International Manufacturing Agreements and the Questions We Ask

Our international manufacturing lawyers are constantly drafting manufacturing agreements for countries all around the world. As the first part of that process, we seek to suss out from our client exactly what they are planning to do with their overseas manufacturing and then, based on that, what should go into their manufacturing contract or contracts. The below is an initial email from one of our manufacturing attorneys to a client that had just retained us to draft manufacturing agreements for Mainland China, Taiwan, and Thailand.

I am posting these questions to give our readers an idea of some of what goes into an international manufacturing contract. Please note though that these questions have already been tailored for this specific client and for the specific countries (Mainland China, Taiwan and Thailand) in which it does and will be doing its offshore manufacturing. I mention this because these questions likely include questions that are irrelevant for your international manufacturing and also fail to include some questions that would be relevant. With that small caveat, here is that email:

 

Thanks for your email. As a first shot at the program, I have the following questions:

1. Your memo does not mention solar panels. Will you also be purchasing solar panels in China as part of this program.

2. I note in general: solar panels from China are generally of good quality. The defect rate in the other items you mention is extremely variable.

3. On the trademark. What is the current status? Your trademark should be registered in the PRC. Have you made arrangements for that?

4. For the product you will purchase, we will need to be clear on the ownership of the intellectual property in the product. Your alternatives in general are as follows

a. Off the shelf products (Base Product) designed and manufactured by the Manufacturer/Factory as its own product. The manufacturer owns 100% of the IP and it is free to sell that product to any third party buyer.

b. The Base Product is modified in some way for the Buyer, which then adds its own trademark/logo and/or uses special trade dress or specific colors and/or makes minor surface modifications to the Base Product. In this case, the Manufacturer owns the IP in the Base Product but it agrees not to sell the Custom Product to any third party buyer.

c. The entire IP/design is owned by the Buyer.

d. The Manufacturer and the Buyer co-design the Product. The ownership of the IP depends on the specific agreement of the parties. See International Product Development Agreements: The Basics.

Some buyer companies purchase only one type of item. Other buyer companies purchase all four. What approach will your company use? Since you will be purchasing many types of products from many suppliers, it seems probable that you will have many different alternatives that we will need to deal with.

5. Will all of your manufacturers be either PRC or Taiwanese or Thai entities? Will all of your manufacturers directly manufacture, or will they subcontract part of all the manufacturing?

6. Will custom molds or custom tooling be fabricated for use for some or all of the products. If yes, what is the arrangement for fabrication and payment for the molds and/or custom tooling?

7. Will pre-production engineering be done for the production of prototypes? If yes, what will be the arrangement for fabrication and payment?

8. How will product price be determined? Will you require the manufacturer hold the prices for a specific period? At what point in the relationship will you finalize prices? Our international manufacturing contracts normally provide for prices in a Price List Exhibit.

9. What will be your payment terms? Most PRC/Taiwan/Thailand companies prefer at least 30% down, with the remainder due prior to shipment. Most foreign buyers prefer no down payment, with payment net 60 from receipt at the port of delivery. This is a big difference. Will you agree on payment terms in advance that are the same for every manufacturer? If not, we will provide that payment terms will be set out in the Price List Exhibit.

10. What will be your requirements regarding acceptance of your purchase orders? You have the following two basic alternatives:

a. You are not required to submit any purchase order and the manufacturer is not required to accept your purchase orders. There is thus no actual contract for the sale of goods arises until after the manufacturer accepts your purchase order. Note that under this approach, any agreement on price, quantity, delivery date, etc, is legally meaningless. The manufacturer can require a change simply by refusing to accept your purchase order.

b. The parties agree on price, quantity and delivery dates for a particular time period. You are required to order and the manufacturer is required to deliver per the contract. That means the manufacturer is required to accept any purchase order you submit that meets the agreed requirements. The only issue with respect to acceptance is if you decide to submit a purchase order that does not comply: excess quantity, request for discount and similar. This approach has the advantage of locking your manufacturer to the basic terms. It has the disadvantage of requiring you to make a certain quantity of purchases.

Which approach will you follow? Many companies follow option a. because of the flexibility. However, they usually do not understand that this flexibility allows your manufacturer to modify terms in ways they may not like.

11. What will be your basic quality control program? Inspections at the factory? Somewhere else? What will be the procedure when defective product is identified upon inspection? Repair and replace? Credit against future purchase?

12. Warranty. As you know, many defects are not identified upon inspection, especially when the the failure occurs after the downstream customer has put the product into use. If this happens a lot, it will be a big problem for you and so we should discuss the following questions by telephone:

a. What will be the warranty time period? Will it be the same for all items? One year is common for most of your products, but two years is obviously better.

b. What will be the warranty program? As you know, there are two issues. First, repair or replace of the defective items. Two, cost of dealing with the customer. The second is usually the bigger issue. But the second is what many overseas manufacturers refuse to address.

c. Do you have a standard procedure for this warranty issue?

Please provide your answers to the above. If you need more information in to answer anything above, please contact me. We will begin drafting your first manufacturing agreement after we get clear on the above.