International OEM Agreements: You Are Naked Without a Good Bill of Materials

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Manufacturing agreements between product buyers and their manufacturers typically come with all sorts of clauses dealing with choice of law, indemnification, time of delivery, failure rate, price, payment, and various other contractual provisions. The Bill of Materials can often make or break the success of a manufacturing relationship, but this document is too often either ignored or given short shrift.

The Bill of Materials is a list of the components to be used in fabricating the proposed product. A good Bill of Materials, inserted as an appendix or addendum to an Original Equipment Manufacturing (OEM) agreement, should specify in excruciating detail exactly what your manufacturer must use in manufacturing your product. A well drafted and precise Bill of Materials minimizes the likelihood of confusion and future mistakes, which in turn saves you money by reducing product defects and recalls.

My law firm’s international manufacturing lawyers have seen far too many OEM manufacturing agreements that did not have a Bill of Materials and far too many OEM agreements where the Bill of Materials was not made a part of the contract.  Perhaps even worse, I have seen Bills of Materials that were made a part of the contract, but that allowed the manufacturer to substitute any component in the Bill of Materials whenever it felt like it. There is oftentimes nothing wrong with allowing your manufacturer to make substitute materials with your knowledge and approval, but there is a lot wrong with a Bill of Materials that gives your manufacturer complete discretion to substitute in materials.

When a problem arises, you should be able to cross-reference your Bill of Materials with the actual product to see if the correct components are present. When I see manufactured products with high return or defect rates, the cause is almost invariably the manufacturer having used cheaper components. But far too often, I also find that there was nothing in the OEM contract or in the Bill of Materials (or in the two of them working together) that contractually prevented the manufacturer from having done exactly what it did. Many times the quality of the Bill of Material will determine whether or not you have any recourse against your manufacturer for bad product.

If you want to reduce your chances of defective or dangerous product, you cannot just rely on your manufacturer to do the right thing in terms of your product’s materials or components. It is your responsibility to make sure your manufacturer uses the correct materials in manufacturing your product. A well drafted Bill of Materials is the first step towards that.

For more on international OEM agreements, check out International Manufacturing Contracts: The Basics.