International Manufacturing Contracts: The Questions We Ask

Earlier this week, we wrote about international manufacturing term sheets. In a sort-of follow up to that post, I am today writing about the preliminary questions our international manufacturing lawyers ask our clients, when tasked with drafting an international manufacturing contract.

I am doing this post to give an idea of some of the things that go into international manufacturing agreements.

I love it when a blog post just lands in my lap, and one just did. It is a couple of emails from two of my law firm’s international manufacturing lawyers to two different clients, both of whom recently retained us to draft international manufacturing contracts. Both clients are in the process of changing their manufacturers (one is staying in China and the other is moving out) and this time they want strong and enforceable product supply contracts with their new manufacturers.

Since my law firm has a fairly standard initial questionnaire we send to our clients when we working on manufacturing contracts, I have combined the two emails into one, further camouflaging the companies involved.

Here are the questions posed by the emails:

  • What is the name and contact information of the manufacturer?
  • What sort of products will the manufacturer be making? Do you anticipate these products will change over time? Will the volume change over time?
  • Where do you anticipate selling your products? In particular, will you be selling them in the country in which the manufacturer is located?
  • What are you expecting regarding shipping terms?
  • Will you be using this manufacturing agreement only with this specific manufacturer, or will you be wanting to re-use it with others? Will you be wanting to use it with any companies outside this one country?
  • What arrangements will be made for packaging prior to shipment?
  • Are you concerned about your manufacturer going around you by selling a competing product to your customers?
  • Exactly what will you want to be  done with any defective product?
  • Do you have an existing purchase orders (POs) that you intend to use for your product orders from this manufacturer? If so, please provide us with a copy.
  • How are you anticipating pricing and other terms will be negotiated? On a purchase order basis? On an annual basis? Some other way?  If you submit a purchase order and is not accepted by your manufacturer, what happens? In other words, will they be bound for some period to make a certain amount of product at a certain price, or will they only be obligated to make product for you after they accept your purchase order?
  • How many of the deal terms have been negotiated at this point? From the documents you have sent us, it appears only very basic terms have been negotiated: 40% down, 60% before delivery/shipping, plus certain quantity discounts. These are not great terms from your standpoint, but fairly typical for deals with manufacturers in Asia.
  • What sort of arrangements have you made for inspection and quality control, and what sort of warranty terms have you negotiated? This question is particularly important in that manufacturers are increasingly insisting on a no-warranty provision.
  • What are your main concerns in this deal? I ask this both so we can focus on the provisions that matter to you, and because it can help determine the choice of law and the choice of venue. From what I know so far, your main concerns seem to be twofold: (1) getting a high quality product and (2) protecting your intellectual property (i.e., ensuring that the manufacturer does not sell your product behind your back and/or steal your tooling).
  • What exactly is the tooling for this product? Does the manufacturer already have all of the tooling in question? If so, who paid for it?
  • Has the manufacturer already signed any sort of Letter of Intent (LOI)/Memorandum of Understanding (MOU) with you, even if only in English?
  • Are there any unresolved issues involving your previous manufacturer ? For instance: have you gotten all off the tooling back from the previous factory? Are there any outstanding invoices or payments due?

After we get answers to the above questions, we will write you again with a whole slew of follow-up questions.