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Explanatory Notes
Manufacture & Supply Agreement
EXPLANATORY NOTES This 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. 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. Clause 2 specifies the initial term of the agreement as 6 months continuing to run automatically for successive 6 month periods until terminated by the Company on 1 month's notice expiring at the end of a 6 month period. Although at first sight apparently inflexible, 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. 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. 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. 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. This may be a sensitive area and the negotiation of the detail of this clause will require diplomacy: in particular an insistence upon unannounced visits or visits at very short notice may give an impression of bad faith and even if agreed to might weaken the mutual goodwill necessary for any commercial contract to deliver. 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 form Manufacturer's works and 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 to formally 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. 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, it does make it much easier for a party claiming loss to recover that loss. 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 late payments that were properly due. Generally the rate of interest will be linked to Base Rate: as a rough guide (and in certain industries different considerations may apply) the suggested figure of 2% above Base Rate would be at the lower end of what might be considered reasonable (anything much above 4% above Base Rate would generally encounter resistance. Although always useful to have such a provision (a much higher figure would be written into such an agreement by the courts) there may often be sound commercial reasons for a party to waive its rights to 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 cost/late delivery implications are made expressly clear. 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/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 protection of confidentiality 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 earlier than by giving 1 month's notice to take effect at the end of each 6 month period (see clause 2): material breach and insolvency. The respective obligations of the parties are also set out: orders to be completed, outstanding monies to be paid and 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 may mean that Manufacturer will hold out for a cost plus formula. Clause 14 deals with 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 14.1 and 14.2. Although ultimately the courts are to deal with any disputes arising from the Agreement there is an obligation in 14.6 on the parties to attempt to resolve disputes through direct negotiation first and then through mediation. The possibility of having a technical dispute referred to an expert is also included. Our website has more information on dispute resolution clauses.
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