Why do you need a manufacturing agreement?

Many companies wish to outsource manufacturing of their product to third party manufacturers. A manufacturing agreement should set out the terms of the arrangement in a legally binding agreement. This will provide a good basis for an effective working relationship in which both parties know what is expected.

What should a manufacturing agreement cover?

The manufacturing agreement should clearly set out the obligations of each party from the beginning of the manufacturing process through to the end of the contract, to prevent misunderstanding and clarify where responsibilities lie.

Although no single manufacturing agreement will look the same, most agreements will cover the following aspects:

Provision of knowledge and equipment

• Set out agreed duties and obligations of the client with regards to providing any equipment, instructions and product information required by the manufacturer.

Manufacturing process

• Should the goods manufactured comply with quality control tests and specifications set by the client? Is the client allowed access to the manufacturing premises and records? Consider provisions relating to insurance and liability.

Standard of manufactured goods

• There is a risk that the products produced will not conform to the client’s expectations. The agreement should specify the expected product specifications and which party is liable for any loss of sales caused by a manufacturing delay.

Delivery and inspection

• The client would normally want to specify that products are packed securely so that they reach their destination undamaged. Inspection and testing of each order by the manufacturer may be required, with accompanying documentation supplied. The agreement should set out which party will be responsible for costs associated with delivery.

Payment and prices

• Specify exactly what the price includes and the payment terms. For instance: will any advance payments be made to the manufacturer and when? Will the company pay the manufacturer on a time-spent basis or only upon receipt of the products?

Intellectual property

• The agreement should explain the limits within which the manufacturer can use the client’s intellectual property, such as know-how, art work and trade-marks. Usually the client, rather than the manufacturer, would be responsible for any third party claims relating to alleged intellectual property infringement.

Confidentiality

• It is important to define what information exchanged should be treated as confidential and what the permitted use of the confidential information is.

Duration and termination

• The length of the arrangement should be limited, for example by having a fixed term agreement. Use specific and realistic criteria when listing potential causes of termination of the agreement. Decide on the amount of termination notice required.

How we can help

Looking to create your own agreement?

The ICAEW Library & Information Service can provide example standard manufacturing agreements and detailed agreement checklists from authoritative sources. See our Document supply service page for information on how to request model documents from us. 

Additionally, we have the following books available to borrow in the Library:

To find out how you can borrow books from the Library please see our guide to borrowing books.

You can obtain copies of articles or extracts of books and reports through our document supply service.

Useful links

• Model contracts for small firms
  A series of model contracts written by trade lawyers, published by the International Trade Centre in 2011. Includes a 16 page example 'International Contract Manufacture Agreement'.
• Need a manufacturing facility, but don't want to own one? Try contract manufacturing and a comprehensive agreement
  Article by U.S. law firm Ward and Smith P.A., highlighting a few of the more significant issues that should be covered in a manufacturing agreement.
• Negotiating manufacturing agreements 
  How to reach an agreement that really fits your needs - advice from contract specialist Christian Wyss, an associate with the Swiss law firm Vischer Ltd.
• What does your contract mean? How the courts interpret contracts
  A Herbert Smith Freehills July 2019 guide which considers the court's approach to interpreting contracts and some practical steps that can be taken to minimise the risks.