Internationale Fertigungsaufträge: Die Grundlagen

International Manufacturing Agreement

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International contract writing is complex. A good contract will ensure that your foreign manufacturer meets your requirements and protect your company when things go wrong. This post can help you understand what goes into the drafting of an effective international manufacturing agreement.

International Manufacturing Agreements

Our international manufacturing lawyers use a fairly standard initial questionnaire when working on manufacturing contracts. We send out the questions and review the responses before we begin drafting the manufacturing agreement to ensure we address all our client’s concerns.

The below is usually our starting point in terms of what our manufacturing lawyers need to draft an effective cross-border manufacturing agreement:

  • Exclusivity: You will need to decide whether the agreement with your manufacturers will be exclusive or nonexclusive. Exclusive agreements can either limit your ability to work with another partner or limit your manufacturing partner’s right to work with other buyers.
  • Manufacturer’s obligations: You have two choices. Either your manufacturer is obligated to make product for any purchase order (PO) you submit, or we draft the agreements to make product only for POs your manufacturer accepts.
  • Delivery: If you will have multiple delivery locations within some of the countries where you get your product, we need to draft some or all of your agreements to provide that each PO will specify the port or delivery location that makes the most sense for that particular PO.
  • Payment terms: It’s best for the agreement to provide that the payment will follow an inspection, but this isn’t always practical. If you will provide for payment 30 days after shipment but before an inspection, you will need to determine when you will inspect the product based on anticipated delivery.
  • Warranty period: The normal warranty period varies for each product and country. This period typically depends on the assumption that the product will be sold within a specific timeframe after shipment.
  • Tooling provisions: Tooling disputes are quite common in international manufacturing. For example, unless the agreement clearly states that you own the tooling, ownership of the tooling often becomes an issue. We’ve found that including a lump sum penalty is (in most countries) the most effective way to prevent these disputes.
  • Trade secrets and IP protection provisions: In some countries, including a monetary penalty is critical for preventing IP breaches. These penalties should be large enough to concern the manufacturer but not so large as to scare them away from signing. In other countries, providing for injunctive relief is the way to go.

Effective International Contracts

The typical international manufacturing agreement also usually requires some combination of the following exhibits:

  • A product list
  • Performance criteria (specifications)
  • A product pricing method
  • Quality control and inspection procedure
  • A customer “no contact” list
  • A tooling list
  • A PO form or example

Additionally, you should also consider whether you will need to coordinate your contracts your overseas product manufacturering contracts to track your contracts with your product buyers. In other words, you do not want a situation where your manufacturing contract provides for you to get your products on November 20 and your contracts with your product buyers require you to provide them with product on November 19. These timing issues become particularly complicated when your overseas manufacturer is dependent on layers of subcontractors and suppliers. It is usually important that you be aware of  potential supply chain bottlenecks, counterfeit products and gray market goods. The best way to avoid these timing issues is to ensure the terms of your contract manufacturing agreement parallel the terms of your product selling/distribution agreement. At a minimum, this means:

  • Your manufacturer is required to accept your POs within your forecast.
  • Your manufacturer is required to lock prices for a set number of years aligning with your distributor agreement.
  • Your manufacturer should be subject to the same consequential liability damages as your distributor for all breaches of its agreement with you.
  • Your manufacturer should assume all risk related to the performance of its overseas subcontractors. If the subcontractors’ performance is late or otherwise doesn’t align with your agreement, but your contract includes a force majeure clause, for example, you’re in for a tough fight.

This also means that your contract should state all of your requirements as clearly as possible and ensures that your manufacturer can be held liable for any violations.

1. Foreign Language Contracts Can Be Key

Language confusion can happen even among native speakers. After all, there is a big difference between being able to watch and understand Lupin in French and having sufficient French language skills to draft an agreement putting millions of dollars on the line. A well-written contract in your foreign partner’s native language ensures both you and your foreign manufacturer are on the same page. For example, if your supplier signs a contract in their language that mandates a 1% penalty payment for every day late, you know they’re taking the terms seriously.

