International Manufacturing Contracts: The Basics

China manufacturing contracts

The below is an email from one of my law firm’s international manufacturing lawyers to a client we helped with its manufacturing contracts in multiple foreign countries (Thailand, Malaysia, Vietnam, India, China, Poland and Mexico).

I am running this email here (revised slightly to hide any identities) because it nicely sets out some of the important considerations/issues to consider when drafting an international manufacturing agreement:

1. We need to determine whether the agreement with your manufacturers will be exclusive or nonexclusive. It appears you want to give at least some of them an exclusive right to manufacture a certain subset of your products, with other companies having the right to manufacture other of your products. Please confirm our understanding is correct.

2. We need to determine the manufacturers’ obligations to sell. There are basically two alternatives. The foreign manufacturers are obligated to produce product under any purchase order you submit and their failure to produce at the agreed price would be a default. On the other hand, you would then almost certainly be required to purchase a minimum amount of product during a specified time period. This approach is best if you want to guarantee supply and you want to hold your manufacturers to their price commitments.

Or, we draft the agreements to obligate your manufacturers to produce product only for those purchase orders it accepts. In other words, they will have the right not to accept Purchase Orders, at their discretion. The advantage of this to you is that it will not require you to purchase any specific amount of product. The disadvantage is that there is no guarantee of supply and there is no way to hold your manufacturers to any price commitment.

3. Your old agreement provides for specific ports of delivery. However, if you will have multiple ports and delivery locations within some of the countries in which you will be getting your product, we should draft some/all of the agreements to provide that the port/delivery location will be specified in the Purchase Orders and we will remove this reference to specific ports from the agreements where this will make sense.

4.  Your payment terms provision is very favorable to you, since it provides for payment 30 days after inspection, not 30 days after shipment. If you will provide for payment 30 days after shipment, you will need to determine when you will inspect the product. It is best to have inspection before payment, but this is not always practical.

5. We have not yet specified a warranty period. The normal period for products like yours in most countries is usually two to three years from date of shipment. Two year warranties are common because the assumption is that the product will be sold sometime in the first year after shipment from China.

6. In the trade secrets/IP protection provisions, we have provided for a monetary penalty for breach that will vary depending on the country, though for all countries we have set it up so that there will be both a lump sum penalty and a percentage of sales penalty. We write these penalties to be large enough to cause concern for the manufacturer, but not so large as to scare them into not signing.

7. The tooling provisions provide for a series of lump sum penalties. Tooling disputes are quite common in international manufacturing and we have found these provisions effective in dealing with this issue. Manufacturers commonly refuse to return tooling and the most effective way to control this is to provide for a significant lump sum penalty for such a refusal.

8. This agreement is written to favor you but be fair.

9. This agreement requires you prepare the following exhibits to provide for the variable and technical provisions of the manufacturing arrangement:

    • A list of products
    • Performance criteria (specifications)
    • A product pricing method
    • A quality control and inspection procedure
    • A customer “no contact” list
    • A tooling List
    • A Purchase Order

We can assist with drafting and translating these Exhibits as necessary.

What goes in your international manufacturing agreements?

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