Here in Asia, it’s surprising how often technology companies will team up with a business partner and commence manufacturing, with no contract in place, placing trust in a few emails, oral conversations and purchase orders. I know, because they will then come to me, after problems have arisen, with questions about their legal rights. Regardless of whether the manufacturer is an ODM, OEM or contract manufacturer, much risk and uncertainty can be eliminated if the parties will first negotiate and sign a basic manufacturing agreement.
Below are a few key terms that may be clarified in such agreements.
Product and Pricing. Naturally, the agreement should include precise descriptions of the product, packaging and pricing, including design, specifications, materials, components, logos, and so forth. Such items are best described in addendums to the agreement, so they may be easily modified as needed. The agreement may also describe the process for making any price adjustments.
Quality and Inspections. The agreement should specify all governmental, environmental, industry, compatibility and customer quality requirements to be complied with, as well as required testing and certifications. It may permit quality audits by the customer (the customer may outsource that task if needed) and should clearly describe inspection rights and remedies for non-conforming products.
Forecasts and Volume. The manufacturer will want binding, rolling forecasts and a guaranteed minimum purchasing volume. The customer will typically provide only non-binding forecasts and will refuse to commit to a particular volume. Various compromises are possible.
Orders & Delivery. The agreement should describe placement and acceptance of orders, minimum order quantity, delivery terms, and respective rights and remedies concerning cancelation, modification or re-scheduling delivery of orders, all prime areas for potential disputes.
Intellectual Property. The agreement may state that each party’s Background IP shall remain its own property and may place restrictions on use of the customer’s trademarks and trade names.
Warranties and Indemnification. Usually, the manufacturer will be required to warrant that the goods comply with the specifications and are free from defects, and to provide spare parts and service for a certain period. The manufacturer will also, typically, agree to indemnify the customer in the event any goods are accused of intellectual property infringement. Such provisions are critical, but both parties have substantial room for negotiating the exact terms and any exceptions.
Term and Termination. The agreement should allow for termination immediately in the event of bankruptcy, or after a certain notice period in the event of default. The challenge is allowing for termination at will, while providing the other party with reasonable protection against resulting damages. In particular, the manufacturer may demand compensation for long lead-time parts or un-purchased inventory that fell within the customer’s forecasts.
Dispute Resolution. As with all contracts, the agreement should specify jurisdiction, venue, governing law and possibly alternative dispute resolution procedures in the event of a dispute.
The above list is not comprehensive, but just a sampling of important issues that may be nailed down in a manufacturing agreement, to simplify the resolution of future disputes. Once the business people reach agreement on the key points, they should call in Legal to ensure that all is stated clearly in an agreement and nothing is missed.
Finally, as the business team will be eager to move forward with the manufacturing, Legal should follow up to ensure that both parties sign the agreement and it is filed in a secure location.
Is there anything you’d like to add? Your comments are always welcome.
For legal assistance, please contact our Taiwan business attorneys.