We often encounter companies that wrongly believe they have a deal with a foreign company when their negotiations are based entirely on English language communications. When we look at such a deal, we immediately notice one or more of the following:

  • There is no way the foreign company would agree to one or more provisions. Either the foreign company thinks it did not agree or does not understand what it has agreed to.
  • One or more provisions are bad for both sides, and everyone would benefit from changing them.
  • One or more provisions are completely illegal in one or both countries.
  • One or more provisions are completely unworkable or nonsensical in one or both countries.

These companies should have involved fully bilingual negotiators in the deal from day one. While gathering all parties, including bilingual negotiators, can be costly and time-consuming in the short term, it nearly always saves way more time and money in the long term.

Most importantly, in many contracts, not having a manufacturing contract in the foreign country’s native language might slow down or even preclude court or arbitration resolution of any dispute. A good contract is one in which your counterparty is afraid not to comply. If your contract does not give you good recourse for non-compliance, your foreign counterparty will not be afraid and your risk of non-compliance just went way up.

2. The “Perfect” International Contract?

We counsel our clients against “perfect” (unrealistic) manufacturing agreements. We do this because such agreements rarely get signed and if they do, they’ve probably be signed by a company that has no intention of abiding by them. We have had clients  The best contract is one that will protect you while still giving your manufacturer enough incentive to work with you over the long haul It takes two to tango, and you’re not going to get a dance partner unless you make it worth their while.

The Questions We Ask

Even small changes in how we draft our manufacturing contracts dictate changes in the questions we need to ask. We mentioned earlier that our international manufacturing lawyers send out an initial email questionnaire to clients. Then they review each client’s responses before drafting the initial manufacturing agreement.

 manufacturing contracts dictate changes

Some of the questions we ask in our questionnaire include:

  • What is your manufacturer’s name and contact information?
  • What products will the manufacturer make? Do you anticipate any changes in product type or production volume?
  • Where do you plan to sell your products? In particular, will you be selling in your manufacturer’s country?
  • What are your expectations for shipping terms?
  • Do you plan to reuse this manufacturing agreement with other manufacturers?
  • What packaging arrangements will be made before shipment?
  • Are you concerned about your manufacturer selling a competing product to your customers?
  • What will you do with defective products?
  • Do you have existing POs that you intend to use for product orders from this manufacturer? If so, please provide a copy.
  • On what basis do you anticipate negotiating pricing and other terms?
  • What will happen if your manufacturer rejects a PO?
  • How many deal terms have been negotiated so far?
  • What arrangements have you made for inspection and quality control, and what warranty terms have you negotiated?
  • What is the tooling for this product, and does the manufacturer already have it? If so, who paid for it?
  • Has the manufacturer signed a letter of intent (LOI) or memorandum of understanding (MOU) with you, even if only in English?
  • Are there any unresolved issues involving your previous manufacturer? For instance, are any outstanding invoices or payments due?

After we get answers to these questions, we follow up to ensure we understand your situation.

You’re Naked Without a Good Bill of Materials

The bill of materials (BOM) can make or break your manufacturing relationship, but this document is too often either ignored or given short shrift.

A BOM is a list of components to be used in fabricating a proposed product. A good BOM, inserted as an appendix or addendum to an original equipment manufacturing (OEM) agreement, should specify in excruciating detail exactly what your manufacturer must use when manufacturing your product. A precise, well-drafted BOM minimizes the risk of confusion and future mistakes, which reduces product defects and recalls and saves you money.

We’ve seen too many OEM agreements that completely left out the BOM. Perhaps even worse, we’ve seen BOMs that were part of the contract but allowed the manufacturer to substitute any component whenever it felt like it.

There’s nothing wrong with allowing your manufacturer to make substitutions with your approval, but there’s a lot wrong with giving your manufacturer complete discretion in doing so.

When issues arise, you should be able to cross-reference your BOM with the actual product to ensure the correct components are present. High return or defect rates almost invariably result from the manufacturer using cheaper components. But far too often, we also find nothing in either the OEM contract or the BOM that would have contractually prevented the manufacturer from doing it.

