International Manufacturing Agreements: The Basic Terms

Asia manufacturing lawyers

Companies usually call my law firm at the inception of their product outsourcing plans. Our international manufacturing lawyers typically start drafting the manufacturing contract once key terms such as price and quality have been agreed upon between the foreign manufacturer and our product buyer client. If the foreign manufacturer and our client cannot reach agreement on the key terms, there is no need for a contract at all.

Often when we tell our clients it is too early for us to help them with the contract drafting, they will ask what terms in addition to price and product quality they should be trying to reach agreement on with their potential manufacturers.  Yesterday we responded to such a request with the following e-mail:

Here are the basic terms you should be discussing with your potential product suppliers:

  • Products (list of products; whether products will be off-the-shelf, custom-designed, or a combination; exclusivity of products)
  • Pricing (per unit; volume discounts; whether prices are guaranteed for a certain period of time)
  • Payment Terms (amount due; date(s) due; method of payment)
  • Shipment Terms
  • Subcontractors (prohibited, allowed if approved in advance, etc.)
  • Quality Control Procedures (including disposition of defective products)
  • Warranty Terms (length, extent of coverage)

We do not expect you to reach agreement on all of the above before we start drafting your contract, but if you are going to pay us for drafting a Manufacturing Contract for you, we would like to see you advance far enough with your potential manufacturer so there is almost no chance of our drafting you a contract for naught.

Many terms of a product manufacturing agreement are best left to the lawyers. For example, we typically like to discuss various penalty provisions with our clients (only) and then just put them in the draft agreement. Our argument is that if the foreign manufacturer has, for instance, agreed to deliver product in 30 days, there is no reason why it should not also accept some sort of penalty for failing to meet such a term. Penalty provisions can be technical and unpleasant and thus best blamed on the lawyers. The same holds true for the dispute resolution provision.

In our experience, if the product buyer and the product seller can agree on price and quality, everything else almost allows falls into place and the deal gets done. Conversely, without agreement on those two things, there is no point in our drafting anything.

What have you seen out there?

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