiation in respect of the indemnity: although an indemnity does not widen the scope of legal liability, its objective is to ensure that Manufacturer makes good all costs and losses incurred by Company.
9. PRICES AND PAYMENT
Clause 9 is fairly straightforward and gives details of what is included in the Product price, review of prices and time for payment. There is also provision for payment of interest on overdue payments. Generally the rate of interest will be linked to Base Rate and the underlying objective is to cover the cost of borrowing if payment is late. An alternative approach is to rely on the statutory right to interest under the Late Payment of Commercial Debts (Interest) Act 1998. That Act allows for interest at around 8% above Base Rate which is a lot higher than most companies would want to pay . Although it is always useful to have a provision to deal with late payment, there are often sound commercial reasons for a party not to insist on its right to claim interest on late payment.
Clause 10 deals in some detail with procedures relating to variations of Orders requested by Company. It is essential for both parties to work within a set timescale and for Company’s final decision to be made only after any the cost/late delivery implications are made clear by Manufacturer.
11. INTELLECTUAL PROPERTY
Clause 11 protects Company’s Intellectual Property Rights from possible misuse by Manufacturer and incorporates a widely drawn indemnity in Company’s favour in relation to any losses attributable to Manufacturer’s breach. It is possible that Manufacturer may demand that the clause is revised so as to be of mutual effect. Note that liability and the related indemnity are expressed to continue in force after termination: this reflects the continuing importance of protecting Intellectual Property Rights.
Clause 12 sets out a fairly standard confidentiality provision benefiting both parties but slightly biased to the interests of Company. Note again that this clause is expressed to continue after termination.
Clause 13 deals with the matters that entitle either party to terminate the agreement early, namely material breach or insolvency of the other party. The respective obligations of the parties are also set out: orders have to be completed, outstanding monies paid and there is an option for Company to buy Manufacturer’s Products and raw materials held in stock at cost price. The nature of the Products manufactured and the state of the relevant market could mean that Manufacturer will hold out for a cost plus formula.
Clause 14 contains standard miscellaneous contractual provisions. In particular note the prohibition on assignment/appointment of sub-contractors. The words in square brackets oblige a party faced with a request to permit assignment/appointment of a sub-contractor to deal promptly and reasonably with a request: it will need to demonstrate an objectively sound business reason for refusal (e.g. where the skill/reputation of Manufacturer was a crucial factor in Company seeking to establish a commercial relationship). If you want an absolute right to refuse permission for assignment or subcontracting, you should delete the words in square brackets in clauses 14.1 and 14.2.
Although ultimately the courts are to deal with any disputes arising from the Agreement, there is an obligation in clause 14.6 on the parties to attempt to resolve disputes through direct negotiation first. The possibility of having a technical dispute referred to an expert is also included. Our website has free information on dispute resolution clauses.