Many times, the quality of your BOM determines whether you have any recourse against your manufacturer for bad product. So, if you want to reduce your chances of manufacturing defects, you must ensure your contract includes a well-drafted BOM.

Should You Use an International Contract Template?

Manufacturing terms and conditions term sheet templates rarely work because terms and conditions vary between different manufacturers. Sure, you can buy a cheap general-use template online, but these virtually never help and they often are a disastor. For some graphic examples of template language gone wrong, check out China Contract Jurisdiction and Being Too Clever By Half. A good product manufacturing agreement should be tailored to fit your company’s unique situation, which cannot be  achieved by using a general template.

Manufacturing term sheet templates can be helpful, but there’s a big difference between the template agreements our lawyers provide to our clients and the template supply agreement term sheets sold online by non-lawyers and imposters for general use.

More on International Contract Drafting

We once got an email from a reader curious about how our lawyers draft contracts for China. The reader was negotiating a deal with a Chinese company, but it wasn’t going very well — because the American law firm that wrote the contracts used highly complex legalese, their potential Chinese partners had trouble reading and understanding the documents. So they wanted to know how we walk the line between American and Chinese legal drafting conventions. What applies below for China also applies to various degrees for nearly every other leading manufacturing country as well. The below was our response:

This is a great question, and here is our answer.

Much bad U.S. contract writing involves using too much language to explain simple concepts and address every possible contingency. In Chinese contracts, though, the concept is the only thing that matters.

We write China contracts the modern way, which simplifies the process and reduces negotiation time, costs and potential failures. This means we eschew legalese and avoid unnecessary boilerplate. We do this for the contracts we draft in English as well as in Chinese.

Most importantly, we don’t need to “walk the line” between American and foreign drafting conventions. When we draft a contract for a client, we first draft it in English so we can work on it with the client. Once we’ve finished the English contract, we then rewrite it in Chinese.

Note that we do not translate it into Chinese. We use lawyers — and only lawyers — to take the English and rewrite it into Chinese. This rewrite is not a direct translation.

Rewriting is critical for China contracts specifically because Chinese courts, lawyers and businesspeople view the Chinese portion as the official contract and disregard the English. So for clients negotiating deals with Chinese entities, we treat the Chinese version as the contract and the English portion as the translation.

This is also why it’s best to avoid dual language contracts when dealing with China — Chinese lawyers and businesspeople usually reject traditional U.S. contract language and legal provisions that do not connect to Chinese law. Instead, they guess the meaning and then use the mistranslation, leading to disaster for everyone involved.

9 Key Components of Solid International Product Agreements

If you walk away from this post remembering anything, it should be what makes a good product manufacturing agreement. The next time you’re working on an international long-term supply contract, you should at minimum consider including the following provisions:

  1. You should be free to inspect goods any time before shipment and final payment.
  2. All tooling, jigs and molds belong to you. If your manufacturer is slow in returning them, it should be required to pay contract damages.
  3. Your manufacturer should be unable to market or sell your product to anyone but you. A nondisclosure agreement (NDA) is not sufficient in this situation.
  4. Your manufacturer should not circumvent you and sell directly to your customers. Consider using nondisclosure, nonuse and noncircumvention (NNN) agreements. Appropriately drafted, country-specific NNN provisions include language to avoid that circumvention.
  5. Your manufacturer should inform you and obtain your permission any time it changes suppliers.
  6. Your manufacturer should identify all subcontractors involved with your project and remain liable for their actions.
  7. Your agreement should be governed by local law and enforceable in local courts. Typically, this means you’ll need a local language contract and an English copy.
  8. Contract damages are usually a better way to fight IP infringement than injunctive relief.
  9. Your contract should provide adequate protection, but it shouldn’t be so perfectly written that no manufacturer would want to sign it.

What goes on in your international manufacturing agreements?

what makes a good international manufacturing contract