Everybody these days seems to want a template international manufacturing agreement. But because international manufacturing agreements must be particularized for each country, each product, and each product buyer’s specific situation, template international manufacturing agreements rarely work at all.
1. Template Manufacturing Agreements Rarely Work.
A couple weeks ago, I did a blog post explaining why our China lawyers do not draft template China manufacturing agreements. I came up with the idea for that post after being cc’ed on an email from one of our international manufacturing lawyers to a client:
I thought about [China Template Manufacturing Agreements] . . . today after reviewing an email from one of our international manufacturing lawyers to a client on which I was cc’ed. The email was the third or fourth email between this lawyer and this client regarding the client’s manufacturing agreements, and yet our manufacturing lawyer was still trying to get more information and clarity from the client before beginning work on the initial draft of the Contract Manufacturing Agreement the client wanted.
I repeat: the initial draft version. In other words, once this lawyer gets the answers sought, the next step will be to generate an initial draft and then the client will review that and then this lawyer will generate another draft of what may be the final version. After that, one of our lawyers will then take the English language version and write it in Chinese.
I defy anyone to read the above and the below and then contend that an off the shelf, one-size fits (or usually doesn’t) Contract Manufacturing has any value at all.
2. Good Manufacturing Agreements Match Each Client’s Specific Situation
That blog post discussed various complicated issues on which our manufacturing lawyers were working to resolve with the client so we could finalize its China manufacturing contract. I write yet again today on the sort of information required before our lawyers can even start drafting an international manufacturing contract, and I again use an email to a client as my starting point.
The big difference between this latest email and the one I wrote about in my previous blog post is that this email poses initial questions to the client involving a complicated, though absolutely typical, international manufacturing relationships. This particular situation involved an American company with a cutting edge and very expensive product, and a customer base to which it did not want its manufacturers selling directly. This client is extremely concerned about protecting its product and its customer base from its overseas manufacturers. The fact that our client gets its products from suppliers in many different countries (including from suppliers with facilities in multiple countries), further complicates its situation, especially since our goal as their lawyers is to create a “template” agreement that requires only minimal modifications for our client to re-use with all of its suppliers.
3. Template International Manufacturing Agreements That Work
There is though a big difference between the template international manufacturing agreements our lawyers provide to our clients and those sold online by non-lawyers and fake lawyers for general use. See China Contract Drafting Scams: From Bad to Much Worse. The template international manufacturing agreements our manufacturing lawyers draft are the initial contract for a specific client, with a specific product, in a specific situation.
Though we then use this initial contract for future contracts for this same client, we do so only after we have reviewed and revised “the template” international manufacturing agreement for each new supplier. So if our template international manufacturing agreement is for China and we are then tasked with creating a manufacturing agreement for Mexico, we modify the template international manufacturing agreement to make it work for Mexico. And if our client is subsequently buying a different (or even slightly different) product, our manufacturing lawyers will first figure out whether and how to modify the contract provisions regarding quality control, liquidated damages, dispute resolution, IP, delivery date, inspection, etc., for the new contract.
4. The Initial Client Email
Rather than me talking more about what our manufacturing lawyers do to tailor-make our manufacturing contracts to fit the specific situation our clients might face, I will simply post below another email to a client that further highlights how particularized manufacturing contracts must be to protect product buyers. The following is that initial email [modified slightly to hide anyone’s identity]:
As we discussed, our plan is to first draft a manufacturing agreement with your Shenzhen factory and then use that agreement as a template for the additional agreements you will need.
Please answer these preliminary questions and then we can dig into details:
1. What products will you be having made by what factories and what are issues most concern you? Price, quantity, quality, delivery date, IP, warranty and related.
2. We need to determine what entity should be party to the agreement. We understand you get your products from a Mainland China entity that owns (or claims to own) factories in Southeast Asia. To what entity do you send the purchase order? To what bank do you make payment? From what port are the products shipped? Note that place of payment is important. It will be difficult to enforce an agreement against your Shenzhen factory if you pay a Hong Kong entity for your products. The same will be true if you do not pay the Malaysian entity that actually makes your products.
3. Your primary concerns are controlling confidential information and preventing suppliers from selling directly to your customers. Note that controlling confidential information and preventing circumvention requires your contract be with the party you want to control. A contract with Chinese Mainland Company X does not control the actions of Malaysia Company Y.We need to know who does what so we can make a plan to control the situation. This may require more than one agreement.
4. What is the IP status of your products? There are four basic types and each type usually requires different treatment in the manufacturing agreement:
1.) Base Product. This is off the shelf product where the factory owns the IP.
2.) Custom Product: This is base product modified to meet your specific needs. The factory owns the underlying IP but it cannot sell your custom product.
3.) Buyer Designed Product: You own all IP in the product and the factory is prohibited from selling this product to anyone other than you.
4.) Co-Designed Product: You and your factory designed the product together. Your manufacturing agreement should set out exactly who owns what IP. I suggest you read International Product Development Agreements: The Basics for more information on co-designed products.
5. Once we are clear on the above, we will ask additional questions that will enable us to draft a manufacturing agreement customized to your specific situation/needs. This manufacturing agreement will address all fundamental issues in your product purchasing program.
We look forward to hearing from you soon on the above.